HRD-81-60 Changes Needed To Deter Violations of Fair Labor Standards Act

F

’ &’ THE COb’lPT’ROLLER GENERAL

Report To The Congress

OF THE UNITED STATES

Changes Needed To Deter Violations

Of Fair Labor Standards Act

The Fair Labor Standards Act, established to

protect the wages of American workers, is not

adequately accomplishing its objective. Em-

plovers who violate certain provisions of the

act are not penalired either because penalties

do not exist or because existing ones are not

used as often as they should be.

The Department of Labor is also lax in recov-

ering maximum back wages permitted by stat-

ute, and by not seeking interest Labor does

not restore, to the maximum extent, the full

value of illegally withheld wages. When some

illegally withheld back wages are not restored

to employees, employers ,profit because the

statute of limitation relieves them of this

obligation.

This report contains recommendations to

--strengthen Labor’s enforcement pro-

gram to deter employers from vio-

lating the Fair Labor Standards Act

and

-improve Labor’s ability to recover the

full amount of back wages illegally

withheld from employees.

HRD-81-60

MAY 20.1981

COMPTROLLER GENERAL OF THE UNITED STATES

WASHlNCTON DC zoy8

B-201792

To the President of the Senate and the

Speaker of the House of Representatives

This report describes the Department of Labor's problems in

administering the Fair Labor Standards Act and recommends legis-

lative and administrative changes needed to deter recordkeeping,

minimum wage, and overtime violations of the act and prevent em-

ployers from retaining back wages owed to employees. We made

this review to determine if Labor's administration of the act

effectively deterred employers from violating it and, if not,

to propose actions for improving compliance and for recovering

illegally withheld wages.

Copies of this report are being sent to the Secretary of

Labor: the Attorney General: the Director, Office of Management

and Budget: and other interested parties.

Acting Combtroller General

of the United States

COMPTROLLER GENERAL'S

REPORT TO THE CONGRESS

CHANGES NEEDED TO DETER VIOLATIONS

OF FAIR LABOR STANDARDS ACT

DIGEST

__----

The Fair Labor Standards Act of 1938 sets

standards for recordkeeping, minimum wage,

overtime pay, and other protections for about

60 million workers in over 4.1 million estab-

lishments engaged in interstate and foreign

commerce. Noncompliance with the act--

particularly the minimum wage provisions--can

severely harm low-wage workers by causing their

income to be substantially below the poverty

level.

While the act does protect employee

wages when employers voluntarily comply, there

are insufficient deterrents to discourage em-

ployers from violating the act, and administra-

tive and statutory limitations can prevent the

Department of Labor from fully recovering wages

illegally withheld.

(See pp.

1, 8, 23, and

45.)

DETERRENTS INEFFECTIVE OR NONEXISTENT

TO DISCOURAGE RECORDKEEPING VIOLATIONS

For one of the most important requirements under

the act--recordkeeping-- there are no civil penal-

ties and although criminal penalties exist for

willful recordkeeping violations, they are not

used. Adequate records are essential to deter-

mine whether employers are complying with the

act and how much illegally withheld back wages

are owed to employees.

Without these basic wage records, the intent

of the act cannot be fully carried out. It is

to an employer's advantage not to maintain

adequate records so that violations cannot be

identified and back wages cannot be accurately

computed--thus, employers profit at the expense

of their employees.

(See p. 8.)

GAO found that recordkeeping violations are ex-

tensive and that they often hamper Labor's

ability to document and recover the full amount

of back wages owed to employees. Labor often

settles cases for less than the estimated amounts

due when employers who have violated recordkeep-

ing provisions dispute the compliance officers'

Tear Sheet. Upon removal, the report

cover date should be noted hereon.

i

HRD-81-60

back wage estimates.

While a compliance of-

ficer's estimates may not accurately reflect the

back wages actually owed employees when records

are not available,

employers often appeared to

profit when settlement negotiations substan-

tially reduced the amounts restored to employ-

ees.

Labor officials agreed that difficulties

proving the extent of violations, due to inade-

quate records,

are major factors in Labor's deci-

sion not to take cases to trial, thus causing

negotiated settlements for less than the full

amount of back wages due. (See pp. 8 and 9.)

GAO believes penalties for violating recordkeep-

ing provisions are essential and that Labor should

be authorized to assess civil penalties.

Because

of the extensive time required to complete cases

in many district courts, the low priority given

to Fair Labor Standards Act cases, and the re-

luctance of Labor's Office of the Solicitor to

pursue court cases under these circumstances,

GAO also believes a formal administrative pro-

cess is necessary to assure fast action while

still providing the due-process protections now

afforded employers.

Formal hearings, conducted under the Administra-

tive Procedure Act,

are presently used to

adjudicate penalties in many other regulatory

cases.

Such hearings would fully protect the

employer's due-process rights by providing for

an impartial hearing officer (an administrative

law judge),

a verbatim transcript of the proceed-

ings,

and the right to appeal adverse decisions

to the courts where cases would be reviewed under

the substantial evidence rule. Under the rule,

Labor's decision would be set aside if the courts

find the decision to be unsupported by substan-

tial evidence.

(See

pp.

17 and 18.)

DETERRENTS INEFFECTIVE OR NONEXISTENT

TO DISCOURAGE WILLFUL MINIMUM WAGE AND

OVERTIME VIOLATIONS

The basic provisions of the Fair Labor Stand-

ards Act require employers to pay minimum wages

and overtime, but there are no civil money pen-

alties for violating the act.

Although criminal

and liquidated damage penalties exist for will-

ful violations of the act by employers, they

have not been used extensively.

Labor can also

obtain a court order requiring an employer to

ii

comply with the act's minimum wage and overtime

provisions.

However, even if such orders are

later violated,

officials in the three regional

solicitors'

offices in the GAO review advised

that monetary penalties for civil contempt gen-

erally are insignificant.

(See p. 23.)

GAO found that many employers appear to have

willfully violated the act and that current en-

forcement actions have not resulted in penal-

ties that would deter these violations. (See

p. 23.)

Many employers repeatedly violate the same

sections of the act,

and others apparently

falsify or conceal records. Both actions

strongly indicate that the violations are will-

ful.

For example, GAO's nationwide question-

naire,

which was completed by Labor's compli-

ance officers for 4,022 cases closed adminis-

tratively in June 1979, showed that in 244

cases (or 6 percent) violators had apparently

falsified or concealed records. In addition,

GAO's review of

--about 75 percent of Fair Labor Standards Act

cases closed in three Labor regional solici-

tors' offices in fiscal year 1978 showed that

86 of 230 employers (or 37 percent) had at

least one prior violation of the act,

--cases administratively closed during June and

July 1979 at six Labor area offices showed

that 90 of 433 employers (or about 21 percent)

had violated the act at least once before, and

--65 cases closed during fiscal year 1978, after

having been filed in court, showed that

regional solicitors alleged that employer

violations were willful in 37 (or 57 percent)

of the cases.

Compliance officers and regional solicitor of-

ficials agreed that willful violations are ex-

tensive. Although the act includes both a crim-

inal penalty and a liquidated damage penalty

to discourage employers from violating the mini-

mum wage and overtime pay provisions, these

sanctions are rarely used.

(See pp. 23 to 26.)

Tear Sheet

iii

Criminal penalties

Criminal penalties may be sought against will-

ful violators of the act with fines up to

$10,000 and,

after a second conviction, impris-

onment of not

more

than 6 months.

Until re-

cently,

solicitors in the three Labor regional

offices had not sought criminal penalties

against willful violators in at least the last

10 years.

Labor officials explained that,

overall,

criminal sanctions are rarely sought

because:

--Department of Justice attorneys do not have

a high regard for Fair Labor Standards Act

cases and would be hesitant to prosecute them.

--Filing criminal suits reduces Labor's ability

to recover employee back wages.

Five of the seven U.S. attorneys GAO inter-

viewed stated they would be willing to crim-

inally prosecute Labor cases.

They agreed that

prosecuting cases criminally could delay back

wage recoveries, but noted that, by coordinat-

ing the timing of criminal and civil suits,

delays can be minimized.

After GAO brought these discussions to Labor's

attention,

solicitor officials agreed to explore

the possibility of making more use of criminal

sanctions.

Subsequently, one regional office

sent two criminal suits against employers to

the U.S. attorney for action. GAO believes

Labor should continue to use criminal sanctions

after consulting with Justice officials to

coordinate litigation strategies. (See pp. 26

to 32.)

Liquidated damage penalties

The Fair Labor Standards Act was amended in

1974 so that Labor could bring action in any

court of competent jurisdiction to recover

from employers the amount of unpaid minimum

wages or overtime compensation and an equal

amount as liquidated damages.

GAO found that

several factors

limit

the usefulness of this

sanction and that regional solicitors have

seldom sought liquidated damage penalties

iv

against employers who willfully violate mini-

mum wage and overtime compensation require-

ments.

As a result,

habitual or flagrant

violators receive no harsher treatment than

do employers who inadvertently violate the

act. (See p. 32.)

Liquidated damages are not an effective way to

impose damages because they must be imposed by

the courts, usually after a district court trial.

Traditionally, however, few civil cases reach

trial in the district courts. As a result, penal-

ties are obtained in very few cases, and violators

are not being deterred. During the year ended

June 30, 1979, only 4.4 percent of the 1,175 Fair

Labor Standards Act cases disposed of by the U.S.

district courts, nationwide, reached trial where

liquidated damages could have been awarded.

(See pp.

32 to 38.)

Labor solicitor officials, district court chief

judges, and administrative law judges agreed that

few Fair Labor Standards Act cases reach district

court for trial. Solicitor officials cited the

lengthy wait for trial required in some courts,

their reluctance to bring cases before a jury,

evidence problems due to inadequate records,

limited resources to pursue more cases to trial,

and the low priority in district courts as the

major factors that discourage them from pursu-

ing cases to trial. Regional solicitors also

noted that, in the few cases that have reached

trial,

the damages awarded were disappointingly

small.

(See pp. 38 to 41.)

To reduce the number and severity of violations

of the act, GAO believes civil money penalties

assessed by Labor should be substituted for

Labor's authority under section 16(c) of the

act to seek liquidated damages.

Labor should

be given the authority to assess a civil money

penalty to deter minimum wage and overtime viola-

tions.

Labor should be able to assess penalties

that are sufficient to deter minimum wage and

overtime violations.

(See pp. 41 and 42.)

GAO believes that the rights of the employers

can be protected effectively by giving employers

the right to appeal Labor's back wage computa-

tions and penalty assessments at formal adminis-

trative hearings before administrative law judges.

(See p. 42.)

WAGE RECOVERIES HAMPERED BY TIME

AND ADMINISTRATIVE PRACTICES

While penalties are important to deter violations

of the minimum wage and overtime provisions, re-

covering illegally withheld employee wages is

also important.

To effectively deter violators,

Labor's enforcement efforts should eliminate any

benefits employers gain from their violations.

Therefore,

Labor should maximize back wage re-

coveries,

including interest, which helps to make

employees whole for the period during which back

wages were illegally withheld. (See p. 45.)

Back wages lost due to running of

statute of limitations

The statute of limitations, established by the

Portal-to-Portal Pay Act of 1947, restricts an em-

ployer's obligation to repay employees back wages

to a 2-year period for nonwillful violations and

3 years for willful violations. Parts or all of

the statutory periods may expire before an em-

ployer waives the right to claim the statute of

limitation or before Labor files legal action in

a district court. Either action stops the run-

ning of the statute (referred to as "tolling of

the statute"). The reductions in back wages that

employees can recover due to the passage of time

are referred to as "back wages lost to the run-

ning of the statute." Considerable time usually

passed from the date compliance officers started

their investigations to the date when regional

solicitors filed suit against employers and, as

a result, back wages were lost due to the running

of the statute of limitations. (See pp. 46 to

49. )

Although Labor may reduce amounts lost due to

the running of the statute by filing cases in

court earlier, its limited enforcement authority

will continue to prevent recovery of full back

wages due employees because time will continue

to pass between the date a violation is iden-

tified and the date the case is filed in court.

Current delays in tolling the statute are due

to the time taken to

--negotiate cases with the employer at the

Labor area office and at the regional solici-

tor's office and

vi

--analyze the case and file suit in district

court.

The most effective time to toll the statute is

when Labor determines that a violation occurred

and computes the amount of back wages owed.

GAO

believes Labor should be given the authority to

determine that a violation has occurred and to

assess the amount of back wages due employees

with the tolling of the statute of limitations

at that point. GAO also believes that the rights

of the employers can be protected effectively

by giving employers the right to appeal Labor's

assessments at formal administrative hearings

before Labor administrative law judges.

(See

pp. 49 and 50.)

Administrative practices

Several administrative practices followed by

Labor also limit the back wages employees

eventually recover.

--Labor rarely seeks the third year's back

wages (allowed under the act when violations

are willful).

(See pp.

50 and 51.)

--Labor rarely updates investigations to re-

cover additional back wages that are some-

times illegally withheld by an employer be-

tween the date an investigation ends and the

date an employer agrees to comply.

(See

PP.

51 to 55.)

--Labor does not have a program to follow up

on employers with a history of violations to

assure that proper wages are paid in the

future.

(See pp. 55 to 57.)

--Labor does not routinely seek interest for

employees whose wages have been illegally

withheld for long periods of time.

(See

pp. 57 to 59.)

RECOMMENDATIONS

GAO is recommending to the Congress that

it amend the Fair Labor Standards Act to

--give Labor authority to assess civil money

penalties large enough to deter recordkeep-

ing violations,

Tear Sheet

vii

--eliminate the section 16(c) liquidated damage

provision of the act and in its place give Labor

authority to assess civil money penalties large

enough to deter minimum wage and overtime viola-

tions, and

--give Labor authorityito formally assess a viola-

tion of the act as well as the amount of ille-

gally withheld back wages, including interest.

Amendments to the act should also provide for a

formal administrative process to adjudicate cases

when employers appeal Labor's assessments. In

addition,

GAO is recommending to the Congress

that it amend section 6 of the Portal-to-Portal

Pay Act of 1947 so that the statute of limita-

tions tolls when a violation of the Fair Labor

Standards Act is formally assessed by Labor.

GAO is recommending to the Secretary of Labor

administrative changes needed to strengthen La-

bor's enforcement program in order to deter em-

ployers from violating the Fair Labor Standards

Act and to improve Labor's ability to recover

the full amount of back wages illegally withheld

from employees.

(See pp. 18, 42, 60, and 61.)

AGENCY COMMENTS

GAO received comments from the Departments of

Labor and Justice,

the Administrative Confer-

ence of the United States, the Minimum Wage

Study Commission,

the Administrative Office of

the United States Courts, and the Chief Judge

of the United States Court for the Northern

District of Illinois (see apps. III through VIII).

Except for Labor's and the Administrative Office

of the United States Courts' comments, the agen-

cies'

comments endorsed the report and recom-

mendations.

The Administrative Office of the

United States Courts had no comments on the

draft report as a whole but stated that, if

GAO's recommendations are implemented, an in-

crease in the Federal courts' workload might

be expected.

Labor did not comment on GAO's

legislative recommendations and either did not

concur with or declined to implement recommenda-

tions made to the Secretary of Labor.

The agen-

cies' comments and GAO's evaluation of them are

included on pages 18 to 22, 43, 44, and 61 to 65.)

viii

Contents

DIGEST

Page

i

CHAPTER

1

INTRODUCTION

Fair Labor Standards Act provisions

Administration and enforcement of FLSA

Extent of noncompliance with FLSA

Objectives, scope, and methodology

2 DETERRENTS INEFFECTIVE OR NONEXISTENT TO DIS-

COURAGE RECORDKEEPING VIOLATIONS

Many employers investigated by Labor violated

FLSA recordkeeping provisions

Many employers unjustly gain from recordkeep-

ing violations

Absence of records creates heavy reliance on

employee testimony

Employers are rarely penalized for record-

keeping violations

Formal administrative process needed to ad-

judicate civil penalties

Conclusions

Recommendation to the Congress

Agency comments and our evaluation

3

DETERRENTS INEFFECTIVE OR NONEXISTENT TO DIS-

COURAGE WILLFUL MINIMUM WAGE AND OVERTIME

VIOLATIONS

Many employers investigated by Labor will-

fully violated minimum wage and overtime

provisions

Criminal penalties are rarely used by Labor

Liquidated damage penalties are ineffective

Civil penalties needed to deter minimum wage

and overtime violations

Formal administrative process needed to ad-

judicate civil penalties

Conclusions

Recommendation to the Congress

Recommendation to the Secretary of Labor

Agency comments and our evaluation

8

9

12

15

17

18

23

26

32

41

42

43

Page

CHAPTER

4

5

APPENDIX

I

II

III

IV

V

CHANGES IN TOLLING OF STATUTE OF LIMITATIONS AND

ADMINISTRATIVE PRACTICES NEEDED TO INCREASE

RECOVERY OF ILLEGALLY WITHHELD WAGES

Back wages lost due to running of statute of

limitations

The time at which the statute tolls should

be changed

Investigations and wage recoveries seldom

cover 3 years for willful violations

Labor frequently does not update investiga-

tions before settling cases

Labor does not have a systematic program to

reinvestigate employers who violate the act

Employers generally have interest-free use of

back wages illegally withheld

Conclusions

Recommendations to the Congress

Recommendations to the Secretary of Labor

Agency comments and our evaluation

ADDITIONAL DEPARTMENT OF LABOR COMMENTS AND OUR

EVALUATION

GAO questionnaire on survey of Fair Labor Stand-

ards Act compliance actions having monetary

findings

Letter, with enclosures,

from the Executive Direc-

tor, Administrative Conference of the United

States to Member Agencies dated April 22, 1977,

on implementation of recommendation relating

to administrative imposition of civil money

penalties

Letter dated March 25, 1981, from the Senior Staff

Attorney, Administrative Conference of the

United States

Letter dated March 13,

1981, from the Assistant

Attorney General for Administration, Depart-

ment of Justice

Letter dated March 5,

1981, from the Executive

Director, Minimum Wage Study Commission

45

46

49

50

51

55

57

60

61

64

66

72

79

91

94

Page

APPENDIX

VI

Letter dated March 17,

1981, from the Director,

Administrative Office of the United States

Courts 95

VII

Letter dated March 5,

1981, from the Chief Judge,

United States District Court for the Northern

District of Illinois

96

VIII

Letter dated March 6,

1981, from the Acting

Deputy Inspector General, Department of Labor

99

ABBREVIATIONS

FLSA

Fair Labor Standards Act

GAO General Accounting Office

CHAPTER 1

INTRODUCTION

The Fair Labor Standards Act (FLSA), enacted in 1938 and

amended several times, sets standards for recordkeeping, minimum

wage,

overtime pay, and other protections for workers of firms

engaged in interstate and foreign commerce. From 1938 to 1979

the number of employees covered under the act rose from 11 million

to about 60 million in over 4.1 million private establishments.

Noncompliance with FLSA requirements --particularly the minimum

wage provision--can severely harm low-wage workers who need a de-

cent wage to provide themselves and their families with life's ne-

cessities. Although minimum wage increases have resulted in higher

earnings for employees, the 1980 minimum of $3.10 per hour provided

only full-time year-round nonfarm workers with 87 percent of the

amount needed to maintain a minimum standard of living for a family

of four at the poverty level. Consequently, effective administra-

tion and enforcement of FLSA by the Department of Labor is needed

to assure the economic well-being of low-wage earners.

FAIR LABOR STANDARDS ACT PROVISIONS

All employees of certain enterprises having workers engaged

in interstate commerce, producing goods for interstate commerce, or

handling, selling, or otherwise working on goods or materials that

have been moved in or produced for such commerce by any person are

covered by FLSA. The act covers other specific groups of workers,

such as domestics. Criteria, such as minimum annual gross volume

of sales a business does or the type of business engaged in, are

used to determine whether an enterprise is covered by the act.

Many enterprises not covered by FLSA

may

be covered by State labor

laws.

Exemptions from the act

Some employees are excluded from the minimum wage or overtime

provisions, or both.

For example, executive, administrative, and

professional employees who meet prescribed duty and salary tests

are exempt from both minimum wage and overtime provisions.

Minimum wage and overtime rates

All employees covered by the act's minimum wage provisions

must be paid at least $3.35 an hour effective January 1, 1981. In

some instances, employers are allowed credits toward the minimum

wage,

such as for tipped employees, defined as those who customarily

and regularly receive more than $30 monthly in tips.

The employer

may

consider tips as part of wages, but such a wage credit must not

exceed 40 percent of the minimum wage.

The act generally requires that employees covered by overtime

provisions be paid at least l-1/2 times their regular rate of pay

for all hours worked in excess of 40 in a workweek.

Recordkeeping requirements

Employers are required to make and preserve records of wages,

hours,

and employment practices needed by Labor to enforce the act.

An employer subject to FLSA must maintain records which include

(1) personal employee information, such as name, occupation, sex,

and home address,

(2) time

and day on which the employee's workweek

begins, (3) employee's regular rate of pay and hours worked, and

(4) straighttime and overtime compensation.

In addition to these basic requirements, employers must keep

special information for certain employees.

For example, employers

who credit tips toward minimum wages must keep a record of the

amount of tips employees receive each month.

Remedies against FLSA violators

Several remedies are available against employers who violate

FLSA. Employees can bring suit against employers under section

16(b) of the act and the Secretary of Labor can bring suit under

sections 16(c) or 17 to recover back wages.

Criminal suits may be

sought by the Secretary of Labor under section 16(a), but criminal

proceedings

may

be brought only by the U.S. Attorney General.

Suits by employees

Any employee or group of employees may file suit against an

employer under section 16(b) to recover the amount of unpaid mini-

mum wages and overtime compensation plus an equal amount as liqui-

dated damages. If Labor has already initiated legal action seeking

back wages and an injunction or liquidated damage against an enter-

prise, employees are barred from also filing suit.

Employees who

win suits are entitled to recover reasonable attorney fees.

The

court may deny or partially award liquidated damages if it finds

that the employer acted in good faith and believed he did not vio-

late FLSA.

Liquidated damage suits by Labor

Labor

may

file suit against an employer under section 16(c)

to recover unpaid minimum wages and overtime compensation plus an

equal amount as liquidated damages.

According to the act, funds

recovered as a result of this suit for any employees Labor cannot

locate must be deposited in the U.S.

Treasury as miscellaneous

receipts.

2

Injunction suits by Labor

Labor may file suit under section 17 against an employer to

restrain future violations, including recordkeeping violations,

and to recover unpaid wages.

Although penalties are not available

under this section,

suits under this section of the act have the

following features:

--Employers are not entitled to jury trials.

--Labor can recover back wages.

--Injunctions can be obtained against any employer violating

the act regardless of the intent of the violation.

--Injunctions continue indefinitely, leaving employers open

to contempt proceedings if future violations occur.

If found guilty of contempt for a subsequent violation, employers

may have to pay monetary penalties. Imprisonment of employers is

also possible but these penalties are rarely used.

Criminal suits by the Department of Justice

Criminal suits may be brought against employers only by the

Attorney General of the United States: however, Labor's Office of

the Solicitor must first recommend cases for criminal prosecution.

Labor

may

initiate such criminal penalties against employers

under section 16(a) for willful violations of FLSA wage and hour

provisions. Employers found guilty of a first offense are subject

to a fine of not more than $10,000. Second-time offenders may be

punished by both a fine and imprisonment of up to 6 months.

Unlike

civil suits--which are subject to a 2- or 3-year statute of

limitations

--criminal suits can be filed within

5

years of the

time

violations are committed.

Recovery of illegally withheld wages is

not provided for under this section.

ADMINISTRATION AND ENFORCEMENT OF FLSA

Administration and enforcement of FLSA is the responsibility

of Labor's Wage and Hour Division and Office of the Solicitor.

The

Wage and Hour Division investigates firms subject to the act to

determine compliance,

and the Office of the Solicitor enforces the

act in district courts.

Labor administrative officials and Office

of the Solicitor attorneys are located in Washington, D.C., and

10 regional offices.

Labor has over 1,000 compliance officers sta-

tioned nationwide in 89 area offices and 261 field stations.

FLSA enforcement is conducted by compliance officers who have

authority to investigate and gather data on wages, hours, and other

3

employment conditions or practices to determine compliance with

the act.

When violations are found, these officers recommend res-

titution of back wages to affected employees and also

may

recommend

changes in employment practices.

Compliance officers can investigate and examine the payroll

practices and records of any establishment covered by FLSA.

Labor

initiates most FLSA investigations on the basis of employee wage

complaints.

In addition to identifying the various types of FLSA

violations, compliance officers must also compute the amount of

minimum wage and overtime pay illegally withheld. Labor cannot

assess penalties against employers found violating FLSA or require

them to pay back wages illegally withheld.

The Office of the Solicitor is responsible for initiating

legal action against employers or settling FLSA cases that are not

resolved by the Wage and Hour Division.

Usually these cases in-

volve employers who refuse to pay the employee back wages found

due or who fail to provide an assurance of future compliance. The

Office of the Solicitor includes regional solicitors, who represent

the Secretary of Labor in district court appearances and appeals,

except for criminal cases,

and conduct negotiations with employers.

EXTENT OF NONCOMPLIANCE WITH FLSA

Labor's investigations of establishments demonstrate that non-

compliance with FLSA recordkeeping, minimum wage, and

overtime

provisions is a serious and continuing problem.

Labor is able to

investigate annually only a small percentage of firms covered by

the act.

For example,

in 1979 Labor investigated less than 2 per-

cent of the 4.1 million establishments with paid employees subject

to FLSA provisions.

The number of covered establishments was last

determined by Labor in 1977.

Although Labor attempts to act on

all FLSA complaints received,

the complaint backlog has remained

fairly constant--between 21,000 and 25,000--during the 3 fiscal

years ended 1979.

Results of Labor investigations of establish-

ments in fiscal years 1978 and 1979 are shown on the next page.

4

Number of FLSA investigations conducted

1978 1979

61,239 75,153

Number of establishments in violation of

minimum wage provisions 30,519 35,251

Number of employees affected by minimum

wage violations

378,363 425,956

Number of establishments in violation

of overtime provisions

25,029 29,623

Number of employees affected by overtime

violations

263,723

287,540

Back wages due (minimum wage

and overtime)

$91,726,521 $123,996,372

Back wages restored (note a)

$59,160,672 $ 73,396,356

a/Represents money employers agree to or are ordered to pay back to

-

employees. Wages actually repaid can be significantly less than

wages reported as restored because Labor considers wages restored

if the employer made a valid attempt to restore them even if the

employees did not receive the wages.

Despite the adverse effect illegal wage underpayments have on

employees, Labor obtained only restoration, in the 2 fiscal years

shown above, for about 60 percent of the amount of back pay found

due. l/ Labor attributes the differences between the amounts found

due employees and amounts restored largely to cases in which em-

ployers refused to pay employees and which Labor found unsuitable

for litigation. Many cases appear to be unsuitable for litigation

because of recordkeeping violations.

