The ripple effect of wage and hour noncompliance

By Higginbotham on February 25 , 2015

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If you’re still not convinced that wage and hour issues are a growing threat to your business, consider these developments:

  • The U.S. Department of Labor (DOL) and Texas lawmakers are both cracking down on noncompliance with worker classification, minimum wage, overtime, recordkeeping and other Fair Labor Standards Act (FLSA) issues, as well as payroll fraud – with industries like food service and construction being especially targeted. Many businesses have been ordered to pay back wages for misclassification and other wage and hour violations.
  • According to the consulting firm Seyfarth Shaw, LLP, over 8,000 wage and hour lawsuits were filed by employees and former employees under the FLSA in 2014, often ending in multimillion-dollar judgments and putting employers on the hook for unpaid compensation, damages, legal costs and penalties. And unlike a harassment or discrimination lawsuit that has to go through the Equal Employment Opportunity Commission, a plaintiff attorney on a wage and hour claim can proceed straight to litigation.
  • There’s a growing awareness among worker advocacy groups and mainstream media about “wage theft” by employers. Even employers who are merely making honest mistakes are getting caught up in the spotlight and suspicions, making them easy targets for wage and hour lawsuits.

It’s clear this risk is growing fast, and like a Texas summer, the heat is on for employers. The most common compliance mistakes are:

  • Misclassifying employees as independent contractors
  • Misclassifying exempt employees as non-exempt
  • Miscalculating bonuses and commissions
  • Failing to pay overtime due to misclassification as exempt
  • Requiring employees to work off the clock

Whether you’re noncompliant because of honest mistakes and oversights, or you’re trying to bend the rules to save money, the end result can be the same – a ripple effect of costly consequences:

  • Workers’ compensation. Employee misclassification is a form of workers’ comp premium fraud, and it costs workers’ compensation insurance carriers hundreds of millions of dollars every year. If your carrier determines that some of your independent contractors are actually misclassified employees, you can be charged payroll for those workers and be on the hook for back wages, back taxes, interest and penalties.
  • Your retirement plan. Independent contractors are generally excluded from retirement plan contributions, so if your independent contractors are reclassified as employees, you could face hefty penalties and have your retirement plan disqualified.
  • Affordable Care Act. A misclassified independent contractor can file a claim against an employer that doesn’t offer essential health care coverage if that contractor is ultimately classified as an employee. That could trigger an ACA penalty and expose the employer to costly medical bills if the employee should suffer a catastrophic accident or serious illness.

Bottom line: the stakes are getting higher, so protecting your business is crucial. While you can’t eliminate every exposure, you can significantly lower your risk by taking some precautions. Know the laws and your responsibilities. Carefully review your current pay practices. And make sure your employees and independent contractors are classified properly. For more information, see the DOL’s Wage and Hour Division.

Wage and hour issues will continue to be a growing risk for employers, and the laws can be complicated. Let the business insurance experts at Higginbotham Insurance help you protect your business from the ripple effect of costly consequences.

Tags: Risk Management


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