Wage & Hour FAQ #2: What to Do When a Wage Hour Investigation Team Arrives to Start Auditing

By Douglas Weiner

Last month, we released our Wage and Hour Division Investigation Checklist for employers and have received terrific feedback with additional questions. Following up on your questions, we will be regularly posting FAQs as a regular feature of our Wage & Hour Defense Blog.

In this post, we address an increasingly common issue that many employers are facing in light of aggressive government enforcement at the state and federal level from the Department of Labor.

QUESTION: If a DOL team of Wage Hour Investigators arrive unannounced demanding the immediate production of payroll and tax records and access to employees for confidential interviews what should we do?

ANSWER: An unannounced arrival to investigate signals some adverse information has been submitted to the DOL concerning your wage and hour practices from either an employee complaint or referral from another law enforcement agency such as a state or federal taxing authority, or even possibly from a competitor or labor union. Effectively managing the investigation from the very beginning is essential to obtaining the best possible results. First, advise the leader of the DOL’s investigation team that you are contacting your designated wage and hour representative  to promptly arrive to provide the investigators with assistance. Courteously direct the investigation team to a comfortable but secure location such as a conference room where normal business operations will not be disrupted.

Upon arrival, our practice is to verify the credentials of the investigators, and conduct an opening conference to ascertain the purpose and focus of the investigation. Our immediate goal is to engage the DOL in a discussion to learn what they are seeking. Clarifying the specific focus of the DOL’s inquiry enhances initial communication, and allows narrowly tailored responses. For clarity, we ask the DOL to provide written requests for documents and employee interviews. Reminding the DOL the employer has the right to cooperate with the investigation in a manner that does not disrupt normal business operations, we ascertain from our client and discuss with the DOL an acceptable protocol for the conduct of the investigation. 

Upon ascertaining the specific focus of the investigation, we advise the DOL we understand what they seek, and propose continuing the investigation in a few days after the identified documents have been gathered (and internally reviewed). We invite the investigators to our firm’s conference rooms where payroll records and other documents may be inspected without returning to our client’s facilities. If the lead investigator is unreasonable in demanding immediate access to records and employees, we consider requiring the DOL to obtain a subpoena. If possible it is preferable to establish an agreed protocol to an investigation to avoid giving the DOL reason to believe you have something to hide, the loss of control over the scope of the investigation and the benefits of good faith cooperation. 

In sum, we suggest three things to do, and three things not to do:

Do:

1.      Notify your representative immediately.

2.      Allow your representative to take control of the management of the DOL’s investigation.

3.      Maintain a courteous and forthright demeanor until your representative arrives.

Do not:

1.      Ask if the investigation has been prompted by a complaint.

2.      Ask the DOL to identify a complainant.

3.      Allow immediate inspection of records or employee interviews to take place before your representative has arrived or an opening conference has been conducted.

* * * * * * * * * *

In subsequent FAQs, we will discuss in more detail a protocol to produce documents, and what information your wage-hour representative needs to respond to DOL audits, whether scheduled or surprise. But, in the meantime, regular internal reviews and audits of your wage and hour practices and documentation is key to protecting against costly exposure from a government investigation.

Be sure to check out our Wage and Hour Division Investigation Checklist for more helpful tips and advice about preparing for and managing a Wage Hour Inspection.

EBG Provides a Wage and Hour Division Investigation Checklist for Employers

Epstein Becker Green is pleased to announce the availability of a Wage and Hour Division Investigation Checklist, which provides employers with valuable information about wage and hour investigations and audits conducted by the U.S. Department of Labor (DOL). Like EBG’s first-of-its kind Wage and Hour App, which provides detailed information about federal and state laws, the Checklist is a free resource offered by EBG.

The Checklist provides step-by-step guidance on the following issues: preparation before a Wage and Hour Division investigation of the DOL; preliminary investigation issues; document production; on-site inspection activities; employee interviews; and back-wage findings, and post-audit considerations.

“The multitude of wage and hour claims and lawsuits that workers have filed under the Fair Labor Standards Act and its state law counterparts have made wage and hour law the nation's fastest growing type of litigation. And federal and state agencies are investigating and pursuing wage and hour claims more aggressively than ever,” said Michael Kun, the national Co-Chairperson of the firm's Wage and Hour, Individual and Collective Actions practice group. “We hope that our Checklist will serve as an important resource for employers to use when confronted with an audit – and perhaps help them avoid an audit altogether.”