These violations also limit

Labor's ability to prove the extent of minimum wage and overtime

violations in cases that are litigated.

OBJECTIVES, SCOPE, AND METHODOLOGY

We made this review to determine whether Labor's administration

and enforcement of FLSA effectively deterred employers from violating

the act and what actions can be taken to increase compliance with

the act and to improve the recovery of illegally withheld wages.

L/The actual percentage of restorations to back wages found due

cannot be computed for specific years since annual restoration

figures include amounts recovered in cases investigated in prior

fiscal years.

We reviewed Labor's enforcement policies and procedures at

the national Wage and Hour Division and Office of the Solicitor.

We also performed work at the regional Wage and Hour Division and

regional solicitor offices in Boston, Chicago, and Dallas and at

15 area offices in these regions.

The regions selected provided

broad geographic coverage and included areas in which many low-wage

earners were located. We interviewed nine U.S. district court

chief judges, seven U.S. attorneys,

and two administrative law

judges to obtain their views on FLSA cases and suggestions for im-

proving the process used to litigate these cases.

We also dis-

cussed with officials of the Office of the Chairman of the Admin-

istrative Conference of the United States L/ the appropriateness

of an administrative civil penalty process.

Additionally, several

studies and reports on alternative litigation methods were

reviewed.

We identified several problems relating to Labor's limited

enforcement authority and inability to impose effective penalties.

To demonstrate the extent of these problems and their impact on

FLSA enforcement, we:

--Prepared and administered a nationwide questionnaire which

was completed by Labor's compliance officers for 4,022 FLSA

cases which had monetary findings and were closed adminis-

tratively in June 1979. (See app. I.)

--Reviewed a random sample of 75 FLSA cases closed by three

regional solicitor offices in fiscal year 1978.

These cases,

which account for about 25 percent of the cases closed by

these offices during the year, were reviewed in depth to

ascertain the effectiveness of the Office of the Solicitor's

litigation actions.

--Reviewed 230 cases, or about 75 percent of FLSA cases closed

by three regional solicitor offices in fiscal year 1978 to

l/The Conference was established by the Congress to assist the

-

President, the Congress, administrative agencies, and executive

departments in improving existing administrative procedures, in-

cluding achievement of needed regulatory reform. The Conference

has 91 members with 55 from the Government and the rest from the

private sector including academic and public interest groups. It

is responsible for conducting studies of the efficiency, adequacy,

and fairness of present procedures by which the Federal adminis-

trative agencies and executive departments determine the rights,

privileges, and obligations of private persons.

On the basis of

such studies, the Conference issues formal recommendations for

improvements and encourages implementation of recommendations

through appropriate agency, congressional, or judicial action.

6

determine the number of cases involving repeat violations.

The 230 cases represent all FLSA cases closed for the 15

area offices covered by our review.

--Reviewed all 378 cases closed during June and

July 1979 at

six area offices in three regions to determine the extent

of repeat violations of the FLSA.

--Judgmentally selected and reviewed 32 cases rejected by

regional solicitors to determine to what extent the statute

of limitations influenced decisions to reject cases.

Our questionnaire was developed and pretested in full coopera-

tion with Wage and Hour Division officials and was sent to all 89

Wage and Hour Division area offices and their 261 field stations

covering all 50 States, Guam, Puerto Rico,

and the Virgin Islands.

The 4,022 responses represent, insofar as we can determine, 100

percent of the universe of FLSA cases having monetary findings and

closed administratively in June 1979, a month believed by Labor

officials to be typical and generally representative of FLSA en-

forcement activity in fiscal year 1979.

The FLSA cases selected for onsite review were the

result

of

applying various sampling techniques ranging from judgmental sam-

ples to random samples to selecting the entire universe at the

specific offices we visited.

Because of these varying samples and

the relatively few cases involved at each location, it would be

inappropriate to statistically project

our

case review results to

the more than 30,000 FLSA violation cases identified annually by

Labor's investigations.

However,

the data gathered through our

nationwide questionnaires corroborated the FLSA enforcement and

litigation problems identified in our case reviews.

We therefore believe that our questionnaire responses, coupled

with the extensive onsite interviews and case reviews in the

selected regional, area, and field offices, provide a very broad

representative data base to evaluate the efficiency and effective-

ness of FLSA enforcement and related litigative activities nation-

wide.

7

CHAPTER 2

DETERRENTS INEFFECTIVE OR NONEXISTENT

TO DISCOURAGE RECORDKEEPING VIOLATIONS

For one of the most important requirements under the Fair

Labor Standards Act--recordkeeping--there are no civil penalties.

Also,

the existing criminal penalties for willful recordkeeping

violations are not used.

Regional solicitors can obtain a court

injunction requiring an employer to maintain records in accordance

with the act. However, even if such orders are subsequently viol-

ated, officials in the three regional solicitors' offices in our

review informed us that monetary penalties for civil contempt of

these court orders generally are insignificant.

Adequate records are essential to determine whether employers

are complying with the act and how much illegally withheld back

wages are owed to employees. In fact, recordkeeping violations

are extensive and often hamper Labor's ability to document and

recover the full amount of back wages owed to employees.

Without

these basic wage records, the intent of the act cannot be fully

carried out. Without appropriate recordkeeping penalties, it is

to an employer's advantage not to maintain adequate records so

that violations cannot be identified and back wages cannot be

accurately computed. In that way,

employers profit at the expense

of their employees.

We believe that penalties for violating recordkeeping pro-

visions are essential and that Labor should be authorized to

assess civil penalties.

In addition, because of the (1) extensive

time

required to complete cases, including FLSA cases, in many

district courts,

(2) low priority given to FLSA and many other

civil cases,

and (3) reluctance of Labor's Office of the Solicitor

to pursue court cases under these circumstances, we believe a

formal administrative process--

such as is presently used to ad-

judicate civil penalties in many other regulatory cases--is neces-

sary to assure faster action while still providing the due-process

protections now afforded employers.

This formal administrative

process should also be used to adjudica-e other civil money penal-

ties needed to deter violations of the act's minimum wage and

overtime provisions.

(See ch. 3.)

MANY EMPLOYERS INVESTIGATED BY LABOR VIOLATED

FLSA RECORDKEEPING PROVISIONS

Recordkeeping violations are extensive and often hamper

Labor's ability to document and recover the full amount of back

wages owed to employees.

In our nationwide questionnaire which

was completed by Labor's compliance officers for the 4,022 cases

which had monetary findings and were closed administratively in

8

June 1979, compliance officers reported that 1,965 cases (or

49 percent) contained FLSA recordkeeping violations. In 766 (or

39 percent) of the cases with recordkeeping violations (19 percent

of the 4,022 violations), the compliance officers reported that

the lack of records hampered the investigation from a great to a

very great extent.

Further,

in 244 cases, or about 12 percent of the cases with

recordkeeping violations (about 6 percent of the 4,022 violations),

the compliance officers noted evidence that the employer falsified

or concealed records.

Compliance officers told us that their in-

vestigations were hampered to a "great" or "very great" extent in

about 76 percent of these 244 cases.

Our more detailed review of

75 cases closed by regional solicitors during fiscal year 1978

showed that 55 employers (or 73 percent) had violated the act's

recordkeeping provisions.

In 43 of these cases, because of the

recordkeeping violations,

compliance officers had difficulty docu-

menting the extent of the violations.

MANY EMPLOYERS UNJUSTLY GAIN

FROM RECORDKEEPING VIOLATIONS

When employers disregard FLSA recordkeeping provisions, com-

pliance officers must base estimates of back wage violations on

whatever records are available and on employee statements. Without

records to support estimates, employers can hold out for smaller

or no back wage restitutions knowing that Labor will have diffi-

culty proving the accuracy of estimates in court.

Consequently,

cases are closed both in Labor's area offices and in regional

solicitor offices with either no restitution or less than full

restitution of employee back wages.

Of the 4,022 cases from our nationwide questionnaire, 472 were

settled and closed within area offices with either no recoveries

or less than full recoveries of back wages estimated by compliance

officers.

They stated that, in 323 of the 472 cases, recordkeeping

violations were present and that these violations hampered their

investigations to a "great" or "very great" extent in 50 percent

or 161 of the cases. The 323 cases had a total of $982,197 in

back wage findings applicable to 4,771 employees, but only $344,283

(or 35 percent) was partially restored to 2,232 employees. The

other 2,539 employees did not receive any back wages that were

determined by compliance officers to have been illegally withheld.

The following cases, taken from the 4,022 cases, illustrate

the difficulties compliance officers encounter in developing FLSA

monetary violations during investigations when employers maintain

little or no records. None of the following cases was forwarded

to regional solicitors for review and, accordingly, the employers

were not penalized for recordkeeping violations. On the basis of

their investigations, compliance officers reported that:

9

--An employer had minimum wage violations estimated at $530

owed to 7 employees,

overtime violations of $545 owed to

13 employees,

and recordkeeping violations.

The employer

agreed to pay all back wages found due.

The compliance

officer noted that the findings would have been increased

to a very great extent if the investigation had not been

hampered by recordkeeping violations.

He commented that

Labor "* * * needs a case to be tried on recordkeeping

alone. As in this case,

a garment industry, back wages

were very conservatively estimated on the basis of employee

statements.

The more the garment industry in this area be-

comes aware that lack of records means less back wages, the

more reason they have to not keep records.

I had one case

where an employer stopped keeping payroll records after a

first investigation * * *.II

--An employer had minimum wage violations estimated at

$10,000 owed to 77 employees and recordkeeping violations.

The employer agreed to pay all back wages found due. The

compliance officer noted, however, that because of a com-

plete absence of records,

the effective rate of pay for

employees had to be established by circumstantial evidence

which greatly affected the employees adversely. He added

that civil money penalties for recordkeeping violations

would have been appropriate in this case.

--An employer had minimum wage and overtime violations esti-

mated at $11,200 owed to 73 employees and recordkeeping

violations.

The employer agreed to pay all back wages

found due.

The compliance officer noted that the employer

kept no wage records at all and, therefore, the hours

worked were totally reconstructed. In this case, the com-

pliance officer noted that the findings would have been

increased to a very great extent if the investigation had

not been hampered by recordkeeping violations.

--An employer had overtime violations estimated at $1,025

owed to 11 employees and recordkeeping violations. The

compliance officer noted that the investigation was ham-

pered to a great extent because of the recordkeeping

violation.

He added that the employer's failure to record

hours worked was used as a basis to dispute Labor's re-

constructed hours.

As a result, only $770 of the $1,025

finding was restored to 11 employees when the case was

closed.

--An employer had minimum wage violations estimated at $4,030

owed to 125 employees, overtime violations of $238 owed to

2 employees, and recordkeeping violations. The employer

agreed to pay all back wages found due.

The compliance

officer noted that lack of available records was the major

10

reason for this case taking so much time to complete--

107 hours.

He estimated that this case could have been

completed in one-fifth the time expended had the proper

records been available.

--An employer had an overtime violation estimated at $3,050

owed to one employee and recordkeeping violations which

hampered the investigation to a very great extent.

The

employer refused to restore any of the back wages due be-

cause he questioned the facts developed by the compliance

officer. The compliance officer stated that there was an

indication of records falsification but without timecards,

it was not possible to be

sure.

--An employer had overtime violations estimated at $3,600

owed to two employees and recordkeeping violations.

The

employer did not maintain hourly wage records and refused

to restore any back wages.

The compliance officer noted

that,

if the employer had maintained hourly records as re-

quired,

Labor could have undoubtedly forced a back wage

payment.

--An employer had minimum wage violations totaling $1,600

owed to 29 employees and recordkeeping violations.

The

employer agreed to restore all back wages owed to employees.

The compliance officer noted, however, that recordkeeping

violations caused a decrease in the amount of income re-

stored because there were several addresses missing for

employees owed back wages.

In this case,

even though the

recordkeeping violation was seemingly minor and had little

or no effect on the development of the finding, it prevented

location of all employees entitled to receive back wages.

--An employer had minimum wage violations of $96 owed to one

employee and recordkeeping violations.

The employer agreed

to pay the back wages found due.

The compliance officer

noted that the employer kept no employee records whatsoever

and as a result, he could not obtain names or addresses of

persons to interview.

The employer indicated that he

em-

ployed casual labor, but no records were kept of their

names or social

security

and income tax data.

The com-

pliance officer also said that assuming that previous

em-

ployees were paid in the

same

manner as the complainant,

more back wages could have been obtained if records were

available.

He concluded that the employer must know this

and his promise of future compliance is simply rhetorical.

The case was not submitted to the regional solicitor as

"* * * mere recordkeeping violations by themselves are not

prosecuted"

according to the compliance officer.

11

ABSENCE OF RECORDS CREATES HEAVY

RELIANCE ON EMPLOYEE TESTIMONY

Widespread employer recordkeeping violations oftentimes

create a need for employees to assist Labor in computing il-

legally withheld back wages and to testify in court regarding

conditions and practices of employment.

Many employees, however,

do not provide the data needed by Labor because they are no longer

employed,

cannot be located, or are unwilling to testify.

(It

usually

takes months or even years for cases to reach trial in

district courts.)

Therefore,

a lack of or incomplete records,

coupled with an inability to obtain employee cooperation, fre-

quently result in reduced or no restoration of employee back wages.

When adequate records are not available, compliance officers

must estimate employee back wages based on available employer rec-

ords and information from employee interviews. According to an

official in one regional solicitor's office, compliance officers

will

often project back wage estimates based on interviews with a

few employees.

It may not be possible to interview all employees

and some may refuse to cooperate.

In FLSA court cases,

witnesses are vitally needed to prove

the existence and the extent of violations when payroll records

are unavailable. Regional solicitor officials noted that esti-

mates of employee back wages are often not acceptable in court

without employee testimony. Regional solicitor attorneys also

stated that recovery of back wages is often directly proportionate

to the number of employees willing to testify. For example, in

one case reviewed, the regional solicitor obtained employee wit-

nesses from Mexico to testify against a restaurant owner in Fort

Worth, Texas. The judge hearing this case awarded back wage res-

titutions only for the witnesses or employees directly named in

testimony. Other employees who may have been entitled to back

wage restoration but were not specifically identified were not

awarded restitution. Consequently, the court ordered the employer

to pay $48,400, which was less than 10 percent of the back wages

sought by Labor.

Time adversely affects cases by limiting Labor's ability to

recover back wages. As time passes, employees move, die, or may

decide not to cooperate any longer.

Also,

the seasonal nature of

many businesses,

such as restaurant and construction businesses,

makes it extremely difficult to locate witnesses once an FLSA

case finally comes to trial. Several Labor area officials agreed

that witnesses become difficult to locate with the passing of

time,

especially when employers pay low wages and have high em-

ployee turnover.

12

A deputy regional solicitor said that, in cases where poor

records are kept,

the issue becomes limited to employer/employee

testimony and which testimony is more creditable to the judge.

He added that, because there is no penalty for poor recordkeeping,

the incentive is to keep poor,

inadequate records or none at all.

He concluded that proving FLSA violations is difficult with no

substantive records,

especially on a first-time offense, and as

a result,

regional solicitors are forced to settle for less and

employers profit from the settlement.

The following case, taken

from the 4,022 responses to our nationwide questionnaire, is a

good illustration of the difficulty in obtaining back wage restor-

ations if employee testimony is needed in lieu of employer wage

records.

--An employer had minimum wage violations estimated at

$31,000 owed to 75 employees and recordkeeping violations.

The employer refused to pay any back wages found due be-

cause,

according to the compliance officer, he recognized

that few employees were available to testify in case of

litigation. Labor's investigation was hampered to a very

great extent because of the recordkeeping violation. The

compliance officer noted that the investigation involved

employees who were transient in nature and, therefore,

failed to respond to inquiry or failed to cooperate in the

degree necessary to develop the case for litigation. In'

conclusion, he stated that otherwise this case would, with-

out question, have been referred for litigation.

The following case, taken from our sample of 75 cases closed

by regional solicitors,

was analyzed from Labor's initial investi-

gation to its completion and further illustrates the difficulty in

obtaining back wage restorations if employee testimony is needed

in lieu of employer wage records.

--The operator of an oil field equipment rental company had

minimum wage violations of $148 owed to 4 employees, over-

time violations of about $13,200 owed to 28 employees, and

recordkeeping violations at four of its branch locations.

The compliance officer reported that, in some instances,

no records of hours worked were maintained, and in other

instances, inaccurate records were kept. He had diffi-

culty documenting the extent of the back wage violations.

In addition, the employer denied the compliance officer

access to certain records.

A lack of witnesses also frus-

trated investigative efforts.

At one branch location,

only 3 of 22 employees signed statements showing their

willingness to testify against the employer.

13

Similar minimum wage and overtime violations were found at

one branch location during a prior investigation in 1974.

Five employees were owed about $2,800 in back wages because

of employer FLSA violations. The case was settled in the

area office when the employer agreed to pay the full amount

of back wages. The area director subsequently learned that

the employer had not paid about $2,500 owed to one employee.

According to this one employee, the firm offered him $300

for his back wages.

The area director requested the em-

ployer to pay the back wages,

but the employer refused.

Labor closed this case without further action.

In the current investigation, the compliance officer noted

that the employer was continuing to violate the act even

though FLSA provisions had been previously explained during

the first investigation. The compliance officer recommended

litigative action since the employer had been investigated

previously and had not acted in good faith in the current

investigation.

The regional solicitor filed suit to obtain an injuction.

Prior to the start of civil legal action, the employer paid

10 employees $3,725 in back wages. The regional solicitor

quickly obtained an injunction against any future 'violations

by the firm and settled the case out of court after the em-

ployer agreed to pay additional back wages totaling $5,248

to 18 employees.

In all, the employer paid back wages

totaling $8,973 to 28 employees,

or about 67 percent of the

total estimated back wages.

We discussed this case with an attorney in the regional

solicitor's office and an assistant area director.

The

attorney stated that the employer recordkeeping violations

were widespread, recurring, serious, and willful in nature.

The assistant area director stated the employer was very

familiar with FLSA and knew how to avoid compliance. In

his opinion, the employer did not maintain records because

he knew the nonexistence of records would keep the compli-

ance officer from proving wage and hour violations.

Because

of recordkeeping violations,

the compliance officer had to

reconstruct hours worked through employees interviews.

These interviews were contradictory and may not have been

conclusive evidence in a courtroom.

Furthermore, the em-

ployer denied any violations and obtained some employee

affidavits which supported his position.

The compliance

officer believed that employees had been coerced into making

false statements but was unable to prove it. The assistant

area director stated that the lack of records undoubtedly

resulted in a reduced back wage settlement.

14

EMPLOYERS ARE RARELY PENALIZED

FOR RECORDKEEPING VIOLATIONS

Despite numerous recordkeeping violations, employers are

rarely penalized for violating the act's recordkeeping provisions.

While there are no civil penalties for violating FLSA recordkeep-

ing provisions,

regional solicitors can obtain a court injunction

requiring an employer to maintain records in accordance with the

act. However,

officials in the three regional solicitors' offices

in our review said that,

even when employers again violate the act,

the monetary penalties for civil contempt of a court order gen-

erally are insignificant.

FLSA does provide a criminal penalty of

up to $10,000 and/or 6 months imprisonment for repeated willful

recordkeeping violations.

However,

regional solicitors rarely seek

criminal penalties for such recordkeeping violations.

Although falsification or concealment of records is one

standard that Labor uses to decide whether to consider an FLSA

case for potential criminal litigation,

the recordkeeping viola-

tions must be accompanied by substantial violations of another

major FLSA provision before the case is considered.

As pointed

out in chapter 3,

Labor has criminally prosecuted very few FLSA

cases because it believes U.S.

attorneys would be reluctant to

prosecute these cases and because filing criminal suits reduces

Labor's ability to recover employees' back wages.

Although we

believe Labor can make more use of criminal suits to penalize the

worst FLSA violators, clearly,

criminal suits are not an appro-

priate way to penalize many employers who violate recordkeeping

provisions.

Without penalties to discourage violations of the act's

recordkeeping provisions, employers will probably continue to

disregard them.

Since proper recordkeeping is essential to

carry out the intent of the act, Labor should have the authority

to assess civil money penalties large enough to deter recordkeep-

ing violations.

Civil money penalty sanctions are widely accepted today.

The Congress has increasingly turned to this sanction to enforce

a variety of Federal regulatory

statutes,

including Mine Safety

and Health, Farm Labor Contractor Registration, and FLSA child

labor provisions.

FORMAL ADMINISTRATIVE PROCESS NEEDED

TO ADJUDICATE CIVIL PENALTIES

Even if civil money penalties are authorized, their effec-

tiveness will be limited if cases need to be adjudicated in dis-

trict courts.

This is because of the lengthy processing time

needed to complete cases--including FLSA cases--in many district

15

courts,

the low priority given to FLSA cases, and the reluctance

of the Labor solicitor's office to pursue court cases under these

circumstances.

District court statistics for the year ended June 1979 show

that the median time to conclude legal action for all 52 FLSA

cases brought to trial by Labor was 28 months.

Overall,

during the

same period,

9,017 civil cases that reached trial were completed.

The median interval from court filing of a case to its court hear-

ing and ultimate disposition for these cases was 19 months.

In the

95 U.S. district courts,

the median time taken to dispose of civil

cases brought to trial ranged from 42 months in the Connecticut

district court to 7 months in the Virginia Eastern, Tennessee

Eastern,

and Alabama Middle district courts.

The median time to

dispose of civil cases brought to trial exceeded 18 months in

46 of the 95 U.S. district courts.

Six U.S.

district court chief judges interviewed cited a

backlog of cases in district courts as a problem leading to long

delays in resolving civil cases.

Regional solicitors and attorneys

interviewed in three regions also cited lengthy processing times

and extensive delays reaching trial in district courts as a major

factor discouraging them from bringing cases to trial.

One re-

gional solicitor said this was the most important factor and that

FLSA cases do not "age gracefully" because, as time passes, wit-

nesses move, die,

or decide not to cooperate any longer.

Regional solicitors and their attorneys in the three regions

visited believe that FLSA cases receive low priority in district

courts and that many judges are not receptive to hearing such

cases. Although chief judges interviewed generally did not feel

they have a negative attitude toward FLSA cases, Labor perceives

that judges are reluctant to hear such cases, and, therefore, Labor

is reluctant to take these cases to trial.

Chief judges stated

that FLSA cases and most other civil cases do receive a relatively

low priority compared to criminal cases and that FLSA cases do not

need to be heard in district courts.

A formal administrative process for adjudicating penalties

is a desirable alternative to seeking penalties through the

courts. This process is used to adjudicate civil money penalties

under statutes, such as Mine Safety and Health, Farm Labor Con-

tractor Registration, and FLSA child labor provisions. The Admin-

istrative Conference of the United States recommended that an ad-

ministrative process be used to adjudicate civil penalty cases

because such a process avoids the delays and high costs associated

with the district courts while preserving and even enhancing the

parties'

due-process rights. In addition, all nine district court

chief judges we interviewed agreed that an administrative process

for imposing civil money penalties would be more appropriate than

a district court process.

16

If properly designed and managed,

an administrative process

would protect the employer's right to appeal Labor's penalty

assessments and obtain a faster impartial hearing. After assess-

ment of a civil money penalty, an employer could appeal the assess-

ment within a reasonable

time at

a formal administrative hearing

before an administrative law judge.

The formal hearings could be

conducted on the record with a verbatim transcript of the proceed-

ings. Employers could have the right to appeal adverse agency

decisions to the

courts

where cases could be reviewed under the

substantial evidence rule. Basically,

under that rule the decision

could be set aside if a judge, after reviewing the hearing record,

finds the decision to be unsupported by substantial evidence.

An administrative process for adjudicating appeals of civil

penalties could also benefit employers who,

under a district

court

process, may feel forced to agree to unfair settlements when faced

with extensive delays and high court costs.

Also, it traditionally

takes less time for an administrative case to reach a hearing than

it does for a civil case to reach a trial in district court, and a

larger percentage of administrative cases actually reach a hearing.

For example, during fiscal years 1976, 1977, and 1978, Labor

administrative law judges disposed of about 6,230 cases in an

average of about 6 months from the date the case was filed to the

date the case was decided. Almost half of these cases actually

reached a hearing, compared to only about 7 percent of the civil

cases completed in district courts in fiscal year 1979. A Labor

administrative law judge said that, in contrast to district court

judges who need to give priority to major cases involving criminal

activities and constitutional questions and who accordingly must

give FLSA cases low priority,

administrative law judges would give

FLSA cases a high priority.

CONCLUSIONS

Provisions for enforcing the essential FLSA recordkeeping

requirements need to be strengthened.

Without adequate records,

Labor has difficulty proving the amount of back wages illegally

withheld and must rely heavily on employee testimony.

Yet, there

are no civil penalties against employers who violate the act's

recordkeeping provisions.

As a result, many employers profit

from recordkeeping violations.

Criminal penalties are provided

for willful recordkeeping violators, but Labor seldom uses this

provision.

Although a court order requiring an employer to main-

tain wage records in accordance with the act can be obtained,

monetary penalties for civil contempt,

if such orders are later

violated, generally are insignificant. While Labor should use

criminal and injunctive authority when appropriate to deter

recordkeeping violations,

it is not practical to apply such sanc-

tions to many recordkeeping violators.

17

Since recordkeeping violators,

including willful violators,

are rarely penalized,

employers have little incentive to comply

with the act's recordkeeping provisions.

This limits Labor's

ability to compute, document,

and recover for employees the full

amount of back wages employers illegally withheld.

To deter recordkeeping violations, we believe that Labor needs

statutory authority to assess civil money penalties.

In addition,

because of the extensive

time

required to complete cases, includ-

ing FLSA cases,

in many district courts the low priority given to

FLSA cases,

and the reluctance of the Labor solicitor's office to

pursue court cases under these circumstances, we believe a formal

administrative process to adjudicate civil money penalty assess-

ments is necessary to assure faster action and still provide due-

process protections now afforded to employers.

If properly de-

signed and managed,

we further believe an administrative process

for adjudicating civil money penalty assessments will lead to

better enforcement and increased protection for employees and em-

ployers.

The Congress has increasingly turned to an administra-

tive process to impose civil money penalties, and the Administra-

tive Conference of the United States has recommended the increased

use of such a process to resolve civil money penalty disputes.

Finally,

all nine district court chief judges interviewed agreed

that FLSA cases could be better handled in an administrative

setting.

We also believe that Labor should use the FLSA criminal

sanctions against flagrant and willful recordkeeping violators

and injunction provisions, as needed,

to obtain compliance with

FLSA recordkeeping requirements.

