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Wage and Hour Lawsuits: How to Protect Your Small Business

Wage and Hour Lawsuits: How to Protect Your Small Business

You don’t need to run a big business to be a target for litigation. Small businesses across the country are targets for potential lawsuits, especially when it comes to wage and overtime compliance.

Wage and hour litigation has grown into a major hazard for employers. Employees can pursue litigation if they feel that they weren’t paid for their work. These types of claims can stem from a variety of factors – an employee worked overtime that wasn’t approved, someone clocked in early when they weren’t supposed to, etc. These claims can wreak havoc on your business, so it’s essential to protect your business from these disputes.

Why is Wage and Hour Litigation a Growing Trend?

While wage and hour lawsuits have been around for decades, they’ve become more prominent in the past few decades. Fair Labor Standards Act (FLSA) lawsuits increased by a staggering 417% between 1997 and 2017, and the stakes have grown even higher in recent years due to complicated labor regulations and the impact of COVID-19.

The Department of Labor’s Wage and Hour Division (WHD) has dedicated more time in recent years to achieve compliance with labor standards. The WHD conducted more outreach events in 2020 than any other year in history, capping off a three-year stretch of increased efforts. More employees also reached out to the WHD, as evidenced by the following numbers.

  • The WHD received more than 9,000 phone calls per day, an 350% increase from their previous average.
  • The WHD website received more than 45 million views since the passage of the Families First Coronavirus Response Act (FFCRA).
  • The WHD collected an average of $706,000 in back wages for workers per day in 2020.
  • WHD investigations in 2020 found that employees were owed an average of $1,120 in back wages.

COVID-19 also created some new challenges for wage and hour compliance. More businesses were forced to have employees work from home, making it difficult for some employers to diligently track hours and account for overtime as they would have before.

How to Protect Your Business from Wage and Hour Litigation

Simply put, employers need to be increasingly careful about wage and hour violations. Even a small timekeeping error or miscommunication can turn into a lengthy, costly dispute. 

Here are some ways that you can protect your business against these lawsuits.

Keep accurate employee payroll records

Clean, accurate payroll documentation is a critical aspect of running a compliant business. The (FLSA) requires businesses to keep accurate payroll records for non-exempt employees, many of which can help you make your case if you ever face a wage and hour lawsuit. Some of those records include:

  • Time and day of week when employee's workweek begins
  • Hours worked each day
  • Total hours worked each workweek
  • Basis on which employee's wages are paid (e.g., "$9 per hour," "$440 a week," "piecework")
  • Regular hourly pay rate
  • Total daily or weekly straight-time earnings
  • Total overtime earnings for the workweek

It’s also important to maintain these records for extended periods of time. Payroll data should generally be stored for at least three years in case of future litigation or if the Department of Labor (DOL) ever wants to review your business.

Audit your timekeeping practices and adjust policies as necessary

One of the simplest ways to protect your business is to review your timekeeping practices. Maintaining outdated or poorly defined practices can lead to unpleasant surprises when it comes to wage and hour law. As such, you’ll want to audit your practices and make the necessary changes to help your business avoid any issues.

A good place to start is to review the Society for Human Resource Management’s (SHRM) checklist for various timekeeping practices. This checklist highlights a few different issues that can clean up your practices and establish more definitive methods for timekeeping. Of course, there are some notable risk areas that you’ll need to address as well.

Establish a timekeeping policy and communicate it to employees

It’s essential to set some ground rules to makes sure everyone is on the same page about your timekeeping policy. Employees should have a clear understanding of how your timekeeping policy works and what they should do when it comes to recording time. For example, you may want to highlight the following policies.

  • Require employees to record and verify all time worked.
  • Break down what counts as hours worked (such as training and travel time).
  • Put controls in place to prevent employees from clocking in early without prior approval.
  • Prohibit off-the-clock work.
  • Clearly state that overtime must be pre-approved by a supervisor.

You’ll also want to have your employees review and sign documentation that they acknowledge your practices. This measure will not only educate employees on your policies, but also serve as a key compliance document to defend your business against some off-the-clock claims.

Avoid rounding for timekeeping if possible

It’s not uncommon for employers to round hours during payroll, but that doesn’t mean it’s the safest approach. According to the DOL, “employee time from 1 to 7 minutes may be rounded down, and thus not counted as hours worked.” The problem with this approach is that it can still open your business up to legal grey areas. SHRM found that “courts have ruled in favor of employees where the employer's rounding policy worked only to the employer's advantage or failed to average out over time.” Some states also have their own rules for rounding time, adding an extra dimension of complexity to the issue. 

This grey area is why pay to the punch is the gold standard for timekeeping. This approach will not only help your company identify exactly how long your employees worked, but also avoid these potential complications that can lead to wage and hour lawsuits.

Invest in payroll technology

These days, a manual timekeeping system is just going to hold you and your company back. Whether you use paper records or some other form of offline time tracking, these methods are inconsistent and time consuming. That combination is only going to make matters worse if your company is ever hit with a dispute.

Payroll technology is designed to simplify timekeeping and keep your business compliant with wage and hour regulations. Cloud-based timekeeping tools like GMS Connect offer a variety of key advantages for small business owners. 

For example, timekeeping software makes it easier to track exactly when employees clock in and out for work and avoid issues with rounding. Technology also helps you streamline payroll management, giving you real-time calculations of employees’ pay and allowing both you and your employees to access schedules, hours, and other details from anywhere with a secure connection.

Work with payroll experts

It’s not easy to manage payroll for a small business. A simple timekeeping mistake can lead to a serious compliance issue that turns into a lawsuit. That need for payroll expertise is exactly why small businesses shouldn’t face these threats alone.

GMS partners with small businesses to help them take control of their payroll administration. We can provide your company with a comprehensive web-based payroll solution to not only keep your business compliant, but also save you both time and money. You’ll also have access to a dedicated GMS payroll processor and other experts who can answer your questions and help you stay on top of new regulations, state laws, and timekeeping trends.

As a Professional Employer Organization, GMS is here to make your business simpler, safer, and stronger. Contact GMS today about how we can help you with payroll administration and other critical HR functions.



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