How To Right Overtime Wrongs

Practical advice for correcting overtime issues before a lawsuit is filed

Imagine this: An employer receives a letter from an attorney representing an employee who claims her client is owed overtime for the employee’s work on a project over the past year. The company then discovers that the employee was switched from an hourly to a day rate without Human Resources’ knowledge. The company also discovers this happened to over 50 other employees who worked on the same project. After consulting with legal counsel, the company confirms the employees are due overtime for their work on the project that lasted several months. The company’s exposure could be substantial. How should the company address the overtime issue while protecting the company from a costly and time-consuming lawsuit? There’s never a cure-all for such situations, but thoughtful planning can help the company dodge a bullet.

As a threshold matter, if a company receives an overtime complaint, it should consult with counsel to determine the potential exposure. An ounce of prevention is worth a pound of cure, particularly considering the heavy cost of litigation. However, once the company discovers that there was likely an underpayment of overtime, what are its next steps to resolve the issue and protect the company?

Understand the Scope of the Problem

First, the employer must have a firm grasp of the severity and scope of the issue and must investigate the issue thoroughly. If the issue involves an error in calculating overtime, the company should review time records, schedules, and related emails or messages to ensure an accurate accounting of the hours worked. While the company should correct any errors, it does not need to overpay employees. If the issue involves whether the worker is an “employee” or independent contractor or whether the employee’s duties meet an exemption from overtime, the company should review the job duties actually performed, even on a week-by-week basis if needed.

Determine How Much Is Owed

Second, once the employer understands the scope of the issue, it must calculate the amount due. Was straight time paid and only the overtime premium due, or were there hours not compensated at all? If the problem goes back years, determine what period the back pay should cover. The Fair Labor Standards Act (FLSA) has a two-year statute of limitations for non-willful violations. Willful violations have a three-year statute of limitations. A violation is willful if the company knew or showed a reckless disregard for whether its conduct violated the FLSA. Whether previous violations are willful is highly fact-specific but generally does not include violations resulting from simply unreasonable or negligent conduct. However, once the company has knowledge of a potential violation, willfulness may exist going forward if the issue is not remedied. It is critical to check applicable state laws as well since state overtime statutes can have a longer statute of limitations. Also, the company must determine if any taxes and benefit contributions should be applied to the backpay. The employer generally does not need to include penalties or interest with the payment for unpaid overtime, but it should be mindful of state or local laws on that issue.

An employer’s response may vary if it is dealing with a $100 issue or a $1,000,000 issue. If the latter, the employer may be more circumspect about whether to acknowledge any liability at all or the extent of liability. The employer should work closely with counsel to determine whether the issue is clear-cut. 

Determine Who Should Be Paid

As a general matter, the company should almost certainly pay anyone affected by the error. Paying current employees but not former employees who are due overtime could expose the company to a willfulness finding. If liability is not clear-cut, such as when exemptions are at issue, prioritize payment to employees or classes of employees with the highest risk of liability.

Prepare What You Will Tell Employees and How to Answer Their Questions

Once the company has identified who will be paid and how much, the company should pay the employee promptly and thoughtfully communicate the reason for the payment. When explaining the reason for the payment to the employee, the company should only state the general reason for the payment, such as an error in calculating overtime or a reevaluation of the duties actually performed. The company should only include enough context to explain the reason for the underpayment and nothing more. The employee does not need to know the details of any complaint, investigation, audit, or the issues leading to the failure to pay overtime. The communication should include how the amount paid was calculated, including any tax withholding and the time period covered. The company should encourage the employee to consult a tax professional for any personal tax implications.

Most importantly, the company should tell the employee that the payment represents full compensation due to the employee and apologize to the employee for any inconvenience. But the company should think very carefully about admitting any wrongdoing. After all, the apology for inconvenience presupposes that the error was unintentional and promptly corrected, not an intentional wrong to any employee.

Don’t Ask for Release of Claims

The company should not request a release of claims in exchange for the payment. Even if employees are willing to waive any claims in exchange for the payment, an employee generally cannot waive their right to overtime compensation under the FLSA absent approval by the Department of Labor or a court. Inviting the Department of Labor to supervise the payment of backpay is tempting fate, risking further inquiry and investigation into the company’s pay practices. By paying the employee the amount the company believes is due, the company is doing the most it can to prevent a potential lawsuit.

At most, companies should consider requesting a signed acknowledgment from employees that they have received all compensation owed to them. However, if the company is concerned, requesting a signed acknowledgment will invite more questions than it would like to answer; the company should consider shifting the burden to the employee to identify any further issues. For example, the company may tell employees that they have been paid all compensation owed, including overtime compensation, and the employee should inform the company of any further issues promptly.  

Correct the Issue Going Forward

Whatever the cause, the issue should be corrected going forward to ensure compliance with the FLSA and any applicable state law. Fixes may include reclassifying employees as non-exempt or independent contractors as employees, altering job duties to satisfy an exemption, updating payroll practices, training managers on the FLSA, and implementing or revising timekeeping or payroll policies. Companies can implement such changes in a way to reduce employee concerns. For example, a reclassification of position from exempt to non-exempt may occur due to a new job description, redefined job duties, or during year-end performance reviews. Finally, inform supervisors of the changes in advance and provide answers to anticipated questions.

Discovering an overtime violation can be jarring. There is no panacea for overtime litigation, but a thoughtful and diligent approach to correcting the issues promptly is a bulwark against any potential litigation.