RECOMMENDATION TO THE CONGRESS

We recommend that the Congress amend FLSA to give Labor au-

thority to assess civil money penalties large enough to deter

recordkeeping violations.

The legislation should provide for a

formal administrative process to adjudicate cases when employers

appeal Labor's assessments.

AGENCY COMMENTS AND OUR EVALUATION

We received comments on our draft report from the Departments

of Labor and Justice,

the Administrative Conference of the United

States, the Minimum Wage Study Commission, the Administrative

Office of the United States Courts,

and the Chief Judge of the

United States Court for the Northern District of Illinois. We

provided copies of the draft report for comment to two additional

chief judges of two other district courts:

but they did not provide

written comments,

and we were unable to obtain their oral comments

in time to include them in this report.

18

Administrative Conference of the United States

By letter dated March 25,

1981, the Senior Staff Attorney of

the Conference

--at the Conference Chairman's request--responded to

our draft report.

(See app. III.)

He stated that the Conference

has never studied the activities of Labor under FLSA, so it is not

in a position to evaluate the findings of the draft report that

are particular to this program.

However,

he stated that the Con-

ference has devoted considerable attention to the topic of civil

money penalty procedures,

and it finds the report's recommenda-

tions interesting, important, and quite persuasive.

(See app. II

for letter, with enclosures,

from Executive Director, Administra-

tive Conference of the United States to Member Agencies dated

April 22,

1977, on implementation of recommendation relating to

administrative imposition of civil money penalties.)

The Conference has defined those factors, which when present

in a particular agency program,

it believes warrant the agency

asking the Congress for authority to impose civil penalties in a

formal adjudicative proceeding within the agency.

The Senior Staff

Attorney's response listed and discussed those factors:

--A large volume of cases likely to be processed annually.

--The availability to the agency of more potent sanctions

with the resulting likelihood that civil penalties will be

used to moderate an otherwise harsh response.

--The importance to the enforcement scheme of speedy

adjudications.

--The need for specialized knowledge and agency expertise

in the resolution of disputed issues.

--The relative rarity of issues of law (e.g., statutory

interpretation) which require judicial resolution.

--The importance of greater consistency of outcome (parti-

cularly as to the penalties imposed) which could result

from agency, as opposed to district court adjudications.

--The likelihood that an agency (or a group of agencies in

combination) will establish an impartial forum in which

cases can be efficiently and fairly decided.

The Senior Staff Attorney stated that the Administration Confer-

ence's conclusion,

after reviewing findings in the draft report

in the context of the above factors,

is that our proposal that

FLSA be amended to substitute an administrative civil money

penalty system for the current court-imposed liquidated damage

system is a sound one.

19

Department of Justice

By letter dated March 13,

1981, Justice informed us that it

has no objection to the recommendations contained in our draft

report.

(See app. IV.)

Justice stated that additional civil

penalties,

such as we proposed,

would assist enforcement of the

statute's mandates,

even in jurisdictions where scarce prosecu-

torial resources hinder effective criminal prosecution under the

act.

Minimum Wage Study Commission

By letter dated March 5,

1981, the Executive Director of the

Commission provided comments on our draft report. (See app. V.)

He stated that the Commission's staff was generally most favorably

disposed toward our report and its recommendations to both the

Congress and the Department of Labor.

Administrative Office of the

United States Courts

By letter dated March 17, 1981, the Director of the Adminis-

trative Office of the United States Courts stated that an increase

in the workload of the Federal courts might be expected to occur

if our recommendations are implemented.

(See app. VI.) He stated,

however, the degree and extent of the increase is not susceptible

to precise measurement.

If our recommendations are implemented, the appeal of an ad-

ministrative decision would be to a United States Federal court.

Accordingly,

we would expect there might be an increase in the

workload of the Federal judiciary insofar as appeals are concerned.

However, the workload of the district courts would be reduced by

the elimination of FLSA trials.

U.S. District Court for the

Northern District

of

Illinois

By letter dated March 5,

1981, the Chief Judge of the U.S.

District Court for the Northern District of Illinois observed that

our recommendations are well supported by the facts our study re-

vealed and that the draft report described in detail the difficul-

ties in administering the present laws.

(See app. VII.) He stated

that the changes we are recommending should bring about a much more

effective, vigorous,

and equitable approach to enforcement.

He also observed that,

during the year ended June 30, 1980,

1,378 cases were filed by the Government under FLSA out of a total

of 168,789 cases filed nationwide.

This represents 0.82 of 1 per-

cent of the total and indicates a reluctance on the part of Gov-

ernment to pursue the smaller cases.

In this district court there

20

were only 41 such cases filed out of the total 12,016 cases filed

during the 2 years ended September 30, 1980.

This was 0.34 per-

cent of total. He stated that the impact of removing this small

group of cases from the filings in the district courts would be

minimal, at least insofar as it would affect the workloads of the

judges.

On the other hand,

to change the procedures to move more

of the cases up through Government prosecution in the courts would

be excessively costly and laborious to the point of being self-

defeating.

He stated that given that (a) many of the employers mentioned

in the report are in marginally profitable situations and/or are

involved in industries which have traditionally hired a sizable

percentage of their staff at or near minimum wage levels, (b) many

of the employers who are found to have been in violation at one

point in time are subsequently found to be in violation, (c) the

amounts involved are often small (though of importance to the

employees), and (d) the evidence and investigation/negotiation

times involved work very much to the favor of the employer and

against Labor and the employee, the use of an administrative forum

to handle these cases appears far more appropriate than the use

of district courts.

As long as judicial review is maintained to

assure due process, the change should expedite Labor's processing

of the cases and bring about much better compliance by industry

with the law and the standards of the Department.

The Chief Judge also stated that he concurred enthusiasti-

cally with our recommendation that there be a maximum use of civil

fines.

He also advised us that he has found no evidence in his court

of an unwillingness on the part of employees to testify when rec-

ords required by the act are not maintained.

We believe this may

be because only those cases in which employees are willing to

testify would ever reach the district court level.

If employees

are not willing to testify, in all likelihood, Labor would not

pursue a case in the courts, especially if required records were

not maintained.

Department of Labor

By letter dated March 6, 1981, Labor stated it would be pre-

mature to comment at this time regarding our legislative recom-

mendations but that it will examine our recommendations in con-

junction with any recommendations that result from the forthcoming

reports of the Minimum Wage Study Commission.

(See app. VIII.)

Labor also stated that any specific legislative activities which

are decided upon will be presented at the appropriate time as part

of the administration's program.

Labor agreed that failure by employers to maintain records

complicates enforcement of FLSA.

Labor stated, however, that it

21

is still feasible to prove violations where employee witnesses are

available to testify and this has enabled the solicitor to recover

back wages in numerous cases where records were inadequate or

lacking.

We do not disagree with Labor that,

where employee witnesses

are available and willing to testify, Labor has been able to re-

cover back wages where records are inadequate or lacking.

However,

many employees are not willing to testify in court cases.

There-

fore,

a lack of or incomplete records,

coupled with an inability

to obtain employee cooperation,

frequently

result

in reduced or

no restoration of employees back wages.

Relying on witnesses'

testimony,

when records are inadequate, is not productive when

--an employer heavily relies on seasonal employees who are

no longer available when the investigation is conducted,

or who will not be available when a case reaches trial:

--employee witnesses move away, die, or do not testify for

fear of job loss;

--time needed to complete Labor's

case

for

court

trial plus

time that elapses before it is heard in a district court

could

result

in years before a trial actually occurs, thus

discouraging employee participation: and

--needed testimony is sometimes not obtained from employees

because of their antipathy toward court trial participation.

22

CHAPTER 3

DETERRENTS INEFFECTIVE OR NONEXISTENT

TO DISCOURAGE WILLFUL MINIMUM

WAGE AND OVERTIME VIOLATIONS

FLSA requires employers to pay minimum wages and overtime,

but there are no civil penalties for violating these wage pro-

visions. Although criminal penalties and liquidated damages can

be imposed against willful violators, they are ineffective and

have not been used extensively. Regional solicitors can also

obtain a court order requiring an employer to comply with minimum

wage and overtime provisions of the act. However, as discussed in

chapter 2, even if such orders are later violated, monetary penal-

ties for civil contempt generally are insignificant.

We found that many employers willfully violated the act and

that current enforcement actions have not resulted in penalties

that would deter these violations.

Without penalties, the worst

that happens to employers when they are found in violation is that

they must repay the back wages they should have paid initially.

We believe that penalties are essential to remove the finan-

cial incentive employers have to violate the act and that Labor

should be authorized to assess civil penalties. As pointed out in

chapter 2, we also believe that a formal administrative process

should be used to adjudicate cases where employers appeal Labor's

assessment.

MANY EMPLOYERS INVESTIGATED BY LABOR

WILLFULLY VIOLATED MINIMUM WAGE

AND OVERTIME PROVISIONS

Our review showed that many employers repeatedly violated the

same sections of the act and that others falsified or concealed

records. Both these actions indicate that the violations were

willful.

The true extent of repeat offenders, however, is unknown

because Labor generally does not ascertain whether illegal labor

practices were corrected unless employee complaints are received

later. We believe that many employers are willing to commit re-

peated violations of the wage and hour laws because chances of dis-

covery are slim, penalties are unlikely, and the rewards of ille-

gally withholding employee back wages can be great.

To determine the extent of repeat violations, we examined

about 75 percent of the FLSA cases closed by regional solicitors

in Boston, Chicago,

and Dallas in fiscal year 1978 and found that

86 of 230 cases (or 37 percent) had at least one prior violation

of the act. We also reviewed FLSA cases administratively closed

23

during June and July 1979 by six Labor area offices and noted that,

of the 433 cases where employers were found violating the act, in

90 of the cases (or about 21 percent) the employers had at least

one prior violation. In addition, 26 of the 86 regional solici-

tor cases and 21 of the 90 area office cases had three or more

violations.

Repeat violations,

especially those that are similar to prior

violations,

indicate willfulness because employers should normally

understand the act's provisions after the initial Labor investi-

gation. As part of their investigation,

compliance officers are

required to explain applicable FLSA provisions to employers.

Despite this practice,

most of the repeat violations were similar

to prior violations. Of the 86 fiscal year 1978 closed regional

solicitor cases with prior violations, available information on

49 cases showed that employers in 48 of the cases (or 98 percent)

had previously violated the same provision of the act. Moreover,

of the 90 administratively closed cases with prior violations,

available information on 73 cases showed that 58 (or about 80 per-

cent) had previously violated the same provision of the act.

While some of the repeat violations that were closed adminis-

tratively may have been limited in scope and could have been in-

advertent, for the most part, employers who wish to comply with

the act after an initial investigation can do so. Employers can

readily contact Labor representatives to resolve any subsequent

minimum wage or overtime questions.

Also,

the extent of repeat

violations is probably understated--perhaps significantly--by

measuring only cases reinvestigated by Labor because (1) employees

whose complaints are not resolved satisfactorily are less likely

to complain about subsequent wage violations, (2) Labor relies

primarily on complaints, and (3) Labor investigates only a few

firms subject to the act.

Falsified or concealed records are an indication that FLSA

violations are willful, and the 4,022 responses to our nationwide

questionnaire showed that in 244 cases (or 6 percent) the compli-

ance officer found evidence that the employer had falsified or

concealed records. As noted in chapter 2, employer records are

essential if Labor is to enforce adequately the act and fully

recover employee back wages.

Falsified or concealed records

especially impede Labor's ability to document the extent of the

violations and to recover the full back wages due to employees.

For example, compliance officers noted that their investigation

of employers was hampered from a "great" to a "very great"

extent in 186 (or 76 percent) of the 244 cases having evidence

of falsified or concealed records.

In several cases, employers altered their recordkeeping

system after being investigated,

apparently to conceal continuing

violations.

In one case from the 4,022 responses, the compliance

officer noted that one employer stopped keeping payroll records

24

after an investigation by the Labor area office. Our review of

75 closed regional solicitor cases also revealed instances of em-

ployers changing their recordkeeping practices after a first in-

vestigation to avoid complying with the law or to conceal continu-

ing violations.

Two such examples follow.

--A building specialist's firm was found not paying overtime

to its employees. The employer refused to pay back wages

but agreed to future compliance. Afterwards,

the employer

changed payroll practices and began paying on a salary and

piecework basis to avoid overtime. Subsequent investiga-

tion found no record showing hours worked even though rec-

ords existed during the previous investigation. The com-

pliance officer estimated an additional $6,845 back wages

underpayment. However, the settlement reached required the

employer to pay only $3,555, or about 50 percent. The com-

pliance officer concluded that the employer changed payroll

practices to avoid paying overtime and thereby violated

recordkeeping provisions.

--The compliance officer found that a chain of grocery stores

was not maintaining proper records of hours worked and not

paying overtime. Subsequently,

according to the compliance

officer, the employer began a timecard reporting system,

but told employees to report only 8 hours a shift and re-

quired that timecards showing over 8 hours be altered.

The compliance officer reported that, in his opinion, the

employer never intended to pay for all hours worked.

Our review of 65 cases closed during fiscal year 1978, after

having been filed in court under section 17 of FLSA, showed that

regional solicitors alleged that employer violations were willful

in 37 (or 57 percent) of the cases.

The case examples described

in the following sections on criminal and liquidated damage penal-

ties illustrate the flagrant nature of some of the willful viola-

tors among the 37 cases cited by Labor. These cases also show

that current enforcement efforts have not deterred employers from

continuing to violate the act.

None of the employers in our sample were penalized for their

violations.

In the three regions reviewed, the regional solici-

tors closed through either settlement or litigation 311 l/ FLSA

cases with minimum wage or overtime violations during fiscal year

1978. We sampled 75 cases, but 10 were settled without legal

action. Regional solicitors filed suit against the other 65 em-

ployers seeking injunction and payment of back wages. Penalties

were not sought, even against the 37 employers Labor cited as

l-/A total of 409 FLSA cases were closed, but this number was

reduced to 311 after combining related cases.

25

willful violators.

Three of the 65 litigated cases were eventually

tried in court where Labor lost 2 cases, and no back wages were

restored to employees.

In the third case, an employer was found

guilty of willfully violating FLSA. The other 62 litigated cases

were settled out of court.

In most instances,

the employers agreed

to restore all or a portion of the back wages.

Also,

injunctions

barring employers from further FLSA violations were obtained in

51 of the 65 litigated cases.

Because employers are rarely penalized and often profit from

illegally withholding back wages,

they have a financial incentive

to violate the law.

FLSA includes both a criminal penalty and a

provision for liquidated damages to discourage employers from vio-

lating the minimum wage and overtime provisions, but these sanc-

tions are rarely used.

CRIMINAL PENALTIES ARE

RARELY USED BY LABOR

Criminal penalties, which have been available for over

40 years, may be sought against willful violators of FLSA with

fines up to $10,000,

and after the second conviction, imprisonment

for not more than 6 months. Labor has rarely sought this penalty

even though some cases apparently met the criteria for such prose-

cution. One regional office, however, has recently recommended

criminal action against two employers. Although we believe that

the criminal sanction should be used more, it is appropriate for

only the most flagrant willful violators.

Labor established specific standards, which state an FLSA

case should be considered for potential criminal litigation if

one or more of the following criteria are present:

--Falsification or concealment of records coupled with sub-

stantial violations of a major FLSA provision.

--Recurring violations found to have occurred under circum-

stances closely similar to those of the violations found

in a previous investigation.

--Minimum wage and overtime violations which are not in-

advertent.

--Violations by an employer who is under an injunction or

who has been previously convicted under FLSA section 16(a)

(criminal sanction).

--Violations of FLSA section 15(a)(3) whereby an employee is

discharged or discriminated against for filing a complaint

or participating in any proceeding related to FLSA.

26

Until recently,

regional solicitors in Boston, Chicago, and

Dallas had not sought criminal penalties against willful FLSA

violators.

Solicitor officials in two regions stated that until

recently no FLSA cases were sent to U.S. attorneys for criminal

prosecution in the past 10 years.

The solicitor in the third re-

gion stated he has never sought suit under this section.

Solici-

tor officials from headquarters confirmed that few criminal cases

have been filed in recent years.

Labor officials explained that

criminal sanctions are rarely sought against employers because

(1) U.S. attorneys do not like FLSA cases and would be hesitant

to prosecute them and (2) filing criminal suits reduces Labor's

ability to recover employee back wages because it delays the res-

olution of the back wage question.

Five of the seven U.S. attorneys we interviewed stated they

would be willing to prosecute FLSA criminal cases.

In addition,

four U.S. attorneys stated that criminally prosecuting a few FLSA

offenders would discourage future violators. One U.S.

attorney

stated that the criminal sanction could be a tremendous weapon

because most employers are extremely fearful of obtaining a crim-

inal record. This U.S. attorney felt that criminal suits, filed

in the proper cases, would deter future violations.

Another U.S.

attorney said that criminally prosecuting a few willful violators

would serve notice that the Government is serious about enforce-

ment and would improve compliance.

Although Labor believes that criminally prosecuting FLSA

cases can reduce the amount of back wages eventually restored to

employees, U.S. attorneys noted that this problem can be mini-

mized by coordinating the timing of criminal and civil suits.

After we brought the U.S.

attorney's views to Labor's attention,

Office of the Solicitor officials agreed to explore the possibil-

ity of making more use of criminal sanctions.

The following examples are cases that apparently met the

criteria established for considering criminal prosecution.

These

examples give an indication of the type of violators that are not

being criminally punished but which probably should be.

Case 1

A restaurant owner willfully and repeatedly violated

the minimum wage, overtime,

and recordkeeping provi-

sions. Minimum wage violations occurred because some

waitresses were only paid tips while others were paid

for considerably less hours than they actually worked.

A few waitresses and a cook were not paid time and a

half for overtime hours worked.

The compliance officer

reported that records of hours worked were falsified

because the employer was underreporting the actual

number of hours each waitress worked.

In this regard,

two employees' names did not appear on the payroll

records. These employees were paid in cash.

27

Labor estimated that 19 employees were due $28,409 in

back wages which were computed based on a combination

of available but falsified employer's records and em-

ployee interviews. The compliance officer noted that

employees were reluctant to speak with her, since they

feared employer reprisals. Only 8 of the 19 employees

were willing to be interviewed by Labor.

One of the

interviewees also provided information on nine addi-

tional employees.

About l-1/2 years earlier,

this employer had violated

the same minimum wage and recordkeeping provisions.

Twenty waitresses were not paid the proper minimum

wage since they only received tips.

The employer also

failed to maintain accurate records of hours worked.

The case was settled in the area office when the em-

ployer paid the entire finding of about $16,000 to

20 employees over 16 monthly installments. No interest

was charged on these payments. (See ch.

4 for discus-

sion of interest problems.)

Due to the firm's prior violation history, the Labor

area office submitted the violations to the regional

solicitor for litigation. The regional solicitor

filed a civil complaint seeking an injunction, but

settled the case before trial after the employer

agreed to pay $18,000 in back wages to 19 employees.

The regional solicitor permitted the employer to

pay the $18,000 over 18 monthly installments. No

interest was charged on these payments.

Although this case appeared to satisfy three of the potential

criminal litigation criteria--records falsification, recurring

violations,

and violations which were not inadvertent--the

regional solicitor did not refer the case to the U.S. attorney

for criminal litigation. We discussed the case with the U.S.

attorney having jurisdiction over the case.

Based on the case

facts presented, the U.S. attorney stated the case would probably

have been suitable for legal action under the FLSA criminal sanc-

tion. He felt that the regional solicitor at least should have

sent the case to his office for review.

Despite the apparent willful and flagrant FLSA violation,

the employer was not penalized even after the second violation.

He was required to restore only $18,000 of the $28,409 in back

wages estimated to be owed to employees.

The employer, accord-

ingly, has a financial incentive to violate the law in the future.

The regional solicitor, in fact, stated that "* * * there is no

way to stop this type of employer from continually violating the

law. The only thing that can be done is to periodically reinves-

tigate the firm."

The ineffectiveness of Labor's enforcement

28

efforts is further shown from a third investigation of this com-

pav,

which also disclosed continuing violations. As of August

1980, a case from Labor's third investigation of the employer was

awaiting legal analysis in the regional solicitor's office. The

area director said he recommended that the regional solicitor file

a contempt action against the firm. Based on past experience, we

believe it is unlikely that this employer will comply with the act

until subjected to criminal prosecution.

Case 2

A meat market operator violated FLSA minimum wage,

overtime,

and recordkeeping provisions. Some em-

ployees were paid below the minimum wage and were not

paid overtime due.

The operator also kept a false

record of employees.

Labor found that some employees

were paid in cash and that appropriate taxes were not

paid or withheld.

The compliance officer reported that during the in-

vestigation, the employer fired two employees for

talking with him.

The employer asked one employee

to sign a false affidavit stating that he only worked

42 hours per week when, in fact, the employee said

he worked 65 to 70 hours per week. Also, according

to the compliance officer,

the employer altered some

records after the investigation to hide violations.

Labor estimated, based on available records and em-

ployee interviews, that 16 employees were due $7,893

in back wages. There were indications that additional

back wages were owed to employees who could not be

located.

The case was referred to the regional solicitor for

litigation. Both the area director and compliance

officer stated that the case had the best potential

for criminal prosecution they had ever seen.

Following normal procedures the regional solicitor,

however,

filed suit seeking only an injunction re-

quiring future compliance and the recovery of back

wages. An out-of-court settlement was reached and

the employer paid $4,325 (or 55 percent) of the esti-

mated back wages. The regional solicitor took no

action on the employee firings because it appeared

that one employee left voluntarily and because neither

employee was willing to go back to work.

This case appeared to satisify three of the potential litiga-

tion criteria--

records falsification,

violations which were not

29

inadvertent, and violations of provisions prohibiting discrimina-

tion against employees exercising their rights under the act--but

the regional solicitor did not refer the case to the U.S. attorney

for possible criminal litigation.

Case 3

The owner of a security protection agency violated

FLSA minimum wage, overtime, and recordkeeping

provisions.

One employee was not paid for a

2

week,

3-day period as a result of a deduction made

to cover the cost of repairing a company car used by

the employee

--FLSA prohibits this. A total

of nine employees

were

owed back wages because of

overtime violations.

Recordkeeping violations

existed because the employer instructed employees

to falsify payroll records by recording less than

the actual number of hours worked on their timecards.

Labor estimated that $3,630 in back wages were owed

to nine employees for the 2-year period ended in

February 1972.

The employer agreed with the finding

but, after considerable delays, refused to pay the

back wages. Accordingly,

the area director referred

the case to the regional solicitor in September 1972

and stated:

"Subject case warrants immediate action.

Employer is very antagonistic and feels

the Department will take no action. Firm's

attorney has employed dilatory tactics in

numerous Wage-Hour cases before. His com-

ments allude to the fact that he knows we

never take any legal action * * *"

The area director further noted that this was the

second investigation of the firm, and the employer had

continued to violate the overtime and recordkeeping

provisions. The case files contained no additional

information on the earlier investigation. He rec-

ommended that the regional solicitor file suit seek-

ing an injunction and back wage payment.

Although the regional solicitor filed suit seeking

an injunction in January 1973, willfulness was not

alleged.

In September 1975, after the employer re-

quested a settlement, the regional solicitor requested

the area director to update the investigation and to

note any violations since 1972. The reinvestigation

showed additional minimum wage and

overtime

violations

which did not exist previously.

Some

employees were

not paid the minimum esge because illegal deductions

30

were made for uniforms.

In addition, the employer

initiated a scheme to avoid paying overtime. Em-

ployees who worked over 40 hours weekly received

two payroll checks.

One check was issued for about

half of the hours worked,

while the remainder of the

hours were paid by a separate firm. No overtime pre-

mium was paid.

Two employees attested to the scheme,

while another employee stated that he knew of three

other employees who were paid on this basis.

Based on the updated investigation which covered

February 1970 to September 1975, the compliance

officer found that minimum wage and overtime viola-

tions totaled about $5,000.

Although the employer

sought a settlement in August 1975, it was not until

November 1977 that the regional solicitor finally

obtained an injunction against the firm and settled

the case for $4,000 in back wages to 58 employees.

In justifying the settlement,

the regional solicitor's

office noted that

"* * * the case was set for trial.

Records were disorganized and uninformative. Many

witnesses had disappeared.

Several weeks of lawyer

and investigator time was needed to pull the case

together." In arriving at a settlement, the regional

solicitor did not verify if the firm had been in

compliance with FLSA during the 26-month period since

the September 1975 updated investigation.

In 1978, the area office received another complaint

against this same security agency.

The complaint was

filed by a competitor--not an employee. This most

recent investigation covered July 1976 to July 1978.

The compliance officer found that despite the outstand-

ing injunction, the firm was still violating the mini-

mum wage and overtime provisions and had been in vio-

lation even before the November 1977 injunction and

settlement. As found during the previous investigation,

many employees were still not paid the minimum wage

because deductions were made for uniforms. Also,

three employees were paid straight time for overtime

hours worked during some weeks in 1976 and 1977.

Labor estimated that 120 employees were due $5,353

in back wages.

The area director referred this case to the regional

solicitor in October 1978 and recommended that the

employer be cited for violation of the injunction and

that liquidated damages be sought. In February 1980

the regional solicitor filed a contempt action against

the employer. A contempt order was entered in June

1980 requiring the employer to repay $7,000 in back

31

wages and assessing $100 in court costs.

No other

penalty was imposed.

Although the regional solicitor took legal action by seeking

a civil contempt judgment for not complying with the injunction,

the penalty assessed against the firm was insignificant.

LIQUIDATED DAMAGE PENALTIES

ARE INEFFECTIVE

FLSA was amended in 1974 to provide that Labor may bring court

action against employers to recover the amount of unpaid minimum

wages or overtime compensation and an equal amount as liquidated

damages.

Senate Rept. 93-300, dated July 6, 1973, supporting the

proposed amendment cited the need for liquidated damages as a

necessary penalty to assure compliance with the act.

At that

time,

the employer was only required to repay the wages that

should have been paid initially.

There was no penalty to deter

future violations.

Liquidated damages are not an effective way to

impose penalties, however,

because such damages must be imposed by

the courts.

Because

so

few cases

actually

reach the trial stage

necessary for liquidated damage assessments in district courts,

habitual or flagrant violators normally escape penalties.

Liquidated damages are seldom obtained

even though they are often warranted

Despite the fact that many employers investigated by Labor

appeared to have willfully violated FLSA minimum wage and overtime

provisions,

Labor rarely sought or obtained liquidated damages.

--57 percent of the 65 closed litigated cases sampled at

regional solicitors' offices were identified as willful

violations.

--About 37 percent of the 230 closed cases sampled at

regional solicitors'

offices had at least one prior

violation.

--21 percent of the 433 closed cases sampled at area offices

had at least one prior violation and most involved similar

violations.

