Red Tape

You've seen the posters, the ones that say "It's the Law!" and then go on about child labor and the minimum wage in tiny type. Chances are, you've put one up in your own office, since federal law requires that you hang such signs in a conspicuous place. But tacking up those posters is about the only employment-law requirement that's easy to comply with.

One particularly troublesome piece of legislation is the Fair Labor Standards Act (FLSA), which sets the minimum wage, restricts the employment of minors, and -- most significantly of late -- requires overtime pay for certain workers who put in more than 40 hours a week. Enacted in 1938, the FLSA was intended to help get depression-era Americans back to work. (The thinking was that rather than pay overtime, businesses would hire more people.)

A lot of things have changed in the workplace since 1938. Unfortunately, the FLSA isn't one of them. It's been amended over the years, but it hasn't been significantly revised since the 1970s. And when you combine an antiquated and arcane law with a shaky economic environment, what you get is an expensive recipe for unbridled litigation.

Ask any lawyer who specializes in labor cases, and you'll hear the same thing: FLSA lawsuits, particularly those claiming unpaid overtime, have skyrocketed during the past few years. Before then, says Robert Turk, a partner at Gunster Yoakley & Stewart in Miami, lawyers looked upon the FLSA as a bit of a backwater. "It wasn't particularly sexy when you could sue for harassment or discrimination, which was where the big money was," he says. "But as the economy turned and you had large group layoffs, it became harder to say that you were fired because you were part of a protected category, when there were lots of other laid-off people who weren't." In 2001, FLSA suits overtook discrimination suits in the number of collective actions filed.

How do you know who's eligible for overtime pay? U.S. Department of Labor (DOL) guidelines divide all workers into two classifications, exempt and nonexempt. Nonexempt workers are entitled to overtime pay if they work more than 40 hours in a week. That's the simple part. But determining which employees fall under that classification is far more complicated.

What's more, an unpaid-overtime suit is relatively easy for an aggrieved employee to initiate. "All employees have to do is pick up the phone, and the DOL takes the ball," says Dyana Tull, a lawyer at Schwartz Hannum, in Andover, Mass. "In certain states, the labor agency almost functions as the employee's attorney."

The rules that describe exactly who is entitled to overtime take up some 60 pages of small-print text in the Code of Federal Regulations. The standard guideline: To be classified as exempt, employees must be executives who spend at least 80% of their time (or in retail and service companies, 60% of their time) doing management tasks. They also must supervise at least two people and have discretionary authority over how they accomplish their work. However, certain types of administrators whose work is deemed related to management policies or general business operations, and who regularly exercise independent judgment, are also classified as exempt. So are professionals whose positions require advanced educational study or whose work is considered creative, original, or artistic, and whose jobs require consistent discretion and independent judgment.

Clear as mud, right? But wait, that's just for starters. Which is why, "over and over I hear the same expression, 'I had no idea I was violating the law," says Turk. "Unfortunately, that doesn't work as an excuse."

One area in which growing companies are likely to get into trouble is the "administrative" exemption. According to Glenn Dowd, a labor lawyer at Day, Berry & Howard in Hartford, too often employers figure that if they pay someone a salary, that person is automatically exempt. "People tend to place a lot of importance on titles and salary, but in reality the Department of Labor couldn't care less," Dowd says. "They look at what a person is actually doing."

Take an employee who starts as a secretary to a person who gets promoted as the company grows. The secretary takes on a lot more responsibility, with a commensurately higher salary, and everyone assumes that the employee is no longer entitled to overtime. In fact, unless the person is actually exercising discretion and independent judgment, he or she is probably not exempt. According to Camille A. Olson, a partner at the Chicago office of Seyfarth Shaw, that is an exceedingly common scenario. "The CEO's assistant is usually treated as exempt," she says. "They figure this person has a lot of power, has access to someone important, and is highly compensated. But it doesn't matter if the person's getting $75,000. She is only exempt if she can sit in for the CEO or if she's dictating where and when the exec will appear."

Confusion also arises over creative interpretations of the terms of the FLSA. When the law was passed, it specified that "production workers" were automatically nonexempt. "But that was meant to apply to assembly-line workers making widgets in the 1930s," says Mary Dollarhide, a partner at Paul, Hastings, Janofsky & Walker, in Stamford, Conn. Increasingly, plaintiffs and their attorneys are stretching the notion of what a "production worker" really is. Dollarhide points to a recent $90-million verdict against Farmers Insurance Exchange, based in Los Angeles, by its claims adjusters. Though the large insurance company's adjusters routinely make decisions about whether claims are denied or accepted and call the shots on how much money claimants get, their lawyers argued -- successfully -- that they should be entitled to overtime pay because they were not acting independently or with discretion. Rather, the lawyers argued, because all the adjusters' decisions were based on predetermined company mandates, they were therefore simply production workers.

