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Acting In Good Faith At Question In FLSA Case

The Fair Labor Standards Act (the “FLSA”) is the federal statute that prescribes standards for the basic minimum wage and overtime pay. The FLSA requires employers to pay covered employees, who are not otherwise exempt, at least the federal minimum wage and overtime pay of one-and-one-half-times the regular rate of pay.

When an employee brings a claim under the FLSA, he/she must establish three elements. First, the employee must demonstrate the existence of an employer-employee relationship. Second, the employee must show that he/she is a covered employee under the FLSA (i.e. he/she is not exempt). Lastly, the employee must establish that his/her employer violated the statutory standards.

Once the employee establishes all three elements, the employer must plead and prove an exemption (which are construed narrowly) or other affirmative defense under the FLSA.

As discussed herein, the employer has certain good faith defenses available to it.

Non-compliance with FLSA minimum wage and overtime requirements can be excused if the employer pleads and proves that the challenged actions or omissions were taken in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation of the Administrator of the Wage and Hour Division, or any administrative practice or enforcement policy of the Division with respect to the class of employers to which he belonged. An employer’s reliance must relate to a written ruling, policy, regulation or order of the Wage and Hour Administrator and cannot be based on conversations between an attorney and a district director of the Wage and Hour Division nor can it relate to the rulings or regulations of another governmental agency. Reliance is analogous to a negligence standard and the employer must demonstrate that it acted as a reasonably careful person would have acted under the same or similar circumstances.

Courts can deny liquidated damages or reduce them in actions where the employer proves that it acted in good faith and with reasonable grounds to believe that it was not violating the Act. There are two components to this defense: (1) subjective good faith, which requires an honest intention to ascertain what the FLSA requires and no knowledge (actual or constructive) of a FLSA violation; and (2) the employer’s objective reasonableness for believing it did not violate the FLSA.

An Illustrative Case - Chao v. Barbeque Ventures LLC

A five-restaurant chain failed to pay overtime to employees whose weekly hours totaled more than forty when working at more than one location. When the case went to court, the owners claimed they weren’t aware that they owed overtime pay. And so arose the case of Chao v. Barbeque Ventures LLC in which the Eighth Circuit had to decide whether those owners had acted in good faith.

No One Kept Track

Each restaurant manager independently hired and scheduled employees without input from other restaurants or senior management. The area director oversaw all five restaurants and visited each about twice a month. He testified that he knew some employees worked at more than one location.

Restaurant managers reported the hours worked by their employees to Payroll Management Inc., an independent third-party that processed the payroll and issued paychecks and W-2 forms. No one combined the hours of employees working at more than one location to see whether they were owed overtime pay.

A Costly Mistake

The Secretary of Labor sued the owners in 2006, alleging failure to pay overtime compensation to twenty-five employees in violation of the FLSA. The complaint sought – on behalf of those employees - $90,055 in unpaid overtime compensation, liquidated damages (damages agreed on in advance) and post-judgment interest.

The trial court ruled for the government without a trial. The owners appealed only the grant of liquidated damages.

The Good Faith Issue

First, the Eighth Circuit noted that, under the FLSA, an award of liquidated damages is mandatory unless employers can show that they acted “in good faith” and with “reasonable grounds for believing” that they had complied with the FLSA. Then “the court may, in its sound discretion, award no liquidated damages.”

This “good faith” requirement is a subjective standard. Employers must establish “an honest intention to ascertain and follow” the dictates of the FLSA. To carry their burden, employers must show that, though they “took affirmative steps to ascertain” the act’s requirements, they “nonetheless violated its provisions.”

Three Employer Arguments

The owners argued that they had demonstrated good faith on three grounds.

1. Lack of specific knowledge. They claimed they hadn’t known that employees worked at multiple locations. The Eighth Circuit found this argument failed to meet the burden of showing an “honest intention” to ascertain and follow the FLSA’s requirements. Thus, lack of knowledge wasn’t sufficient to establish good faith.

2. Lack of employee complaints. The owners claimed that they had proved that no employees complained about not getting overtime pay. The Eighth Circuit held that the fact that an employer has broken the law for a long time without employee complaints doesn’t demonstrate the good faith required by the statute.

3. Payroll outsourcing. The owners claimed that they had established good faith by outsourcing their payroll. The Eighth Circuit noted that it had previously rejected (in Goldberg v. Kickapoo Prairie Broadcasting Co.) the proposition that delegating the payroll function to a subordinate satisfied the FLSA.

Thus, the Eighth Circuit concluded that the owners had failed to establish an honest intention to meet FLSA requirements and upheld the award of liquidated damages.

No Easy Task

This case demonstrates how complying with the FLSA is not an easy task. To be safe, wise employers conduct periodic self-audits to determine whether all employees not receiving overtime compensation are actually exempt under the FLSA’s provisions.



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