--6 percent of 4,022 violators identified by our question-

naire apparently falsified or concealed records.

Although not all of these cases were completely resolved when

we reviewed them, none of the 75 closed cases resulted in a liqui-

dated damage penalty.

In fact,

even though Labor identified 37 em-

ployers as willful violators, none of the cases were filed under

the liquidated damage section.

(Some of these cases involved

32

flagrant minimum wage and overtime violations that harmed low-wage

employees.)

Solicitor officials in three regions and in headquar-

ters agreed that liquidated damage penalties are rarely sought

against employers.

Solicitor officials in the three regions said

that almost 100 percent of FLSA cases are filed under the act's

injunction provisions.

While many employers who willfully and repeatedly violate

FLSA warrant penalties,

the current liquidated damage provision

is not an effective way to impose penalties.

Regional solicitors

rarely seek liquidated damages because of difficulties that prevent

such cases from reaching trial in district courts where liquidated

damages can be awarded.

The regional solicitors believe they can

be more effective by obtaining injunctions prohibiting future vio-

lations and recovering some illegally withheld back wages for em-

ployees. Solicitors in the three regions said their primary ob-

jective in filing injunctive suits is to obtain future employer

compliance and to recover as much as possible of the illegally

withheld back wages,

rather than to penalize employers.

At the completion of our review, two regional solicitors said

they were attempting to make more use of the liquidated damage

sanction against employers. They said, however, that practical

considerations will continue

to limit

the number of cases in which

liquidated damages are awarded.

One regional solicitor said he

hoped the threat of liquidated damages will improve Labor's bar-

gaining position and allow Labor to obtain better back wage settle-

ments from employers. Another regional solicitor hopes that, if

a few violators are assessed liquidated damages, others might be

less likely to violate the act.

Neither believes that liquidated

damages would be assessed against more than a few willful violators.

Traditionally, few civil cases reach trial in district courts.

During the year ended June 30, 1979, U.S. district courts, nation-

wide,

disposed of 1,175 FLSA civil cases filed by Labor.

Only 52

cases (or 4.4 percent) reached trial where liquidated damages could

have been awarded.

Therefore, even if liquidated damages have been

sought by Labor, actual assessments against employers violating

the act would have been minimal because of the few civil cases that

actually reach the trial stage.

The following examples,

taken from among the 37 willful

violations in our 75 case sample, further illustrate the need

for more effective penalties.

Case 4

The owner of four gasoline service stations repeatedly

and willfully violated FLSA minimum wage, overtime, and

recordkeeping provisions.

Some employees were paid

below the minimum wage while others did not receive

overtime

pay. In addition,

the employer falsified

33

records to show that he had paid overtime when, in

fact, he had not.

The same violations were identified

at one of four service stations during an earlier in-

vestigation.

At that time the employer agreed to

comply in the future and to pay four employees $900.

Labor found, however,

that even though the employer

submitted signed receipts showing the money had been

paid,

it was not paid and the employer had falsified

the wage receipts.

During the latest investigation, the employer continued

to falsify records.

One station manager signed a

statement that the owner, in his presence, refigured

the hours worked in a new payroll book to show that

time and one half was paid for overtime hours. This

occurred after the investigation was started. The

employer also instructed employees to lie to the com-

pliance officer and threatened to fire at least one

employee if he cooperated with the compliance officer.

The compliance officer estimated that $16,330 in back

wages were due to 17 employees.

The regional solicitor

obtained an injunction and settled the case before

trial for $7,034 in back wages to 16 employees.

About

$2,743 of the $9,296 adjustment was attributed to cor-

rections to the original calculations, while the

remainder resulted from negotiations between the firm

and the regional solicitor's office.

An attorney from the regional solicitor's office said the

primary reason the case was settled was that some employees were

uncooperative,

were reluctant to testify, and could not be located.

The compliance officer, however,

noted that although some current

employees were afraid to admit they were not paid overtime, sev-

eral other employees had signed statements confirming the viola-

tion.

Also, two managers said that no one at any of the four

stations was paid overtime and that records were changed to show

overtime was paid.

The assistant area director involved with

this case agreed that the settlement was insufficient and that

the firm should have been penalized criminally or through liqui-

dated damages.

He does not believe the firm is currently in com-

pliance based on its history and attitude.

The injunction called for the firm to make three monthly

payments ended in August 1978.

The firm met the first payment

date, but as of February 1980,

the second and third payments

totaling $3,572 had not been made.

At the completion of our

fieldwork,

the regional solicitor's office was attempting to

collect the back wages through contempt action.

34

This employer apparently falsified records, repeatedly and

willfully violated the act, violated the injunction requirements,

and discriminated against employees who cooperated with Labor.

Despite these actions by the employer, Labor did not seek either

criminal or liquidated damage sanctions.

Case 5

Labor filed a willful complaint seeking an injunction

and payment of back wages against a security guard firm

for violating the minimum wage, overtime, and record-

keeping provisions.

Guards were told to record only

scheduled hours on timecards regardless of the actual

hours worked.

In some cases, the employer reduced the

hours recorded by guards.

As a result, employees were

not paid for all hours worked,

a minimum wage viola-

tion.

In addition, the firm made illegal deductions

that reduced compensation below the minimum wage and

did not pay any overtime.

Labor estimated that a total

of $12,849 was owed to 79 employees ($3,986 was for

overtime violations that the regional solicitor later

decided not to pursue).

Labor settled the case for

$5,579 (or 43 percent) of the original finding. Some

legally collectible back wages also were not included

in the original finding.

The violations appeared willful because the employer

had a history of violations and showed knowledge of

FLSA provisions.

The employer violated overtime pro-

visions and agreed to pay $3,522 during a previous

investigation.

The employer also showed knowledge of

FLSA provisions by limiting the number of hours em-

ployees could record and by changing the hours actually

recorded.

The firm was also extremely uncooperative,

refused to supply needed records and did not answer

letters from the area director requesting access to

records.

In spite of the willful nature of this employer's violation--

repeated violation and falsified records--Labor did not seek penal-

ties against the firm.

The attorney from the regional solicitor's office who nego-

tiated the settlement said the back wages were reduced because re-

cordkeeping problems made the compliance officer's estimates dif-

ficult to prove in court. He said some employee statements were

inconsistent and the calculations would be confusing to explain

in court. The area director noted that, although recordkeeping

problems prevented the compliance officer from fully documenting

the violations, the computations were as accurate as possible given

the circumstances.

He said the regional solicitor's settlement

was reasonable, considering that the only alternative was to wait

2 or 3 years for a trial.

35

1

Case 6

The operator of a retail grocery store chain violated

FLSA minimum wage, overtime, and recordkeeping provi-

sions.

The compliance officer reported that, during

Labor's investigation, the employer told employees to

lie to the compliance officer.

He also required em-

ployees to write letters indicating that all overtime

hours were paid and the hourly rate of pay was greater

than the minimum wage.

In addition,

the employer re-

quired employees to record only 8 hours per shift on

timecards. The compliance officer documented several

interviews reporting these attempts at coercion and

falsification.

Employees were willing to testify

for Labor.

The compliance officer estimated that 188 employees

were underpaid $21,557 in back wages for the 2-year

period ended in September 1975. After investigating

additional branch locations and unsuccessfully nego-

tiating with the employer,

the area director submitted

the case file to the regional solicitor for legal ac-

tion in March 1976.

The regional solicitor filed suit

seeking an injunction and back wages.

He requested

an updated investigation which found continued vio-

lations during the 2-year period ended in May 1977.

The compliance officer estimated that $10,004 in back

wages was due to 77 employees. Of this amount, $5,743

was a part of the $21,557 of back wages found due

during the initial investigation. Although the total

unduplicated back wages from both investigations was

$25,818 owed 198 employees, the regional solicitor

obtained an injunction and settled the case out of

court for $7,000 of back wages to 77 employees--a

settlement representing $18,818 less than the original

estimate.

We discussed this case with the compliance officer assigned

to the case who stated that the employer had previously violated

the same FLSA provisions at one store. The violations occurred

in January 1974, and the case was settled by the area office after

the employer paid $2,282 in back wages.

He further stated that,

in the latest investigation,

recordkeeping violations reduced

his ability to document wage violations, which encouraged the

regional solicitor to settle the case.

Although the employer willfully and repeatedly violated

FLSA, the employer was not penalized and apparently profited by

not maintaining required records.

Based on the nature of the

violations and the fact that the employer restored only a small

percentage of employee back wages,

we believe that this employer

36

will have little incentive to comply with FLSA in the future. In

this regard, the compliance officer stated that he doubted the

employer came into compliance even after the current injunction.

After our fieldwork, he had not, however, been assigned to re-

investigate the firm since no new employee complaints had been

received and other higher priority complaint cases were awaiting

investigation.

Case 7

A hotel operator willfully and repeatedly violated

FLSA minimum wage, overtime, and recordkeeping pro-

visions.

Tipped employees were paid below the minimum

wage. Also,

employees who should have received over-

time pay were improperly paid straight time for all

hours worked.

Further, the firm destroyed timecards

and failed to maintain a record of tips. The compli-

ance officer estimated that 38 employees were

owed

about $6,575 in back wages covering a 2-year period.

The compliance officer also noted in his report that

violations were willful in that the employer

--destroyed timecards representing a 2-year period

after the compliance officer initiated the inves-

tigation,

--fired an employee for cooperating with the inves-

tigation,

--recorded overtime earnings on unmarked timecards,

and

--forced employees to falsify tip credit records.

The Labor area director recommended that the regional

solicitor

sue

to obtain an injunction or liquidated

damages.

The regional solicitor settled the case

without filing suit for $5,059 (or about 77 percent)

of the original findings.

An injunction was not

obtained against the employer to restrain future

violations.

We discussed this case with officials of the regional solici-

tor's office. They noted that the case would still be awaiting

trial in district court if

suit

had been filed.

Moreover, they

stated that the out-of-court settlement was warranted because the

firm had financial problems.

The employer has since violated the same FLSA overtime and

recordkeeping provisions and the violations again appear willful.

After the first investigation, the compliance officer explained to

*

37

.

the employer the proper method of computing overtime and record-

keeping requirements.

Based on the guidance provided, the firm

should have been able to correct pay practices that violated FLSA.

The willful nature of the second series of violations suggests,

however,

that the employer continued to violate the act because of

the opportunity for financial gain.

In fact, evidence indicates

that the employer was not in compliance when the original settle-

ment agreement was signed--despite the employer's assurance that

compliance had been achieved.

The compliance officer stated that the employer specifically

instructed managerial personnel on schemes to avoid paying

time

and a half for hours worked over 40.

The compliance officer

estimated that $8,525 in back wages were owed to 10 employees.

The regional solicitor has filed

suit

seeking an injunction and

liquidated damages,

but as of September 1980 the case was pending

in the district court.

Factors that make the liquidated

damage provision ineffective

Liquidated damages are not an appropriate way to penalize

employers who willfully violate FLSA.

To obtain liquidated

damages,

cases normally must reach trial: however, few cases

reach trial in district court.

District court chief judges and

Labor solicitor officials agreed that roadblocks limit Labor's

access to district courts.

Chief judges we interviewed at several U.S. district courts

cited the (1) requirement that some cases, including criminal

cases,

receive first priority, (2) large volume of cases filed in

courts,

and (3) need to settle most cases to keep the courts from

being overwhelmed as the major factors limiting not only FLSA

cases but most civil cases from reaching trial.

Regional solicitor officials also identified several road-

blocks that will continue to limit the number of cases Labor ac-

tually brings to trial and therefore will continue to limit the

number of employers who can be penalized under the liquidated

damages provision.

The major factors discouraging Labor from

pursuing liquidated damages by bringing

more

cases to trial in

district court include

--the lengthy wait for trial required in many courts,

--Labor's reluctance to bring FLSA cases before a jury,

--the low priority labor cases receive in district courts,

--evidence problems due to inadequate records, and

38

--limited resources to pursue more cases to trial.

Solicitor officials in two regions noted that, in the few cases

that have reached trial, the damages awarded were disappointingly

small.

A study sponsored by the Administrative Conference of the

United States L/ identified similar roadblocks preventing cases

from reaching trial in district courts and hindering enforcement

efforts in other Federal regulatory programs that rely on dis-

trict court trials. This study concluded that extensive delays

reaching trial and the inappropriateness of district court judges

hearing many highly technical,

but relatively insignificant cases

prevent most cases from reaching district courts and encourage

agencies to accept low settlements.

According to this study, the

present system may also be allowing some of the worst offenders

(those who will not settle but who cannot feasibly be brought to

trial) to get away.

A brief discussion of roadblocks limiting Labor's willingness

or ability to obtain liquidated damages follows.

Lengthy wait for trials in some district courts

As discussed in chapter 2, an inordinate amount of time is

required to bring civil cases to trial in many district courts.

This was cited by Labor officials as a major reason for not seek-

ing liquidated damages.

District court chief judges we interviewed also cited the

backlog of cases as a problem leading to long delays resolving

civil cases. One judge noted that most cases do not come to trial

because of the time and cost involved, which creates considerable

pressure to settle.

Another said that in his court cases take

2 years to reach trial.

According to him, the backlog is a

serious problem and he encourages parties to settle cases to con-

trol it.

He noted, however,

that in his experience the Government

usually gives up the most in settling cases.

Jury trials

Labor officials advised us that they avoid seeking liquidated

damages partly because they do not want to bring FLSA cases before

a jury.

These officials said that employers are entitled to a

jury trial in section 16(c) liquidated damage actions if they

l-/"An Evaluation of the Present and Potential Use of Civil

Money Penalties as a Sanction by Federal Administrative

Agencies" by Harvey J. Goldschmid, Associate Professor,

Columbia University School of Law.

39

desire.

Labor's reluctance to face a jury trial

stems

partly from

its perception that judges would be reluctant to use a jury to hear

FLSA cases and partly from a recognition of the high

cost

involved

in a jury trial relative to the amounts involved in a case.

FLSA cases receive low priority in district court

As discussed in chapter 2, regional solicitors and their

attorneys in the three regions we visited believe that FLSA cases

receive low priority in district courts and that many judges are

not receptive to hearing FLSA cases.

Solicitor officials in one

region said judges' attitudes are a major factor encouraging

settlements.

They said judges do not want to waste their

time

on FLSA

cases,

which they see as insignificant, and therefore,

the judges tend to give FLSA cases the lowest priority and en-

courage Labor attorneys to settle cases out of court.

The regional solicitor in another region said FLSA cases are

minor ones, so district court judges give them the lowest priority.

In the third region, the deputy regional solicitor said judges

give FLSA cases low priority in court, reschedule cases several

times,

and pressure Labor attorneys to accept lower settlements

in order to clear cases from their dockets.

In general, the chief judges we talked to did not agree'that

they disliked hearing FLSA cases, or that they give FLSA cases

lower priority.

One chief judge said, however,

that

FLSA

cases

are minor ones which do not belong in the courts and that it is

ridiculous to tie up the courts with petty overtime cases. He

said he gets the attorneys together and forces them to settle

cases. Another chief judge noted that FLSA cases are nonpriority

cases in the sense that the Congress has established priorities

for other types of cases, such as criminal cases, but that FLSA

cases are not given lower priority than most other civil cases.

Evidence problems

Inadequate records, as discussed in chapter 2, have an adverse

impact on Labor's ability to document the extent of violations in

court. As a result, Labor is reluctant to bring

cases

to trial

when recordkeeping violations

cause

evidence problems.

Limited resources

Regional solicitor officials noted that limited resources

restrict their ability to bring more FLSA cases to trial.

Labor

attorneys seek to settle as many cases as possible before trial

and engage in extensive negotiations to settle cases. Regional

solicitor officials said that cases that reach trial take more

time to prepare than do cases that are settled, and that if more

40

cases reach trial,

fewer cases overall can be handled. One re-

gional solicitor cited limited resources and high caseloads as a

serious problem limiting his ability to handle FLSA litigation

cases.

A related problem cited by regional solicitor officials, as

an additional cause of FLSA case processing delays, is the re-

quirement that processing deadlines must be met for other types

of cases.

Occupational Safety and Health Act cases, for example,

must be processed within strict time limits.

Regional solicitor

officials explained that,

because FLSA cases do not have process-

ing deadlines, they are sometimes put aside and delayed within the

region because deadlines must be met for other types of cases.

CIVIL PENALTIES NEEDED TO

DETER MINIMUM WAGE AND

OVERTIME VIOLATIONS

As discussed in chapter 2,

there are no civil penalties for

FLSA recordkeeping violations.

Similarly, there are no civil

penalties for minimum wage and overtime violations. Without such

penalties,

employers will continue to violate FLSA provisions.

To better protect employee wages,

Labor should have the authority

to assess civil penalties large enough to deter minimum wage and

overtime violations.

FORMAL ADMINISTRATIVE PROCESS NEEDED

TO ADJUDICATE CIVIL PENALTIES

As discussed in chapter 2, even if civil penalties are au-

thorized, this alone will not be effective to deter recordkeeping

violations.

Similarly,

civil penalties alone will not deter mini-

mum wage and overtime violations because of extensive delays in

completing cases in district courts: the low priority given to

FLSA cases:

and the reluctance of Labor's Office of the Solicitor

to pursue court cases under these circumstances. Accordingly,

there is a need to establish a formal administrative process to

adjudicate civil penalties.

CONCLUSIONS

Labor's FLSA enforcement authority needs strengthening. To

reduce the number and severity of FLSA violations, Labor needs

the authority to impose civil money penalties that discourage

violations.

Although FLSA includes both a criminal penalty and a

liquidated damages provision,

Labor's current enforcement actions

rarely,

if ever,

lead to penalties, even against the worst viola-

tors. Labor should consult more closely with Justice officials

to coordinate criminal and civil litigation strategies. While the

criminal penalty can be used more effectively to punish the worst

offenders,

criminal sanctions are only appropriate in a limited

41

number of cases.

On the other hand,

liquidated damages are not

effective against most willful violators.

Liquidated damages can-

not normally be imposed without a full district

court

trial, and

extensive delays and other roadblocks limit the number of cases

in which Labor can obtain damages.

We believe civil money penalties, assessed by Labor, should

be substituted for Labor's current authority to seek liquidated

damages under section 16(c) of FLSA.

Labor should be given the

authority to assess a civil money penalty large enough to deter

minimum wage and overtime violations. (See ch. 4 for a recommenda-

tion that Labor also be given authority to

assess

back wages owed

to employees.) Labor should also continue to

use

the injunction

provisions, as needed,

to obtain compliance with FLSA minimum wage

and overtime requirements.

As discussed in chapter 2, the process should protect the

employers' rights to appeal Labor assessments and to obtain a

fast, impartial hearing. We believe

this

can be accomplished

most effectively by giving employers the right to appeal Labor's

penalty assessment at formal administrative hearings before

administrative law judges.

We also believe that Labor should use the FLSA criminal sanc-

tions against flagrant and willful violators of the act's minimum

wage and overtime requirements.

To minimize the potential adverse

impacts of using such sanctions,

criminal and civil litigation

strategies should be closely coordinated with the Department of

Justice.

RECOMMENDATION TO THE CONGRESS

We recommend that the Congress amend FLSA to eliminate the

section 16(c) liquidated damage provision of the act and in its

place give Labor authority to assess civil money penalties large

enough to deter minimum wage and overtime violations.

The legis-

lation should provide for an administrative system for adjudicat-

ing cases when employers appeal Labor's actions, as recommended

in chapter 2.

RECOMMENDATION TO THE SECRETARY OF LABOR

We

recommend that the Secretary make more use of FLSA criminal

sanctions for willful minimum wage and overtime violations, after

consulting with Justice officials to coordinate criminal and civil

litigation strategies.

42

AGENCY COMMENTS AND OUR EVALUATION

Department of Justice

Justice noted that our draft report stated that one of the

problems with criminal enforcement of FLSA is reluctance on the

part of U.S. attorneys to prosecute such violations. Justice

pointed out that the priority

given

FLSA cases by the U.S. attor-

neys is most often influenced by their particular caseload and

the nature of pending litigation in their respective offices.

Furthermore, even a willful violator of the act is not subject

to imprisonment until after a second conviction.

Justice also noted that, according to our draft report,

Labor officials stated that commencement of criminal actions

reduces Labor's ability to recover employees' back wages because

it delays the resolution of the back wage question.

Justice

stated that criminal prosecution may remove the incentive for

defendants to enter into settlements with Labor in regard to

civil actions filed to recover back pay: nevertheless, GAO

should be aware that with respect to a criminal conviction under

section 216 of the FLSA, U.S. attorneys are specifically in-

structed to make every effort to secure restitution of all em-

ployee claims for back pay as a condition of sentence. Justice

also stated that probation may be conditioned with the requirement

that the defendant make full restitution and that the postponement

of sentencing pending restitution is an option.

Therefore, Jus-

tice concluded,

in the types of egregious cases illustrated in

our report, criminal prosecution may in fact be a more effective

and faster method of obtaining back pay claims than a civil suit

filed by an employee or the Secretary of Labor.

Department of Labor

Labor stated that it does not concur with our recommendation

that the Secretary of Labor make more use of FLSA criminal sanc-

tions for willful minimum wage and overtime violations. Labor

commented that regional solicitors have found that the resources

of their offices are better devoted, on the whole, to seeking

civil remedies which include restitution of back wages in the

great majority of cases.

Labor noted that the maximum criminal

penalty which can be imposed on a first conviction is only

$10,000 and, apart from the fact that such a maximum penalty

would rarely if ever be imposed, it is considerably less than

can often be recovered in back wages.

We agree with Labor that the regional solicitors' primary

emphasis in enforcing FLSA should be to recover employees' back

wages. However,

we continue to believe that increased use of

FLSA criminal sanctions is warranted because the use of such

sanctions would serve as a deterrent to FLSA violations and. as

43

noted above by Justice,

can be an effective way of recovering

back wages.

Labor aaid that at the time of our study, the section 16(c)

liquidated damages remedy may

have

been infrequently aought, but

it is now much more common to file suit under this provision.

Labor stated that, in certain offices,

up to 50 percent of FLSA

suits

are

brought under section 16(c) and that these cases tend

to be those in which witnesses

are

readily available and viola-

tions

are

of a recurring nature.

While the number of cases filed under section lb(c) may be

increasing,

we do not believe there will be a significant in-

crease in liquidated damage awards.

Between the filing of liqui-

dated damage court suits against employers

and

the completed court

hearing and assessment of liquidated damages, there is a long and

arduous procedure strewn with obstacles.

Some

of the

obstacles

include

--inability of regional solicitors to apply resources to

engage in many actual court hearings because their work

not only concerns FLSA but other Labor acts, some

of

which require priority attention:

--inability to assess liquidated damages unless a suit

culminates in a court trial:

--delays in preparing a case for trial plus

time

awaiting

trial date can weaken a liquidated damage case: and

--the assessment of liquidated damages is not mandatory

even after an employer is convicted of violating FLSA

and, therefore,

a convicted employer

may

not be

assessed such damages.

Also, as Labor noted,

section 16(c) actions tend to be used in

cases where witnesses are readily available.

As

we pointed out

in chapter 2

of

this report,

in many cases employees are not

available to testify and, when available, they are reluctant to

testify. Therefore, the unavailability of witnesses will also

limit

the

number of liquidated damage cases.

44

CHAPTER 4

CHANGES IN TOLLING OF STATUTE OF LIMITATIONS

AND ADMINISTRATIVE PRACTICES NEEDED TO INCREASE

RECOVERY OF ILLEGALLY WITHHELD WAGES

While penalties are important to deter violations of FLSA

recordkeeping, minimum wage, and overtime provisions, recovering

illegally withheld employee wages is also important.

Labor can

do more to increase the amount of backwages restored to employees.

However,

its actions alone will not be sufficient to assure maximum

recovery of illegally withheld back wages. The time at which the

statute of limitations stops running--referred to as "tolling of

the statute "--must also be changed to remove its overly restrictive

effects.

In connection with this change, Labor should also be

given the authority to assess the amount of back wages owed to

em-

ployees,

including interest, which helps to make employees whole

for the period during which back wages were illegally withheld.

We believe these changes will also deter willful violations,

as will the penalties described in chapters 2 and 3.

Coupled with

the penalties, these actions will help to assure that employees

will be made

whole

and that employers will not benefit from vio-

lating FLSA. As pointed out in chapter 2, we also believe that a

formal administrative process should be used to adjudicate cases

where employers appeal Labor's assessments.

We found that the recovery of illegally withheld wages could

be improved by

--changing the time at which the

statute

of limitation is

tolled,

--pursuing wage recoveries for 3-year periods permitted by

FLSA for willful violations,

--updating investigations before settling cases,

--systematically reinvestigating employers who violate the

act, and

--requiring employers to pay interest on back wages illegally

withheld from employees.

Speedily resolving FLSA cases is especially important because

delays adversely affect low-income employees. The time covered

by the investigation and legal proceedings delays the date when

employees-- some of whom may be living below the poverty level--

receive their back wages.

As time passes, employees may receive

45

less back wages because as Labor's case gets weaker the regional

solicitors will settle for less. Also,

the value of back wages can

be seriously eroded by inflation.

Finally,

if they cannot be

located,

the employees will not receive any back wages.

BACK WAGES LOST DUE TO RUNNING

OF STATUTE OF LIMITATIONS

The statute of limitations restricts an employer's obligation

to repay employees back wages to a 2-year period for nonwillful

violations and a 3-year period for willful violations.

The amount

of illegally withheld wages recovered, however, can be severely

reduced by the time that passes either before an employer waives

the right to claim the statute of limitations or before Labor files

legal action in a district court. Either action stops the statute

from running. The reductions in back wages that employees can re-

cover due to the passage of time are referred to as back wages lost

to the running of the statute.

Therefore,

if (1) violations in a

nonwillful case dated back a full 2 years and (2) a delay occurred

from the date of the most recent violation to the point in time when

the employer waived his rights or Labor filed legal action, the em-

ployer's legal back wage liability would be less than what had been

illegally withheld from the employees during the 2-year period

covered by the investigation.

The 2-year statute of limitation was established by section

6 of the Portal-to-Portal Pay Act of 1947 (29 U.S.C. 255) which

limited an employer's liability to pay minimum wages or overtime

pay under FLSA and related statutes to a 2-year period.

In 1966,

the Congress extended the statute of limitations to 3 years for

willful FLSA violations.

We found that delays stopping the statute of limitations from

running,

either at Labor area offices or at the regional solicitor's

offices,

reduced the amount of back wages employees could recover.

Our review showed that considerable amounts of time usually passed

from the date compliance officers started their investigations to

the date when regional solicitors filed suit against employers.

Because of these delays, a portion of employees' back wages was

often not recoverable.

In 65 of 75 cases reviewed, regional so-

licitors filed legal action against employers in U.S. district

courts.

