Preparing for Increased Wage and Hour Litigation and DOL Enforcement: A Primer for Texas Employers

Whether in the form of civil lawsuits or federal governmental enforcement, Texas employers can expect increased scrutiny of their wage and hour practices in 2010 and beyond. Wage and hour lawsuits have been on a steady rise across the country, including in Texas, over the last decade. During this period, cases filed in Texas federal courts under the Fair Labor Standards Act ("FLSA"), which establishes minimum wage, overtime pay, and recordkeeping standards for employers covered by the Act, increased nearly 400 percent, from 108 cases filed in 2001 to 525 in 2009. This trend is likely to continue. In fact, in 2009, FLSA cases filed in Texas federal courts increased more than 50 percent from the previous year.

Litigation is not the only source of potential challenges to Texas employers' wage and hour practices. With an increased budget and plans to ramp up enforcement, the Department of Labor's Wage and Hour Division, which is responsible for enforcing the FLSA, hired 250 more investigators in 2009, has announced plans to hire more, and is taking steps to focus its resources on enforcement activities. In addition, the DOL recently announced a significant change to its long-standing practice of providing specific guidance to employers on wage and hour compliance issues through the use of Opinion Letters. Rather than providing "definitive opinion letters in response to fact-specific requests submitted by individuals and organizations," the DOL will now issue "Administrator Interpretations" whenever it deems appropriate in an attempt to "clarify the law as it relates to an entire industry, a category of employees, or to all employees."1 This change, based in part on the DOL's conclusion that its resources were better used elsewhere, potentially limits Texas employers' ability to obtain clear guidance on important wage and hour issues.

As the scrutiny of wage and hour practices continues to intensify, Texas employers should consider taking action now to reduce risks and ensure compliance. Steps taken in advance of any threat of litigation may prevent, or reduce the impact of, DOL enforcement actions and/or private causes of action for wage and hour violations and are usually far cheaper and less burdensome than those compelled as a condition of settlement or judicial decision. These steps include conducting periodic internal audits as well as employing strategies to effectively review and modify policies and practices regarding employee compensation. Such strategies, as well as the goals of internal audits, are discussed in more detail below.

Wage and Hour Litigation

Wage and hour litigation generally involves claims that an employer has failed to properly pay an employee, or a group of employees, all wages due in accordance with federal or state wage and hour laws. While state wage and hour statutes often impose significant requirements on employers, this article focuses on the FLSA, which establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employers covered by the Act. Although FLSA litigation can involve a variety of claims, two of the most common are misclassification claims—i.e., allegations that an employer has misclassified an employee, or a group of employees, as exempt from the FLSA's overtime requirements—and "off-the-clock" claims—i.e., allegations that an employee, or group of employees, has not been paid for all of the time they worked for the employers.2

These and other claims under the FLSA can be brought individually or, as discussed below, on behalf of all "similarly situated" employees and former employees. As a result, FLSA cases can involve a large number of employees and present significant financial exposure for employers. For instance, in Bahramipour v. Citigroup Global Markets Inc. f/k/a Salomon Smith Barney,3 the plaintiffs, who were securities brokers for Salomon Smith Barney, alleged they were improperly classified as exempt under the FLSA. The case was ultimately settled for $98 million.4

In addition to the potential for large recoveries, the FLSA's complex statutory and regulatory maze, coupled with some unique characteristics affecting FLSA litigation, create an environment ripe for litigation. Initially enacted in 1938, the FLSA was passed into law when the country's workforce was far different from what it is today. Although amended in some respects over the years, many of the FLSA's requirements and standards were not written with the current workforce in mind. As a result, employers are faced, at times, with trying to apply arguably outdated standards to current fact scenarios in making wage and hour decisions regarding their workforce.

Also, unlike other employment-related claims where the plaintiff carries the ultimate burden of proof to establish liability, employers in FLSA cases must, at times, meet their burden of proof to avoid liability. For instance, in a misclassification case, the claimed exemption is in the nature of an affirmative defense. Thus, the employer has the burden of pleading and proving that the employee at issue is properly classified as exempt from the overtime requirements of the FLSA.5 In other words, if an assistant store manager who has been treated as exempt her entire career files a lawsuit claiming she was misclassified and thus due back overtime wages, the employer, not the employee, has the burden of establishing that the employee was properly classified.

Another unique aspect of the FLSA is its approach to class claims. The FLSA contains its own class action mechanism, under which plaintiffs may sue either individually or on behalf of themselves and others "similarly situated."6 Because no employee may be made a party plaintiff unless he or she files a written consent to become a party or "opts in," the FLSA provides for a type of "collective proceeding," rather than a traditional class action under Federal Rule 23 or similar state rules.7

The FLSA does not provide much guidance to courts regarding how to manage these collective actions. Although differences exist among the courts, they generally follow a two-step approach in managing such cases.8 Under the first step, a court will "conditionally certify" a class based on an initial showing by the plaintiff that there are other employees "similarly situated."9 Courts generally employ a...