Will New DOL Overtime Rules Result in a Spike in Collective Actions?

By Robert G. Chadwick, Jr., Managing Member, Seltzer Chadwick Soefje & Ladik, PLLC

The financial stakes in a collective action under the Fair Labor Standards Act (“FLSA”) dwarf many other types of employment litigation. These stakes entail personal liability for an employer’s leaders.  These stakes are predicted to skyrocket in 2017 when new overtime rules unveiled on May 16, 2016 by the U.S. Department of Labor  (“DOL”) become effective.  U.S. businesses, as well as their individual leaders, should thus be concerned about their vulnerability to a potential spike in FLSA collective actions in 2017.

For a multitude of reasons, collective actions under the FLSA, which governs minimum wages and overtime pay, have long held a unique appeal for plaintiff’s attorneys. First, the starting point for a collective action can be a suit brought by a single plaintiff brought on behalf of himself and “others similarly situated.” To join the suit, other potential claimants need only (1) show they are similarly situated to the plaintiff, and (2) file a written consent with the court. This procedure differentiates collective actions from class actions which generally have more complex procedural requirements.

Second, with only a minimal showing, a court will assist plaintiff’s counsel in notifying all potential claimants of the opportunity to join the collective action. This assistance generally includes an order directing the employer to provide the names and addresses of current and former employees who fit the definition of “similarly situated. This assistance also entails approval of a written notice to be mailed to potential claimants and/or posted on employee bulletin boards at the employer’s workplaces. An approved notice typically consists of a description of the suit, the right to join the suit, the procedure for joining the suit, and the rights against retaliation protected by the FLSA.

Third, the financial stakes of a FLSA collective action can be astronomical, especially if the number of plaintiffs is in the hundreds or thousands. The Act allows for the recovery of unpaid wages going back two years for all violations, and three years for willful violations. The Act also allows for the recovery of double (or liquidated) damages and attorney’s fees for successful claimants. An employer sued under the FLSA also bears the cost of defending the collective action.

Fourth, predicting the outcome of a FLSA collective action can often be elusive. The analysis of whether a claimant has been paid in accordance with the Act can be fact-intensive and/or dependent upon ambiguous standards. The burden of proof as to the primary issue in dispute, moreover, is not always be borne by the plaintiffs. Indeed, the burden of proving that a plaintiff is exempt from the minimum and overtime pay requirements of the Act is borne by the employer. The cost of meeting this burden can, itself, be astronomical.

Fifth, the FLSA allows for an employer’s agents to be named individually as defendants in a collective action. Naming an agent as an individual defendant in a FLSA collective action is perceived by many plaintiff’s attorney as a viable strategy for (1) obtaining, in return for a settlement, incriminating testimony by the agent regarding the employer, or (2) pressuring the agent to reach a settlement on behalf of the employer. Agents routinely named as defendants for these purposes include chief executive officers, chief financial officers, corporate counsel, human resources officials, and immediate supervisors.

Finally, a large settlement may be a bitter pill for an employer to swallow but may ultimately be a better alternative to costly and protracted litigation which the employer may lose. In February 2015, for instance, Publix Supermarkets, Inc. agreed to pay $30 million dollars to settle a collective action brought by 1,580 current and former department and assistant department managers seeking overtime pay under the FLSA. Apparently Publix determined a $30 million settlement was preferable to the cost of meeting and/or losing the burden to prove the department and assistant department managers were exempt from the overtime requirements of the Act.

Ultimately, therefore, the determination by a plaintiff’s attorney to file a FLSA collective may not be primarily based upon actual evidence of violations of the Act. Rather, the determination may be primarily based upon facts indicating the employer is vulnerable to a FLSA collective action. Such facts may entail inadequate time-keeping procedures, or inadequate proof that employees are actually performing exempt duties under the Act.

Lest there be any doubt about the appeal of FLSA collective actions, statistics released in March 2016 by the Administrative Office of the U.S. Courts (“AOUSC”) confirm that more federal suits claiming FLSA violations –8,781 – were filed during the 12-month period from September 30, 2014 through September 30, 2015, than any comparable 12-month period in recorded history. It is anticipated even more FLSA suits will be filed during the 12-month period from September 30, 2015 through September 30, 2016.

So why may there be a spike in FLSA suits in 2017 when the new overtime rules unveiled this week by the DOL become effective? The answer is that the new rules will significantly tighten the overtime pay exemptions currently in place for administrative, executive, professional, computer and outside sales employees. The projected impact of the new rules is that approximately 4.2 million workers will no longer qualify for these exemptions. History shows the last time the DOL modified the rules governing these overtime pay exemptions in 2004, the affect on FLSA suits was swift and dramatic. According to AOUSC statistics, FLSA suits rose 31.5% during the 12-month period from September 30, 2003 through September 30, 2004, and another 12% during the 12-month period from September 30, 2004 through September 30, 2005. Apparently, the uncertainty provided by untested rules supplies yet another appealing reason for a plaintiff’s attorney to file suit.

So what does a potential spike in FLSA suits mean for employers? The stakes of being vulnerable to collective actions will rise even higher. For such employers, it may no longer be adequate to conduct audits of compensation procedures through human resources professionals, measured against the requirements of the FLSA. Rather, it may be necessary to conduct audits of compensation procedures through legal counsel, measured against the requisite evidentiary burdens and stakes of a collective action. Otherwise, the only question which the employer may face in 2017 is as to the size of the settlement check to write to plaintiff’s counsel.