An analysis of 42 of the 65 cases showed that an average

of 12 months passed between when Labor's investigations began and

when the court action was filed and the statute of limitations was

tolled.

Although individual case files rarely contained written

explanations of how settlements were reached, we believe that back

wages were lost to the running of the statute in 21 of the 65 lit-

igated cases, as illustrated by the following cases.

46

Case 1

A restaurant owner violated FLSA minimum wage, overtime, and

recordkeeping provisions. Busboys and kitchen help were paid

below the minimum wage. In addition, some employees were

paid straight time for overtime hours worked, while others

were paid on a salary basis without additional compensation

for overtime. The employer did not maintain records of the

hours worked by salaried employees or of tips received.

The compliance officer estimated that, for the 2-year period

ended September 1975, $4,307 in back wages was owed to 22 em-

ployees. Although the investigation was initiated in Septem-

ber 1975, the case was not forwarded to the regional solicitor

until August 1976. The delay was attributed partly to the em-

ployer's promise to pay back wages and subsequent refusal to

pay.

The regional solicitor filed an injunctive suit against

the employer in March 1977.

At this point, 18 months had

passed since the start of the investigation, and accordingly,

all but 6 months of the back wages were lost to the running

of the statute.

A memorandum dated July 29,

1977, prepared by an attorney in

the regional solicitor's office,

included a recommendation

that the case be settled for $2,550, or 59 percent of the

back wages. The attorney noted that the statute of limita-

tions II* * * has run on all but 6 months and we could not do

any better at trial." On September 20, 1977, the regional

solicitor obtained an injunction prohibiting future viola-

tions and requiring the employer to pay $2,250 in back wages

to 22 employees.

Consequently, up to $1,757 of employee's

back wages were lost to the running of the statute.

Case 2

A Labor investigation

of

a

gasoline service station showed

minimum wage and overtime violations estimated at $8,212 over

a 2-year period ended in April 1977.

The owner paid 13 em-

ployees less than the minimum wage and deducted shortages

from employees' pay. Minimum wage violations totaled $i,O74.

Overtime violations totaling $7,138 occurred because the em-

ployer paid 17 employees straight time wages for all hours

worked, including overtime hours.

The violations were ap-

parent on

the

records,

and substantiated by employee inter-

views.

The employer admitted to the violation and agreed to

comply in the future, but claimed he was not aware of the

act's provisions.

He also said he was financially unable

to pay the back wages found due.

47

The area director sent the case to the regional solicitor

in June 1977 and recommended that the solicitor file court

suit

to recover back wages.

The regional solicitor filed

suit in August 1977 based on the contention that at least

some back wages could probably be recovered even though the

employer contends he is unable to pay.

The regional solicitor accepted the employer's offer to

settle the case,

and in October 1977 a consent judgment

called for future compliance and payment of $5,000 to 17 em-

ployees.

According to an attorney in the regional solici-

tor's office,

the settlement was accepted because the run-

ning of the statute of limitations had made $1,157 of back

wages legally uncollectible and because the individual no

longer owned the gasoline service station. The $1,157 lost

to the statute of limitations had been illegally withheld

between April 1975 and August 1975.

We also reviewed 32 FLSA cases, 11 in Boston, 9 in Chicago,

and 12 in Dallas that regional solicitors had rejected for litiga-

tion.

Cases were primarily reviewed to determine if the regional

solicitors had rejected them because of the statute of limitations.

None of the Boston cases had been rejected because of the statute.

However, in Chicago and Dallas regional solicitors took no legal

action against employers in 8 of the 21 rejected cases because the

statute of limitations had largely eroded any recoverable back

wages. The following two cases illustrate such loss of back wages.

Case 3

A Labor investigation of two specialty food stores disclosed

overtime and recordkeeping violations.

Employees at both

locations were not paid overtime and records of hours worked

were not maintained for salaried employees. The compliance

officer estimated that 17 employees were owed $7,850 over

a a-year period fran October 1974 to October 1976. While the

employer agreed to comply in the future, he refused to pay

back wages, claiming he was financially unable to pay.

The case was sent to the regional solicitor in December 1976,

and a legal analysis was prepared that recommended filing

suit to recover the back wages. Twelve months later, in Feb-

ruary 1978, a second legal analysis noted that the firm had

agreed to comply, and concluded that the case should be re-

jected because of delays in acting on it. According to the

attorney's legal analysis, $4,355 was not recoverable because

of the statute of limitations. Rather than litigate the re-

maining amount at that late date,

the regional solicitor re-

jected the case.

The area director protested the rejection

in a letter to Labor's regional office stating:

48

'Did you look at this file?

This is the second

one we have received in a few weeks that SOL

(Solicitor) initially analyzed as suitable for

litigation, but after a year laying on some

attorney's desk, it was reanalyzed and found

unsuitable because the statute of limitations

had run out on the major portion of the back

wages."

A Labor investigation of a restaurant disclosed minimum wage

and overtime violations of $9,385 owed to 85 employees for

a 20-month period ended August 1976. Waitresses and dish-

washers were paid less than the minimum wage, and employees

were paid straight time for all hours worked. Recordkeep-

ing was not a problem,

and the violations were calculated

based on records of hours worked. The employer agreed to

comply with the act but said he could not afford to restore

the back wages.

In December 1976, the case was referred to the regional so-

licitor for legal action to collect the back wages. In Au-

gust 1978,

1 year and 8 months later, the file was returned

to the area office with no legal action taken. The regional

solicitor, in rejecting the case, said the file was being

returned because the running of the statute of limitations

had made the back wages legally uncollectible.

According to Labor's assistant regional administrator in

Dallas,

losing back wages to the statute of limitations is a major

factor affecting enforcement.

In November 1979, he requested the

regional solicitor to return 41 FLSA cases. Although these cases

had been referred to the regional solicitor for legal action at

least 1 year earlier, suit had not yet been filed in any of the

cases. In his memorandum to the regional solicitor, the assistant

regional administrator stated, "Since your limited resources pre-

cluded your handling these cases on a timely basis, I am requesting

that they be returned for administrative disposition."

THE TIME AT WHICH THE STATUTE

TOLLS SHOULD BE CHANGED

The point at which the statute of limitations is tolled should

be changed to maximize the recovery of back wages. Current delays

in tolling the statute are caused by the time taken to

--negotiate cases with the employer at the Labor area office

and at the regional solicitor's office and

--analyze the case and file suit in district court.

49

These delays are described in the above examples under

the

discus-

sion of the restrictive statute of limitations.

While

some

im-

provements in the process obviously can be made to reduce these

delays,

no matter how efficiently Labor handles these cases, some

back wages will continue to be lost to the running of the statute

of limitations.

The problem can be resolved only if the

statute

of

limita-

tions tolls when Labor compliance officers determine that an FLSA

violation occurred.

Since the compliance officer has computed

the back wages owed and notified the employer that Labor believes

a violation exists,

it does not make sense to allow the statute

of limitations to continue to run,

thereby reducing the back wages

that employees can recover.

Rather, Labor should have the author-

ity to assess the amount of back wages owed to employees and the

statute of limitations should toll at that time.

The Portal-to-

Portal Pay Act needs to be changed to allow the statute of limi-

tations to toll when the FLSA violation is assessed. To protect

the employer's right to a relatively fast, fair process

for

re-

solving disputes,

the employer should have the right to appeal

such Labor assessments through the formal administrative process

described in chapter 2.

INVESTIGATIONS AND WAGE RECOVERIES SELDOM

COVER 3 YEARS FOR WILLFUL VIOLATIONS

In 1966, the Congress attempted to deter violations while

providing greater protection to employees by extending the statute

of limitations to 3 years in

cases

where the violation is willful.

Labor, however, has restricted pursuit of such third year back wage

recoveries by requiring compliance officers to obtain, through area

directors, authorization from both assistant regional administra-

tors and regional solicitors in individual

cases

before computing

illegally withheld wages for

the

third year.

our analysis of the 4,022 responses to our nationwide ques-

tionnaire showed that compliance officers found evidence of falsi-

fied records --a strong indication of willfulness--in 244 (or about

6 percent) of the cases.

Yet, only 40 cases had investigations

which were extended beyond

a

2-year period.

In addition,

our

re-

view of the 75 sampled cases showed that regional solicitors al-

leged that violations were willful in 37 cases.

Back

wages

for

the full 3 years, however,

were only computed and sought in

four

(or about 11 percent) of those cases where regional solicitors

alleged willful intent to violate FLSA.

Thus,

illegally withheld

wages are rarely recovered for the third year period and, as a

result,

most willful employer offenders are treated no differently

than nonwillful offenders.

We discussed Labor's infrequent attempts to

seek

the third

year of back wages with both regional solicitor and Labor area

50

office officials.

The Boston Regional Solicitor said the possi-

bility of seeking the third year of back wages is used primarily

as a bargaining tool in settling cases.

He also stated, that although compliance officers must request

permission from his office to seek the third year of back wages,

they rarely make such requests. He added that once his office

receives an FLSA case,

it is very difficult to reenter a firm to

compute the third year of back wages.

Employers are often hostile

and uncooperative upon learning the purpose of the visit. There-

fore, he believes that compliance officers should automatically

compute the back wage violations for a full 3 years if they appear

willful.

Chicago and Dallas regional solicitor officials took a some-

what different position. They stated that the third year of back

wages is not usually computed in willful cases because a signifi-

cant portion of the third year violations often become legally un-

collectible, due to the running of statute of limitations.

Dallas

regional solicitor officials also stated that computing the third

year of violations would require spending additional compliance

officer resources which could be more effectively utilized making

other employer investigations.

An attorney in this regional soli-

citor's office told us the extra work necessary to recover 3 years'

back wages would further delay resolving the case.

Area directors stated that regional solicitors rarely request

compliance officers to extend investigations to include the third

year of back wages. One area director said he allows his compli-

ance officers only to estimate violations for the additional year,

but not to compute them,

unless the attorney agrees to attempt to

collect the additional back wages instead of bargaining them away

to obtain a settlement.

Another area director said it is not prac-

tical from a resource utilization standpoint to spend time comput-

ing additional back wages for disputed violations because settle-

ments usually compromise the back wages owed and the third year's

back wages are the first to go.

LABOR FREQUENTLY DOES NOT

UPDATE INVESTIGATIONS BEFORE

SETTLING CASES

Labor frequently does not update its investigation, before

settling a case,

to recover employee back wages illegally withheld

between the date the investigation ends and the date the employer

agrees to comply. Often, many months elapse before a regional so-

licitor can settle a case after the date of the last investigation.

If employers do not comply with the act during this period, the

amount of illegally withheld wages returned to employees will be

limited.

We found that some employers continued to violate FLSA

provisions and underpay employees after completion of the inves-

tigation.

51

Our review of the 75 sampled cases showed that back wage esti-

mates resulting from investigations were updated in only 17 cases

before settlement.

In three additional cases from one region, the

solicitor obtained a written pledge of compliance from either the

employer or the firm's attorney.

These pledges usually stated

that the firm had been in compliance with the act since investiga-

tion.

In the other 55 cases,

the original employee back wage esti-

mates

were not updated.

Updating, however,

was not warranted in

21 cases. For example,

several establishments had gone out of

business,

eliminating a need

for

followup. In the other 34 cases,

Labor's failure to verify compliance and update findings may have

significantly contributed to unjust employer enrichment and denial

of back wages to employees.

Our analysis of the 34 cases where

verification of compliance was warranted, but not performed, dis-

closed that an average of about 22 months elapsed from the date

of the last violation noted in the investigation to the date the

cases were settled. Overall, this period ranged from 6 to 52

months.

Failure to verify employer compliance is particularly signifi-

cant in light of the results obtained when initial investigations

are updated. For example, the regional solicitor in one region

requested updated investigations

in 13

of our sample cases. In

doing so, compliance officers found that violations of the act were

continuing in 8 of the 13

cases.

Although 7

of

the 13 employers

had agreed to future compliance with the act after the initial in-

vestigations were completed,

the updated investigations revealed

additional violations in 4 of these 7 cases.

The following sample cases show that, when Labor does not up-

date its investigations before settlement, employers may continue

to violate FLSA.

--In July 1976, Labor investigated a hotel operator and found

willful violations of the minimum wage, overtime, and rec-

ordkeeping provisions.

The compliance officer estimated

that $6,574 had been illegally withheld from 38 employees.

The employer refused to fully restore the back wages and

stated he might not commit himself to future compliance.

The regional solicitor received the case in February 1977

and settled it for $5,059 in January 1978--about 18 months

after the investigation started.

As part of the settlement

agreement,

the employer stated that he was currently in com-

pliance with FLSA, but no mention was made of the previous

18-month period.

Labor did not verify compliance after the

initial investigation but before settlement.

In March 1979, Labor investigated this employer again based

on another employee complaint, and found that the employer

was not complying with the act when the previous settlement

52

agreement was signed. In addition,

violations continued

to occur despite the agreement. The second investigation,

showing that $8,525 was due to 10 employees, was sent to

the regional solicitor for his review in May 1979. In

January 1980, he filed suit against the employer for back

wages. As of September 1980, the

case was

still pending

in the court.

--An investigation of a chain of small convenience grocery

stores in September 1976 found overtime violations of

$50,948 owed to 104 employees and recordkeeping violations.

The case was sent to the regional solicitor in January 1977

with a note that the company had not pledged future compli-

ance and a recommendation for

court suit

for back wages and

liquidated damages. The solicitor did not pursue litigation

but instead, settled the case in October 1977 for $34,810,

after granting an overtime exemption to store managers.

The firm's attorney signed

a

settlement agreement that in-

cluded a note that the firm was currently in compliance with

FLSA and had been since the start of the investigation in

September 1976. Labor did not verify that compliance had

occurred.

Although the solicitor accepted the firm's pledge of compli-

ance, data in the case file at that time showed that the

firm

was

not in compliance when the employer's attorney

signed the settlement agreement. Additional case data in-

dicated the firm was not in compliance after the signing

of the settlement.

On September 6, 1977--about 6

weeks

before the signing of

the settlement agreement--

the

area

director sent the re-

gional solicitor an additional employee complaint. The

area director stated,

"The attached interview discloses

continuing noncompliance with Sections 7 and 11 of the act.

Please review and include in

your

file which has been sub-

mitted and recommended for litigation." In this interview

statement dated September 1, 1977, the employee, who was

an acting manager and cashier, stated in part:

"* * * I worked approximately 66 hours per week

* *

l

I earned $150 per week for all hours worked.

* * * It is my understanding all other employees

in all stores are subject to working the long hours

for a straight salary. * *

l

No accurate record

of hours worked was maintained. * *

l

II

In addition, on May 23, 1978, the assistant area director

submitted another complaint to the regional solicitor

53

showing that an employee, who was an assistant manager,

stated he did not receive credit for all hours worked.

Our review of the case file disclosed that the regional so-

licitor took no action on either of these additional com-

plaints. On July 23, 1979, we asked Labor to reinvestigate

this firm to determine if this employer was complying with

FLSA. On April 15, 1980, the area director responsible for

the reinvestigation stated that Labor found that the employer

had not paid employees most of the back wages that were due

to them. He noted that Labor received a check from the firm

for the remaining back wages on March 4, 1980. The compli-

ance officer is now attempting to determine if the firm ever

came into compliance.

The area director noted that early

indications show that the firm is still violating FLSA over-

time provisions. In addition, several more employees have

filed complaints against the employer.

--A chain of fast food restaurants was found violating FLSA

minimum wage, overtime, and recordkeeping provisions. The

investigation covered a 2-year period ended March 1975 and

disclosed that 730 employees were owed $25,641 in back wages.

The case was sent to the regional solicitor in August 1975

because the employer refused to restore the full back wages

to employees. Labor filed suit seeking an injunction against

the employer in November 1975. In January 1977, the regional

solicitor asked the area director to recompute the original

back wage computations

because

of a recent change in overtime

compensation instructions and to include any new complaints

in the recomputation of back wages.

The back wage recomputation showed that $19,121 was owed

to 692 employees.

An additional $15,110 of back wages was

also found illegally withheld from employers for the updated

review period since the last investigation. In October 1977,

Labor obtained an injunction against the employer and settled

the case for only the $19,121.

The remaining $15,110 appli-

cable to the updated investigation period was not obtained

from the employer for distribution to underpaid employees.

We discussed this case with the responsible regional solici-

tor attorney to determine why the updated back wages of

$15,110 were not reimbursed to underpaid employees. He

advised us that these back wages were used as a leverage

against the employer in settling the case and thus, were

compromised away. He added that the employer would not have

settled if he had not felt that he was gaining something.

Although,

in this case, necessary steps were taken to update

the investigation,

the employer unjustly profited from the

settlement and will undoubtedly have little incentive to

comply with FLSA in the future.

54

We discussed the policy of updating investigations before

case settlements at three regional solicitor's offices and noted

that:

--The Dallas Regional Solicitor's policy is to request the

area office to verify current compliance and to update

investigation findings before case settlement.

The purpose

of the update is to add additional violations which may have

occurred during the interim period and to exclude violations

lost to the statute of limitations.

He added, however, that

all violations during the interim periods may not be included

in the settlement.

The regional solicitor's primary concern,

before settling a case, is that the employer has come into

compliance with FLSA.

--The Chicago Regional Solicitor generally does not request

the area office to update investigations before settling

cases. The primary goal is to obtain future compliance, so

the policy generally prefers that attorneys secure employer

agreements to comply so that attorneys can proceed to another

case.

-An official in the Boston Regional Solicitor's office said

that if the employer or his attorney stated in writing that

the firm is currently in compliance and had been since the

investigation, estimates of back wages due employees would

not be updated. The regional solicitor added that if the

firm's attorney is reputable and trustworthy, the attorney's

word alone would be acceptable assurance of past and present

compliance.

In addition he expressed some concern that up-

dating could jeopardize or upset settlement negotiations

with the employer.

We also discussed the policy of verifying compliance and up-

dating back wage estimates before settling cases with officials

from the Office of the Solicitor's Fair Labor Standards Division

who stated that there is no formal policy regarding this matter.

They said that regional solicitors, at a minimum, should request

Labor to spot check employers for compliance before settling if

there is any doubt about compliance.

They added that regional

solicitors should not settle a case without requesting an update,

even though it may jeopardize tentative settlement agreements.

LABOR DOES NOT HAVE A SYSTEMATIC

PROGRAM TO REINVESTIGATE EMPLOYERS

WHO VIOLATE THE ACT

Labor does not systematically reinvestigate employers who

previously violated FLSA although our review showed that many em-

ployers repeatedly violate the act.

55

As pointed out earlier,

our review of cases closed administra-

tively during June and July 1979 at six Labor area offices showed

that 90 of 433 employers (or about 21 percent) had at least one

prior violation, and 21 cases had three or more violations. In

most cases the employer continued to violate the same sections of

the act.

The extent of repeat violations identified by Labor prob-

ably understates the actual extent to which employers continue to

violate the act, however, because (1) employees whose complaints

are not resolved satisfactorily are less likely to complain about

later violations if the first enforcement action does not stop the

violation, (2) Labor relies primarily on complaints in determining

which firms it will investigate, and (3) Labor investigates only a

small fraction of the firms subject to FLSA.

Labor is able to investigate only a small fraction

of

the firms

that are covered by FLSA. In 1979, for example, Labor investigated

only about 2 percent of the 4.1 million establishments subject to

FLSA provisions.

It also faces a substantial backlog of complaints

from employees and others, and as a result, directs its investiga-

tive resources to complaint cases. Therefore,

employers may con-

tinue to violate the act without being reinvestigated.

An employ-

er's promise to comply is often accepted by Labor, and followup in-

vestigations are rarely made unless an employee again complains.

Some employers not only continue to violate FLSA after being

caught, but also realize they can get away with greater violations.

One area office director said virtually every time he has adminis-

tratively closed a case without an agreement to pay back wages, a

later investigation of the same firm discovered even greater vio-

lations. He believes the system positively reinforces noncompli-

ance.

Further, in 11 cases closed by a regional solicitor during

fiscal year 1978, which originated from this area office, employers

usually paid all back wages after their first investigation, but

refused to pay after later Labor investigations.

Area offices maintain records of FLSA violators which can be

used to schedule reinvestigations of employers, but such records

are seldom used to initiate reinvestigation8 because of heavy em-

ployee wage complaint backlogs.

For example, as of August 1979,

a total of 22,117 FLSA complaints were backlogged nationwide in

area offices.

Compliance officers said that employees become dis-

couraged when their complaints are not investigated promptly with

satisfactory results.

Therefore,

some employees refuse to complain

further if they are dissatisfied with Labor's investigation.

One area office director said Labor's receipt of back wage

complaints depends on two factors:

--If a previous investigation did not result in compliance

or payment of back wages,

employees will probably not

complain again.

However, if an employer came into

56

compliance and/or paid back wages, the employees will be

much more willing to report repeat instances of noncompli-

ance.

--If the employer has only a few employees, he has a better

chance of intimidating them.

The larger the organization,

the better the chances one person will complain.

In addition, during periods of economic downturn, the Nation's

lowest paid employees may be even less willing to complain when

employers illegally withhold back wages from them because they

fear losing their jobs.

Accordingly, Labor may not receive cooperation from the employ-

ees if the employer continues to violate the act, and Labor may not

even become aware of the violation unless employees complain. For

example,

in one case a compliance officer described an employer who

was investigated three times with minimal results.

During the

last investigation,

one employee refused to talk with the compli-

ance officer,

even though he had previously sent wage complaints

to Labor.

This employee also advised fellow employees not to talk

with the compliance officer because, if no results were achieved

from previous investigations, there was no reason for them to risk

their jobs.

Another case involved a security firm which violated the act

three times,

apparently without ever complying with the act after

Labor investigations.

The third investigation was based on a com-

plaint from a competitor,

rather

than from affected employees.

EMPLOYERS GENERALLY HAVE INTEREST-FREE

USE OF BACK WAGES ILLEGALLY WITHHELD

Labor does not routinely seek interest for employees, includ-

ing those whose back wages have been illegally withheld for long

periods of time.

Thus,

employers have interest-free use of back

wages due to employees. Conversely,

employees

are

denied use of

back wages due to them during the same period. When they do ulti-

mately receive their back wages, inflation may have substantially

eroded the value of such wages. Thus,

without interest the employ-

ees are not receiving just compensation.

Labor, in settling cases

at

the

area

office level, does not

seek interest from employers on

wages

illegally withheld, includ-

ing those withheld for long periods.

One assistant regional admin-

istrator said there is no legal authority to seek interest for

cases settled within the area office.

However, Labor officials

stated that the possibility of interest being assessed by the

courts is used

as a

bargaining tool to entice employers to pay

back wages at the area office level.

57

In filing FLSA suits against employers in U.S. district

courts,

regional solicitors usually request the court to assess

interest on employee back wages.

Complaint forms for filing legal

action normally request that back wages be paid together with in-

terest from the date such back wages become due until they are

paid.

If a case goes to trial, interest is

assessed

at the discre-

tion of the

court.

As previously noted, however, few cases ever

reach trial. Most cases are negotiated and settled

out

of

court.

Regional solicitors do not generally obtain interest as part

of agreements because it is normally negotiated away to reach out

of court back wage settlements. According to regional solicitor

officials, asking for interest could upset settlement negotiations.

Since

records

of negotiation are not prepared showing factors con-

sidered in the final settlements between employers and regional

solicitor officials, we could not determine what effect, if any,

potential interest charges had on case settlements.

One regional solicitor told us he had instructed his attorneys,

within the past year, to actively seek interest if employers are

allowed to pay back wages on an installment basis. However, he

said that

the

strength of the case and the final settlement dictates

whether interest is sought. If a high settlement is obtained

or

if the findings are speculative, interest would most likely not be

sought.

Our review of the

75

sample cases showed that both prejudg-

ment interest, i.e.,

interest from the date back wages are due,

and installment interest were rarely obtained.

Prejudgment inter-

est was only assessed in 5 of 75 sample cases. In each of these

five

cases,

interest was assessed as part of a default judgment

obtained against employers who failed to appear in court. Default

judgments, however, do not insure the payment of back wages or in-

terest since some employers are unable to pay or may never be found.

In fact, prejudgment interest

was

only paid in two of the five de-

fault judgments. In 15 of the 75 sample

cases,

employers

were

per-

mitted to pay employee back wages on an installment basis. The

installment periods ranged from 3 to 33 months and averaged about

12 months. Regional solicitors, however, only obtained installment

interest for employees in 1 of the 15

cases.

Employers who illegally withhold back wages from employees

generally have the interest-free use of

these

wages for several

years. Our review of the 75 sample cases showed that investiga-

tions went back at least

a

full 2 years in 55 of the 75 cases.

In addition, although employers in

63

of the 75 cases paid all or

portions of employee back wages,

in 36

cases

payments were not made

until

an average

of 25 months

had passed

since the investigation.

Furthermore, the 15 employers who restored employee back wages on

an installment basis took an average of 12 additional months to

complete payments.

58

To

illustrate

how employers profit from not being required to

pay interest on back wages,

in one of the cases

in

our sample, a

regional solicitor recovered portions of back wages.

However, the

employer had interest free use of the illegally withheld

wages

for

about 10 years and, therefore, profited considerably by violating

the law.

First,

the firm obtained interest-free use of employees'

wages for the 3-year period in which violations occurred.

Second,

the employer did not pay interest on back wages from the start of

the investigation to the time the case

was

settled.

A final set-

tlement of $70,000 plus $1,000 court costs was reached approxi-

mately 4 years and 3 months after the start of the investigation.

The employer had interest-free use of $70,000 throughout this per-

iod. Finally,

the solicitor agreed to allow the firm to make quar-

terly back wage payments to employees over a 33-month period, but

did not demand interest on the installments.

The money that employers can save by not paying interest for

illegally withheld wages is often substantial.

Some back wage

amounts are large and litigation periods lengthy.

The following

table shows simple interest savings to five employers included in

our sample.

We computed interest on the final back wage settlement.

Simple

interest

Length of savings Percent

Em- Back wage litigation at 9 interest is

ployer

settlement (note a) percent of judgment

1 $ 19,121 2.2 years

$ 3,786

20

2

187,932 3.1 years 52,433 28

3 4,000 2.3 years 828 21

4

3,251 2.3

years

673 21

5 200,000 2.1

years

37,800 19

a/Computed from the date the

case

was received by the regional

solicitor's office to the date final payment was made to employ-

ees. This estimate is conservative because it does not include

time for which the

wages

were illegally withheld before being

submitted to the regional solicitor.

Labor's failure to seek interest on

wages

illegally withheld

penalizes employees because, as time passes, inflation erodes the

value of the back wages. For example, during the 5-year period

ended in 1978, the consumer price index--which reflects changes

in prices for fixed group of items such

as

food, housing, apparel,

transportation, medical care, and entertainment--increased from

134.7 to 193.1. If wages had been withheld from an employee for

this 5-year period, the value of these dollars would have decreased

by over 40 percent.

