A Matter of Interpretation – DOL Fines FL Operator

In a cautionary tale for launderers nationwide, a Florida hospitality operator, Miami-based Crown Linen LLC, recently was cited for violations of the Fair Labor Standards Act (FLSA) for employing supervisors and an assistant chief engineer at its Orlando plant as salaried staff, when an inspector determined that they were – in her view – misclassified hourly employees.

A company can never be sure its interpretation of the law will match that of a Department of Labor (DOL) inspector, said Managing Partner Pablo Lucchesi, noting that the company has maintained the management structure for which it was cited since its founding more than 15 years ago. The plant had passed previous DOL inspections, but this time, the inspector held that the company was not in compliance with the FLSA.

Crown management objected to the ruling, but decided to reclassify the affected staff members rather than engage in a costly lawsuit with the DOL. “We do not agree with the concept because supervisors have a management role,” Lucchesi said. “They don’t really work on machines as operators. They perform their role on the production floor, but they don’t work as machine operators.” The DOL inspector wasn’t moved by these arguments, he said.

Joseph Shelton, a partner in the firm of Fisher & Phillips, Atlanta, and a specialist in FLSA compliance issues, said the case wasn’t altogether surprising. “What Crown experienced is not uncommon in that a company’s long-standing classifications of exempt employees might be challenged as being unlawful.”

As a result of the settlement, Crown agreed to reclassify roughly 20 salaried employees in the two classifications affected by the citation as hourly staff. These employees are now working on a fluctuating hourly work week. Crown Human Resources Director Mayra Rodriguez said that under this system, these employees earn half-time pay when they exceed 40 hours. They also may work less than 40 hours during slow periods. “A fluctuating work week recognizes a half rate of pay for hours worked over 40 for individuals in that role,” Rodriguez said. “It does guarantee the individuals a fixed weekly salary. But then hours worked over 40 there is a formula that Department of Labor does support.” One irony of the change resulting from the citation is that under the new system, employees may in fact earn less than they did before the change.

Shelton said this type of compensation model is helpful to companies in certain situations. “While the fluctuating hourly work week isn’t always the best substitute for paying the more standard hourly rate and time-and-a-half for hours worked over 40 in a week, this approach does have benefits that can sometimes outweigh the cons for certain positions.”

Crown’s agreement with the DOL requires the company to pay roughly $64,000 in back wages over a two-year period to the employees affected by the ruling. Rodriguez pointed out the violations weren’t classified as “willful,” which would have required payment of up to three years’ back wages. The DOL also imposed no civil penalties on Crown. “There’s a distinction between what is with intent and what is not,” Rodriguez said. “This was not identified as a willful violation, which is why the back wages only goes back a period of two years. It also includes why we were not issued any civil money penalties or any other charges from this audit. I think it’s very important to identify that because it’s certainly not an intended action on behalf of Crown Linen.” Lucchesi said a Miami Herald article on the case misleadingly implied that Crown had deliberately withheld wages from its staff.

Rodriguez said the change hasn’t impacted staff morale at the plant. Employees are going about their duties as before, although now they are classified as hourly staff, rather than supervisory personnel who are exempt from FLSA overtime requirements. Crown’s other four plants have made similar adjustments to staff classifications in order to ensure full compliance with the law.

As for other companies dealing with similar issues, Lucchesi and Rodriguez advised carefully reviewing the DOL’s statutory requirements on job classifications. “They have a lot of latitude to do an interpretation of the law,” Lucchesi said.

Shelton agreed that reviewing company policies in this area can help ensure ongoing compliance. “Periodic reviews/audits of your company’s pay practices are vital to determine if your business has potential wage-hour violations,” Shelton said. “Audits of this nature should put a spotlight on whether your exempt employees would meet the tests for the applicable exemptions.” Other areas potential vulnerability that Shelton cited include:

• Off the Clock Issues – are you engaging workers in ways that could trigger off the clock violations?
• Time Records – are your time keeping records in compliance with what the law requires?
• Overtime Calculations – are you correctly determining the “regular rate of pay” when calculating your overtime payment obligations?
• Deductions – are you lawfully handling deductions for things like uniforms, shortages, and property damage?
• Independent Contractor Classification – are your 1099 workers really going to survive scrutiny if they are put under a microscope?