New legislation could help end wage theft epidemic
Senators Patty Murray and Sherrod Brown, together with Rep. Rosa DeLauro, are tackling one of the most important employment issues of the 21st century—wage theft, the failure of employers to pay employees what they are legally owed. This is a serious social and economic problem, which I have estimated could amount to more than $20 billion a year in stolen or underpaid wages, including non-payment of overtime pay, failure to pay the federal, state or local minimum wage, failure to pay statutorily required prevailing wages, forcing employees to work “off-the-clock,” taking illegal deductions from the paychecks of drivers misclassified as independent contractors, and even failure to pay anything at all. A study by the U.S. Department of Labor suggests that minimum wage violations alone range from $8 billion to $14 billion a year.
The consequences of these losses are serious: increased poverty, hardship for the near-poor, lost tax revenues for governments, including lost Social Security and Medicare contributions, and increasing inequality. When the employers who commit wage theft go unpunished it undermines their law-abiding competitors and generally diminishes respect for and faith in the rule of law.
Just as raising the minimum wage could save hundreds of million dollars in safety net program expenditures, failing to pay the current minimum wage causes safety net spending to increase considerably. As DOL found in its recent study of minimum wage violations, “Minimum wage violations led to $5.5 million in additional breakfast benefits in California and $3 million in New York, in FY2011. The school lunch program spent an additional $10.1 million in California and $4.8 million in New York in FY2011 due to minimum wage violations.”
Why do so many businesses violate the wage and hours laws? Three reasons: they get a competitive advantage or a higher profit and have little fear either of getting caught or of being punished. The advantage is straightforward: if Business A can illegally pay its employees a salary with nothing at all for the overtime they work, it will be able to sell its products more cheaply than Business B, which complies with the law and pays time-and-a-half for overtime. If Business X pays its “interns” nothing, while its competitors all pay their interns the minimum wage, Business X will be able to charge clients less and, perhaps, steal business away from its competitors.
If the business doesn’t lower prices to undercut its competitors it still pockets the difference between the wage owed and the wage paid. The employee’s loss is the owner’s extra profit.
And third, the chances of an employer getting caught cheating on wages are remote. There are only about 1,000 federal Wage and Hour investigators for the whole country; they are responsible for investigating 7 million businesses and protecting more than 100 million employees. In 2014 they conducted fewer than 35,000 investigations and recovered about $250 million in unpaid wages. (How much could Wage and Hour have recovered if it had investigated 350,000 businesses?) All of the state labor departments and attorneys general combined did even less.
When businesses do get caught they are rarely punished. If violations are found, the consequences are often no more than an order to pay back the wages that were owed, or even a fraction of the total amount, even though the Fair Labor Standards Act makes the employer liable for the full amount and “an additional equal amount as liquidated damages.” How can violations be deterred if there is no effective punishment? There are several problems:
- Under the FLSA, DOL has authority to recover only the amount by which the employer failed to pay the minimum wage or overtime pay and an equal amount in liquidated damages, rather than setting damages according to the full amount by which wages were underpaid. If, for example, the employer promised $10.00 per hour but only paid $5.00, DOL could recover only $2.25 x 2 = $4.50 for each hour worked, rather than ($5.00 x 2 = $10.00) because the federal minimum wage is $7.25 per hour.
- The maximum amount of back pay that can be awarded under the FLSA is twice what was owed, but recent research by Daniel Galvin of Northwestern University finds that the state laws that have effectively increased employer compliance award treble damages – triple backpay.
- The FLSA’s civil penalties for violations are too small to be a deterrent. There is no fine for first time offenses or violations that can’t be proven to be willful. Even for repeat or willful violations the maximum penalty is $1,100, whether the culprit is a local ice cream shop or a giant multinational corporation like Walmart. And for many years, Wage and Hour failed even to seek a penalty in most of its cases.
- Criminal penalties are rarely, if ever, used, even though the FLSA makes willful violations a misdemeanor punishable by up to 6 months in jail.
This is the context for the Murray-Brown anti-wage theft legislation, which addresses every one of these problems.
- The bill requires employers to pay all wages owed to an employee and sets damages accordingly.
- It authorizes triple back pay.
- It creates a civil penalty of $2,000 when employers violate minimum wage and overtime protections or the protection guaranteeing workers their full compensation. The Act would also increase the existing civil penalty for willful or repeat violations to $10,000. It makes it easier for employees to know and to prove they have been cheated by requiring employers to provide initial disclosures of the terms of their employment and regular paystubs to all employees and creates a civil fine for noncompliance of $50 for the first violation and $100 for each subsequent violation.
- It directs DOL to refer to the Department of Justice for criminal prosecution those employers who comprehensively engage in wage theft by 1.) willfully stealing employees’ wages, 2.) falsifying records to hide the truth, and 3.) retaliating against employees when they try to speak up for themselves or cooperate with a DOL investigation.
- It prohibits employers from entering into pre-dispute agreements with employees to limit their right to bring suit in court or to pursue a class action against the employer for wage violations.
- It also makes it easier for employees to take collective action to recover their stolen wages by removing the current requirement that employees affirmatively “opt-in” to engage in a collective action under the FLSA. This will enable employees to pursue collective action cases in a manner similar to most class action cases, in which members of the “class” must affirmatively “opt-out” of the case in order to not be involved.
- It requires employers to pay final paychecks within 14 days of separation or by the payday for the pay period, whichever is earlier; the employer will owe the employee in question her daily wage for each day beyond this period that the paycheck goes unpaid, for a maximum of 30 days.
- It strengthens whistleblower protections and increases damages to four times back pay.
- It strengthens the FLSA’s recordkeeping provision by creating a civil penalty of $1,000 for an employer’s first violation of the provision and $5,000 for each subsequent violation. Employees will have a right to inspect their employer’s records by requesting a copy. Finally, if an employer violates the recordkeeping provision, an employee’s reasonable evidence regarding their hours worked could be used to create a rebuttable presumption that the employer engaged in wage theft, and to establish the exact amount of that wage theft. Under this bill, the employer would be allowed to rebut this presumption only with clear and convincing evidence.
All in all, the Murray-Brown-DeLauro anti-wage theft legislation could be powerful enough to stop the spreading epidemic of wage theft and make the labor market a safer place for workers and honest businesses alike.
Enjoyed this post?
Sign up for EPI's newsletter so you never miss our research and insights on ways to make the economy work better for everyone.