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Automatic deductions and collective actions

Oklahoma Employment Law Letter - December 2012

By Brian Burget

“Auto-deduct” policies and practices are becoming more and more commonplace. Often via a payroll software program, a set amount of time is automatically deducted from each hourly employee’s paycheck. The deduction reflects the amount of time the employee is required to take for breaks. In using auto-deduct programs, many employers also implement policies for overriding the automatic deduction to ensure payment is made to employees when breaks are missed or interrupted. Problems arise, however, when override policies do not exist, are discouraged by management, or simply are not followed.

As a result, lawsuits against employers alleging Fair Labor Standards Act (FLSA) violations stemming from issues associated with time and attendance software programs have dramatically increased. In the past several years, there has been a virtual outbreak of FLSA lawsuits filed against employers for failing to pay for meal breaks that were missed or interrupted because of work performed by employees during that time. One of the primary arguments made by employees filing these claims involves the fact that automatic deductions for meal and break periods fail to recognize if and when work was performed during the specified period.

In addition, under the FLSA, groups of employees can band together in a lawsuit (known as a collective action) against their employer. Collective actions often result in expensive and lengthy litigation. Fortunately for employers, courts are restricting employees’ ability to file these lawsuits. For example, in the following case, the U.S. 6th Circuit Court of Appeals recently affirmed a district court’s decision to decertify a collective action filed under the FLSA. The lawsuit challenged an employer’s automatic-deduction policy for meal periods. The court held that the employee in the case was unable to meet his burden of demonstrating that the opt-in members of the class were similarly situated.

 

Facts

James Allen Frye worked as a step-down nurse in the intensive care unit at a hospital run by Baptist Memorial Hospital, Inc., from 2004 until his termination on April 19, 2007. Baptist operates three acute care hospitals in Tennessee. Collectively, its hospitals employ more than 4,000 employees, including approximately 274 supervisors who staff more than 200 hospital departments.

Baptist policies require hourly employees to take daily uncompensated meal breaks. To account for the breaks, the employer relies on a payroll system that automatically deducts a set amount of time from each hourly employee’s paycheck. The automatic deduction reflects the amount of time the employee is required to take for meal breaks.

If, however, an employee experiences a work-related interruption—no matter how brief—during a meal break, Baptist policies state he must receive a subsequent uninterrupted meal break or be paid as if he worked through the entire break. Although the auto-deduct policies apply systemwide, Baptist doesn’t have a systemwide policy for allowing employees to cancel the automatic deductions if they experience an interrupted or missed meal break. Consequently, employees are tasked with reporting any missed or interrupted meal breaks to Baptist to ensure they are properly compensated.

Following his termination, Frye alleged that Baptist violated the FLSA by failing to properly compensate him and other similarly situated employees for all time worked. According to him, the automatic-deduction policy resulted in Baptist’s failure to pay for missed or interrupted meal breaks at all three of its Tennessee facilities.

 

Court’s opinion

The 6th Circuit held that Frye couldn’t maintain a collective action because he failed to present substantial evidence that any other would-be or opt-in plaintiffs were similarly situated. The court noted that to achieve final certification, an individual must produce “more than just allegations and affidavits” demonstrating similarity. Moreover, the court found that various circuit courts throughout the country have recognized that “the similarities necessary to maintain a collective action… must extend beyond the mere facts of job duties and pay provisions.” A court also must consider

  1. Employment settings,
  2. Individual defenses, and
  3. The fairness and procedural impact of certification.

The 6th Circuit disagreed with Frye’s argument that the FLSA requires employers to compensate employees for voluntary work that the employer “knows or has reason to believe” the employee performed. Although the court recognized this principle as going to the merits of Frye’s FLSA claim, it didn’t relieve him of his burden to meet the Act’s similarly situated class certification requirement.

Frye also introduced deposition testimony that he claimed evidenced the fact that some of the opt-in plaintiffs (1) didn’t know their compensation rights with regard to interrupted meal breaks or (2) voluntarily failed to report work performed while on break. However, the court ultimately determined that Frye’s evidence, while possibly “indicative of individual FLSA violations,” failed to prove that opt-in plaintiffs experienced a common, similarly situated FLSA injury.

Frye didn’t claim that Baptist failed to compensate employees who reported interrupted or missed breaks, nor did he dispute the fact that it promptly paid employees for known isolated instances of nonpayment. Consequently, the 6th Circuit characterized his theories of certification as merely a compilation of employees’ unique experiences, which amounted to nothing more than a “critique of Baptist Memorial’s use of an automatic-deduction policy.” The court concluded that without more, an automatic-deduction policy comports with the FLSA and “cannot serve as the lone point of similarity supporting class certification.” Frye v. Baptist Memorial Hospital, Inc., No. 11-5648, 2012 WL 3570657 (6th Cir., Aug. 20, 2012).

 

Application

While 6th Circuit decisions aren’t binding on Oklahoma employers, this case provides an illustrative example of the limits courts now are placing on individuals seeking to file collective actions that challenge their employer’s automatic-deduction policies. The 6th Circuit reiterated that persons named in a collective action must demonstrate more than individual FLSA violations to meet the “similarly situated” burden required for class certification. While that’s good news for employers, it doesn’t completely eliminate an employee’s ability to prevail in auto-deduct collective actions filed under the Act.

Therefore, you should examine your policies to ensure (1) all time worked during breaks is compensated and (2) employees are fully trained to use any system you have in place to override the automatic deduction. In addition, employees should be instructed on policies that deal directly or indirectly with their obligation to report time worked during breaks. Finally, you should document and keep good records of the training in each employee’s personnel file.