    Click Here to Download EBG's Wage and Hour Division Investigation Checklist

Labor Secretary Hilda Solis Resigns: How Will the Enforcement Policy of the Wage and Hour Division Change?

By Douglas Weiner and Kara Maciel

“There’s a new sheriff in town.”  With those words in 2009, Secretary Hilda Solis initiated a policy at the Department of Labor that emphasized increased investigations and prosecutions of violators rather than the prior administration’s emphasis on providing compliance assistance.

Her departure – announced yesterday – is unlikely, however, to have much effect on the Department’s current aggressive enforcement policy, as the top enforcement officer of the Department remains Solicitor of Labor M. Patricia Smith.  Solicitor Smith was previously the New York State Commissioner of Labor, where she introduced task force investigations and procedures for government agencies to share information to enhance enforcement initiatives.  Under Solicitor Smith’s leadership, the Department has implemented many of these same techniques and hired additional investigators and attorneys to strengthen the Department’s enforcement of the Fair Labor Standards Act, and related wage and hour statutes. 

We expect enforcement to remain a top priority of the Department under the second term of the Obama Administration no matter who is appointed to replace Secretary Solis.  Accordingly, with the start of the new year, employers would be wise to take the time to closely examine payroll policies and practices, including exempt and independent contractor classifications, meal break deductions, and overtime calculations. Our advice is to be proactive with a self-audit that is protected by the attorney-client privilege and correct inadvertent errors before a government investigator or plaintiffs’ attorney comes knocking at your door. 

Waivers and Releases of Massachusetts Wage Claims

By Evan J. Spelfogel

On December 17, 2012, in Crocker v Townsend Oil, the Massachusetts Supreme Judicial Court invalidated a settlement agreement, waiver and release to the extent it purported to release claims under the Massachusetts Wage and Hour Laws, but did not expressly include that statute by name among the claims being released. Specifically, the Court held:

We...conclude that a settlement or contract termination agreement by an employee that includes a general release, purporting to release all possible existing claims will be enforceable as to the statutorily provided rights and remedies conferred by the Wage Act only if such an agreement is stated in clear and unmistakable terms.  In other words, the release must be plainly worded and understandable to the average individual, and it must specifically refer to the rights and claims under the Wage Act that the employee is waiving.  Such express language will ensure that employees do not unwittingly waive their rights under the Wage Act.  At the same time, this course preserves our policy regarding the broad enforceability of releases by establishing a relatively narrow channel through which waiver of Wage Act claims can be accomplished.

In settling claims with departing employees and offering severance packages in return for all-encompassing written waivers and releases, employers often list by category in the settlement papers, among others, all tort and contract claims, claims for emotional distress, all public policy and statutory claims including, without limitation, all claims that might arise under anti-discrimination laws and wage and hour laws.  We have frequently advised employers that they would be better protected if they listed expressly at least the relevant major federal and state statutes.  In light of Crocker, employers who wish to obtain binding waivers of wage and overtime claims under Massachusetts law must be careful to list the Massachusetts Wage Act expressly, in the settlement documents.

Hurricane Sandy Is About to Blow Our Way: Wage & Hour Implications for Employers

By:  Kara M. Maciel

Hurricane Sandy is approaching this weekend, so employers along the East Coast should refresh themselves on the wage and hour issues arising from the possibility of missed work days in the wake of the storm.

A few brief points that all employers should be mindful of under the FLSA:

  • A non-exempt employee generally does not have to be paid for weather-related absences. An employer may allow (or require) non-exempt employees to use vacation or personal leave days for such absences. But, if the employer has a collective bargaining agreement or handbook policies, the employer may obligate itself to pay through such policies.
  • An exempt employee generally must be paid for absences caused by office closures due to weather, if he/she performs work in that week. The Department of Labor has stated that an employer may not dock a salaried employee for full days when the business is closed because of weather. Partial day deductions for weather related absences are not permitted.
  • If certain employees are required to be on-call (such as public safety, IT, or other essential personnel) during the storm, and the employee cannot use the time effectively for his or her own purpose, the on-call time is compensable and the employee must be paid. However, if the employee is simply at home and available to be reached by company officials, then the time is not working time and an employer does not have to pay for that time.

