FLSA Compliance for Small to Medium Sized Employers


The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Overtime pay at a rate of not less than one and one-half times their regular rates of pay is required after 40 hours of work in a workweek. Although certain classes of employees are exempt from the FLSA requirements, most employees are entitled to be paid overtime.

A recent poll of managing partners of law firms in Houston,Texas, revealed that “employment law” claims were rated as one of the fastest growing fields of law today.1 Why? Because employment law claims, and in particular FLSA claims, are increasing in terms of the number of cases filed, verdicts awarded and penalties assessed.

In fact, the Department of Labor/Employment Standards Administration’s Wage and Hour Division (WHD) recovered more than $212 million in back wages in fiscal year 2003 – a 21 percent increase over the record setting amount in fiscal year 2002. The number of workers receiving back wages increased nearly 30 percent from the fiscal year 2002 level. Average days to resolve a complaint decreased in fiscal year 2003 from 129 days to 108 days. In fiscal year 2003, WHD assessed employers nearly $10 million ($9,993,041.44) in civil money penalties.2

But private lawsuits are growing in numbers as well. A few examples of private pay outs resulting from FLSA class action lawsuits are Pacific Bell, $35 million, United Parcel Service, $18 million, Pepsi Bottling Group, $30 Million, and Perdue Farms, $10 million. Radio Shack and Wal-Mart are reported to have paid in excess of $100 Million to resolve FLSA class action litigation. Perhaps the most sobering example of the success by the Plaintiff lawyers in these causes of action was set by three California grocery chains which recently reached a $22.4 million settlement agreement with 2,100 illegal alien contract labor janitors.3

Some employers are even targeted by the DOL WHD for compliance because of a history of industry wide noncompliance. For instance, nursing homes and healthcare providers were targeted by the Department of Labor WHD for FLSA violations. Their survey found that 85% of facilities surveyed were in violation of the FLSA overtime violations, and that 15% of those surveyed were in violation of child labor laws.4 Those facilities were substantially fined and multiple subsequent lawsuits were filed.

Small and mid-level employers are as much at risk as large employers. Even minor violations may amount to thousands of dollars for each employee in back pay, compounded in class action cases. Employees are also entitled to liquidated (or double) damages, unless an employer can affirmatively prove they had a “good faith” and “reasonable” belief that they were in compliance with the Act – such as the formal advice of their attorney. Employees can also obtain three (3) years of back pay by establishing a willful violation of the Act. Finally, prevailing plaintiffs are entitled to automatic attorney’s fees in FLSA lawsuits.

Understanding the basics of the FLSA is more important now than ever. The unwary employer who fails to comply should be concerned about becoming the next FLSA statistic.

The garden variety wage and hour claim pled by a single employee is not be an economical cause of action for a Plaintiff lawyer. However, the FLSA allows for a type of class action, called a “collective action” which permits the aggregation of several thousand claims at once as long as the employees are “similarly situated.” The distinction between a “collective action” and a “class action” (under Fed. R. Civ. Proc. 23) is that Plaintiffs must “opt-in” to be included in the FLSA case, whereas in a true “class action,” class members may “opt-out” of representation to pursue individual claims. In other words, once a case is filed, the Court will generally order all potentially affected employees to affirmatively sign an acknowledgement saying they wish their claims to be part of the FLSA collective action. In a class action, employees are represented in the case unless they explicitly choose not to participate. There is also a much less stringent standard for the initial certification than the more rigorous Rule 23 standard for class actions.5

Employers do not have to pay overtime to employees who are employed in an executive, administrative, or professional capacity and paid on a “salary” basis. Those employees are considered “exempt” from the overtime provisions (meaning the employer does not have to pay them overtime). In order to meet these exemptions, an employee must satisfy one of three tests classifying them as an executive, administrative or professional employee. The tests for each classification, as specified by the Department of Labor, are rigorous. Some help is available from the Department of Labor where its FairPay Fact Sheets summarize the overtime pay rules in the revised Fair Labor Standards Act (FLSA) in a few pages.6

The FLSA also allows a defense for “good faith.” If an employer can show that it made its exemption decisions in reliance on a reasonable basis, the employer may have a valid legal defense to liquidated damages, and in some instances, all past liability, in the event a misclassification is found. To better support your “good faith” defense, it is important to have your classifications reviewed by an attorney.

To help defend against FLSA challenges and the growing threat of litigation, it is crucial that small and mid-level employers take proactive and preventative actions now. They should perform a “self-audit” for FLSA compliance in accord with the executive, administrative and professional exemptions. This FLSA audit should include, but by no means should be limited to, the following:

audit payroll and time-keeping records and overtime practices for the past three years;
enact effective overtime policies indicating overtime must be pre-approved at your workplace;
effectively document the use and administration of the “comp time” and/or “pay deduction” practices for nonexempt staff;
remember that exemptions are the exception to the rule. Your number of exempt employees should be much smaller than the number of non-exempt employees;
try to identify any problem areas in time-keeping practices within the nonexempt classified staff;
recognize those employees who may be working over 40 hours in a seven-day period, and determine if the overtime rules apply to these employees;
find those employees who are working two or more separate jobs for your company and track the number of hours worked in a seven-day period;
review “comp time” policies and procedures, and ensure that they are being followed by all nonexempt staff;
support your “good faith” defense by having legal counsel review your exemption decisions and prepare an opinion letter;
display FLSA wage/hour/overtime/age posters in conspicuous places where all employees can see them.
It is highly recommended that you consult a board certified Labor and Employment law attorney to help you with your classification and auditing in order to avoid any difficult litigation or penalties by the DOL WHD for FLSA violations.


1 Texas Lawyer, December 20, 2004.

2 Fiscal year 2003 is the first year that WHD is able to report on the actual assessed civil money penalties since implementation of its new database. In previous years, the reported civil money penalty assessments were the amounts that became due in the fiscal year following any post assessment negotiations with fined employers. For this reason, comparisons to prior year reporting on civil money penalty assessments would not be appropriate.

3 See Flores v. Albertsons, Inc., No. CV 01-00515 (C.D. Cal. 2002).


5 See Mooney v. Aramco Services Corp., 54 F.3d 1207, 1214 (5th Cir. 1995)(“fairly lenient standard.”)