Extra Edition / Business Management

Payroll Issues, Personal Liability: Employers Paying the Penalty for Wage and Hour Violations

January 23, 2012
KEYWORDS management
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Richard Alaniz
Richard D. Alaniz

In prosecution of wage and hour violations, the stakes are getting personal. In several recent cases, the government has penalized company owners and officers for failing to pay overtime, imposing stiff fines and even imprisonment.

In one case, the president of a Minnesota sheet-rocking company was sentenced to two years in jail and a potential fine of $3.3 million for intentionally underpaying employee overtime and union pension and benefit contributions.

In another recent case, the owners and officers of an Illinois security company were fined over $200,000, constituting back wages and liquidated damages, for violating overtime and record-keeping provisions.

Under the Fair Labor Standards Act (FLSA), “any employer” who violates minimum wage or unpaid overtime compensation laws may be liable for both the shortfall, and liquidated damages, which means double the damages. The FLSA definition of “employer” can be very broad. Along with supervisors and high-ranking executives, it can also include officers and directors.

To avoid both FLSA violations and personal liability, employers need to be sure they comply with all the relevant minimum wage, overtime, and other salary- and benefit-related regulations and agreements. Otherwise, they may find themselves paying a steep price.

Employers in the Cross-Hairs

While the U.S. Department of Labor is always tracking potential FLSA violations, several cases have put a particular spotlight on the issue.

In the Minnesota case, the sheet-rocking company, Franklin Drywall, had collective bargaining agreements with several unions. Under those agreements, the company was required to pay a specified amount of money into pension and benefit funds for each hour worked by employees in particular job classifications. As part of a plea agreement, Phillip Franklin, president of the company, admitted that he ordered employees to under-report hours by falsifying time sheets and submitting false information to union pension and benefit funds. He also ordered administrative employees to tell the pension and benefit funds that union employees never worked more than 40 hours per week, regardless of how many hours those employees actually worked.

Employees who did work more than 40 hours per week were either paid for their excess hours on a separate paycheck with no overtime pay, or paid for their extra hours at their straight hourly rate on paychecks that were marked as “other pay.”

According to the U.S. Attorney’s Office in Minnesota, from January through December of 2006, Phillip Franklin evaded payment of at least $190,000 owed to the pension and benefit funds.

“This sentencing shows that the Labor Department is committed to ensuring that justice is served for those who steal from their workers,” said James Purcell, acting regional director of the U.S. Department of Labor’s Employee Benefits Security Administration’s Kansas City Regional Office.

In the case of the Illinois security guards, the defendants received a permanent injunction not to violate FLSA in the future, along with the fines. In Solis v. International Detective & Protective Services (N.D. Ill. May 24, 2011), the Department of Labor accused the company’s owners of misclassifying 57 security guards as independent contractors in order to avoid paying overtime.

“An employer may not misclassify its workers as independent contractors in order to avoid paying them required wages under the FLSA,” said Thomas Gauza, district director of the Labor Department’s Wage and Hour Division in Chicago. “The Department of Labor is committed to ensuring that all workers receive their rightfully earned wages, and the resolution of this lawsuit demonstrates that we will use all available enforcement tools to protect workers against exploitation and ensure compliance with the law.”

In her ruling, Judge Virginia M. Kendall noted that the defendants tried to incorrectly characterize the guards as independent contractors through an employment contract. “Such an effort to avoid responsibility under FLSA to pay overtime premium is ineffective,” the judge wrote in the ruling. “Defendants violated the FLSA and therefore are liable for unpaid overtime compensation.”

In a case involving a Puerto Rican nursing home, the Wage and Hour Division ordered the company and one of its officers to pay nearly $20,000 in back wages and interest for FLSA violations. It was the second time the officer, Elba Garcia Hernandez, was the subject of an FLSA investigation. Separately, the Department of Labor assessed the defendants $1,540 in civil money penalties for willful and repeat violations. According to the Department of Labor, if the defendants fail to make the payments, the court will appoint a receiver with power to seize and liquidate their assets to satisfy the order.

Along with the payments for back wages and interest, the consent judgment prohibits the defendants from future FLSA violations.

FLSA Investigations and Penalties

When workers are eligible for overtime, they must be paid at least one and a half-times their regular rate of pay for the time they work over 40 hours in a week. But determining who qualifies for overtime versus who is exempt can be difficult, and employers often run into trouble.

The Wage and Hour Division of the Department of Labor conducts investigations of alleged FLSA violations. When, pursuant to such an investigation, the Department of Labor decides a company is not in compliance with FLSA, there are several ways employee back wages can be recovered:

• The Wage and Hour Division may supervise payment of back wages;

• The Secretary of Labor may bring suit for back wages and an equal amount as liquidated damages;

• An employee may file a private suit for back pay and an equal amount as liquidated damages, plus attorney’s fees and court costs; and

• The Secretary of Labor may obtain an injunction to restrain any person from violating FLSA, including the unlawful withholding of proper minimum wage and overtime pay.

When it comes to recovery of back pay, there is a two-year statute of limitations, except in the case of a willful violation, where the statute of limitations is three years. When employers are found to willfully violate FLSA, they can also face criminal prosecution and fines up to $10,000. Upon a second conviction, employers could face imprisonment.

Staying Out of FLSA Trouble

In order to stay out of trouble, employers should do the following to ensure they are paying workers properly:

• Classify Employees Properly

Determining who is eligible for overtime isn’t always straightforward. In the International Detective & Protective Services case, Judge Kendall pointed to several factors that employers need to consider when deciding if workers are employees or independent contractors, including: control over the manner and method employees work; opportunities for profit or loss; investment in equipment; special skills of workers; permanency of the relationships; and whether services provided by workers were an integral part of the business.

• Know State Laws

Along with federal laws, some states also have broad definitions of who qualifies as an employer under state wage and hour laws. This could increase liability at the state level. For example, under New Jersey’s Wage and Hour Law, an “employer includes any individual, partnership, association, corporation or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee.”

Employers should consult with legal counsel to understand who may be liable for overtime infractions, so they can plan accordingly.

• Review Payroll Practices and Job Classifications

It is advisable for employers to periodically review how employees track their hours. Laws change, job classifications get reworked, and new technology can make the process easier and less prone to errors.

• Conduct Audits

In addition to implementing solid overtime and timekeeping policies, companies should also routinely conduct audits. A spot check of one site or department may reveal that employees are not tracking hours properly or that supervisors are not following established procedures.

• Be Particularly Careful with Union Employees

At union shops, the number of hours that employees work is not just reflected in their paychecks, it can also count for contributions to pension and benefits funds. As in the case of Franklin Drywall, employers can get into even more trouble when they shortchange those funds. If you have union employees, pay extra attention to how those employees’ hours are tracked.

Executives and officers put a great deal of themselves into their businesses. They should be sure to spend some of their time making sure payroll and overtime are correctly managed. Otherwise, they could end up paying fines and spending time in jail.

Publication date: 01/23/2012

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