Company and CEO Held Jointly Liable for Minimum Wage Violations

A federal district court in Pennsylvania has held American Future Systems, Inc., and its CEO jointly liable for Fair Labor Standards Act (“FLSA”) violations arising from the company’s break policy. That policy required employees to log off of their computers and forgo compensation for all breaks, even short ones lasting fewer than 20 minutes. The CEO, as a 98% owner of American Future Systems and the “final authority” for compensation and break policies, was found to be a joint employer and therefore personally on the hook for these FLSA violations.

The company’s written compensation policy, which had been in place since 2009, required employees to log off of their computers during all breaks, including short personal breaks to use the restroom or get a cup of coffee. Because the company only compensated employees for the time they spent logged into their computers, all breaks were rendered unpaid. Such a policy clearly contradicts the FLSA, which states that short breaks between 5 and 20 minutes are considered compensable work hours. As a result of failing to pay employees for their short personal breaks, American Future Systems allowed employee compensation to dip below minimum wage over the course of each pay period, prompting the lawsuit, which was brought by the U.S. Department of Labor.

While a company facing liability for violating FLSA minimum wage and recordkeeping requirements is nothing new, the fact that the CEO was held personally on the hook as a joint employer is an interesting wrinkle that business leaders should take note of. In this case, American Future Systems’s CEO was a principal owner of the company, had hiring and firing authority, controlled compensation and break policies, and was ultimately responsible for company strategy and the activities of its employees. By having that level of control over the day-to-day operations of American Future Systems, the CEO was liable, along with the company itself, as a joint employer. Complying with the FLSA is always imperative, but for owners who exercise a high degree of control over their businesses, this decision provides a new sense of urgency in the form of potential personal liability. It also highlights the importance of having employee handbooks and workplace policies reviewed from time to time, as seemingly innocuous policies such as “always log off from your computer before going on break” could result in significant consequences for the company as well as its owners.

Frank Gulino is an attorney with Berenzweig Leonard, LLP. He can be reached at FGulino@BerenzweigLaw.com.

Trend Toward Enforcing FLSA Settlements

The general rule regarding out-of-court settlements for claims brought under the Fair Labor Standards Act (“FLSA”) is that in order to be enforceable, the settlement agreement must be approved by the Department of Labor or by a court. This rule has long posed a burden on employers because unlike many other employment-related claims that could be resolved through a private settlement agreement, settlement agreements in FLSA claims need to be filed in the public record for necessary court approval.

A recent ruling out of the Fifth Circuit Court of Appeals has provided a breath of fresh air for employers. In the case of  Martin v. Spring Break ’83 Productions, LLC, a group of film-industry technicians brought a claim under the FLSA for additional compensation for hours they allegedly worked. After an investigation, a union representative determined that it would be impossible to determine whether the technicians actually worked on the days they claimed.  Subsequently, the union and employer entered into a private settlement agreement regarding the disputed hours. Though the settlement agreement was entered, the technicians filed suit seeking unpaid wages under the FLSA. The employer moved to dismiss due to the previous settlement agreement. The Fifth Circuit ultimately ruled that there existed a bona fide dispute as to the number of hours allegedly worked. Because of this, the court held that the settlement payment was “an enforceable resolution of those FLSA claims predicated on a bona fide dispute about time worked and not as a compromise of guaranteed FLSA substantive rights.”

Importantly, the court allowed this private settlement because it “resolve[d] a bona fide dispute as to the number of hours worked – not the rate at which [the technicians] would be paid for those hours.” Employers must take note that nothing in this opinion allows for employees to privately waive or release substantive rights provided under the FLSA. For example, nothing in this opinion would allow an employer to enter into a settlement agreement whereby the employer would settle to pay half of an employee’s claimed overtime compensation or where the employer negotiated to pay a higher rate of pay than allowed for hours worked in excess of 40 per workweek.

Although the Fifth Circuit came to this conclusion, other jurisdictions may not necessarily reach a similar conclusion.  The Fifth Circuit is the appellate jurisdiction covering Louisiana, Mississippi, and Texas. The Fourth Circuit covering Virginia and Maryland has not yet permitted a private settlement waiver of FLSA overtime claims.  This decision calls into question the long standing principle that FLSA settlements must always be approved by a court or the Department of Labor to be valid. Employers should take note of this opinion and discuss with counsel its potential impact on any FLSA settlement.

Posted by Nick Johnson, Associate Attorney at Berenzweig Leonard, LLP, a business law firm in the DC region.  Nick can be reached at NJohnson@BerenzweigLaw.com.