Policies and procedures to keep in place:

  • Decide whether your company will offer “weather days” for non-exempt workers who are absent because of disasters.
  • Ensure that your payroll systems are prepared for employees working from home, longer shifts, or not taking lunches.
  • Decide whether employees absent because of weather will be allowed / required to use vacation or PTO time.
  • Ensure safety of payroll records and ability to process payroll from alternate location if needed.

Natural disasters pose a myriad of employment and HR issues from wage-hour to FMLA leave and the WARN Act. The best protection is to have a plan in place in advance to ensure your employees are paid and well taken care of during a difficult time. Our reference tool contains answers to common questions, and while aimed at employers in the Gulf Coast, if you have operations anywhere along the East Coast, you should find it helpful.

California One Step Closer to Mandating Overtime and Meal Periods for Private Home Housekeepers and Babysitters

By:  Adam C. Abrahms

Last week Assembly Bill 889 cleared a California State Senate Committee, advancing it one step closer to becoming state law.  The bill, authored by Assemblyman Tom Ammiano (D – San Francisco), seeks to extend most of California’s strict wage and hour regulations to domestic employees working in private homes.  While the bill excludes babysitters under the age of 18, it extends California wage and hour protections to babysitters over the age of 18 as well as any other housekeeper, nanny, caregiver or other domestic worker.

Should the bill become law individual Californians and California families who employ the services of these domestic workers will be required to follow the same overbearing regulations that currently plague California’s small and large businesses.  Specifically, absent the applicability of narrow and limited exceptions, individuals/families using domestic services from babysitting to adult caregiving and transportation to housekeeping will, among other mandates, be required to:

  • Pay their domestic workers in accordance with California overtime rules including time and half for over 8 hours in a day; ·

  • Provide duty-free meal periods for domestic workers working over 5 hours in a day; ·        

  • Permit paid rest periods for domestic workers working over 3 ½ hours in a day; ·       

  • Maintain and record the actual start and end time for all work periods (including meal periods);

  • Provide detailed and regular itemized pay check statements detailing hours of work, rates of pay and deductions; and

  • Comply with certain notice posting and record keeping requirements.

 Above and beyond the regular requirements of California law, the bill imposes a new and special requirement that individuals/families employing domestic workers provide them specific food items of their worker’s choosing if meals are part of the worker’s compensation.  The bill also explicitly provides domestic workers the protections of California’s Workers Compensation System and requires individuals/families employing the services of domestic workers to comply with the applicable workers compensation laws. 

In addition to any other damages and attorney’s fees resulting from an individual/families’ failure to comply with California’s complex wage and hour laws, the bill imposes a new $50 penalty for each day an individual/family violates the bill’s mandates. 

The bill now moves onto the full California State Senate for consideration. In unrelated news, California’s unemployment rate is amongst the highest in the nation as businesses find friendlier climates in neighboring states. 

Landmark Fifth Circuit Ruling Allows Private FLSA Settlements Without DOL/Court Supervision

By: Greta Ravitsky and Jordan Schwartz

On July 24, 2012, the Fifth Circuit became the first federal appellate court in over thirty years to enforce a private settlement of a wage and hour dispute arising under the Fair Labor Standards Act (“FLSA”) in Martin v. Spring Break ’83 Productions LLC.

For decades, federal courts have consistently held that FLSA wage and hour disputes may not be settled privately without approval from either the Department of Labor (“DOL”) or a federal district court.  This apparently “settled” area of law was based exclusively on the Eleventh Circuit’s decision in Lynn’s Food Stores, Inc. v. United States. As a result, courts and employment attorneys alike have cautioned employers to undertake a private resolution of an FLSA dispute at their own peril.  Until now, the Eleventh Circuit wasthe only court of appeals that had ruled on this issue. In this recent groundbreaking decision, the Fifth Circuit declined to apply Lynn’s Food Stores’ requirement of supervision and approval of private settlements, finding that a private settlement unapproved by either the DOL or federal district court can be enforceable under certain circumstances.

In Martin, the plaintiffs,several unionized lighting and rigging technicians, filed a grievance claiming they had not been paid for all hours worked during the filming of the upcoming movie “Spring Break ’83.” Upon concluding that it would be impossible to determine that the plaintiffs worked the days they alleged to have worked, the union and the employer entered into a settlement agreement with regard to the disputed hours worked, waiving the claimants’ right to file any claims with regard to those disputed hours. Before the settlement agreement was signed by union representatives, the plaintiffs filed this lawsuit against Spring Break’ 83 Productions, L.L.C. Thereafter, once the settlement agreement was executed, the plaintiffs accepted and cashed the disbursed payments. The district court granted defendants’ motion for summary judgment, enforcing the private settlement agreement. 

