Catalyst for Action: New Wave of Lawsuits for Unpaid Overtime or Unpaid Leave

Calgary, AB (June 18, 2006) – Wal-mart, the world’s largest retailer, was the first of a string of corporations that was charged with a class-action lawsuit for unpaid overtime. In 2002, the Associated Press reported that more than 400 employees from 24 of Wal-mart’s 27 Oregon stores had sued the retailer, accusing it of violating federal and state wage laws. At the time, 39 other class-action lawsuits were pending against the company in 30 states. In 2004, the AP reported that a federal jury found that Wal-mart owed millions of dollars to plaintiffs for unpaid overtime.

Since then, similar lawsuits alleging unpaid overtime or unpaid leave have flooded the Supreme Court. Companies—from Electronic Arts, Carnival Cruise Lines, Cingular Wireless, and Office Depot—have been ordered to pay settlements ranging from $6.25 and $15.6 million.

The worst part of being on the losing end of such claims is the knowledge that the whole problem could have been avoided if simple business procedures were followed.

Avoiding Claims for Unpaid Overtime

Detailed knowledge about federal and state overtime rules helps guide best business practices. That is a given fact, but knowledge does not protect if it is not put into action. Many employers fall short on implementing practices that reflect their knowledge of these labor laws.

The Department of Labor and Supreme Court judges do not allow loose interpretations of labor laws. Failing to understand the law can literally mean the difference between profitability and the continuation of your organization.

According to Vincent DiCarlo, author of How to Not Get Sued by Your Employee, the first most common error many employers commit is improperly categorizing an employee as exempt or non-exempt. Exempt employees are generally expected to work whatever number of hours is required to complete assigned tasks, while non-exempt employees must be paid overtime if they work more than 40 hours per workweek. Non-exempt employees receive more protection under federal law than exempt employees. DiCarlo points out that many employers attempt to categorize some or all of their employees as exempt from overtime rules.

According to DiCarlo, this leads to another error committed by employers: inadequately tracking overtime. DiCarlo said that “just because employees are asked to not work overtime does not mean that employers can dispense with monitoring their working hours.” Employees who work off the clock—early, late, through lunch and on weekends—require compensation.

Finally, DiCarlo noted that even employers who may have been properly tracking overtime were failing to document it properly. Adequate record keeping is critical to document proper payment. DiCarlo suggests that timesheets are a good tool for this. They should be signed by the employee and kept in a file for at least four years. The timesheet should also include a disclaimer detailing the hours the employee worked, that the employee has not worked any overtime. Additionally, DiCarlo suggests ensuring that your company policy manual clearly states that employees must seek written approval to work overtime or work outside of the office. Your policy should also say that employees will be paid at the proper rate when approved to work overtime or work off-site.

Avoiding Claims for Unpaid Leave

In most companies, employees are given paid time off, or PTO. Employees accrue this time like wages at a rate of per week, month, or other period worked. Failing to track these accruals and balances can result in liabilities and large payouts to employees for unpaid time.

According to DiCarlo the first common error with PTO is invalid forfeitures. Over time, accrued PTO can grow in overwhelming proportions. Some companies try to combat this problem by limiting accrual rates, such as limiting the amount of vacation leave or limiting carry-forward amounts from year to year. Many businesses make the mistake of attempting to reset formulas and, as a result, build up enormous obligations while inadvertently creating invalid forfeitures. It is important to know that once time off is earned, it must be used or paid.

The second problem DiCarlo identified was inaccurate tracking and record keeping of paid time off. While tracking accruals is simple, tracking time off is not. Because PTO accrues at a consistent rate, a simple calculation of hours worked multiplied by the accrual rate is all that is required.

Without proper paper trails and data, the tedious task of record keeping can result in inaccuracies and inconsistencies. Misstatements in PTO data generated on the basis of poorly tracked payroll can prove quite the arsenal to a well-paid lawyer.

To avoid claims for unpaid time off, you must keep accurate records on file for years, dated and signed by all parties. DiCarlo suggests that you should include your policies of accumulated leave in your annual employee acknowledgement. In the leave and overtime section of the acknowledgment, the language should clearly state how much unpaid time the employee has accumulated and that the employee is vouching for the accuracy of the figure.

Lastly, DiCarlo also acknowledged the problem of employers overlooking accrued time off for their top management and professional employees. While these employees may be exempt from wage and overtime laws, they still accrue leave like everyone else. Failing to do so has resulted in many claims for years of accumulated leave at a demonstrably steep rate.

The California Labor Commissioner believes that “it is the employer’s obligation to keep records which are sufficient to compute the amount of any balance of accrued vacation pay due an employee upon termination. It is also the employer’s responsibility to interpret and correctly apply its own policies, however confusing those policies may be.”


In light of the new wave of lawsuits for unpaid overtime and unpaid time off hampering employers across the United States, there is no room for employers lacking adequate understanding of wage and hour classification of their employees. According to WEA Consulting (article entitled “Deluge of Wage and Hour Lawsuits Drowning California Employers”), failing properly classify exempt and non-exempt employees can result in a termination of business continuity. With millions of dollars on the line, there are many attorneys who can be quite mercenary.

Delivering a clear vacation policy, accurate tracking and accrual of vacation balances, and consistent employee communication protects employers from lawsuits for unpaid overtime or unpaid time off. Another best business practice is displaying vacation balances on each check stub. Then at the end of each fiscal year, employees should sign off a record of agreement on the amount of accrued vacation pay.

Follow these steps consistently and you will reduce your risk of drowning in a pool of lawsuits for unpaid overtime and unpaid time off.


1. DiCarlo, Vincent. How to Not Get Sued by Your Employee. The Sacramento Law Office of Vincent DiCarlo. Retrieved by June 12, 2006.

2. Staff Writer. CA Labor Commissioner Unfriendly to Employers. WEA Consulting. Retrieved June 12, 2006.

3. Staff Writer. Deluge of Wage and Hour Lawsuits Drowning California Employers. WEA Consulting. Retrieved June 18, 2006.


About the Author
Raj Narayanaswamy is the co-founder and co-CEO of Replicon, Inc. (, the industry leader of web-based time and expense management solutions. Founded in 1996, Replicon, Inc. powers companies, of all sizes, to maximize profitability and productivity. Clients include Ernst & Young, Sony Music Entertainment, Charles Schwab, and Volvo. Replicon is based in Calgary, Alberta, Canada.

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