To prevent employers from profiting by ille-

gally withholding employee wages without paying interest, Labor

should be authorized to assess a reasonable amount of interest in

addition to the amount of back wages.

.

CONCLUSIONS

We believe that Labor should be given the authority to deter-

mine that a minimum wage and overtime violation has occurred and

to compute and assess the amount of employee back wages illegally

withheld from employees, including interest.

Changes to the

Portal-to-Portal Pay Act are needed to allow Labor to stop the

running of the statute of limitations when it determines that a

violation has

occurred.

This would materially increase the il-

legally withheld back wages restored to employees--many of whom

are low-wage earners-- that are now lost because of the mere passage

of time.

Tolling the statute of limitations at the time a determination

is made that wages have been illegally withheld would also provide

Labor with greater incentive to calculate the third year of back

wages --which is now largely ignored --when employer violations are

willful. Labor's fuller utilization of a 3-year period in comput-

ing back wages in willful

cases

would conform to the intent of the

Congress to deter violations.

Labor does not routinely update its investigations to recover

back wages illegally withheld between the date an investigation

ends and the date an employer agrees to comply.

Consequently, this

administrative practice limits the amount of back wages that.'employ-

ees can recover.

Labor should update cases to assure that employees

receive the full amount of back wages they are entitled and to pre-

vent employers from profiting from violations.

Labor also does not systematically reinvestigate employers

that violate the act even though many repeatedly do so.

We believe

a systematic program to reinvestigate some employers that previ-

ously violated the act will improve FLSA compliance.

We recognize,

however, that Labor's complaint backlog and limited resources will

limit the number of employers Labor can reinvestigate.

In addition, Labor should routinely seek interest for employees

whose wages have been illegally withheld.

The assessment of interest

would eliminate the incentive for employers to illegally withhold

wages and would help make the employees whole for the period during

which wages are illegally withheld.

RECOMMENDATIONS TO THE CONGRESS

We recommend that the Congress:

--Amend FLSA to authorize Labor to formally assess a violation

as well as the amount of illegally withheld back wages due,

including interest.

60

--Amend section 6 of the Portal-to-Portal Pay Act of 1947 so

that the statute of limitations tolls when an FLSA violation

is formally assessed by Labor.

RECOMMENDATIONS TO THE

SECRETARY OF LABOR

We recommend that the Secretary:

--Issue instructions requiring compliance officers to compute

the third year's back wages in willful violation cases.

While Labor can do more to identify and recover back wages

withheld during the third year in some cases, we believe

it will have only limited success until the legislative

changes to stop the running of the statute of limitations

and strengthen enforcement authority are adopted.

--Reinvestigate firms before settling cases referred to the

regional solicitor's offices to assure that employers have

come into compliance and to calculate any additional back

wages owed to employees.

--Establish a program to systematically monitor firms found

in violation of the act.

All firms considered likely to

again violate the act, and a sample of other firms that have

violated the act should be reinvestigated within the 3-year

statute of limitations period to assure that employers do

not profit from continuing violations and that illegally

withheld employee back wages are fully restored.

AGENCY COMMENTS AND OUR EVALUATION

United States District Court for the

Northern District of Illinois

The Chief Judge noted that the Portal-to-Portal Pay Act, in

many instances,

limits Labor's ability to recover illegally with-

held wages. He concluded that this can and should be remedied as

we indicated.

The Chief Judge stated that he concurred enthusiastically with

our recommendations that there be effected a change in the point

at which the 2- or 3-year statute of limitations period is tolled

and that a maximum use of interest be brought about.

Department of Labor

Labor stated that it does not concur in our recommendation

that instructions should be issued requiring compliance officers

to compute the third year's back wages in willful violation cases,

if our recommendation applies to all willful violation cases.

4

61

Labor also stated that the courts in

some

jurisdictions have pro-

vided guidance as to what circumstances amount to willful viola-

tions but that the issue generally requires careful scrutiny, par-

ticularly if the case arises in a jurisdiction which has no prior

court precedent on the issue of willfulness. As a result, Labor

said the regional solicitor's input is needed on a case-by-case

basis.

We continue to believe that Labor should issue instructions

requiring compliance officers to compute the third year's back

wages in willful violation cases.

It was the Congress' intent, in

enacting section 6(a) of the Portal-to-Portal Pay Act, that recov-

ery of third-year back wages in such cases be pursued and, in our

opinion,

pursuing third-year recoveries in such cases on a consist-

ent basis would serve as a deterrent to FLSA violations.

In addi-

tion, pursuing recovery of third-year back wages would undoubtedly

result in significant voluntary recoveries of such wages from

em-

ployers as presently is the case with the pursuit of the first 2

years of back wages. We do not concur with Labor that input from

the regional solicitor is needed on a case-by-case basis.

Labor

has issued instructions for the guidance of compliance officers on

what constitutes willfulness for potential criminal litigation.

Similarly, Labor can issue instructions to compliance officers

where courts have provided interpretations of willfulness.

Reinvestigation and monitoring of

employer wage payment practices

Labor concurred with our recommendations for reinvestigation

of cases prior to settlement and for establishing a program to rein-

vestigate employers who violate FLSA.

Labor believes, however,

that if our recommendations are to be effectively implemented, more

resources are needed.

Labor said that, in many cases, investiga-

tions are being updated at the time of settlement.

Labor also said

that firms are scheduled for reinvestigation when there is any doubt

concerning future compliance and, more importantly, when enforcement

resources are available.

Labor added that the availability of en-

forcement resources has precluded any commitment to a systematic re-

scheduling program but it has been done when an employer's assurance

of future compliance is questionable.

Labor concluded that demands

from the employee complaint backlog,

special directed enforcement

programs,

and other priorities create a drain on resources that

precludes reinvestigation on a regular basis.

Labor's response, in effect,

raises the question of what is

the most effective use of staff resources.

While we concur that

the investigation of new complaints is desirable, the present prac-

tice of limited monitoring of firms found in violation of FLSA and

reinvestigation of firms before settling cases, in our opinion, re-

sults

in inconsistent enforcement actions and creates a lackadais-

ical compliance attitude in many employers who profit from willful

62

violations of the act.

We believe that a consistency in reinves-

tigating firms before settling

cases

and systematically monitoring

firms found in violation of the act would be an effective deterrent

to violations of FLSA and ultimately would reduce the number

of

repeat violators.

Accordingly, we continue to believe Labor should

implement our recommendations.

Tolling of the statute of limitations

Labor commented that our report presents an unhappy picture

of back wages lost by reason of the running of the statute of limi-

tations.

Labor said we alleged this occurred because of the time

taken by the regional solicitors'

offices to review investigative

files submitted for potential litigation.

Labor stated, however,

that to the extent that there

have

been delays in the past, sig-

nificant steps have already been taken to remedy the problem of

back wages being lost due to running of the statute of limitations.

Labor added that standards are now in place which set time dead-

lines for regional solicitors,

with respect to action taken on FLSA

case files.

Under present conditions,

it is almost impossible for Labor to

process a case without losing

some

back wages to the running of the

statute,

unless an employer agrees to waive the statute or unless

the violations are very recent.

For example, in an investigation

which includes numerous violations occurring about 2 years before

the investigation completion date,

the oldest back wage violations

will start being lost to the running of the statute

because

of

just

the normal time it takes to process a case through the area office,

assistant regional administrator,

and regional solicitor before the

court filing. This normal process time may include area office

supervisory case review,

negotiation with an em..oyer at Labor's

area and regional solicitors offices, regional

iicitor attorney

case analysis,

and filing the suit in court.

T ;se are valid func-

tions that,

no matter how efficiently carried out, will continuously

result in some back wages being lost to the running of the statute.

Accordingly, while

the

establishment of standards and time dead-

lines in regional solicitors'

offices should alleviate the problem,

in our opinion, it will not eliminate the loss of back wages due

to the running of the statute.

Seeking interest on back wage8

Labor stated that it ia currently a common practice in regional

solicitor offices to seek interest in connection with settlements

permitting installment payments.

We believe that it is a sound practice to seek interest for

employees on back wage8 that employers have agreed to pay on an

installment basis. However,

this does not,

in our opinion, negate

the need to seek interest for employees during

the

time that their

back wages have been illegally withheld.

,'

CHAPTER 5

ADDITIONAL DEPARTMENT OF LABOR COMMENTS

AND OUR EVALUATION

Labor referred to the statement in the cover summary of our

draft report that FLSA, established to protect the wages of Amer-

ican workers, is not accomplishing its objective. Labor stated

that

--there is little or no support in the report for this conclu-

sion, except for isolated,

anecdotal bits of evidence

selected in a highly unscientific manner:

--there is no evidence whatever in the report that more than

a small minority of employers seek to avoid their obliga-

tions under the act:

--the Minimum Wage Study Commission will shortly publish the

results of its noncompliance survey,

which will constitute

the most reliable measure of compliance with the statute:

and

--the overall conclusion of the report is thus premature, to

say the least, and surely not justified on the basis'of the

evidence presented in the report.

Labor also said that restitution, as shown in our report, of ap-

proximately 60 percent of the amounts of back wages found due in

the course of its investigations is quite impressive.

We revised the cover summary to say that FLSA is not ade-

quately accomplishing its objective. However, we disagree with

Labor's views on the adequacy of our review. We believe the

description in chapter 1 of our objectives, scope, and methodology

clearly shows that our review was not based on anecdotal material,

but rather on extensive review and analysis. Also, the results of

our review set forth in chapters 2, 3, and 4 firmly establish the

many problems in administration and enforcement of FLSA that pre-

vent adequate protection of workers' wages under the act.

Data provided by the Minimum Wage Study Commission from its

1979 Noncompliance Survey indicate the magnitude of noncompliance

with FLSA and nonrecovery of illegally withheld back wages.

Re-

sults of the survey indicate that approximately $370 million in

back wages were owed to 5 million workers in a a-year investiga-

tion period as a result of FLSA minimum wage and overtime viola-

tions. The survey results also indicate that minimum wage under-

payments represent 8.5 percent of all earnings received by workers

paid an hourly equivalent of the minimum wage or less during the

fourth quarter of calendar year 1979. The survey disclosed that

64

about 5 percent of all subject establishments did not comply with

the minimum wage provisions, while 20 percent of all firms using

overtime hours violated the act's overtime provisions during the

survey's

"current workweek."

With respect to back wages restored to employees, we noted

in chapter 1 that Labor's statistics on wage restorations repre-

sent money employers agree to or are ordered to pay back to employ-

ees.

In an April 18, 1980, report, Labor's Office of Inspector

General revealed that tests of the $59 million of back wages re-

ported by Labor as paid to employees nationwide during fiscal year

1978 can be overstated by as much as one-third or about $20 million.

Therefore,

the 60 percent restoration figure referred to by Labor

is inflated.

Whatever the present percentage of back wages Labor

is actually able to get restored, we believe that the amount of

back wages found due and the percentage of back wages restored can

be substantially increased if the recommendations included in this

report are implemented.

65

APPENDIX I

U.S. GENERAL

SURVEY OF FAIR

CO!il’LIANCE ACTIONS

Instructions

The U.S. Ccner*l Accounting Office, in coop===-

tion with the Depertment of Lebor, is conducting *

review of enforcement ecrivitiee under the yei=

Lebor Stenderde Act (FLSA). To complete this review,

We riced the help of compliance officer8 end eree

office menrgement in filling out P short queetion-

n*ire.

The purpose of this queetionneire (GAO Form

A) io to survey the monerery findinge end income

restored of FLSA minimm wexe end

OVertime

viol*-

-

tionr,end recordkeeping violations.

To be specific, we need certein figuree vhich

rre not recorded on

Form

ESA-33 end hence me not

eveileble on e netionel beeie. These figurel will

allov ue for the firet time to enelyre the iawcte

of the major ceueee for minimum wexe, overtime,

end recordkeeping violetione on the netion ee

l

whole end the verious perte of the lebor force.

We ere *eking for your help beceuee you end

your

fellow complience officers working in the field

ere in the best position to report on these findings.

The complience officer ia raked to coneider

only those minimum vexe end overtime end record-

keeping FLSA violetions em moneaind-

inge. Complete one GAO

Form A

for eech

l

uch ceee

during the .$&&u month of June 1Ffor which

a Form ESA-33 wee filled out. Since ease of the

ceee informetion we need ie

l

lreedy recorded on

Form ESA-33, the complience officer ie eleo eeked

to provide e copy of thie form with the GAO Form A

que*tionn*ire.

Be sure to coneider ell concilie-

tione end limited inveetigetiona ea well

l

e ell

full inveetig*tione.

Unlees the ceee ie very compliceted, meet of

the GAO Form A queetionnelree ten be completed in

e little leee then helf en hour.

Hoat of the time

will be tsken up by queetione 5,6,7, and 8. Here

we eak for e more deteiled breekout of the Nonetary

Finding end Income Restored figuree preeented in

the

ESA-33

dete fielde 29-32 end 38-41.

For exmple,

in queecion 5, we vould like to know *et proportion

of the tote1 number of employees effected by min-

iam vege violetione (ESA-33 dete field no. 29)

wee recounted for by

l

ech of the following type‘

of minimum voge viol*tione:

no p*yment for *ll

hour, worked, pure miniown vege vialetione, illegel

deduction*,

tip credit violetione, etc.

Pleeee a the w fppu. the

numbers in the eheded perentheeee to the right of

eech queetim.

In the inetencea where ic ie difficult to

develop exect numbere (perccnteges) frw the ceee

recorde, pleeee provide P beet

l

stimete recher

then deley or feil to respond.

If more then one compliance officer worked

on e particul*r tree,

the form should be filled

out by the officer moat femiliar with the ceee.

ACCOUNTING OFFICE

LABOR STANDARDS ACT

SAVING MXJETAIIY FINDINGS

66

To minimize the complixnce officer’s reporting

burden, we

l

re collecting deta iOr &d&the w

mOnth of June.. So it ie reeentiel thet the

complixnce officer’s policiee end precticee for

completing ceeee not be chenged during thie wnth.

All ceeee thet would normally be completed should

be completed; don’t hold eny beck. If our reeulte

l re

to be velid, thie met reprceenr

l

typicel

June month.

l%ie ie important. LO pleeee beer

with ue

l

e we reviev ,011~ of your procedure*.

Before you begin the queetionneire, we euggeet

thet you get

l

copy of the ESA-33 end pull the ce.e

file.

Then quickly reed the entire GAO queetion-

neire

l

o thet you heve e general idee of whet i8

to be eeked of you end

rhat

typee of informecion

you my need from your files.

When you finish filling out thie form, pleeee

m the yellow copy (or

l

photocopy) of the

completed Form ESA-33 to the front of GAO Form A.

This ie very importent beceuee ESA-33 conteine

needed informetion not

l

eked for on GAO Form A.

If you hrve

l

ny queetione ebout GAO Form A

or if there ie eny difficulty in providing the

informetion, pleeee cell Ted Alvem (617/223-6536)

et the GAO Boeton Regionel Office or Cherlie

Gereie (202/523-g706),

l

GAO repreeenrrtivc et

thcbor Depertment in Weehington. D.C.

m=Y

will be *tending by to help.

After completing both ISA-33 end CA0 Form A,

check to meke cure both forme

l

re stepled together

end then forwerd both forms to your

l

ree director.

The

l

ree director will

l

end them to Mr. Cherlee

J.Gercie, GAO Repreeentetive. gooa N1509, New

Depertmnt of Labor Buildinx. 200 Conetitution

Avenue. N.W.. Weehington. D.C. 20210 not leter

then July 6, 1979.

Pleeec write legibly.

Your

coopererion ie

greetly epprscieted.

I

I. Ceee b Aree Office Idcntificetion

1. Aree Code i///

wa E2-M

(Trenecribe from

item 3 on

Form

ESA-33)

2.

Seriel No. / / 1 ! / / ts;%) ~%%#

(Trenecribe from

item 4 on ESA-33;

if eerie1 no. bee

not

been aswiped,

go to 3)

3.

If e seriel number bee not yet been

essigned to this ceee. enter belor the

neme of the employer involved.

I

Neme of employer (Item 1 on ESA-33)

APPENDIX I

GAO Form A

APPENDIX I

b. lJh.t kinde of FLSA violetiona are cited in this case?

(Check all that apply)

1. m FLSA minimum weg. rir& 2.

/? FLSA overtime (irF’$ 3.

-

1-7 FLSA recordkeeping (12)

-

II. Minimum W.B. Viol.tion.

A. Monetary Finding,: Btaekout of Tot.1

5. Con.id.r th. tot.1 number of-

effected by them. findingr end the

coral

dollar

mount

of the minimum W.I. viol.tion

monetary

finding. for thie cu. (Item 168, Deta Field.

29 end 30 on Form ESA-33). The.. totel. were developed by eulrming the monctrry findingo, the

numbar of peopl.,.nd the dol1.r Mount.

l

ccount.d for by

l

ech specific type of minimum wege

violrtion.

WC n.ed you to review th. work pepcre urcd to develop thir rumnury and eetimete

th. proportion or p.rc.nt of the tot.1 figure. th.t we.

.ccount.d for by each specific type

of viol.tion.

H.nce, the au..tion i.:Wn.t percent of the tot.1 number of employees due the

b.ck w.g.. (dete field 29),.nd whet percent of the

total

doller .mount (det. field 301, ve8

.ccounted for by ..ch of the following minimum w.ge viol.tione:

no p.ym.nt for houra worked,

ill.g.1 w.g. deduction., improper uniform chrrgc., tip credit, pur. minimum v.g., and other

violetion. For ex.mple, .eeum. th.t th. ESA-33 d.t. field 29 lieted 30 employees .e due

beck w.g.e bec.uee of minimum weg. viol.tione.

Alao, l

eeumc that the ceee file ehowed that

10 of the.. employcer were not p.id for 011 the hour. worked end th.t all

of

the employees

(30) w.r. eubjected to illeg.1 deductions. You would enewer item 1: Hour, worked by writing

33% in column A (lo/30 - .33) end item 2:

Ill.g.1 Dcductione by writing 100% in column A

zinc. ell 30 employace wr. .ff.cced.

Not. thet beceuee the came employeer mey be subjected

to lrmltipl. violetion.,

the c01w.11 A tot.1 could exceed 100%. Thi. ie not the ceee for the

column B tot.le,

the dol1.r .mount..

(In anewering thir end other eimilar queetions coneult

your c..e work prpere .nd write the percent figure. in the appropriate epaces. Enter NA in

any rpacc that dote not .pply to thi. ceee.

office workare.

For ex.mple, tip credit. would not apply to

Writ. zero if there er. no viol.tion..

If the precir. infonution ie not

re.dily .v.il.ble, provide U. with e rceeoneble eetimate rather then spend e greet deal of

time working up the figure..)

INOTE: HINIMDM WAGE VIOLATIONS ONLY, DO NOT INCLUDE OVERTIU’J

---

Monetary Finding (Ltem 168 on ESA-33)

--

Minimum W.ge

Viol.tione

Ieffected by ..ch viol.tia

l.H

mu: The employer d&d

not

p.y employ... for .11 houre worked

(Note: Include non-P.-t of w.g..

end off-the-clock tim.1

x .~:ij@$$&

2. Illep.1 Deductionb; The employer

rad. illcgel deduction. for

l

uch

thing.

l

e

l

hortegee or breekeg.

j

which reduced employ.. veg. below the I

minimum r*t..

3. Unifom: The employ.. med. p.yment‘

for

l

uch thing.

l

. uniform. purcheeed

end MintLined which rsducsd employee

agee below th. miniam veg. ret..

4. TiD Credit:

Tip credit provirione

were vio1.t.d.

z $@;z3W3

5.

.

Pure Employcee whoee

.tr.ight time r.t. of p.y, *ether

p.id hourly

rete

or on eelary, ie

leee then the Federal minimum wage

rate. (Do not include amounts related

t0 hour. worked, illegal deduction,

uniform, or tip credit violations.)

6. w. Violations other than those

lieted above.

(Please specify)

TOTAL

100%

67

B

a _

. x of total $ .mo”nt

in Data Field 30

accounted for by

each violation

x (:%$q&$

% WO-6.21

--

% (46-M)

APPENDIX I

II.

Elinimum~e Violations (continued)

--

B. Incomr Rwtor*d:

Brukout of Total

--P

6. Now conrider the total number of employeea

l ffoctrd

by in one

et

amount of

ineomo

rratorad

brcaum

of minimum w l viohtrona MA-33 Itam

17A Data Pieldl

31 and 32).

+yd and

tha,total

dollar

I

We would like to know whet

x

of

tha total numbrr

of

employees wea affected or

due back wegeo, md

what

X of the

total

dollar amount wan accounted

for, by l

ch

of

thr

fol-

lowing minimum wa

l

violrtiow:

.iT----p

no payment

for

houra workad, illegal wage deductiona, Fmpro-

pw unl arm charpra. tip

credit, purl

minimum waga.md

othrr

violation*2

(Consult your

file8 and

write

tha parcxntagra in the appropriate #pacea.

Remamber,

if the precise infor-

mation ia difficult

to

providr, approximations

l

ra good rnough.)

[NOTE: MINIMUM

WAGE

VIOLATION6 ONLY. DO NOT INCLUDE. OvkR%&;!

--- --.

I

Income

Peearrd

(Item 17A on

ESA-33)

1

A. X of total no.

I

of

-a in

Minimum Wage Data Field 31

.affrctrd by each violation

accounted for by ,

each violation

pay cmploycce for all houra worked.

(Note:

Include non-payment of wag..

I

end off-the-clock time.)

x g##!&

% ~a~-%~

2. Illg&-Deducfiona: The employer

.-.-

made illegal deductionr for

l

uch

things aa chortagc# or breakage

I

which reduced employee wage below

/

the minimum rate.

2 8$~4q>i % w-aI.> ;

3. Uniforms: The employee made payments

for such things PLI uniform6 purchased

and maintained vhich reduced employee;

wages below the mininum wage rate.

:

4. Tip Credit:

Tio credit provisions

were violated.

I

5.

re Mv: Employees whose ’

straight time rilte of pay, whether

paid hourly rate or on salary, is

leas than the Federal minimum wage

rate.

(Do not include amounts relateb

to hours worked, illegal deduction,

uniform, or tip credit violationa.) ;

6. Other

Violation* other than those

listed above. (Please specify)

TOTAL

100% 100%

68

APPENDIX I

III.

Overtime Violations

A. Monetary Findings:

Breakout of Total

7.

In the next questions.7 h 8. you will be asked to estimate the impact of each of the major

types of overtime violations rather than minimum wage violations (questions 5 6 6).

Since

the procedure for making these estimations is explained in question 5. it is not repeated

here. However, if you have not read and ansvered questions 5 h 6, do so before continuing;

otherwise, you nay nake a mistake in answering the next series of questions.

Consider the total number of employees affected or due back overth wages and the total

dollar amount of the overtime violations monetary findings- (ESA-33. Item 168, Data Fields

38

and 39).

What X of the total number of employees affected.and vbat X of the total dollar

amount~vas accounted for by each of the following overtime violations:

employee misclassi-

fication, additional customary remunerations not considered,

improper premium,and other

violations?

(As in question 5. consult files 6 write percentages in appropriate spacer.

Again,

u.3e approximations if necessary.)

Monetary Finding (Item 16B on ESA-33)

A. % of total no.

1 *.

‘: of total S amount

,

of employees in

in Data Field 39

Overtime Violation

,

Data Field 38

accounted for

)sffected by each violation1

by each violation

1. 48s 1 ification (Part 541):

I

Employees “ere erroneously clas-

sified - employer warn denied

)

exemptiona under Pert 541.

I

% 4W49l i % 4w-21) 1

2. 4dditional Remunere~ The

I

1

regular pay rate used to cslcu- j

i

late overtime pay did not in-

/

elude additional remuneration

!

for rruch things 8s board. lodging, ,

or other facilities customarily i

I

furnished by the employer,

including production bonuses and

cmmnission payments.

i

I

% @&~zr~

% m-27>

3.

-over Pr& The employer

/

1

did not pay the proper premium

for all overtime hour; vorked. !

1

(Do not include amounts covered

by items 1 6 2 above).

% t2t-30).

% 431+x3) I

,

4. Other: Violations other than

those listed above. (Please

specify)

% (M-351

-

% (Ir?“39)

TDTAL

100%

(may total to more

than 100% due to

multiple viola-

tions)

100.”

69

APPENDIX I

III.

Overtime Violations (continued)

9.

hcome Restored:

Breakout of Total

8. This time,

consider the total number of employees affected or due back

pvertiw wages and the

total dollar amount of the Income Restored because of overtime violations (ESA-33, Item 17A,

Data Fields 40 and 41). What % of the total number of employees affected,and what % of the

total dollar amount of income restored.vas accounted for by each of the following m

violetjgaa: employee misclassifications, additional customary remunerations not considered,

improper premiums,and other violations?

(Ae in question 5, consult the case filea and write

percentages in appropriate spaces.

Use approximations when necessary.)

Overtime Violation

1. Hiexlsssification (Pert 541):

Employee8 were erroneously Clan-

sified - employer was denied

exemptions under Part 541.

2. Additional Relarnerstion: The

regular Pay rate used to calcu-

late overtime pay did not in-

clude additional relnrnerstion

for such things as board, lodging,

or other facilities customarily

furnished by the employer,

including production bonuses and

commission paymenta.

3.

Improper Premium: The employer

;iid

not

pay the proper premium

for all overtime hours worked.

(Do not include amounts covered

by items 1 6 2 above).

4. Other:

Violations other than

those listed above. (Pleaee

specify)

Income Restored (Item 17A on ESA-33)

A. X of total no.

8. Xoftotal$~

of- in

in Data Field 41

Data Field 40 accounted for

affected by each violation

by each violation

x @j&@

x ~&~~i!

TOTAL

100%

(may total to more

than 100% due to

wltiple viola-

tions)

100%

IV.

Recordkeeping Violations

9. Did your compliance action/investigation

diacloae evidence that FLSA Section LI

recordkeeping provisions were violated?

(Check one)

w>

1. 17 Yes

(GO TO QUESTION 10)

2. 1-7 No

-

3. L7 Not sure

(CO TO QUESTION 13)

70

10.

TO vhat extent,

if at all, wao this inves-

tigation hampered or made more difficult

because of recordkeeping violation87

(Check one)

f@$.

1. I1 to little or no extent

-

(Co TO QUESTION 12)

2. 1_1 to (Lome extent

3. l-7 to a moderate extent

-

4. l-7 to P great extent

tcoNTINLn!)

-

5. l-7 to a very great extent

I

-

APPENDIX I

11.