Other cases attempt to apply the same logic to computer personnel. "In computers," says Dollarhide, "you figure the programmers are the ones who are creative, dealing with the internal architecture of systems." Recently, however, some plaintiffs are claiming that computer programmers aren't acting independently at all but are simply following what the computer maker's manual says to do. Again, says Seyfarth Shaw's Olson, it comes down to the actual duties. "You'd have to look at how much time that person is spending as a systems analyst, working with the end user to develop a program to meet their needs," she says. "That would be exempt. But if the person is just installing hardware, that's nonexempt. It may be technical, but it's basically just 'production' work in the computer world."

Tammy McCutchen understands that something needs to be done. McCutchen is administrator of the DOL's Wage and Hour Division, and she's painfully aware of the abstruse nature of the FLSA. "Even our investigators have trouble applying the rules," she says. "So you can imagine what it's like for small companies without corporate legal staff or even human-resources departments." And when you add in state wage-and-hour statutes, things can get even more complex. Some things that may not be actionable under the FLSA may violate a state statute. For example, while federal law requires overtime pay for anything over 40 hours in a given workweek, some states -- like California, Colorado, and Alaska -- have daily overtime-payment requirements.

What you're left with is an area of the law in which "nothing is categorical, nothing is clear, and everything is arguable and intensely fact specific," says Richard Alfred, a partner in the Boston office of Seyfarth Shaw. "These cases are difficult to predict and expensive to litigate." How expensive? Starbucks recently paid $18 million to settle an overtime case. RadioShack and SBC Pacific Bell settled two similar collective-action cases for $30 million and $35 million.

For a small company, even an individual lawsuit can be debilitating. Take the hypothetical case of a midlevel employee making $75,000 who has worked some 60 hours a week for about three years. If that employee were to successfully file suit, the back-pay liability of time and a half alone would run north of $160,000. And that figure doesn't include any attendant liabilities such as "liquidated damages," which you might have to pay if your company is found to have knowingly broken the law. (Liquidated damages are comparable to punitive damages, except that the amount -- equal to the back pay owed -- is predetermined.) You might also have to ante up interest on back pay, as well as court costs and lawyers' fees.

McCutchen promises that change is imminent. She's set a goal for her staff to draft new regulations that anyone can understand. A small-business owner, she says, "shouldn't have to call a lawyer to comply with this law." She hopes to publicize the proposed changes early this year, although it would be at least another year before they could take effect.

Of course, not everyone would be happy with such a change. McCutchen says she's met with dozens of advocacy groups for both employers and employees, and that employee advocacy groups will likely decry any action that decreases the number of people eligible for overtime pay. Kim Bobo, executive director of the National Interfaith Committee for Worker Justice in Chicago, says that her group is advocating updating the salary threshold below which workers are automatically covered. "If you translated the dollar figures from 1975 to today's figures, we wouldn't have to worry about job titles," she says. "Low-wage earners would automatically earn overtime, regardless of their title. But clearly, employer groups don't want to do that."

"It's a controversial issue," says McCutchen. "Business groups and employee groups think very differently about it." Still, she ultimately wants to prevent the debilitating financial judgments against employers who were acting in good faith but unwittingly went afoul of the law. "People shouldn't have to guess," she says. "They should be able to read the regulations and know they're doing it right."

Are You Too Flexible?

By their very entrepreneurial nature, small companies are especially vulnerable to Fair Labor Standards Act violations. When it comes to employment law, entrepreneurs' hallmark flexibility could be a liability, especially if it leads to playing fast and loose with workers' schedules or asking people to put in long hours and then promising them "comp time." As long as everyone's happy with the situation, there shouldn't be any problem, right? "People think they can make up rules as they go along as long as the employee agrees," says Camille A. Olson of Seyfarth Shaw in Chicago. "But it doesn't work that way. Employees cannot waive their rights under federal law." Keep in mind these potential trouble spots:

Comp time. According to Glenn Dowd of Day, Berry & Howard, the concept of "compensatory time" isn't recognized under the FLSA. Say your people are working like crazy to make a customer's deadline, so you tell them you'll make it up to them with extra time off during the summer months or when things get slow. It's a fairly common practice, but it violates federal wage-and-hour laws, which state that all wages must be paid in the payroll period in which the work occurred.

Telecommuting. Another feature of the modern workforce that the creaky old FLSA wasn't quite prepared for is working from home. When employees are not under your direct watch, determining the number of hours that they actually work can be a challenge. It gets especially tricky when you provide remote access to your computer system. According to Dowd, it doesn't matter whether you're asking them to work; you're permitting them to work. "If you have an extremely conscientious employee, they might be working all kinds of crazy hours," he says. "If you don't take steps to stop them from incurring overtime, you could be liable."

Independent contractors. Just because you employ people on a contract basis doesn't mean that you're immune to wage-and-hour violations for those workers. If the Department of Labor decides that those "independent contractors" are actually employees, the next question is, Are they exempt? If not, you may be obligated to pay overtime. And hiring through a temp agency doesn't protect you from litigation. "The agency may be where the DOL goes first," says Richard Alfred, a partner in Seyfarth Shaw's Boston office. "But they may look to the company that contracted them for additional payment. There can be joint liability."

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