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Tips to Avoid Wage and Hour Lawsuits

Tips to Avoid Wage and Hour Lawsuits

Wage and hour compliance is one of the hot button items for businesses in 2010, with the promise of increased investigations and fines by both the Internal Revenue Service (IRS) and Department of Labor (DOL). This does not include state or local tax agencies that may also be stepping up their efforts in this area. There have been reports that non-government wage and hour settlements in 2009 grew by 44% over those in 2008. For suits filed under the federal Fair Labor Standards Act (FLSA), lawsuit settlement amounts rose from $253 million in 2008 to $364 million in 2009. Below are some of the major wage and hour problem areas that have historically resulted in lawsuits and continue to be a litigation quagmire for employers.

Proper Classification

There are two major classification errors that occur, which are discussed below;

Independent Contractor vs. Employee: The IRS has strict guidelines on who can be legitimately classified as an Independent Contractor and incorrectly classifying a worker opens the door to steep penalties and increased scrutiny by the IRS. The Federal government estimates that between 1996 and 2004 it lost an estimated $34.7 billion in tax revenue due to the misclassification of workers as an Independent Contractors.

Exempt vs. Non-exempt Status: Once it has been determined that a worker is indeed an employee the next question is can that employee be classified as exempt. An exempt employee is one that is from the minimum wage regulations, overtime regulation and various other wage and hour provisions. For an employee to be considered exempt their position, work duties, and wages must meet the rigorous requirements set forth by the Fair Labor Standards Act (FLSA). It is important to know if your state also has criteria for who can and cannot be considered exempt as failure to comply with both may result in penalties.

Differences between federal and state regulations

As briefly touched on above, the state in which you operate may have different standards than those outlined in the FLSA, which is the major piece of federal legislation that governs the wage and hour arena. In almost all circumstances when federal and state laws differ the employer will follow the rule that is most advantageous to the employees. For instance; the current federal minimum wage is $7.25 per hour and in California the current state minimum wage is $8.00 per hour. This means that California employers must the state minimum wage of $8.00 as this is most advantageous to employees.

It is imperative to know if your state has any specific wage and hour regulations, what those regulations are and how to properly apply them to avoid unnecessary claims.

Improperly applying wage & hour rules

This last category is wide ranging as there are many regulations in this area that can be misapplied, some of the most common errors are as follows;


Improper deductions from pay

Final pay

Minimum Wage

Call Back Pay

Reporting Time Pay

Standby or On-Call Time

Meal and rest periods

Preparatory and concluding activities

Training Time

Travel Time

As one can see there are many areas in which a company may be exposed to wage and hour claims. This is why it is essential for employers to understand all wage and hour rules that affect their operations and know how to apply them properly. Below are some tips to assist in avoiding wage and hour claims;