To what extent, if et all, would the find-

inge have been increeead if your inveeti-

getion bed

not

been hempsred by recordkeep-

ing violariG? (Check one)

1. /1 tn little or no extent “”

2. /1 to wme extent

3. /7 to a moderate extent

4. 1z_1

t

0 P gre*t ertent

5. 1_1 to * very gre*t extent

6. 1_1 don’t know

12. Did your investigation disclose evidence

that relevant records were foleified or

concealed?

(Check one)

.c@j

-

1. I I Yes

-

2. 17 No

V. Statute of Limitation. and Refueol to Pay

13. Did your investigation of thia firm

disclose any evidence that the employer

was in violation of the ect prior to

the period covered by your investigation7

(Check one)

:@@jx

1. 17 Yea

3.

/‘7 Not sure

4. LT Not applicable (investigation

covered entire period of operation

under current management, etc.)

14. If the employer refused tn pey pert or

all of the back wages found due his em-

ployees, vhat do you conaider to be the

rployer’s primary reamn(s) for refus-

ing to pay?

(Check ell thet apply; if not ewe,

check with the Area Director or Aesistent

Area Director.)

1.

/1

2. 17

3. l-7

-

4. 17

5. 17

6. 17

7.

/1

0. 17

9. 17

Not Applicable - Employer

agreed to pey all back wages

found due.

8;@S

Not covered by act.

(*I

Exempt under the act.

-(if:)

Statute of limitations.

@z:)

Other question of law.

cn9

Questioned facts developed. (743

Outstanding persons1 loan

to employee.

f:?li)

Financiel inability to pay. f:%f

Other reason (pleaee spec-

m

G-7 f

APPENDIX I

15. WU thir ceee recolmnended to be lent to

the Renionel Solicitor’e Office for review

and poerible litigation?

(Check one; if not ewe, check with the

Area Director or Aeeietent Area Director.)

1. /1 Ycr

2. 17 No

VI.

Additionel Commtnte

16. Pleeee uee thie epece

to

provide any @$l

additional information which you be-

lieve should be coneidered by GAO in

enelyring your reeponeee to any of the

above queetionr.

(Be sure

to

indicete

which numbered question you

l

re com-

nenting on.)

NOTE: Pleese review this queetionneire to

make sure you have answered all the quer-

tions that are applicable to this are.

Unless instructed to skip, eech reeponae

space should have en enever, P check, a zero

or NA. Make sure you have atteched e copy

of the ESA-33 to the front of this form.

Then, aend the questionneire to the Area

Director (or in his/her ebsence, the Aeeie-

tent Area Director) for forwarding to GAO.

Thank you.

71

APPENDIX II

ADMINISTRATIVE CONFERENCE OF THE UNITED STATES

2120 L STREET, N.W., SUITE 500

WASHINGTON, D.C. 20037

(202) 254-7020

OFFICE OF

THE CliAIRMAN

k!l?JfORANDUM

TC:

Member

FROM:

Emmett

Agencies

Gavin

Executive Director

April 22, 1977

SD-ZECT:

Enclosed Memorandum and Sample Statute

for

Implementation

of ACUS

Recommendation 72-6 Relating to

the

Use of Civil Money Penalties as

2

S2nction

To aid you in your consideration of Reconmendation 72-6, 1 am enclosing

a sample civil money statute with accompanying explanatory memorandum.

When the Administrative Conference adopted Recommendation 72-6, many

agencies requested us to supply them with such a sample statute.

% believe

that this statute is

2s

useful today as it was then in 1973, especially given

the Supreme Court's

recent

e?proval of the Occupational Safety and Health Act's

civil

money

penalty scheme in Atlas Roofingv.

OSHRC, 45 USLW 4312 (U.S. Supreme

Court, decided March 23. 1977).

72

APPENDIX II

ADMINISTRATIVE CONFERENCE OF THE UNJTED STATES

2120 L STREET, N.W., SUITE 500

WASHINGTON, D.C. 20037

December 27, 1973

OFFICE OF

THE CHAIRMAN

TO

: Member Agencies

FROM

: Antonin Scalia

Chairman

SUBJECT

: Implementation of Recommendation 72-6 Relating to Civil Xoney

Penalttes.

The Administrative Conference of the United States has recommended

that agencies consider the use (or increased use) of civil money penalties

to supplement other civil and criminal sanctions; and that in appropriate

situations authority should be sought to impose such penalties in admini-

strative proceedings rather than in the courts, with the agencies' determi-

nations subject to review on a substantial evidence test, but not subject to

trial de novo or to collateral attack in a collection proceeding.

Recommenda-

tion 7%6,adopted December 14, 1972, 35 Fed. Reg. 19792.

Several agencies have asked the Chairman's Office of the Conference to

formulate a sample statute that would grant authority for administrative

imposition of civil money penalties,

as an aid to those agencies that might

desire to seek such legislation.

The present memorandum and attachment are

an attempt to provide such assistance.

While the suggestions they contain

pertain to implementation of Recommendation 72-6, and have received the atten-

tion of the Conference's Committee on Compliance and Enforcement, they are not

formal recommendations of the Conference itself.

The attached sample statute contains those provisions which we consider

the minimum that are necessary and desirable. It is intended as a useful

point

of

departure for the agencies' own drafting processes, and varjation

or addition will be appropriate in particular situations. Some issues not

alluded to in the statute require special discussion, since they should be

resolved either in the legislation or the implementing regulations but can

be treated so variously that sample language is not feasible.

(1) Preliminary procedures. Before commencing a formal administrative

proceeding to assess a penalty, an agency will normally communicate with the

person involved by means of a written notice calling attention to the apparent

violation and requesting an explanation. See, for example, 2 A.C.U.S. 919-22

for

a description of the preliminary procedures followed by the Federal Avia-

tion Administration and the Federal Communications Commissjon.

Experience demonstrates that most assessments either will not be contested

or will be compromised.

It is therefore important that field evaluations and

low level staff recommendations to impose penalties be given careful revier;

within the agency before an assessment is made.

73

APPENDIX II

If apparent violations arc brought to the attention of the agency by

complaint from private parties,

the extent to which complainants may partici-

pate in later stages

of the proceeding should be described in agency rules.

(2) Content of Notice.

Regulations should specify that each notice

assessing

2 pendlty

must contain:

(1) The statutory section, rule or regulation allegedly

violated:

(2) The material facts constituting the alleged violation;

(3) The penalty assessed and its justification in light

of

the statutory standards in subsection (b) of the statute;

and

(4) The procedural remedies available to the person (e.g.,

right to an.agency hearing) and the steps that must

be taken to obtain them.

(3) Location of the Hearing. Hearings may be held in the area of the

sesidence of the person involved,

at the regional office of the agency, or

at the central office of the agency. The appropriate location of the hearing

depends on a variety of factors, including the nature of the program, the

volume of decisions, the costs involved, and the convenience of parties and

witnesses. Normally, local or regional hearings should be preferred.

(4) Hearing Officers. The hearing officer will usually be an Adminis-

trative Law Judge employed by the agency itself. Administrative Lav Judges

may

be

borrowed from other agencies however,

(5 U.S.C. 5 3344) so that where

several agencies administer similar programs Administrative Law Judges

employed by one agency may be loaned to the others as the need arises. In

one program, penalties are assessed by an independent agency established for

that

purpose, which employs Administrative Law Judges and reviews their

detetminations. See 2 A.C.U.S. 930-31, n.88.

(5) Expedited Procedure.

Where proceedings involve uncontested facts,

agencies should consider a procedure that permits the Administrative Law

Judge to make a determination solely on the basis of written prese%tations.

It should be noted, however, that while such

2

procedure may permit an effi-

cient disposition of cases,

it

may also encourage persons to request a determi-

natlon rather than settling informally, thereby actually increasing the overall

workload of

the

agency.

(6) Review of Initial Decision.

The attached statute provides that

the decision of the Administrative Law Judge will be reviewed by the agency

74

APPENDIX II

in the same -ner as other formal adjudications, subject to the separation

of functions and other provisions of the Administrative Procadure Act.

Rather

than imposing these requirements by reference to section 5.54 of Title 5, the

agency may wish

to

set them forth expressly in the proposed legislation.

In reviewing routine cases the agency may wish to adopt the initial d&-

oions

of

the Administrative Law Judges as its final orders.

If authorized

by

statute, an agency may also provide that such decisions are final subject

only to discretionary review by the agency,

or not subject to agency review

at

all.

(7). Subpoenas.

If

the

agency does not have power to issue subpoenas,

ft may be &-b&a to include ptov~ous authorizing their -Jse in connection

with proceedings relating to civil.money penalties. The Conference is con-

sidering general legislation.relating to subpoenas which, if enacted, would

xender such provisions unnecessary.

(8) Types

of

Penalties. The sample statute assumes that the amount of

the penalty may be set in the agency's discretion up to a specified maximum.

Alternatively the statute may provide for a fixed penalty or may give the

agency a choice between two or more fixed penalties, depending on the serious-

ness of the violation,

(9) Standards for Determination of Penalties. Penalty standards that

may be appropriate in addition to those set forth in subsecrion (b) of the

sample statute can be found at 2 A.C.U.S. 946-47 (comments B-l and B-4). If

the program does not involve a "business" (e.g., noncommercial airplane pilot

licenses), the standards set forth in subsection (b) should be appropriately

revised.

(10) The Reviewing Court.

The specific Court of Appeals with jurisdiction

CO review an order imposing civil money penalties should be designated. This

will usually be either the Court of Appeals for the District of Columbia Circuit

or

the

Court of Appeals for the Circuit: in which the person involved resides.

The Conference considered the suggestion that review be vested in the District

Courts. This was rejected

since Judicial review is

likely

to be sought only

in cases involving matters of principle or establishing significant precedent,

which would probably be appealed to the Court of Appeals in any event.

(11) Pleas of Nolo Contendere. The Conference's study and recomnendatfon

did not address the effect which imposition of a civil money penalty might have

in private litigation relating to'the act or omission in question. In view of

the

possibility of such an effect, however,

the agency might wish to seek

specific statutory authority to accept pleas which permit collection without

admission of wrongdoing.

75

APPENDIX II

(12) Minor Variations from the Sample Statute. There ar5 numerous

minor variations from the enclosed sample statute that will be appropriate.

Thus the words "any person," "this

Act,"

"Administrator," and the like.

should be defined or replaced by the appropriate term.

Different procedures

may be appropriate for an agency which Is part of a department than for multi-

member independent agencies. In certain circumstances, the collection pro-

ceeding set forth in subsection (e) may be supplemented by other collection

techniques. See 2 A.C.U.S. 944-46. Finally, if the agency already has

statutory authority for other formal adjudicatory proceedings it may find

some portions of the sample statute unnecessary.

76

APPENDIX II

Sample Statute for Implementation of ACUS Recommendation 72-6

Relating

to

the Use of Civil Money Penalties as a Sanction

Section

. Civil Honey Penalties.

(a) Assessment of Penalty. Any person who violates any provision of

section

of this Act may be assessed a civil money penalty of not more

than $-

for each violation.

The penalty shall be assessed by the Adminis-

trator:, or his delegate, by written notice.

(b) Standards.

In deten.ining the amount of the penalty the Administrator

shall take into account the gravity of the violation, degree

of

culpability,

any history of prior offenses, ability to pay, size of the business entity,

effect upon ability to continue in busineSs,

and such other matters as justice

nay require.

(s) Hearing. The person assessed shall be afforded an opportunity for

-agency hearing, upon request made within days after issuance of the

notice of assessment.

In such hearing,

all issues shall be determined on

the record pursuant to section 554 of Title 5. The agency determination

shall be made by final order which may be reviewed only as provided in

subsection (d).

If no hearing is requested as herein provided, the assess-

ment shall constitute a final and unappealable order.

(d) Judicial Review.

Any person against whom an order imposing a citiS

money penalty has been entered after agency hearing under this section may

obtain review by the United States Court of Appeals for

by filing a notice of appeal in such court within

days from the date of

such order, and simultaneously sending

a

copy of such notice by registered

or certified mail to the Administrator.

The Administrator shall promptly

certify and file in such court the record upon which the penalty was

77

APPENDIX II

imposed, as provided in section 2112 of Title 28. The findings of tha

Administrator shall be set aside if found to be unsupported by substantial

avidence as provided by section 706(2)(e) of Title 5.

(e) Reference to

the

Attorney General. If any person fails to

pay

an assessment after it has become a final and unappealable order, or after

the Court of Appeals has entered final judgment in favor of

the

agency,

the

Administrator shall refer 'the matter to the Attorney General, who r&all

recover

the

amount assessed by action in the appropriate United States

District Court.

In such action the vaLidity end appropriateness

of

the

final order imposing the penalty shall not be subject to review.

(f) Compromise or Remission.

The Administrator may, In his disare-

tion,

compromise,

modify,

or remit eny

civil

money penalty which is subject

to imposition or has been imposed under this section.

(s) Regulations.

The Administrator shall promulgate

regulations

establishing procedures necessary to implement this section.

(h) Disposition of Penalties.

All penalties collected under authority

of this section shall be covered into the

Treasury

of the United States.

78

APPENDIX III

ADMINISTRATIVE CONFERENCE OF THE UNITED STATES

2120 L STREET, N.W SUITE 500

WASHINGTON, D.C. 20037

(202) 254.7020

March 25, 1981

William J. Anderson

Director

General Government Division

U.S. General Accounting Office

Washington, D.C. 20548

Dear Mr. Anderson:

Chairman Robertson has asked me to respond to your letter of February 11

requesting our comments on the draft of your proposed report to the Congress entitled

“Legislative and Administrative Changes Needed to Deter Recordkeeping, Minimum

Wage and Overtime Violations and Prevent Employers From Retaining Sack Wages Owed

to Employees.” I apologize for the tardiness of our comments.

The report examines the Department of Labor’s program to enforce the provisions

of the Fair

Labor

Standards Act of 1938 (FLSA) which sets standards for recordkeeping,

minimum wage, overtime pay and other protections for about 60 million workers

throughout the United States. The Act’s enforcement provisions are complicated. Under

section 16(c) of the Act the Secretary of Labor may bring a civil suit on behalf of

aggrieved employees, against an employer to recover the amount of unpaid wages plus an

equal amount as liquidated damages.

injunctive relief against an employer

Under section 17, the Secretary may seek

to restrain future violations, including

recordkeeping violations.

Aggrieved employees may sue in their own right for unpaid

wages and liquidated damages, but such private suits may be maintained only in

situations where the Secretary has not filed suit. Finally, section 16(a) provides for

criminal penalties for willful violations of the Act’s provisions.

The draft report’s general conclusion is that this statutory scheme has not proved

satisfactory for effective enforcement of the Act. The report finds that violations of

the Act’s recordkeeping provisions are extensive and largely unpunished since there is no

statutory sanction for past recordkeeping violations short of the rarely used criminal

penalty for willful violations. The lack of a credible deterrent leads to failure to

maintain records needed to prosecute back pay/liquidated damage cases in court. As for

substantive violations of FLSA, the report finds that criminal penalties for willful

violation, again, are rarely sought and that most civil actions filed under section 16(c) do

not obtain liquidated damages since 95% of such suits are settled prior to trial. As for

the back pay sought in such actions, the study indicates that overall, the Department is

able to obtain from employers agreements to pay about 60% of the amounts sought.

To improve enforcement, the draft report recommends that a civil money penalty

sanction be substituted for the liquidated damages sanction, and that such civil money

penalties be imposed in a formal administrative hearing process within the Department

of Labor, with review on the record by the courts of anneals.

GAO note:

Page references in this appendix may not correspond to

page numbers in the final report.

79

APPENDIX 121

APPENDIX III

Comments

The Administrative Conference has never studied the activities of the Department

of Labor under the FLSA, so we are not in a position to evaluate

the

findings of the draft

report that are particular to this program.

We have, however, devoted considerable

attention

to

the topic of civil money

penalty

procedures, and we find the reoort’s

recommendations interesting, important and quite persuasive. As the report points out,

members of your study team consulted us about

our

work in this area and we are oleased

that your conclusions mirror, to a large degree,

the

conclusions we

have

reached in our

more general recommendations pertaining to

the use

of civil oenalties. Our 1972 studv,

performed by Professor Harvey Goldschmid, diagnosed manv of the same oroblems

with

agency enforcement

schemes

as were found in your study of the FLSA.

And the

solution

recommended by the Administrative Conference in our Pecommendation 7%fi

(Attachment A)

has

largely been adopted by your report.

Paragraph A(2) of our recommendation states

that

civil money penalties sre often

particularly necessary to supplement more potent remedies already availahle to

an

agency whose use may prove unduly

harsh

or infeasible. Under FLSA, criminal sanctions

are available, but are rarely used. Such sanctions are undoubtedly necessarv and useful

fcr egregious cases, but a

more

flexible, less harsh sanction must be available.

In

1974

Congress sought to provide this alternative remedy by amending

the

Act to add a

provision for liquidated damages.

This, in theory, is similar to a civil money penalty

provision (a doubling of the back pay award), but in practice apparently, very few such

awards are made. Hence your recommendation for a further change to an administrative

imposition system of civil money penalties.

In paragraph B of our 1972 recommendation the Conference ureed agencies to

consider asking Congress for authority to impose civil penalties in a formal adjudicative

proceeding within the agency, with judicial review in the court of appeals on the basis of

the substantial evidence test of 5 U.S.C. 706(e) (as opposed to de novo judicial review in

district court).

--

We then listed 6 factors

whose

presence “tends to commend

such

a

course11 with respect to a particular program:

These bear

close analysis:

(a)

A large volume of cases likely to be processed annually.

Your study indicates that the Uepartment’s investigations result in unwards of

30,000 FLSA violation

cases

annually and that there is a large hacklorz of comolaints to

be investigated. Furthermore in

the

year ending June 1979, a total

of 1,175 %‘3A cases

were “terminatedv

by

federal district courts (though only 52 cases reached trial). This is

obviously a higl+volume program, and even though more than 90% of the eases do not

reach the federal courts, over 1,000 do. A movement to administrative imposition

would,

remove a large bloc of cases from the federal courts, and would also enhance the

attention given to meritorious cases that now are among the 96% that apoarently are

settled due to the difficulties in bringing suit in

the

federal district court. Under an

agency imposition system of civil money penalties, settlements would likely continue to

predominate, but

the

number of cases set for hearing (before administrative law judges)

would likely increase and the rate of recovery

both

in settlement and after decision,

would likely be improved. Non-meritorious cases could be challenged equally well, since

employers would have a right to a fair hearing before the ALJ, review by the agency and

then judicial review.

(b)

The availability to the agency of more p

otent sanctions with the resulting

likelihood

that civil penalties will

be

used to moderate an otherwise too

harsh

response.

80

APPENDIX III

If the Department of Labor were given administrative imposition authority, it

could then use civil penalties instead of the inflexible, more potent, and stigmatizing

criminal penalty. At present, the criminal sanction is rarely used, and the liquidated

damage provision, which also requires district court trials, is apparently an imprnctical

alternative. Indeed, as was pointed out in your study, criminal cases receive precedence

over such civil cases on federal court dockets. Thus court-assessed civil monev oenalties

may paradoxically be more cumbersome than criminal cases. This might lead to an undue

emphasis on the use or threatened use of criminal penalties, when lesser, more flexible

penalties would be more appropriate.

(cl

The importance to the enforcement scheme of speedy adjudications.

Your study found that for the year ending in June 1979, the median time to

“conclude legal action”

for

all 52 cases brought to trial by the Department of Labor was

28 months as compared to 13 months for other civil cases and as cornoared to a much

shorter time for eases heard by Department of Labor ALJs. Although your statistics

might be more clearly presented, it is evident that the low priority assigned to FLSA

cases within the federal district courts creates greater delays and inhibitions that would

not be present if the cases were heard by ALJs (even if some fraction of initial decisions

required review by the Secretary cr delegated review board).

It also seems clear that speedy adjudications are important to the enforcement

scheme, since in an inflationary time it is to the violator% benefit to delay payment

(especially since interest is rarely recovered in a settlement or even in a judgment).

Such incentive to delay can only contribute to a general disrespect for the entire

enforcement program. If the Department were given imposition authority, it could

manage its caseload to minimize this problem.

(d)

The need for specialized knowledge and agency expertise in the resolution of

disputed issues.

While this study &es not discuss (except in the case studies) the nature of the

issues disputed in these cases, we would speculate that the issues recurring under the

43-year old Act tend to be within the specialized knowledge of the Department% Wage

and Hour Division, and Office of the Solicitor.

Furthermore, assignment of hearings to

Department of Labor ALJs, who now conduct hearinzs in FLSA child labor cases, FLSA

rulemaking proceedings and Service Contract Act enforcement cases, among others,

would lead to more informed initial decisions than would occur under the present system

where hundreds of district court judzes might each hear one or two cases a year. The

“agency expertise” rationale is not one to be used unthinkinplv, but in this situation

where the expert investigators in the Wage and Hour Division settle 99% of the cases

already, and an agency adjudication system familiar with similar issues is in place,it

seems wasteful to increase the number of trials in the district courts.

(e)

The relative rarity of issues of law (e.g. statutory interpretation) which require

IudlciaI resolution.

The report sheds little light on this factor. Under the agency imposition system,

one would expect that issues of law will continue to be raised in appeals of the agency’s

final decisions to the courts of appeals. If cases frequently turn on legal issues (which we

have no reason to believe), this would argue against having the trials in the agency; since

the agency could not make authoritative decisions on the legal issues, the flow of appeals

to the courts would not abate. While we suggest that vour study address this point in

81

APPENDIX III

more detail, we would speculate that whatever legal questions might arise in the

course

of civil penalty proceedings could probably be decided authoritatively in apoeals to

the

courts of appeals, and that most cases would turn on fact-finding

that

agency ALJs

should be competent to perform.

(fl

The importance of greater consistency of outcome (particularly as to

the

penalties

imposed) which could result from agency, as opposed to district court,

adjudications.

Given the large volume of complaints (which would increase if recordkeeping

violations were made subject to civil penalties),

the

nationwide

scale

of the

orogram, and

the relatively small amounts involved per violation, it would seem quite important to

have consistent decisional standards and penaltv amount standards in enforcine this

program. A system of administrative imposition should certainly lead to more

consistency

than

one that depends on decisions bv 95 district courts throuehout the

nation.

Your &aft report does not discuss the specifics of the recommended statutory

amendment (other

than

citing our draft model statute). In general, as we stated in our

later Recommendation 79-3, “A penalty intended to deter or influence economic behavior

should, at a minimum, be designed to remove

the

economic benefit of

the

illegal activity,

taking into account the documented benefit and the likelihood of escaping detection.”

Thus, sny statutory civil money penalty provision ought to contain penalty maximums

sufficiently large to deter future violations, but not so unreasonable as to permit

“blackmail” initial assessments. Perhaps, as in the tax code or customs code, and like

the

concept of liquidated damages, the statutory penalty amount

ought to

be explicitly tied

to the amount of wages lost (plus interest). Or

the

statute could contain some maximum

amount per violation, which would enable

the

Department to set standard amounts for

particular types of violations. This would insure consistency of application and a more

flexible fine-tuning of the system to provide maximum fairness and deterrence. But our

basic point is that in a program like this one, consistency clearly would be facilitated bv

an administrative imposition system,

k)

The likelihood that an agency (or a group of agencies in combination) will establish

an imparttal forum in

which

cases can be efficiently and fatrly decided.

This factor boils down to

the

question of whether the Department of Labor can

provide a fair, due process hearing to those charged with violations of

the

FLSA. As we

mentioned above, the Department currently emplovs ALJs to preside over a large number

of benefit claims cases and cases arising under other

efrforcement orograms, using the

hearing procedures of

the

Administrative Procedure Act.

Furthermore Congress has, in recent vears, used

the

administrative imposition

model more frequently

when

enacting civil penalty statutes. In 1972

when

Professor

Goldshmid surveyed the field, only a few statutes provided for agency imposition of civil

money penalties without de novo court review, most notabl

%

the OSH Act. But since

1972 at least 13 statutes haveprovided for agency imposition.

1

Appeals from initial decisions of ALJs under these programs do not, however,

follow any uniform procedure.

The Benefits Review Roard hears appeals in

longshoremen’s and black lung benefits cases, initial decisions in some programs are final

agency action (e.g., Farm Labor Contractor Registration Act, FLSA child labor cases),

and some reviews are conducted by the head of the Administration involved.

82

APPENDIX III

more detail, we would speculate that whatever legal questions might arise in the course

of

civil penalty proceedings could probably be decided authoritatively in apoeals to

the

courts

of

appeals, and that most cases would turn on fact-finding that agency ALJs

should be competent to perform.

(D

The importance of greater consistency of outcome (particularly as to the penalties

imposed) which could result from agency, as opposed to district court,

adjudications.

Given the large volume of complaints (which would increase if recordkeeoing

violations were made subject to civil penalties),

the

nationwide scale of the oroqram, and

the relatively small amounts involved per violation,

it

would seem quite important to

have consistent decisional standards and penalty amount standards in enforcing this

program. A system of administrative imposition

should

certainly lead to more

consistency

than

one that depends on decisions bv 95 district courts throughout

the

nation.

Your &aft report does not discuss the specifics of the recommended statutorv

amendment (other than citing our draft model statute). In general, as we stated in our

later Recommendation 79-3, “A penalty intended to deter

a

influence economic behavia

should, at a minimum, be designed to remove the economic benefit of the illegal activity,

taking into account the documented benefit and

the

likelihood of escaping detection.”

Thus, any statutory civiI money penalty provision ought to contain penalty maximums

sufficiently large to deter future violations, but not so unreasonable as to permit

l’blackmail” initial assessments. Perhaps, as in

the

tax code

a

customs code, and like ‘the

concept of liquidated damages, the statutory penalty amount ought to be explicitly tied

to the amount of wages lost (plus interest). Or the statute could contain some maximum

amount per violation, which would enable the Department to set standard amounts for

particular types of violations. This would insure consistency of application and a

more

flexible fine-tuning of the system to provide maximum fairness and deterrence. Rut our

basic point is that in a program like

this one,

consistency clearly would be facilitated bv

an administrative imposition system.

(Ed

The likelihood that an agency (a a group of agencies in combination) will establish

an impartial faum in which cases can be efficiently and fairly decid

e.

d

This factor bolls down to the question of whether the Department of L&or can

provide a fair, due process hearing to those

charaed with

violations of

the FTSA. As we

mentioned above, the Department currently employs ALJs to preside over a large number

of benefit claims cases and cases arising under other

effacement Drograms, using the

hearing procedures of the Administrative Procedure Act.

Furthermae Congress has, in recent vears, used the administrative imposition

model more frequently when enacting civil penalty statutes. In 1972

when

Professor

Goldshmid surveyed the field, only a few statutes provided fa agency imposition of civil

money penalties without de novo court review,

most

notabl

the OSH Act. Rut since

--

1972 at least 13 statutes have provided fa agency

I

imposition.

