We often advise clients that if they discover that an employee has been misclassified as exempt, the best course of action is to determine the amount of overtime owed for the previous three years (the statute of limitations period) and pay the employee in exchange for a waiver and release of claims. The reasons for this advice are many. First of all, FLSA and state wage laws are “strict liability” statutes, meaning that it doesn’t matter whether the misclassification, or failure to pay overtime, was a good faith mistake, or even agreed upon by the employee. If the employee was improperly paid, the employer is liable.
Secondly, wage claims are expensive for employers. If successful, an employee can recover not only the wages owed, but liquidated damages (generally twice the wages owed) and their attorney’s fees. That’s why we say, if an employer realizes they made a mistake, paying the back wages before a claim is filed is a much cheaper way to resolve the matter.
As usual, though, timing is everything. If the employer discovers that wages are owed prior to the employee making a claim, the employer is free to enter into a settlement agreement with the employee. Once an employee files a claim with the Department of Labor or files suit in court, though, the employer is not free to enter into a settlement of wage claims without approval of the settlement by either the DOL or the court.
As the 8th Circuit Court of Appeals reiterated this year, because FLSA rights are statutory and generally cannot be waived, companies can settle claims in only two ways. For claims at the DOL level, an employee can waive their FLSA rights only if they agree to accept full payment of a settlement offered by their employer, they receive full payment of that settlement, and the settlement was supervised by the Secretary of Labor. After commencing litigation, employees can waive their rights only if the parties agree on a settlement amount and the district court enters a stipulated judgment.
This is important for employers for two reasons. First of all, it underscores the importance of self auditing employee classifications and overtime practices from time to time to ensure compliance with wage laws. In addition to it being cheaper to resolve a wage dispute before a claim is filed, employers can also settle those claims without oversight. Secondly, if a wage claim is filed, it is important that an employer adheres to the legal requirements of resolving a claim at that point.
Wage claims can be tricky, and costly. An experienced labor and employment attorney can help an employer analyze a claim and advise on the best solution.