On appeal, the Fifth Circuit upheld the district court’s decision, holding that the payment offered to and accepted by the plaintiffs pursuant to the settlement agreement constituted an enforceable resolution of their FLSA claims, which were predicated on a bona fide dispute about the time worked. The court further noted that the settlement agreement was not a compromise of guaranteed substantive rights under the FLSA, but simply a compromise of plaintiffs’ claims; therefore, it did not contravene the Supreme Court’s restriction on union representatives’ waiver of substantive FLSA rights of their members. The Fifth Circuit found Lynn’s Food Stores to be distinguishable in that, unlike the Lynn’s Food Stores employees, the Martin plaintiffs were represented by counsel who had filed a lawsuit specifically seeking overtime pay for the plaintiffs before the settlement agreement was executed, and thus, the settlement constituted a valid release.  “The money [plaintiffs] received and accepted . . . for settlement of their bona fide dispute did not occur outside the context of a lawsuit, hence the concerns that the Eleventh Circuit expressed in Lynn’s Food Stores [were] not implicated.”

Martin’s common sense reasoning is certainly welcome news for employers who have been hesitant to enter into a private settlement agreement, given the myriad of issues inherent in obtaining approval of the settlement from the DOL or federal district court.  Certainly, the ability to settle FLSA disputes privately and confidentially should help employers avoid the potential of facing “copycat” lawsuits as a result of a settlement that has been put in the public record.  While this decision provides support for entering into an unsupervised private settlement agreement of wage and hour claims in the Fifth Circuit (Texas, Louisiana and Mississippi), particularly where the FLSA claimant is represented by counsel and an adversary process is underway, it is still advisable for employers in other jurisdictions to seek DOL or court approval for FLSA settlements in order to ensure the validity of the release of claims.

We will be sure to keep you apprised of any trends or developments arising out of this landmark decision that could pave the way for private FLSA settlements to be treated and enforced in the same manner as settlement agreements in all other employment-related disputes.

Seventh Circuit: Pharmaceutical Sales Representatives Are Exempt Because They Use Significant Discretion In Visits With Physicians.

By Michael Thompson

The Seventh Circuit has ruled that pharmaceutical sales representatives are covered by the Administrative exemption to the FLSA because “the core function of the representatives’ duties, the physician office visits,” requires significant discretion and independent judgment. While other courts have applied a case specific analysis to determine the applicability of the Administrative exemption in this context, the Seventh Circuit’s analysis appears to be applicable to virtually all sales representatives in the pharmaceutical industry. Indeed, without separate analyses, the Court of Appeals dismissed two distinct class actions (against Eli Lilly and Abbott Laboratories) in one fell swoop.

The exempt status of pharmaceutical sales representatives is a hotly litigated issue because pharmaceutical sales representatives do not actually consummate sales. Thus, the Second Circuit Court of Appeals has held that they are not covered by the Outside Sales exemption. Conversely, the Ninth Circuit Court of Appeals has held that, in the context of the industry, “common sense” shows that these sales representatives fall within the terms of the Outside Sales exemption. The United States Supreme Court has granted the plaintiffs’ petition to review the Ninth Circuit ruling, and is poised to resolve the conflict regarding the Outside Sales exemption.

In the event that the Outside Sales exemption is held to be inapplicable to pharmaceutical sales representatives, employers will have to rely on the Administrative exemption if they wish to defend the exempt status of their sales representatives. That defense, however, has met with mixed results. 

For example, the Second Circuit Court of Appeals in In re Novartis Wage & Hour Litigation, concluded that Novartis sales representatives did not have enough independent discretion to qualify for the Administrative exemption. Conversely, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that the named plaintiff formulated and implemented strategies for her territory, and thus exercised sufficient independent discretion to qualify for the Administrative exemption.

The Seventh Circuit took up this issue through a consolidated opinion on two collective actions, Schaefer-LaRose v. Eli Lilly & Co. and Jirak et al. v. Abbott Laboratories Inc.  The Court of Appeals first concluded that the sales reps did “administrative” work directly related to the general business operations of their employers because “[t]he representatives before us are the public face of their employer to the most important decision-maker regarding use of their companies’ products, the prescribing physicians.”

