FLSA FAQs: Liquidated Damages and FLSA Non-Compliance

In our last post, we discussed what can happen if you do not pay the proper overtime premium to your employees pursuant to the Fair Labor Standards Act (FLSA). Employees whose employers fail to make FLSA-required overtime can enforce their rights under the FLSA in a private action filed in a federal district court for their unpaid overtime compensation. 29 U.S.C. § 216(b). Generally, the employer can be sued where the employee worked, where the employer does business, or where the employer is incorporated. State law might also provide separate or different remedies, too, but we’ll stick with federal law for now. The FLSA provides for three remedies:

1. Backpay
2. Liquidated Damages
3. Reasonable Attorney’s Fees

We discussed each of those remedies, but I want to come back and focus on how employers can overcome the presumption that liquidated damages would be awarded. Under the FLSA, liquidated damages are an amount equal to any backpay. That’s essentially a double “backpay” remedy. Liquidated damages are awarded in most but not all FLSA cases. As the Seventh Circuit has explained, there is “a strong presumption in favor” of awarding liquidated damages. An employer can only overcome this presumption by “‘good faith . . . and reasonable grounds for believing that [the] act or omission was not a violation” of the FLSA. To avoid liquidated damages, employers must show that (1) their actions were taken in good faith and (2) they had reasonable grounds for their belief that they were complying with the FLSA. (See 29 U.S.C. § 260).

Good Faith under the FLSA

Under the “good faith” element of the FLSA’s test, courts will view the conduct from the perspective of a “subjectively reasonable” employer. Usually, that means that an employer must take some concrete action to demonstrate its violation was not willful. As the saying goes, ignorance of the law is no excuse. Generally being a “good” employer of high character that will do the right thing going forward will not save you from liquidated damages. Courts have held that an employer cannot “simply remain blissfully ignorant of FLSA requirements” to avoid double damages under the FLSA.

What does “good faith” entail? As one example, look at the Fourth Circuit’s 2011 decision in Perez v. Mountaire Farms, Inc. In that case, the chicken processor employer was found liable by the district court under the FLSA for failing to pay workers for time they spent donning and doffing protective gear (a subject fraught with FLSA risk in its own right). Nonetheless, the district court did not award liquidated damages because it concluded that the employer acted in good faith. On appeal, the Fourth Circuit explained:

Mountaire also produced evidence of its good faith by showing that the company relied on the advice of David Wylie, an attorney retained by the National Chicken Council. Mountaire presented to the district court fourteen letters and memoranda from Wylie in which he interpreted donning and doffing cases from various jurisdictions, provided updates on plant surveys conducted by the Department of Labor, and advised poultry companies on how the companies could alter or maintain their practices to remain in compliance with the FLSA, as interpreted by different courts. The district court found that Mountaire “clearly” changed its policies based on Wylie’s information and advice.

These steps are the kind of “good faith” required by the FLSA. Mountaire both sought and, just as importantly, followed the advice of its qualified wage and hour counsel. Following this advice did not save them from ultimately losing on the merits of their case, but it did save them nearly $750,000 in additional liquidated damages. Here, the takeaway should be that employers cannot simply make assumptions: they must take concrete, documented steps to comply with their obligations under the FLSA. Assumptions alone do not establish reasonableness because they are not “good faith” actions.

Reasonable Grounds under the FLSA

The second element required to avoid liquidated damages under the FLSA is “reasonable grounds” for the position you take. Courts view this component from an objective reasonableness standard. Employers can establish reasonableness if they actually rely on a reasonable, albeit erroneous, interpretation of the FLSA and its accompanying regulations. In other words, it’s not enough to consult wage and hour counsel in good faith. Courts also require employers to show that they followed that advice, that the advice was objectively reasonable (hire qualified wage and hour counsel, not just anybody!) just like Mountaire Farms did. To illustrate this point, you cna look to Mumby v. Pure Energy Services, a 2011 case where the Tenth Circuit affirmed a district court’s award of liquidated damages against an employer who sought (and followed) legal advice on how to properly pay day rates under the FLSA, but then ignored their counsel’s advice that its failure to pay overtime, regardless of the day rate, violated the FLSA. The appellate court held that the company could not “both rely on and disregard advice of counsel in order to avoid a three-year statute of limitations and liquidated damages.”

How can you demonstrate that the grounds for avoiding liquidated damages are “reasonable?” Courts have found reasonableness where the issue is novel, different, confusing, or unsettled. Again, you can’t simply stick your head in the sand and ignore the plain meaning of the FLSA, its regulations, and the case law. The absence of precedent is a relevant factor when determining objective reasonableness. For obvious reasons, employers have to take decide on a court of action before a dispute with an employee arises or the DOL begins an investigation. Just as you cannot ignore the law, after a dispute arises or the investigation begins, it is too late to start your reasonable, good faith inquiry into the FLSA. Even if you arrive at a perfectly reasonable, defensible interpretation of the FLSA, you cannot do it after the fact.

Employer Takeaways

The best defense to liquidated damages remains not having FLSA compliance issues in the first place. Regularly auditing pay practices, particularly in businesses like retail, logistics, construction, and even manufacturing remains the best defense. Failing proactive options, avoiding liquidated damages will depend on the particular facts of your situation. Since most lawsuits and DOL investigations aren’t looking at last week’s paycheck only, the next relevant question is how far back employees can go in seeking unpaid overtime. That was part of the issue in the Tenth Circuit case cited above. We’ll look at the FLSA’s statute of limitations in our next our next FAQ installment.