Avoiding the back-pay double whammy

“What? I have to pay double?” 

Welcome to the world of liquidated damages. Until recently, if your business was found in violation of minimum wage or overtime regulations by the U.S. Department of Labor: Wage and Hour Division, you were usually required to pay back wages to your employees for violations found in the last two years. Now, you pay that amount – twice.  

Let’s use an actual example to see the impact that liquidated damages can have on an employer’s bottom line.

Company ABC didn’t pay overtime to its salespeople for the last two years because it thought they were exempt. However, the salespeople only made sales from inside company headquarters over the phone and internet so they didn’t qualify for the outside sales exemption. And they did not qualify for the commission exemption because more than 50 percent of their pay was in base salary. The 40 salespeople at the company averaged 50 hours of work per week over the two year period and were paid an average of $600 per week in base salary and commissions. Company ABC has never been investigated by the Wage and Hour Division before, they had no idea that their employees weren’t exempt, and they maintain perfect time, attendance, and pay records.

Back wages owed: $249,600

NEW! Liquidated Damages owed: $249,600

Total: $499,200

Historically, liquidated damages were only collected when the Wage and Hour Division (WHD) won a court settlement. Under the current administration, the WHD has begun assessing liquidated damages administratively along with back wages during a final conference with the employer. The assessment of liquidated damages began on the East Coast in 2011 and has spread slowly across the country, with all regions implementing it in 2012 and 2013. This year will probably see a giant leap in the number of cases with liquidated damage assessment.

If your business is violating minimum wage or overtime regulations found in the Fair Labor Standards Act (FLSA) there is little you can do to avoid a liquidated damage assessment.  A violation does not have to be repeat or willful for such assessment. The only wiggle room is what’s known as a “good faith defense.”

The Portal to Portal Act of 1947 amended the FLSA by establishing a good faith defense against liquidated damage assessment if the employer can prove that they were acting in good faith and that they had reasonable grounds for believing that the action was not a violation of the FLSA. An example of a good faith defense would be legal advice from a labor lawyer. Unfortunately for some employers, blissful ignorance is not a good faith defense.

The only way to avoid liquidated damages in the future is to review your employment practices now. Most FLSA investigations will cover a two-year period, and the overtime liability alone can be quite hefty even without a liquidated damages assessment. Reviewing your employment and pay practices on a regular basis can help you stay ahead of any problems that may arise.