Vigilant Blog

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Mar 27, 2018

Q&A: Be careful when considering a settlement for back wages

Q&AWage and Hour 

Question: We recently conducted a self-audit and discovered that we underpaid one employee for wages earned. If we pay her the past wages owed and ask her to sign something releasing us from liability, are we covered?

Answer: No. Conducting self-audits can be helpful in identifying errors in your wage and hour practices and providing information about possible liability, but you should be careful when seeking to correct past errors. Generally, a settlement of past wages under the federal Fair Labor Standards Act (FLSA) must be supervised by the U.S. Department of Labor (DOL) or a court in order to be enforceable. If you settle a claim for past wages without the supervision of the DOL or a court (e.g. by entering into a private settlement agreement directly with the employee), you may still face a wage and hour lawsuit from that employee. The employee could allege that you only paid part of what was owed, and demand that you also pay liquidated damages (doubling the amount you owed). In addition, any waiver signed by the employee must unequivocally show that they are accepting payment in exchange for waiving their rights under the FLSA. In one recent case, an employer mistakenly believed that an employee who cashed a check that said “all back wages owed” in the memo line would qualify as a valid waiver of rights under the FLSA. Unfortunately for the employer, their payment was neither supervised by the DOL or a court, nor did it constitute a valid waiver of the employee’s right to sue. As a result, they’re out the money they paid to the employee and they still have to defend themselves in a costly wage and hour lawsuit (Lopez v. Real Monarca, Inc., MD Florida, March 2018).
Another aspect to consider when exploring wage and hour settlements: settling FLSA claims does not mean you’re off the hook for state wage and hour violations. Unless the settlement agreement specifically addresses state law (in addition to FLSA claims) and fully compensates the employee, then you could still face liability for violations of state wage and hour laws. The bottom line is that you should be in close contact with your employment attorney when conducting a self-audit of wage and hour practices, as well as anytime you want to settle wage and hour claims with an employee. Because there’s a lot to consider and the liability can be costly, it’s important to seek legal counsel before you get started.

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This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.