Wage & Hour - How Much Can it Cost You?

1. Wage & Hour - How Much Can it Cost You? November 9, 2006 Moderator: Carrie Brodzinski (Beazley) Panelists: Beth Schroeder (Silver & Freedman) Joe English (Taylor, Busch, Slipakoff & Duma, LLP) Jack McCalmon (The McCalmon Group, Inc.) Chicago, IL ~ November 8 - 10, 2006

2. How Do These Cases Arise? • Class Actions • Solo or Multi-Plaintiff Cases • Audits by the Department of Labor (“DOL”) or State Labor Commissioners • Private Attorney General Statute in California

3. What Laws Govern Wage & Hour Claims • Federal Law, Fair Labor Standards Act (“FLSA”) • Enforced by Department of Labor (“DOL”) • State Law, State Labor Codes • Enforced by State Labor Commissioners • Local Ordinances

4. Wage & Hour 101: A Primer • FLSA generally requires that employers: • Pay employees minimum wage for all hours worked; • Pay employees 1.5 times their regular hourly rate for all time worked > 40 hours in a workweek (unless exempt); and • Keep accurate records of daily and weekly hours worked by non-exempt employees.

5. How Difficult Is That? • The FLSA is one of the most complex of all federal laws, and one of the most difficult for employers to fully comply with • Written in the 1930s • Voluminous and technical DOL regulations • Inconsistent opinion letters

6. Broad Coverage • FLSA applies to any “enterprise” which has: • Employees who touch goods/materials that have been moved in or produced for interstate commerce; and • Annual business dollar volume of $500,000.

7. Covered “Employees” FLSA construed broadly in favor of coverage! • Common Exclusions: • Independent Contractors (in fact, not in title) • Volunteers • Trainees / interns / students learning skill or trade for their benefit

8. Hours Worked • Includes all time an employee is required to be on employer’s premises, on duty, or at a prescribed workplace “The devil is in the details”

9. Hours Worked: HOT TOPICS • Rest breaks • Meal breaks • Waiting time • On-call time • Commuting/travel time

10. Minimum Wage • No matter how pay is determined, it must generate an hourly rate of at least the minimum wage when divided by the number of hours worked in a workweek • Federal is $5.15/hour • Many states have higher minimum wage laws Special rules for “tipped” employees

11. Overtime Pay • UNLESS EXEMPT, employees are entitled to overtime pay of 1.5 times the employee’s “regular rate” for all time worked in excess of 40 hours in a workweek • Certain States, such as California, may impose more stringent rules • “Regular rate” can be complex and confusing • Salaried non-exempt (What hours does salary cover?)

12. Regular Rate – Federal and State Law • Overtime is calculated on the basis of an employee’s “regular rate” • Must include “announced and expected” bonuses, commissions, and other extra compensation • Piece rate employees are calculated by taking total compensation for week divided by hours worked, and may receive a new rate every week

13. Main Issue…Exempt vs. Non-Exempt • Must meet “salary” test • Must meet “duties” test Federal vs. California…there are many differences

14. Salary Test • Under FLSA, must receive $455 a week • Under California law, must receive salary equal to two times minimum wage, based on 40 hour work week – currently $28,080/year • Minimum wage in California due to increase January 1, 2007 to $7.50 an hour, and again in 2008 to $8.00 • Computer professionals different - In California, must be nearly $98,000 annually, adjusted every year

15. Salary Test • Must pay based on work product not hours worked or performance • No weekly deductions for plant closures or jury duty • No daily deductions, unless taken from a bona fide vacation, sick or PTO plan

16. Duties TestExempt Employees • Professional, Administrative or Executive • Certain computer related employees • Outside/inside sales employees

17. Professional EmployeesIn California… • Licensed attorney, doctor, engineer, etc., or • Engaged in occupation commonly recognized as a learned or artistic profession (FLSA definition) • Work requiring knowledge of an advanced type in a field customarily acquired by prolonged course of specialized intellectual instruction and study or work that is original and creative in character in a field of artistic endeavor, and • Work predominantly intellectual and varied in character and is of such character that the output produced cannot be standardized in relation to time, and • Work customarily and regularly requiring the exercise of discretion and independent judgment

18. Professional EmployeesIn California… • Under Federal law, college degree is probably sufficient; however, under California law, “prolonged course of study” is greater than a four-year college degree • Registered nurses, dental hygienist, pharmacists, and paralegals are not professionals under California law • Staff accountants and auditors who do not hold a CPA license are usually not exempt as professionals in California

