By James Hanson and Christopher Eckhart

Employers face countless labor and employment challenges every day. Wage-and-hour compliance issues are near the top of that list because employers have experienced an increase in the number of class- and collective-action lawsuits filed against them, and that trend is likely to continue. Understanding the dynamics of class and collective actions and what drives them should be a chief concern of every company that wants to avoid high-stakes, bet-the-company litigation.

In the wage-and-hour context, class actions typically assert violations of state laws, such as Indiana’s Wage Deduction Statute. Ind. Code § 22-2-6-2. Class and collective actions are similar in that they are both “representative
actions” brought by a single plaintiff or group of plaintiffs on behalf of other individuals in the same case.

There are differences, however. While class actions typically assert violations of state wage-and-hour laws, collective actions are principally brought under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq., the federal law that
obligates employers to pay their employees at least the minimum wage for all hours worked and overtime pay for hours worked over 40 in a workweek. Class actions also tend to be larger in scope because class members in a class action are by default included in the class unless they affirmatively opt out, while class members in collective actions must affirmatively opt in to be included in the class.

Damages in wage-and-hour class and collective actions can be staggering, particularly in industries with high turnover. The FLSA, for example, permits employees to collect unpaid wages, liquidated damages and attorney fees. Similarly, Indiana’s Wage Payment Statute also provides the potential for liquidated damages on top of the unpaid wages. One need not look very far to find a multimillion-dollar settlement in a wage-and-hour class action.

Identifying key problem areas will enable employers to make changes that will reduce the risk of a class or collective action.

Independent contractor misclassification. Putative class- and collective-action lawsuits attacking the independent contractor status of groups of workers continue to pepper the dockets of state and federal courts across the country and are the aim of administrative investigations on both the federal and state level. The IRS and the U.S. Department of Labor have signed information-sharing agreements, and those agreements have now included 31 states. Misclassifying an employee as an independent contractor is typically not independently actionable, but plaintiffs must prove their employment status for the wage-and-hour laws to apply, making this question a key gateway issue in a significant number of wage-and-hour cases. Companies that utilize independent contractors should audit their independent contractor agreements, policies and practices to confirm the individuals providing services to the companies are correctly classified as independent contractors.

Overtime exemption misclassification. Salaried employees claiming their employer misclassified them as exempt from overtime continue to file putative class and collective actions. And with the increase of the minimum salary requirement to $913 per week (or $47,476 annually) under the FLSA’s white collar exemptions, employers will likely continue to face this problem. Other exemptions, like the FLSA’s Motor Carrier Act Exemption, have also led to significant litigation
in the transportation industry. Employers should conduct an audit of their exempt employees to confirm the employees satisfy the requirements of the applicable exemption.

Wage deductions. States impose strict requirements on payroll deductions. For a wage deduction to be valid
under Indiana law, the agreement must, among other things, be in writing, signed by the employee, and by its terms revocable at any time upon written notice. Indiana law also identifies the limited types of deductions employers can make. Employers that do not adhere to the technical requirements of state law or that make deductions not authorized by state law risk class-action lawsuits seeking repayment of the amounts deducted. Employers can minimize that risk by confirming all of the deductions made to their employees’ checks are permitted under state law and are memorialized in a compliant agreement.

Expense reimbursements. Employee-paid business expenses can wreak havoc if not monitored. For example, requiring an employee to pay for business expenses could cause the employee’s regular rate of pay to drop below the minimum wage under the FLSA. Similarly, several state laws place limitations on the extent to which an employer can make an employee pay for business-related expenses. Indiana, for example, caps the amount of money an employer can deduct for uniforms or equipment necessary for the job at $2,500 per year or 5 percent of the employee’s weekly disposable earnings. Employers that require employees to pay for business-related expenses should closely monitor their practices to ensure they do not run afoul of minimum wage and wage deduction requirements.

Vacation pay policies. Several states, like Indiana, treat accrued vacation pay as wages. Failing to pay
employees their accrued but unused vacation pay upon termination would violate Indiana law and subject the employer to a claim for the unpaid wages, and potentially liquidated damages and attorney fees. Vacation pay policies that do not clearly state how and when an employee accrues vacation pay, and under what circumstances the vacation pay is forfeited (i.e., a use-it-or-lose-it policy), increase the risk of a class action asserting vacation pay claims. Employers should carefully review their vacation pay policies and practices to confirm employees will not be shorted accrued but unused vacation pay.

Recordkeeping. Some states require employers to put specific information on wage statements and provide
for penalties if the employer violates their statutes. Employers should check the laws in each state in which they operate to confirm the employer uses compliant wage statements.

All employers hope they never face a wage-and-hour class or collective action. Those that do will be happy they planned ahead.•

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• James H. Hanson and Christopher J. Eckhart, who are partners in the
labor and employment group of Scopelitis Garvin Light Hanson & Feary P.C., represent clients in class and collective actions nationwide. The opinions expressed are those of the authors.