Wage Theft: Growing Problem Faces Workers Nationally, Locally

Construction workers. Photo by Mike Brown, C4AD.

By Jim DeBrosse and Mike Brown

At the Golden Corral in Mason, servers discovered their manager was shaving hours from their weekly time cards to keep the restaurant’s costs down.

At Smythe Automotive in Cincinnati and Northern Kentucky, drivers making runs to the warehouse for auto parts were required to work through their breaks in violation of federal labor law.

At TruGreen in Ohio, lawn technicians saw their hourly pay converted to a flat salary in the payroll system to cheat them out of overtime.

At Renovo Services in Kentucky and Ohio, repo agents were illegally classified as independent contractors rather than employees to avoid paying them minimum wages and overtime.

At Burlington Coat Factory locations in Cincinnati, stockers were misclassified as managers, if even one other employee was working in their vicinity, so they wouldn’t have to be paid overtime.

Wage theft – an umbrella term for failing to pay employees their lawful wages and benefits — is rampant in America and, as these examples show, the Cincinnati area is no exception. While the cases cited above were settled with the help of Cincinnati labor attorney Deborah Grayson, federal and state enforcement of wage and hour laws is woefully inadequate.

Those who can least afford it are most often the victims of wage theft – low-income wage earners, immigrants and their families. That’s why Cincinnati is among a growing number of localities where grassroots organizations are seeking to pass wage theft prevention laws. The Cincinnati Interfaith Worker Center, a non-profit advocate of workplace justice, has gathered 3,000 signatures for its Just Pay Cincy campaign to enact a local ordinance against wage theft. The campaign has the backing of the Greater Cincinnati Foundation, the Catholic Archdiocese of Cincinnati, and local labor unions.

“No one should go home after a long day and fear they won’t be paid fairly for their work.”

Chris Seelbach

Cincinnati City Council Member

Not all wage theft is intentional. but many employers show a blatant disregard for wage laws and can be repeat offenders. Workers across the country recovered nearly $1 billion in unpaid wages from employers in 2012, according to a 2014 study by the Economic Policy Institute, including $280 million recovered by the U.S. Department of Labor, $172 million by state labor departments in 44 states, $14 million from state attorney generals in 45 states and $467 million from class action lawsuits.

But the true extent of wage theft is certainly much higher. Many workers accept illegal pay practices as a condition of employment and don’t even think about complaining.  Many others often assume their attempts to seek justice will fail because they lack evidence or resources. They often fear they will be fired or face other retaliation from their bosses, such as suspensions, demotions, reduced hours or pay, or less desirable duties and work schedules. Workers in some industries fear being blacklisted by employers and unable to find work in their trade or profession.

“Why don’t these guys come forward? Well, they need a check and they have families to feed,” said Terry Burke, president of Local 8 of the Heat & Frost Insulators and Allied Workers. “There’s no enforcement of the laws, and if they complain, they end up losing their jobs. Not only that, in a small industry like ours, there’s a lot of blackballing that goes on.”

Like an iceberg, a significant portion of wage theft lies hidden from view.

Iceberg illustration by Zina Deretsky, National Science Foundation
Iceberg illustration by Zina Deretsky, National Science Foundation

A 2009 survey by the National Employment Law Project found that more than 60 percent of 4,500 low-wage workers in the nation’s three largest cities – Los Angeles, New York and Chicago – had some pay illegally withheld by their employer each week, for a yearly average of $2,634 in unpaid wages. Generalizing the results of this study, EPI estimates there could be as much as $50 billion nationally in unpaid wages below the waterline.

Generalizing the same study to Cincinnati’s 33,000 low-wage workers, the estimated toll comes to $52 million a year in earned but unpaid wages – a significant impact when a third of all Cincinnati residents, and more than half of its children, live below the poverty line.

Working families aren’t the only ones who suffer. Taxpayers suffer because unpaid wages mean higher taxpayer subsidies for food stamps, earned income credits and other income supports for the working poor. They are hurt again when national, state and local governments garner less tax revenue for roads, education, health care, law enforcement and other services. And companies who play by the rules and pay their employees the wages they’ve earned find themselves at a competitive disadvantage.

Wide-Ranging Problem

Although the poor are the worst hit by wage theft, it’s a problem that takes many forms and cuts across a wide range of employees, including those classified as “white collar.”

Most workers covered by the Federal Fair Labor Standards Act must be paid time-and-a-half for each hour of work over 40 hours in a workweek.

But millions of so-called white-collar workers — from shift managers at convenience stores to supervisors at big box retail stores who are working 50 or 60 hours a week or more — lack overtime protections and even the right to a minimum wage because of outdated federal regulations. This may change in the coming months after President Obama directed the U.S. Department of Labor last year to update the rules exempting certain white-collar workers. Proposed changes to the rules, published in early July in the Federal Register, would raise the salary exemption for so-called white-collar” workers to a minimum yearly salary of $50,440.

DOL will issue the final rule later in the year after evaluating public comments. Readers can submit comments until September 4, 2015 through the Federal eRulemaking Portal http://www.regulations.gov/. Comments must be identified by the Regulatory Information Number (RIN) 1235–AA11.

In the meantime, administrative, executive and professional workers who are paid a salary of at least $23,660 – or less than the poverty level for a family of four — are not eligible for overtime if their work includes managerial responsibilities and independent judgment. For some, the effective hourly rate can also fall below minimum wage. Today, because of inflation, only 12 percent of salaried workers meet the threshold for overtime protection, compared to 18 percent in 2004 and 65 percent in 1975 when the law was first enacted, according to the DOL.

Employers can evade labor laws by misclassifying hourly employees as salaried managers under the white-collar exemption.  A class action suit was filed in Ohio in March 2015 on behalf of assistant store managers who worked more than 40 hours per week at any Jimmy John’s in Ohio and were not paid overtime. The suit claims the primary duties of the misclassified employees required little skill or managerial responsibilities or independent judgment. Instead, the actual duties were bussing tables, cleaning the restaurant, checking to make sure that supplies were properly shelved, checking inventory, cooking, and helping customers. Jimmy’s John’s faces similar misclassification suits in Florida and Illinois. Seth R. Lesser, a New York area labor attorney representing the Florida plaintiffs, said, “Jimmy John’s operates over 2,000 restaurants around the country, and underpaying (assistant store managers) seems to be part of its business model.”

Employers can also evade labor laws by misclassifying their workers as self-employed independent contractors – a strategy in many industries to avoid paying taxes, overtime and employee benefits. Based on state surveys, the Economic Policy Institute estimates that 10 to 20 percent of employers misclassify at least one employee. An individual “is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done,” according to IRS guidelines. But that hasn’t kept many companies from stretching or defying the law. Fedex, which issues strict controls over its drivers, classifies some of them as self-employed.

Misclassified employees are cheated out of family and medical leave, overtime, minimum wage and unemployment insurance. Misclassification also shortchanges the U.S. Treasury and Social Security and Medicare funds as well as state unemployment insurance and workers compensation funds.

Today, because of inflation, only 12 percent of salaried workers meet the pay threshold for overtime protection.

On July 15, the DOL issued new guidelines clarifying whether a worker is economically dependent on the employer or is really in business as an independent contractor. The working relationship between the employer and the worker is the deciding factor, not the job title or any agreement between the parties. These new guidelines addressing misclassification have taken on an added urgency with the rapid growth of the nation’s “sharing economy,” which treats millions of on-demand workers, like Uber drivers, as self-employed. The guidance states that workers can be employees even if they set their own hours and are never directly supervised.

In addition to the tax revenue shortfalls it generates, misclassification creates an uneven playing field for businesses within many industries. Payroll savings from misclassification may be as much as 30 percent. As a result, law-abiding businesses are left at a competitive disadvantage and, given the weak enforcement of labor laws, are tempted to cheat in order to meet the artificially low prices of dishonest competitors.

According to DOL estimates, at least 5 million workers across the United States are misclassified as independent contractors rather than as employees.

In Ohio, former Attorney General Robert Cordray estimated in 2009 that Ohio had 92,500 misclassified workers, costing the state up to $20 million in payments for unemployment compensation, more than $103 million in worker compensation premiums and over $36 million in forgone state income tax revenues. The impact on local government was estimated at more than $100 million in local income tax revenues to cities and villages in 2006, and an additional $7.8 million to school districts with an income tax in 2008.

Weak Enforcement

Workers are protected by federal and state wage and hour laws, but enforcement at both levels of government is weak and penalties are few. For some unscrupulous employers, wage theft is a rational choice. It is seen as a profitable, low-risk way to do business.

In a 2004 study for the Harvard Center for Textile and Apparel Research, researchers concluded that, for companies in the U.S. apparel industry, the potential yearly gain of breaking the law was a hundred times greater than the potential yearly cost of getting caught — $12,205 per worker versus just $121.

The federal standard for unpaid wage claims, the Fair Labor Standards Act of 1938, establishes a minimum wage, overtime pay for more than 40 hours in a workweek, a ban on child labor, and a requirement that employers keep accurate time records. It applies to most but not all workers. States can provide a higher floor than the federal minimum. While the federal minimum wage is $7.25 per hour, Ohio provides a minimum wage of $8.10 an hour for some categories of workers.

The DOL’s Wage and Hour Division enforces FLSA and related laws. Between fiscal 1978 and 2012, the division’s investigative staff declined 13 percent, from 1,232 to 1,067, while workers covered by minimum wage laws increased 63 percent, from 57 million to 93 million. The number of inspectors per 100,000 such workers declined by half, from 2.2 to 1.1.

Richard Repasky, a former investigator for the DOL’s Wage and Hour Division in Ohio, said labor violations are widespread in the construction industry but the state has too few DOL investigators to clamp down on the problem. “I think they’re pretty much just going through the motions. I don’t think they take labor laws seriously at all.”

“The attitude (in Ohio’s state government) is that enforcement is anti-business.”

Terry Burke

Heat and Frost Insulators and Allied Workers

Local 8

Ohio currently has 30 to 33 full-time labor law investigators, according to Don Harrison, who heads the Ohio office of the DOL’s Wage and Hour Division. But Repasky, who retired in 2011, believes the state needs at least 50 full-time investigators, and ideally one in each county of the state, for a total 88, to cut down on travel time.

Ohio’s Bureau of Wage and Hour Administration, which enforces laws on overtime on public projects as well as minimum wage requirements and pay to minors, has just six investigators and one supervisor to cover the entire state. “Their staff is so small as to be almost irrelevant,” said Zach Schiller, research director of Policy Matters Ohio, a non-profit government watchdog.

There were more than 250,000 business establishments in Ohio with 4.6 million paid employees earning $195.6 billion in 2012, according to the U.S. Census Bureau. But in 2014, Ohio’s Bureau of Wage and Hour Administration handled 900 complaints and recovered just $676,000 in unpaid wages.

Employees of small businesses face more difficult challenges. Most businesses in Ohio (69 percent) have fewer than 10 employees. “When people call me and it’s a blatant violation, most often it’s a small employer because they’re not that sophisticated, and, in many cases, they’re struggling just to survive,” said Stephen Simon, Cincinnati employment attorney.

Burke, president of The Heat and Frost Insulators and Allied Workers Local 8, said a state official told him privately that Ohio needs at least 26 state investigators, not six.

Schiller says that, unlike federal investigators who seek out violators, Ohio officials simply respond to complaints, which represent only a small portion of all violations since workers are afraid of reprisals. “It’s almost like a dead letter office,” he says. “The attitude (in Ohio’s state government) is that enforcement is anti-business.”

Court Claims on Rise

Workers can file legal claims for unpaid wages in both local and federal courts. The number of federal court claims averaged 1,434 per year between 1990 and 2000, but increased fourfold thereafter, averaging 5,469 per year through 2014. In 2014, FLSA claims reached record levels of 8,083.

FLSA Cases Filed in US District CourtsIn Ohio, the number of FLSA claims averaged 65 per year between 1990 and 2006, but doubled thereafter, averaging 131 per year through 2014.

FLSA Cases - filed in OhioThe wage theft claims of most individual workers are too small to justify hiring a lawyer and going to court. The average labor department recovery for each worker with an FLSA claim is $890. But a worker is more likely to recover unpaid wages by banding together with other workers in a class action lawsuit against the employer. Most FLSA claims are collective or class action suits, according to EPI. Of the 2012 recoveries studied by EPI, FLSA claims were the largest single course accounting for one-half — $467 million — of all recoveries.

For businesses, class action cases can be costly to defend, putting tens of millions of dollars at risk. After consumer fraud cases, class action suits for labor and employment law cases are the largest and most costly category for companies, according to Carlton Fields Jorden Bert. Not surprisingly, business associations have tried to limit their risk through legislation and lawsuits aimed at tightening the rules for forming classes and prosecuting cases.

As an alternative tactic, some businesses now require employees, including low-wage employees, to resolve pay disputes through arbitration only.  This practice prohibits an employee or group of employees from taking legal action against an employer, including class action claims.

Arbitration also is more likely than a jury trial to produce a favorable result for employers, Simon said. “Most arbitrators are not willing to hand down large awards against a company. Those (arbitrators) who do it full-time want to continue to have cases. If they slam a company with a big verdict, who’s going to choose them (for arbitration) the next time?”

“Employers are scared to death of jury trials,” said Paul Tobias, a Cincinnati employment law attorney. “An arbitrator is not going to be as emotional (as a jury). They (juries) might put you out of business.”

Even when employers are ordered to pay stolen wages, either through arbitration or by a court judgment, many do not pay. A 2013 UCLA Labor Center and NELP study found that between 2008 and 2011 only 17 percent of California workers who obtained a judgment against their employer ever collected any of the money.

And, according to a 2015 report titled “Empty Judgments” by the Urban Justice Center, “in the months or years it takes to get a court judgment, employers transfer money from their bank accounts, put property in the names of family members, close down their business or change its name, create sham corporations, ignore court orders, or leave the country with their property.”

Wage Theft Prevention Laws

Recognizing the challenges that victims face, some states, counties, and cities have adopted laws to prevent wage theft. Cincinnati is expected to consider its own anti-wage theft ordinance sometime this fall, says City Council Member Chris Seelbach.No one should go home after a long day and fear they won’t be paid fairly for their work. “No one should go home after a long day and fear they won’t be paid fairly for their work,” he said.

At least 16 states have passed laws requiring private employers to provide detailed information to employees about how their wages will be calculated and paid and by whom, according to an April 2012 client alert posted by Latham & Watkins.

California, for example, requires private employers to notify new, non-exempt employees of the timing, manner, and rate of pay, including rates for overtime and allowable deductions from pay. Employers must also notify workers of the employer’s name, including any DBA trade names, address, and telephone number. Workers must also be notified of the name, address, and phone number of the employer’s workers’ compensation insurance carrier. New York has similar notification requirements.

A Cook County ordinance, which took effect in May, allows the county to deny or terminate the business license, county contract or county property tax incentive for any employer who is a willful or repeat violator of the FLSA or wage and labor laws in Illinois or other states. County officials also consider the last five years of compliance.

Miami-Dade County unanimously adopted an ordinance in 2009 that permits a worker to file a complaint, at no charge, with the county to recover unpaid wages of $60 or more.

The county first seeks an agreement resolving the dispute between the employer and employee. If that fails, the matter is referred to a hearing examiner, appointed by the county, who has the authority to take depositions, collect evidence and issue subpoenas. Based on the hearing’s findings, the examiner can require the employer to pay up to three times the unpaid wages as well as the hearing costs.

In 2013, the Miami-Dade ordinance led to 166 agreements with a value of $341,000, and forwarded 212 claims to hearings that awarded $543,000 in wages and penalties. Florida’s Alachua, Broward, and Osceola counties have since adopted wage theft prevention ordinances similar to Miami-Dade’s.

Various cities have also adopted wage theft ordinances including Chicago, Memphis, Grand Rapids, Boulder, Kansas City, Houston, and El Paso as well as west coast cities of Seattle, San Francisco, and San Jose, among others.

Seelbach said Cincinnati City Council is looking at several city ordinances as possible models but will tailor any proposal to Cincinnati’s needs.

Contact Jim at jdebrosse.c4ad@gmail.com or Mike at mbrown.c4ad@gmail.com