19. Executive Employees • Duties and responsibilities involve the management of the employer’s business or a customarily recognized department or division of the business, and • Customarily and regularly directs the work of two or more other employees, and • Has the authority to hire or fire other employees, or effectively recommend such action, and • Customarily and regularly exercises discretion and independent judgment

20. Working Managers • Federal law vs. California – issue regarding “primary duty” • Key – In California, cannot spend more than HALF of his/her time on non-exempt functions • Seating guests, pouring coffee, expediting food, stocking shelves, conducting inventory, providing customer service, bookkeeping, cooking and assisting on a cash register ARE NOT exempt duties! • Based on actual work duties, not job description! • “Assistant” managers are always suspect, especially in California

21. Administrative Employees • Duties involve either: • Performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers, or • Performance of functions in the administration of a school system or educational establishment

22. Administrative Employees • Customarily and regularly exercises discretion and independent judgment, and either: • Regularly and directly assists a business owner, or an employee working in a bona fide executive or administrative capacity, or • Performs under only general supervision work along specialized or technical lines requiring special training, experience or knowledge, or • Executes under only general supervision special assignments and tasks

23. Administrative Employees • Again, cannot perform non-exempt functions more than half the time • Non exempt functions include: • Bookkeeping • Clerical functions • Technical services • Customer service or support • Payroll services • Phone support/receptionist duties

24. Suspect Classes • Loan officers bank tellers • Stock brokers • Technical service writers • Quality control or assurance • Marketing, public relations, graphic artists • Screenwriters, development, animators, associate producers, technical personnel • Accounting personnel below CFO or Controller level • Customer service, account executives or account managers • IT or IS personnel below manager level • Secretaries, payroll clerks, general admin personnel • Underwriters or adjusters

25. Computer Personnel • Primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment, and • Primarily engaged in one or more of the following: • Application of systems analysis techniques and procedures, or

26. Computer Personnel • Design, development, documentation, analysis, creation, testing or modification of computer systems or programs based on and related to user or system design specifications, or • Documentation, testing, creation or modification of computer programs related to the design of software or hardware for computer operating systems, and • In California, earns an hourly rate of at least $47.81 to be adjusted annually

27. Sales Personnel • Outside Sales • More than 50% of time outside of office/home office • More than half time dedicated to sales • Inside Sales • Earns at least 50% of income on “commission” basis • Earns at least 1 ½ times minimum wage (currently $405.00 a week in California ) • Only applicable to Wage Orders 4 and 7 in California AND “retail sales” under FLSA • Only exempt from OT, not other rules (such as meal and rest breaks) • BIG issue under federal as well as state law (e.g., stock brokers)

28. And then there is California… Chicago, IL ~ November 8 - 10, 2006

29. Why the Surge in Wage & Hour Cases? • FLSA dates back to 1930’s, so…? • Sav-On decision (2005) • Allowed classes to be certified more easily • Cortez decision (2000) • Allowed plaintiffs to use Business & Professions Code § 17200 as a tool to recover unpaid wages and extended statute of limitations to four years • Increased internet advertising by attorneys

30. California’s Private Attorney General Act – Section 2699 • Civil action by employee to recover penalties for certain violations of Labor Code where normally no private right of action • Employee gets 25% of recovery; State gets the rest • Employer pays employee attorneys’ fees • Effective August 11, 2004, SB 1809 amended Section 2699 to require a 30 day notice to DLSE before civil lawsuit can be filed

31. Rest and Meal PeriodsCalifornia’s Hottest Issue – Meal Period • Minimum ½ hour, unpaid meal period for employee working at least five hours • If employee works no more than six hours, meal period may be waived • We recommend the waiver be in writing, but it’s not required by law • Otherwise, under current law, employee MUST actually take the meal period • DLSE has interpreted this to mean that an employee cannot work more than five consecutive hours without a meal break • Employees must be fully relieved of all duties during the meal period unless nature of work does not permit • On duty, paid meal period • Very limited interpretation • Must be authorized in writing with employee right to revoke

32. Rest and Meal PeriodsRest Breaks • Ten minute paid break for every four hours worked • Need only be made available, i.e., need not force employees to take them (unlike meal period!!)