The Seventh Circuit went on to evaluate whether the pharmaceutical sales representatives used independent discretion in “the core function of the representatives’ duties, the physician office visits.”  The Court of Appeals briefly addressed the related tasks performed outside the presence of the physicians, which it said “manifest a substantial measure of judgment.” The Seventh Circuit noted that sales representatives exercised discretion because they could choose “to see physicians not on their call plans or non-physicians who may influence prescribing patterns,” were expected to propose “comprehensive visit plans for the territories” and spent “the vast majority of their time entirely unsupervised.”

While these considerations were relevant, the Seventh Circuit placed greater emphasis on the sales representatives’ face-to-face meetings with physicians. The Court stated that “these physician interactions [are] the critical function of the job and the place in which discretion is most evident.” The Court of Appeals explained that “[i]n speaking to individual physicians, the representatives must tailor their messages to respond to the circumstances, whether those be the time or attention constraints from the physician or the concerns and objections that are voiced during a particular or previous visit.” The Seventh Circuit further noted that “[t]he representative who is unable to tailor the conversation to the time and circumstances, or to engage the physician in an intelligent conversation, is understandably not an effective representative to the professional community whose estimation of the company is key to its success.”

For those reasons, the Seventh Circuit held that the FLSA's administrative exemption applied to pharmaceutical sales representatives (and that the applicability of the Outside Sales exemption was therefore moot). Accordingly, the Seventh Circuit Court of Appeals affirmed the summary judgment in favor of Eli Lilly and reversed the summary judgment against Abbott Laboratories.

Spring Tune-Up: Gas Stations Should Review Their Pay Policies and Recording Practices to Steer Clear of the DOL's Recent Enforcement Initiative Targeting Them

By Douglas Weiner and Meg Thering

The U.S. Department of Labor (“DOL”) has announced that it has been finding “patterns of violative pay practices” in gas stations throughout New York, Long Island, and New Jersey. Last year, in New Jersey alone, the Department of Labor, through its multi-year enforcement initiative, conducted 74 investigations of gas stations and ordered employers to pay over $1 million in back pay to employees.

As many commuters know, long daily and weekly hours are the norm for many employees in the gas station industry. Enhanced enforcement activity is now focused on this industry. Specifically, DOL wage and hour investigators are looking for off-the-clock work, flat salaries paid for all hours without variation for overtime, minimum wage and overtime violations. 

STEER CLEAR OF THE DOL’S ENFORCEMENT INITIATIVE BY KEEPING GOOD RECORDS

 Maintaining a strong set of payroll records is the primary defense to a wage challenge. Keeping accurate records of all hours worked protects employers from claims by employees who may later exaggerate and over-generalize the number of hours they have actually worked. Also, record-keeping violations fuel investigators’ suspicions of wage violations. Failure to keep the payroll records required by law (29 C.F.R. § 516; NYLL § 195; N.J.S.A. 34:11-4.6) greatly increases an employer’s risk of exposure to wage claims. Robust payroll records showing each employee’s daily arrival and departure times, the start and stop times of rest periods and meal periods, and the amounts employees are paid in straight and overtime pay, provide the evidence an employer needs to prove proper pay for the daily and weekly hours actually worked. Of course, employers should also record the actual payments made. Records demonstrating minimum wage and overtime compliance are the best defense to a wage and hour challenge, whether questions arise from a government audit or plaintiffs’ class action lawsuit. 

DON’T GET STUCK IN TRAFFIC: MAKE SURE YOU HAVE GOOD UNDERLYING PAY PRACTICES, AS WELL AS PROPER RECORD-KEEPING PRACTICES

Good record-keeping will get you nowhere if your underlying pay practices do not comply with the law. An “industry norm” defense may not suffice. Depending upon the circumstances, employers may consider a variety of strategies to ensure compliance with federal and state wage and hour laws.  A salary method of compensating non-exempt employees may be designed to comply with the overtime requirements of state and federal law. Using the principles of the “fluctuating work week,” an employer may use the payment of half-time overtime advantageously. 

Employers should also ensure that improper deductions are not taken from wages, employees are given requisite notice of their pay, and workers are properly classified as employees versus independent contractors and as non-exempt versus exempt employees.

In light of this new enforcement initiative, we recommend all gas station employers conduct a “spring tune-up” review of their pay practices and records. Better you conduct this tune-up now rather than having to deal with picking up the pieces of a crash after the DOL or a plaintiff’s attorney comes in and finds violations.