Protecting Employers Since 1985


Audit compensation classifications and policies

√ Implement arbitration agreements

The New Year is a time for fresh starts – diets, exercise programs and wonderful sounding self-improvement programs. This is great – but in your quest for improvement, don’t forget about your business! While resolutions to audit employee classifications and compensation policies and to adopt an arbitration policy may not carry the exciting vision of a new you, they may be the most significant (and long-lasting) of your resolutions this year.

To that end, you should consider:


Wage and hour claims under the Fair Labor Standards Act (“FLSA”) (and usually under state wage laws piggybacked onto FLSA claims) continue to rise and the claims, which are usually filed as collective or class actions, carry enormous liability exposure. These claims are generally extremely expensive to litigate and settle due to the fact that employees can seek damages for up to three years of unpaid wages or overtime for him/herself and for other similarly situated employees. In most cases, the amount owed will be doubled due to a “liquidated damages” provision of the FLSA. And, to make matters worse, you will likely have to pay not only your defense attorney but the plaintiffs’ class/collective action attorney under a fee-shifting provision of the FLSA.

Small mistakes in employee classification or compensation policies add up quickly when the claim involves many current and former employees and may quickly reach tens or hundreds of thousands of dollars if a collective or class action is certified and after liquidated (doubled) damages and the plaintiff’s attorney’s fees are taken into account.

To minimize these risks consider the following:

1.  Are you incorrectly classifying non-exempt (hourly) employees as exempt (paid salary without overtime)?

Remember: An employee is not exempt simply because you pay them by salary and the salary meets the minimum Department of Labor threshold; the employee must also meet the duties tests. The duties test requires analysis of the employee’s job and whether it fits within one of the overtime exemptions.

Example: Even if you have an employee who you pay a substantial salary, if the employee is primarily performing “blue-collar” work or is an administrator performing routine tasks with no supervisory authority, the employee is likely non-exempt despite the high salary. There are general and specific overtime exemptions under the FLSA. It is worth your time to evaluate each job. If in doubt, non-exempt is always the safest classification.

2.  Do you have an agreement with an employee that seems a “win-win” but violates compensation laws?

Remember: An employee cannot waive their rights to be lawfully compensated under the FLSA. The employee may agree to your arrangement today, but tomorrow could file a wage claim or you might find yourself under a DOL audit. Neither the DOL not the courts will care that the employee agreed or even requested the illegal pay arrangement.

Example: If you have a non-exempt employee who wants to work more hours but you can’t afford to pay overtime, don’t agree to pay the weekly hours over 40 under the table. This practice (very common in certain industries) is not only illegal but can result in an extension of the FLSA statute of limitations from 2 to 3 years.

3. Do you pay overtime wages to employees who work overtime without authorization?

Remember: If your non-exempt employee works overtime, you have to pay overtime compensation whether the work was authorized or not. If you have a problem with unauthorized overtime, you should discipline (or terminate if the problem continues) the offending employees but you still have to pay them overtime.

4. Do you require employees to keep accurate account of their time?

Remember: If you have employees who refuse to sign in or out, or sign in too early or sign out too late, you need to discipline (or terminate if the problem continues) the offending employees. It is your obligation as the employer to ensure that time is accurately tracked. If you fail to ensure accurate timekeeping, you may have a very expensive lawsuit to defend, even if the problem was created by employees failing to properly follow your timekeeping rules. Additionally, consider having employees sign off on their timesheets – on paper or electronically. You might consider added language above their signature affirming that the time records reflect all hours worked.

5. Do you allow employees to be interrupted with work tasks while on an unpaid break?

Remember: If your employees are sometimes interrupted to address work questions or tasks during an unpaid break, such as a meal break, if you do not pay for their time during the break, you may be susceptible to substantial liability. This may seem trivial but consider all of your past and current employees over the last 2 -3 years and all of their lunch breaks. Then, consider that if all of those hours should have been compensated, you would not only owe the employees for the unpaid break time but also overtime pay if the additional time puts the employees over 40 hours for the week — plus liquidated damages and attorney’s fees, of course.

6. Are you incorrectly classifying employees as independent contractors?

Remember: Even if your employee doesn’t want to be treated as an employee, if that is what the worker is, you can’t agree to pay them as an independent contractor. An agreement to call an apple an orange, even if in a signed document, will not make the apple an orange and will be no defense in a lawsuit.

Also, the costs of transitioning “independent contractors” to employees may not be as high as you think – careful review and modification of schedules and pay rates may result in minimal additional costs.


There is no way to completely avoid a wage claim. However, with a well-drafted arbitration agreement you can avoid having to litigate in court and, most importantly, can avoid a class or collective action. This validity of a class/collective action waiver in an arbitration agreement was solidified in May, 2018 in three consolidated cases. See Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018). While the cost savings of arbitrating a single employee claim vs. court litigation are debatable, the benefits of a class/collective action bar are clear.

However, those of you in the transportation industry will not be able to enjoy the benefits of an arbitration clause as to your employees because employment contracts of workers in interstate commerce are expressly exempted from coverage under the Federal Arbitration Act. However, the United States Supreme Court is expected to issue a decision this year in New Prime Inc. v. Oliveira, U.S., No. 17-340, as to whether drivers that classified as independent contractors may be bound by an arbitration (and class/collective action waiver) agreement. Transportation employers should keep their eyes open for this decision.

In short, careful consideration of compensation policies and procedures may avoid costly litigation. But, to further buttress your business against wage and hour litigation, consideration should be given to the adoption of an arbitration agreement including a class/collective action waiver.

Questions? Need help reviewing employee classification or drafting an arbitration agreement? Contact Attorney Jennifer Adams Murphy in our St. Charles office at or (630) 377-1554

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