33. Rest and Meal PeriodsWhat is the Cost? • If employee does not receive meal or rest break, employer must pay one hour of employee’s pay for each day in which employee does not get all breaks and meal periods • Employers may automatically pay the extra hour if the employee works through the meal

34. Uncertainty in Meal and Rest Break Rules • Is one hour of additional compensation a “penalty” or a “wage”? • If penalty, only one year statute of limitations; if wage, up to four year statute (Under Business & Professions Code Section 17200). • If penalty, employee cannot recover other penalties in addition to the one hour; if wage, employee would be entitled to additional penalties for failing to pay wages owed. • If penalty, employee cannot recover attorneys’ fees; if wage, employee can recover attorneys’ fees.

35. Other Hot Topics Hot Issues • Recent Popular Class Action Issues • Exempt/non-exempt • Overtime/regular rate/hours worked • Meal & rest break violations • Working “off the clock” • Forfeiture of wages (commissions often at risk) • Unlawful tip pooling (including managers and bartenders) • Unlawful bonus programs

36. Other Hot Topics Hot Issues • Recent Popular Class Action Issues • Time edits/“shaving” • Reporting/call in pay • Reimbursement of expenses – Labor Code §2802 • Uniforms and other payroll deductions • Split-shifts • Server banking • Final paychecks • Unused vacations

37. How Much Can a Mistake Cost? • Unpaid overtime or other wages and/or penalties per employee • One year for penalties per California Law • For wages, three years under Labor Code • For four years under Business & Professions Code section 17200 • Double damages under FLSA • Attorneys’ fees for actions brought in court • Cost of defense of the claim • May be less than you think!

38. How Much Can a Mistake Cost?...Plus Penalties • Failure to pay any owed wages upon termination • Labor Code section 203 – 30 days waiting penalties at employee’s daily rate • Refusal to pay owed wages • Labor Code section 225.5 - $100 per employee, per violation, plus 25% of amount unpaid

39. How Much Can a Mistake Cost?...More Penalties • Underpaid employee • Labor Code section 558 - $50 for first violation, $100 thereafter, per violation, per employee • Labor Code section 1197.1 - $100 for first violation, $250 thereafter per violation, per employee • Failure to pay minimum wage • Labor Code section 1194.2 – liquidated damages in amount equal to unpaid wages • Fair Labor Standards Act – double damages

40. Who Has to Pay? • The Company • Per new California Supreme Court ruling in Reynolds, individuals are NOT liable for most wage and hour violations • May be liable for penalties only under certain Labor Code Sections which expressly refer to “responsible persons” • NOT insurance – Wage and hour claims are excluded from most insurance policies, including EPLI

41. Loss Prevention Strategies • Class action risks • Employers whose workforce is primarily comprised of non-exempt employees • Employers whose work is performed primarily by “independent contractors” • Multi-state employers • Multi-city employers • Certain cities impose wage and hour requirements • Living wage • Employers with centralized human resource departments • No on-site management

42. Loss Prevention Strategies • Litigation Economics • Wage and hour - the perfect class action • Claimants • Past employees • Present employees • Class easy to recruit • Easier to certify • Violations easy to prove • Facts rarely disputed • Time cards ultimate proof • No science needed • Accountants only • Damages easier to prove • Interest and penalties act as multiplier • Recovery small for individual claimants, but huge for attorneys

43. Loss Prevention Strategies • Procedures • Each locality must have its own payroll procedures • An attorney should review the wage and hour procedures for each locality • Job Descriptions • Every job must be classified either as exempt or non-exempt • A legal opinion should be obtained for any questionable exempt classification • Employees should acknowledge their job description / classification

44. Loss Prevention Strategies • Employee Handbook • Should define the different classifications • Should direct employees where they can discover their classification • Should provide and outlet for questions and disputes • Should incorporate retaliation prevention measures

45. Loss Prevention Strategies • On-Site Controls • Employers should have management personnel trained on wage and hour matters at every location • Employers should audit each location’s payroll records every two years • Every claim made to the Department of Labor or a state labor department should be investigated quickly and professionally

46. Loss Prevention Strategies • Training • Certain management personnel in each locality should be trained on the federal, state and local labor laws • Human resources personnel an obvious choice • All managers should be made aware of what they can and cannot do as to non-exempt employees’ time • Special attention to breaks, clocking in, and working overtime

47. Loss Prevention Strategies • Payroll services • Closely review their contractual obligations • What they guarantee and do not guarantee • Educate your insured/clients • Review wage and hour opinions • Monitor decisions • Work closely with wage and hour specialists • Many carriers offer wage and hour education as part of their loss prevention platforms • Hot lines to attorneys with wage and hour questions

48. Wage & Hour - How Much Can it Cost You? Thank you for attending! Chicago, IL ~ November 8 - 10, 2006