It’s About Time: Employee Classification and Proper Time Records

When it comes to employment risks, it may surprise most employers to know that the largest risks in employment practices are not currently associated with discrimination or sexual harassment. The most violations and the ever-increasing litigation deal with wage and hour laws including payment for breaks, meals, and overtime.

The Issues

Employers are at risk for a number of reasons, which include failure to properly identify employees who are eligible for overtime and a lack of diligence in payroll and recordkeeping processes to mitigate claims that employees were not paid for time worked or were ineligible to be paid as they claim. Further, many employers simply do not understand the Fair Labor Standards Act and overtime rules at the federal and state level and how they apply. They may “follow” practices learned at past employers, “industry” practices, or simply “run the business their way.”

The Trend and Payouts

While the Fair Labor Standards Act was created in 1938, the Department of Labor (DOL) sought to clarify the overtime exemptions and make it easier for employers to determine who was eligible and who wasn’t in 2004. At that time the DOL raised the salary threshold for automatic overtime qualification and made a few other guidance clarifications. Instead of decreasing the number of overtime litigation cases as it had intended, these changes had the opposite effect. Since 2004, the lawsuits related to wage and hour violations have been increasing steadily with no indication that the trend will be ending.

Some speculate that the 2004 changes made employees as well as employers more informed and aware of the rules. With employees more informed and many states with what are viewed as “employee friendly” statutes, wage and hour claims are on the rise.

The top ten class action wage and hour settlement cases for 2006 totaled about $514 million, with Citigroup Global Markets settling the largest wage and hour litigation ($98 million) according to the Annual Workplace Class Action Litigation Report 2007.[1] With the ability of plaintiffs to file class action suits, companies of all sizes are extremely vulnerable to the impact of business process and operational failures that lead to non-compliance with regard to overtime and other aspects of salaries and wages.

Big Bucks, Small Business

Yes, the class action litigation cases were big business and big bucks. The large businesses who make mistakes in employee classifications and who have cases made against them for failure to pay overtime or other wages usually have deep pockets. Even when, as in most cases, their business insurance doesn’t cover these types of litigation losses the businesses will not be forced into closing their doors to settle the financial obligations. The question for businesses that are not in the same size category (e.g., the small business) is this: What would happen to the business if we are sued for violations related to wage and hour laws? Are we following the overtime laws? Do we have sufficient documentation of how we determined who is or isn’t eligible for overtime and the hours people are working? Do we have payroll records to show what time we are paying our employees for breaks, overtime, and so on? Do we even know the rules?

First Step: Know the Rules

The first step for every employer is to know the rules, both state and federal. Understand if you are in worker-friendly state or an employer-friendly state, and the implications to your business. Know if your state is a work-day or work-week overtime rule. Understand how the laws have been interpreted in your state; for instance, in California the state Supreme Court interpreted in April 2006 that the premiums owed to employees for missed meals and rest periods were to be categorized as “wages” and not “penalties.”[2] What is the difference? Well the wages are subject to a three year statue of limitations, penalties are subject to a one year statute…The differences add up financially.

Second Step: Accurate Records

The importance of accurate records cannot be overemphasized. Timesheets and written policies and procedures are critical to the company being able to demonstrate that sufficient level of effort has gone into compliance and that there is documentation of what was reported, tracked, and paid. The ability to show that there are policies, procedures, and oversight that are consistent with both state and federal laws, as well as the means to provide support for the payroll calculations and practices, will be the difference between winning and losing any litigation—should it come to that point.

Mitigation and Prevention: Proper Understanding

With a proper understanding of the underlying laws and requirements comes an ability to keep the business out of trouble, or at least to mitigate it. By having a business that is aware of the requirements and is engaged in the process of compliance, then incidents of non-compliance will be significantly reduced if not fully eliminated. The environment for compliance is created and supported throughout the organization. It won’t preclude members of the organization from circumventing the system for off the books work, that is truly up to management and the culture of the organization. But the organization that intends to comply will have a significantly better chance, than one that has no plan, process, or clue about what is required.

Copyright © 2008 F.O.C.U.S. Resources, Inc.


[1] Seyfarth Shaw Law Firm. Fourth Annual Workplace Class Action Litigation Report. Chicago: Author, 2008.

[2] California Labor Code Section 226.7, which states “If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.”

%d bloggers like this: