A case involving basic Fair Labor Standards Act ("FLSA") violations, such as not paying for meal breaks worked and inadequate recordkeeping, typically doesn’t generate too much attention. However, when the case involves a $14.5 million dollar verdict and requires back pay to some 1500 employees, employers need to pay attention. The decision by the Second Circuit Court of Appeals in Reich v. Southern New England Telecommunications Corporation, Nos. 95-6207(L), 95-6239(CON), 7/31/97, clearly demonstrates the severe consequences that can result from an employer’s misapplication of the basic principles of the FLSA. The following discussion of the case presents the problems employers can have in applying the FLSA and gives practical suggestions for protecting your organization from a similar verdict.

The Facts

Southern New England Telecommunications Corporation ("SNET") had a policy of not paying for meal periods taken by its approximately 1500 "outside craft workers" who were required to remain at open work sites during their lunch breaks. These employees work primarily on-site, out-of-doors performing such duties as installing and replacing telephone poles and cables and cable splicing and repair. SNET required these employees to spend their lunch break at their work sites to secure the area and its equipment and to prevent possible harm to the public. These unpaid lunch periods generally lasted 30 minutes. Employees who left the work site during the shift without specific permission could be disciplined. The Department of Labor ("DOL") filed a suit against SNET on behalf of the 1500 employees, alleging FLSA violations of overtime and recordkeeping requirements.

Remaining On-Site Does Not Trigger Pay; Work Does

The key question in the case against SNET was whether the meal periods should have been paid time because the employees were required to remain on-site and had to perform certain duties during these breaks. To evaluate the claims, the Second Circuit relied on the DOL’s regulations interpreting what time must be paid as working time under the FLSA. In particular, 29 C.F.R. §785.19 does not require employers to pay for "bona fide meal periods," defined as meal periods when the employee is completely relieved from all work duties while eating. The meal period still may be unpaid if the employee is required to remain on the work site, as long as the employee does not have to work during the period. Accordingly, the fact that the SNET employees were required to remain on-site during their lunch breaks by itself did not impose an obligation on SNET to pay for the breaks. Rather, the determining factor for the court was whether the employees were required to "work" as defined under the FLSA.

The court applied the "predominant benefit standard" in its determination that the SNET employees were required to work during their meal breaks. According to this standard, if the employee performs activities that are predominantly for the benefit of the employer during a meal break, the break must be paid. The court rejected SNET’s argument that the employees’ safety and security roles were "wholly passive" so that the breaks were predominantly for the benefit of the employees. The court noted that SNET would have to pay others to perform the same services and, therefore, was "effectively receiving free labor." As a result, the time spent during these meal breaks should have been paid.

Recordkeeping Violations Muddy Payout Calculations

The determination of back pay and overtime for the 1500 workers was complicated by the fact that SNET could not present evidence of either the precise amount of work performed by the employees or evidence to refute the DOL’s calculations of what was owed to the employees. The Second Circuit pointed out that under the FLSA, "when an employer fails to keep adequate records of its employees’ compensable work periods ... employees seeking recovery for overdue wages will not be penalized due to their employer’s recordkeeping default." The burden is on the employer to present evidence of the time worked. Since SNET could not meet its burden, the court affirmed the lower court’s reliance on the DOL’s calculations, which included $88,893.33 in overdue wages, $4,823,884.60 in back pay, and $9,647,769.20 in liquidated damages.

Good Faith Defense Not Established

SNET challenged the almost $10 million awarded in liquidated damages claiming that it had acted in "good faith" and, therefore, should have the damages reduced. The "good faith" defense may apply when an employer acts, or fails to act, in good faith and if it had reasonable grounds for believing that the act or omission was not a violation of the FLSA. The Second Circuit pointed out that to establish good faith, the employer must produce "plain and substantial evidence of at least an honest intention to ascertain what the Act requires and to comply with it." The court emphasized that good faith "requires more than ignorance of the prevailing law or uncertainty about its development." Based on this definition, the court determined that it was not sufficient for SNET to claim good faith because it did not purposefully violate the FLSA, employees did not complain about the practice, or SNET complied with industry-wide practice.

Lessons for the Rest of Us

This case provides several basic lessons about FLSA compliance that all employers can follow to limit exposure to wage and hour claims:

• If you require employees to work during lunch, you must pay for the break. However, you can require employees to remain on-site during lunch periods without having to pay them.

• To determine whether a meal break should be paid, consider who receives the "predominant benefit" of the break period. If employees can use the time for their benefit and do not perform work, then employees generally do not have to be paid. It may be prudent to pay for any meal break that requires even the appearance of performing work for the employer.

• Sloppiness in recordkeeping will only hurt the employer. This case makes it very clear that courts will err in favor of employees and rely on the workers’ recollections or the DOL’s calculations regarding what should be paid time if the employer does not keep adequate records. It also underscores the importance of appropriately categorizing what time should be considered paid working time to prevent these types of violations.

• Misunderstanding the FLSA or doing what "everyone else does" is not a defense against violations. Employers have an affirmative duty to attempt to understand the FLSA’s requirements and to comply with them, even if no employee has ever complained. As SNET found out, the complaint can be initiated from outside the organization.

For further information on the FLSA and pay, meal break, and recordkeeping requirements, see Chapter 207, Hours of Work.