1

Appeals from initial decisions

of

ALJs under these programs do not, however,

follow any uniform procedure. The Benefits Review Roard hears appeals in

longshoremen’s and black lung benefits cases, initial decisions in some programs are final

agency action (e.g., Farm Labor Contractor Registration Act, FLSA child laba cases),

and some reviews are conducted by the head of the Administration involved.

83

APPENDIX III

On occasion, particularly in controversial enforcement programs, complaints are

heard that it is unfair to litigants to deprive them of a right to a trial by jury in the

federal district court and that a hearing before an agency ALJ, even with ouportunitv for

agency review and judicial review,

is unfair since

the agency

also

houses the

investigators and prosecutors. Congress responded to some of these concerns in the

OSHA program and the similar mine safety program by establishing specialized

independent review agencies staffed with a corps of ALJs to administer the imposition

of penalties sought by

the

Department of Labor.

The

OSHA enforcement

scheme has

been

upheld by the Supreme Court in Atlas Roofing Co. v. nSRTiC 430 U.S. 442 fl977).

Establishment of such specialized

review

agencies, however, can create a whole new set

of problems and should probably be reserved for the most controversial and policy-laden

enforcement programs.

We do not suggest

such

a course here, esoeciallv given

the

r.abor

Department% well-established hearing

process

for other types of cases under FLSA and

similar programs.

Our conclusion, after reviewing your findings in the context of the factors listed

in our Recommendation 72-6, is that your proposal that the FLSA be amended to

substitute an administrative civil money penalty system for the current court-imposed

liquidated damage

system

is a sound one. I should add that the basic thrust of our 1972

recommendation was reaffirmed in 1979 in Recommendation 79-3 (Attachment B) which

also urged agencies to better articulate their penalty standards and utilize fair informal

procedures for initially assessing and settling of cases prior to trial.

Additional comments

1. The report’s title

may

be too much for some to swallow. Why not, “Legislative

and Administrative Changes Needed to Improve Fair Labor Standards Act

Enforcement”?

2. The current lack of adequate sanctions for recordkeeping violations seems to be

dragging down the whole enforcement effort. This area, especiallv, seems to

require a flexible penalty system.

3. The organization of Chapters 2 and 3 of

the report seem

needlessly duplicative,

since you have to make the argument for civil penalties and for agencv imoosition

twice.

Why not establish the need for civil penalties in

each

area and then have a

separate chapter discussing the need for administrative imposition?

2

See the following statutory provisions in the 1976 Supplement of the U.S. Code: 7

U.S.C. S9 [CFTC, commodities tradid; 7 U.S.C. 9193(b), 213(b) [USDA, packers and

stockyardsl; 7 U.S.C. S2048(b) [Labor, farm labor contractors); 15 U.S.C. S2615 [EPA,

toxic substances controlJ; 16 U.S.C. S1540a [Commerce and Interior, endangered species];

16 U.S.C. S1658 [Commerce, fishery conservationI; 29 U.S.C. S216(e) [Labor, child labor).

1977 Supplement:

30

u.s.c.A.

Sal9 [FMSHRC, mine safety and healthl; 30

U.S.C.A.

S1268 [Interior, surface mining and reclamatiortl; 42 U.S.C.A. 97420 IFPA, clean air).

1978 Supplement:

procedure)].

47 U.S.C.A. S503(bK3KA) [FCC, communications (optional

See also: P.L. 95-630 SSlOl, 102, 103, 106(a), 106(c), 107(e)(l)-(4), 106

[banking agencies] and P.L. 96-25 SlO [FMCI.

3

The Occupational Safety and Health Review Commission and

the

Federal Mine

Safety and Health Review Commission.

84

APPENDIX III

4.

You recommend elimination of the liquidated damage provision of the Act. This

seems harmless, since few awards are made.

Rut do vou intend

that emplovees

should continue to receive back pay awards

? Would anv of

the

civil oenalty

monev

be given

to the employees? Would emplovees retain the right to file suits on their

own behalf? [Perhaps liquidated damages should be retained in emolovee suits.1

5. Your caseload table on page 8 indicates that there were 75,153 Fl,SA

investigations in 1979, that there were 35,251 establishments in violation of

minimum wage provisions and 29,623 establishments in violation of overtime

provisions.

Does

this mean that multiple violations were found in most

investigations? It indicates a high rate of violations per investigation. Vow do

these numbers relate to the figure of 30,000 FLSA cases annuallv (p. lOal?

On pages 22 and 25 your caseload figures are confusing. What does “to

conclude

legal action” mean? With respect to the Labor ALJ cases, you seem to be lumping

all categories of cases to come up with a figure of six months for the hearing

stage of the case. This requires greater explanation. Also, the time taken on

appeal to the agency head or review board should

be

added.

6.

Your statement on page 25 that DOL ALJs would give FLSA cases high priority,

leads me to ask whether the Department can obtain enough ALJs to hear these

cases. More information is needed on the size and productivity of

the

DOL ALJ

corps.

7.

It should be noted that the recordkeeping problems, discussed et pace 54, would

cause difficulties in administrative hearings as well.

Solving

these

problems

seems crucial to any overall solution. Similarly, delays caused by the lack of

processing deadlines as compared to other DOL cases (p.55) would not he

ameliaated by

the

proposed reform.

8.

We have no comment on Chapter 4, dealing with a modification of the statute of

limitations and other investigative and collection practices.

9. Some minor corrections ought to

be

made in your references to

the

Administrative

Conference.

On page 9 you make reference to

“the Chief

Investizatorfl of

the

Conference. There is no such official.

We suggest that the sentence bezin, ‘IWe

also discussed with officials of

the

Office of

the

Chairman of the Administrative

Conference. . . .”

In

the

fifth line of

the

footnote on page 9 we sugzest

substituting the number “55” for

the

word “half.”

On page 52, the footnote citation to Goldschmid should be followed with the

citation, “2 Recommendations and Reports of ACUS 896.”

Finally, we appreciate

the

inclusion of our model civil penalty statute as Appendix

85

9PPENDIX III APPENDIX III

II. May we also suggest that the enclosed Recommendation 72-6 be included as well?

In conclusion, we appreciate the opportunity you have given us to consult with

your researchers during the study and this additional opportunity to comment. If we can

be of any further assistance, please do not hesitate to let us know.

Sincerely yours,

Jeffrey S. Lubbers

Senior Staff Attorney

Attachments: ACUS Recommendation 72-6. 76-3

cc: Reuben Robertson, Chairman

APPENDIX III APPENDIX III

~3oSX-r clvll Mooey Pm&la ” .

8OOdlOO(RSCO

ameadaho No. 734).

w Federal admltlbwve agmdea

enforce many atulltory provlaloM 8nd

adrnmeave regul8uolM

for

vbla-

tlon of which fixed or vuiable dvll

money perultl~ lluy be lmpased. ’

~i~~;9Tl. seven executive

de-

U&teen lndependent

yenciea mlh3cted well ln excess of 110

mllllon, la over 15300 ases: all evi-

&me points to a doubling or tripling

dollar ougnltude and mbstulthllY ill-

txedng as&d within the next few

ycM.-

(b) Imxeued use of dvll money pen-

&lea la an

lmmrtant

and srlutan-

trend. When civil money penaltie are

not 8vshble. rocncY Bra

often voice fmstmtIon

at hatInt to

render harsh

“all-or-nothing decl-

slons” (e.g., ln license revoc8tlon pro-

mdingl). sometlmea advemely rifect-

lng innocent third partlea. in cnse.s In

which enforcem~?t purpoaea could

better

be setwd by a more precixe

memurement of

culpdllty

and a

more flexible rmponae. In

many

areas

of Wreased

mncem

kg.. health and

safety. the environment, mnsumer

protection) wallsbURy of civil money

penaltie

might signifiaantly enhance

an agmcy’r ablllty to Lchieve ita statu-

brp goals.

(cl In developing s range of aanc-

tiom ulequ8te to meet enforoement

need8, Congmas ~43 8gmdw muat

often

detennlne whether 8 “almlnal

fine”

or a “clvll money

pemlty.”

or

both, ishould be applied to a given rep-

uhtory offense. The choke they make

h8shrgeconmquencea.~pen-

altlee expoee an offender to the dia-

mace and disabffltlea amociated with

“convlcUonx”: they require special

pre

cadural and other protectlonr: and

they an not be lmpcmd stlmlhh-

t&My. These factma make it spproprt-

ate to conal&w whether almlnal aauc-

Uotu should

not

be suppletnented or

=P-bpd~moMp~ue?.

(d) Under mat money penalty at&-

u>* g~thbumtlxlfttt

aovo ad&dlaUon lo federal dbtrlqt

court. whether or not an administra-

tive procesding has been held pmvl-

ously. The already critIcal overburden-

ing of the courts argues against flmd-

lng them with mntroversies of this

type. which generdly have small me-

cedenthl slgrdfimnee.

cc) Became of such factors aa consid-

erstion6 of equity. mltlgatlng circum-

atums, and the substantial time.

effort and expertise such lititration

often require8 in caees usually involv-

hg relaUvely amll awna (an average

of lea th8n t1.000 per case). agencks

settle well over 90 percent of their

cam by me8na of mmpromlse. remis-

sion. or mitigation. Settlements are

not wrong per se, but the quality of

the settlements under the

present

ryd.em Is a matter of concern. Regula-

tory needs are sometime3 8acrifIced

for what is mllectible. On the other

hand, those accused rometimed charge

that they are being denied procedural

protectlo~ and an impartirl forum

and that they are often forced to ac-

qule6ce In unfair settlements because

of the lack of a prompt and emnomi-

cal procedure for fudlcial resolution:

Moreover, several

agency

admhlstra-

tors warn that some of the worst of-

fendem, who will not

settle

and

cannot

feasibly be brought to trial. are exap-

lng penalties altogether.

Thl6 remmmendatlon is intended TV

meet the problems posed above.

A. Deeimbutty o/ CYvtl Money Penattics OI

0. sanctton. 1. Federal admlnWmt1ve Well-

da dtould emlutc the benefIta ahtcl~ may

be derlved

from the w (or lncmued use) of

dvU money luxuries as . wctlon. Such

PSMIU~ should not be sdoWed ” . mean8

Of mtpplwltbIg or

curt&Uiother private or

puhllcdvu mmedle&

3. clvu money pmmlun am often pwtlcu-

lwly

valuable. and ranemllr should be

#nwht, to supplemmt those mom potent

umtlwls already wall&k to sn ~ency-

such u llcenr susPawloa or mvoauon-

whar use may provez (a)

Undui~

hmah for

mlathely minor offenses, or (b)

infculble

hecume. for example. the offender

provlda

rcrvlar which QMut be d&upted wlthout

5erloue bsrm to the public.

3.

E8ch federal asency ahlch admlnlaten

laws that pmvtde for CrlmlMi

SUlCtlOtW

should review Ite emerimce aith such sane-

tlons 10 determIne whether

l

thorizing civil

money ~nrltla u Mother or substltute

sanction would he in the public Interest.

87

APPENDIX III

litlo l-Go~ral Provirionr

Such guthority for ctvll money

pcnaltks

would be ~artlcululy ~~ro~rlate. and gen-

cnlly should be aought. where offendbag be-

hwlor Ir not of g type radlly recogninDlc

Y 1lkdY to

wunnt lmPrlwnmtnt.

B. A&udfwecrt&m ol ctvil Money Palattv

Came

in an

Adminittmtioe

Impotttion

s&em 1. In tom0 cl-

It

It dtdr-

8blc u, wmmlt the lmpaitlon of dvll

mot%eY Dtn8lt1a to 8gmda themto1va.

wlthout sublaMIng uency detew

to de now Judldd rwlew. AcemItt rhotid

conelder 8ekJn8 Co- to

8rwt

than

tueh aahorlty.’

hcth whaM

Prtemwttmd8tocommcnd

tudt8counewIthraPtctto8puu~

pen&y wovi8ion include the follorlnr:

(8) A hrge volume Of clwr lJkClY to be

Pmcaad 8tuuullY:

(b) The waUabUJty Co the agency of more

potent uactlonr 84th the raultbw lkdl-

hood th8t civil money PcrultJa Will be used

tom~demteanotherrlctoohurhre

tVOWt:

CC) The lmportulce to the wforwmmt

tdmmt

of ueedr edmdlw

Cd) The need for lpcelallged knowledge

U&I 8@?ncy e~ptrt& in the resolution of

dbPuttd leeus

CC) The rthuve nrlty of issue, Of lsw

kg.. rtrtutory hLerPrttuloa) whkh re

Pulrt JUdkhl ruo1utJon:

(I) The lmPortMct Of Erater csnaaency

Of outtom? (

DtRkUldYUtothtDtIldtltS

kWoetd) whkh could result from agency. u

OPPmod to dbtact court, 8dmdlc8uo~ wd

(I) The lJktuhood ul8t M agency tar ‘

rroup0fuencieglncslabiri@&n~otll~b

uIh8nim~foNmhwhI&atawn

be effldantly and fairly dedded.

Co?itidtratio~ such ” those set forth

0bove should be wekhed huvlly in favor of

8dmhWnUve imw&km when

the

usual

moaatw wrulty for an offerme

or

a r&t-

ed eerIea of off- would bt relatwely

EMll.UIdshoUldnomUb’bcdedrlperhm

the

PtMltY

Would be ualJkeJy M exceed

y~.$owm?& the btlltffti to bt dtriwd

-wdtht-

tntlvt hpadtlon thouof. rhould also be

conMend when Lhc g+naltla may be rela-

u* lust.

~~8ddWZUi~blWO8iUOlltY8ttttl

thouldPmvids

(8) mr uld

8adauonontbtnwrd

Punuvlttothe~~Pmwdlue

Act. 5 uac. 008-W c1n0,. 8t the option Of

~8lltcedofftadtrortllt~

muowthtsped8l

-wdtt8tut

Of the utllttd stata Tax court. the nuan-

8k for 8dmuuntlvt lmpotlum m&y hwe

oclll umktd WPllwbulttr to CM1 money

Pefulua 8dmbudertd by

the

Int.8rMl Rtr-

enuc strviw.

tlmt:

te, Tlmf If the person on whom the LEnti-

ty ia ~mpcrtd aweds. M mxcmy’t deAdon

will be rnlewei In unltd state cou- of

Appult

under

the subatantlil CVtdcneC rule

in Nwrdwct rtth

the

Addtwnt~V~ R@

wdurt Act. 0 U.S.C. ?oo&X

Cd) Rut Imutt rrmdt IN by muon Of (b)

rbovO d it8tm whkh WC= ni8a or

might

hNt

bhen dttd. h 8 ~macdm for

mirht hgvt --.. .--e----m

rwkwundertc)0b0vcmcrYMtbclrlred~

DtbtnlGdu

.-

8 defense to. rult by the Unltcd SUta for

* &..a-.

st8ttt

for

collect colloct&n of the pcrulty.

&mdtt should sdopt rule8 of

~Ntlec

which wilJ

amble

Jur+ lnex~rmlve and

speedy dottrmbutl0~. They rhould prOtide

prwtdurte

for

ttttltment by mtam of I-+

m&don. mitU8tion or cauwmmlu.

88

APPENDIX III

Q 306.794

Agency Asaasmcnt

sod Mitige-

t&e d Clril Money Peeehles (Recem-

mandatioo No. 79-3).

(a) The civil money pen&y has

become one OK the most widely used

techniwws in the enforcement pro-

grams of federal admidatrative agem

ciu. Most regulatory offenses punish-

able by civil penalties Involve adverse

social cmsequences of private business

activity. The motivational impact of

these penalties depends In large part

on the certainty of imposition and uni-

formity of amount. although some

weea msy require lndfvfdualked tailor-

lng to the cWum&ance of the offend-

er so as to remove the economic bene-

fit

of the illegal conduct. Other civil

petulties may also .serve a secondary

function of

compensating society for

the harm caused by unlawful conduct.

tb) Recommendation 72-g urged

that the advantages of civil money

penaltics would be best achieved

through an %dministtative imposftion

system” in which the agency would be

empowered to adjudicate the violation

and impose the penalty after a trial-

type hearing, subject to “substantial

evidence” Judicial review. Such a

system. it was stated. would avoid the

delays, high costs. and Jurisdictional

fictions inherent in the traditional and

most common system of imposing civil

money penalties by a court in a civil

action initiated on behalf of the

agency by the Department of Justice.

(c) Since adoption of that Recom-

‘mendation

in 19’72,

the use of civil

money

penalties

in genexal and of ad-

ministratlvely imposed civil money

penalties in particular has IMmaaed

simiflcantl~. and the constltutionahty

and deshability of administratively

impoeed penalties has been widely rec-

0-

Cd) Experience has shown th8t agen-

cies play a crucial mle and exercise

broad discretion in the admfnistration

of &II penalty programs. whether or

not the statute in questIon

authorime

an administnttive Imposition system

8 303.79-3

Agencies possessing such authority

have found it efficient to try to resolve

cases before the formal hearing stage.

through settlement and negotiation.

Those agencies

not

possessing admin-

istrative imposition authority operate

under a wide variety of statutes: some

make no express reference to an

agency role in the penalty process.

while others confer on the Dpency

only a power to **assess” or to “miti-

gate” penalties, thereby expressly or

impllcltly resenUg to the reepondent

the right to seek a subsequent de nova

fact-finding hearing by the court in a

collectlon p

rocedng. Agencies typi-

cally exercise their statutory authori-

ty to “mitigate” in resolving contested

penalty asmmueiltd prior to the hiti-

ation of formal enforcement action. In

theee recommendations the term

“mitigation” refers to any informal

pmcess of resolving a contested initial

pen&y

assessment.

Cc)

Whatever the

statutory frame-

work.

the enforcing agency typically

makes the

initial.

assessment. and

pro-

vides a process for mitigation of the

penalty. Thus. both where there exists

administratIve imposition authority

and where such authority does not

exist. agencies and respondents cus-

tomarily utillae these initial assess-

ment and mitigation

pmceaaes

to re-

solve the great malority

of civil

money

penalty cases without reaching the

stage of formal

admhbtntlve adjudi-

atlon or court collection pmceeding.

(f)

These hdonnal pmceaaes for the

initiation and termination

of

civil

pen-

alty prcednm represent an area of

previously unstudied and largely dis-

cretionary agency action.

Appmpri8te

standards and structures for the

exer-

cise of

such discretion

are

needed to

improve the consistency, efficiency

and openness

of

agency assessment

and mitigation processa

(g) The recommendations that

follow focus orx ( 1) The nfzg;ogc;

da to develop smndards

ing

penalty

amountd. (2) 4ency

prom-

dures

for

initially sesessing penalties.

(3) agency mitigation procedures. and

(4) the use by agencies of evtdentiary

hearings to impoee civil penalties

where such a procedure. though not

required by statute, might result in a

limited scope

of

Judicial review.

89

APPENDIX III

9 305.79-3

Title 1-4.n.mihvisiom

a. Inftfat A-

t o/PenalLfm

1. &en&a should Sh’e LdMUSte rritt.W

atnount of. the Den&y

UsawNtlt.

2 Agenda rhovld not mechuUcUl9 Uem

weable dvll money ~ermltia at the Itrtu-

mmmrlty.

3.Theueaerthede6wetowhkhM

- decNtulku IU penalty eaemneat

mJthorlty. the more It should unIctun the

entinreviewby~

offldai would tmteriatly llnpJr the effec-

Uwnaa of the miorwment m

mcedumsrhouldbe#omrN6

by the followin& ~rbWaM

1.&mdashouldurwIdsltlmrapoadmt

riUlartchttorell19awrItlluteaPenalt9

A. standordc /or LMennfnanm of prnol:v

Amount

1. Agenda enforcbu nxulawry stwM4s.

v(oktlon of which Ia DunJahable by 8 dvll

money penalty. should eatsbUsh s&nduda

ior

deUlWb-dn8 SDDmD*tt

Derultv

amounta for lndlvldul - In atrbkhhU

standards. ucncla should wedis the fat-

tontabebedersdbldeterminlnc~e~P

DrODtdW=

PNdtY

.ISlO=t iZl l m

case. To the extent ~rwtlable. uenda

should mwdfy the relatlw w&hta to be at-

tached ta lndkfdrul factan In the wrulty

ulculatloa md lneowor8t.e such factam

into formulu for’ detsrmlnllll Denat.

amountd or into fIxed rhcdula Of PdU

fade penuty amountr for the mad common

t9ues

or ut.worka of ti0l8t1oa A

DeMltr

intended

ta deter or InO- wo&nnk be-

hwtor

shwld.

at

L mbumuta be dakNd to

remwe the economk

beNfit Of

tnt llleml

actitity.

IdIN Into auount the dNutNn~

ed kneflt and the likelihood of au~lne de-

tection. PtNlty StMduds should. la ada-

tloa apeeify whether md to WMt exIcat

the ucney will cmdder othff f&Son such

u comwmuUon for harm cawed by the vlo-

ution or the ImuNt Of the vumlt9 on the

ViOhtofS fllutlda Nndluoa In order to

reduce the cat of the

penalty

cab&don

tmcas and kcreus the

medktabUIt9 of

-ihe aNtloa dmRlKYlnr usumotloM about

the benefit rdked from or the hum

ad by fflnrl

actbit

- be UtIlkd.

sUnW. Suih evsllutiolu should bi b&i

won the resulta

of

ComDllxNe surww aIs6

IntellId rudlu Of uutcy usemment uxl

mltlgstion de&ION LI Well u data on the

nature and

frequcncj’

d PlolMo~ routinely

genersted by the uency’r eaforcemeat pm

mua

3. Amada should make rueh stuuUd#

*noan to the DUb& to the Pat”t

C-t

feulble thmurh rulmUha or pub-

Of poucy sra-tr such aa aDIlrowh *

emeddy

duirable where sdJ-

that twoduN WIltten deddoN ue rue.

4. Amndts should collect aud index than

wrtttendedsioMtNdeblrapoNetontitl-

ytti4luterneruencY

-t

deddoNwsusble

tothepublicexcwttatheextenttbatthelr

dlsclcmre U moblbltad by law. Wbenmer s

moondent dta . ewvious wrttten dad&n

Mscmcedaltfortheuenc9tofollortu

the rauondcnt’s cue. the - atmuld

&her do W. duinruirh uIetvocueaor

WDhbl Itd rasoN for not followilu the

twior decision.

eldm.

3.A3encyataffshaUdnotmftueamuon-

sbk wausst to ducua a NNlty clmh

owll9.ButMlnfowulNnfereNe~not

mitlsation rewatr entertained only if in

writt4?n form.

90

APPENDIX IV

U.S. Department of Justice

MAR 13 1981

Mr. William

J.

Anderson

Director

General Government Division

United States General Accounting Office

Washington, D.C. 20548

Dear Mr. Anderson:

This letter is in response to your request to the Attorney General for

the comments of the Department of

Justice

(Department) on your draft

report entitled "Legislative and Administrative Changes Needed to Deter

Recordkeeping, Minimum Wage, and Overtime Violations and Prevent Employers

from Retaining Back Wages Owed to Employees."

The Department has no objection to the basic recommendations contained

in the draft report suggesting that the Fair Labor Standards Act (FLSA)

and the Portal-to-Portal Pay Act be amended to give the Secretary of

Labor expanded administrative authority to determine violations of the

FLSA, assess civil penalties, provide administrative hearings, and toll

the applicable statute of limitations. Any action taken by Congress

should, of course, be consistent with the Administrative Procedure Act

and other acts providing for similar administrative authority and proce-

dures.

The draft report notes that FLSA criminal cases are rarely brought to a

United States Attorney--only 2 in 10 years--because they are subject to

serious evidence problems, are a low priority of the courts, and such

trials would seriously delay back wage recoveries. Accordingly, the

General Accounting Office (GAO) recommends legislative and administrative

changes needed to strengthen the Departmnt of Labor's (DOL) internal

and administrative remedies, i.e., administrative hearings instead of

district court proceedings. The Department endorses these recommendations

as realistic measures in terms of helping the recovery of lost wages as

a primary goal, and recognizing the practical impossibility of obtaining

any additional relief from the already over-burdened United States Attor-

neys and United States District Courts.

The following specific ccmments are offered on the report's discussion of

proposed sanctions under the FLSA:

1. Additional Civil Remedies for Recordkeeping, Minimum Wage and Overtime

Violations.

The Department has no objection to the proposed additional civil penalty

for violations of the FLSA recordkeeping, overtime, and minimum wage re-

quirements. Such additional civil penalties would assist enforcement

91

APPENDIX I'; APPENDIX IV

of the mandates of the Statute, even in those jurisdictions where

scarce prosecutorial resources hinder effective criminal prosecution

under the Act.

2.

Feasibility of Criminal Prosecution Under Section 216.

The draft report states that one of the problems with criminal enforce-

ment of the FLSA is reluctance on the part of United States Attorneys

to prosecute such violations.

We would point out that the priority

given FLSA cases by United States Attorneys is most often influenced

by their particular case load and the nature of pending litigation

in their respective offices. Furthermore, even a willful violator

of the Act is not subject to imprisonment until after a second convic-

tion.

In the case of egregious or repeated violations, where civil

action has been ineffective, DOL is free to refer cases, including

criminal contempt for violation of civil court orders, to the appro-

priate United States Attorneys through the Criminal Division of the

Justice

Department.

3. Restitution.

Finally, according to the draft report, DOL officials stated that com-

mencement of criminal actions reduces DOL's ability to recover employees'

back wages because it delays the resolution of the back wage question.

True, criminal prosecution may remove the incentive for defendants

to enter into settlements with DOL in regard to civil actions filed

to recover back pay, nevertheless, GAO should be made aware that

with respect to a criminal conviction under Section 216 of the FLSA,

United States Attorneys are specifically instructed to make every

effort to secure restitution of all employee claims for back pay as

a condition of sentence as stated in the enclosed United States

Attorneys' Manual, Title g-139.230.

As the Manual explains, probation

may be conditioned with the requirement that the defendant make full

restitution. Moreover, the postponement of sentencing pending resti-

tution is also an option. (18 U.S.C. 5 3651 et seq. and U.S. v.

Berger, 145 F.2d 888 (2nd Cir. 1944).) There?&e, in the-es of

egregious cases illustrated on pages 37 - 42 of the report, criminal

prosecution may in fact be a more effective and faster method of

obtaining back pay claims than a civil suit filed by an employee or

the Secretary of Labor.

We appreciate the opportunity to comment on the draft report. Should

you desire any additional information, please feel free to contact us.

Sincerely,

6paJ~~~

Kevin D. Rooney

Assistant Attorney General

for Administration

Enclosure

92

APPENDIX IV

UNITED STATES ATTORNEYS' MANUAL

TITLE +-CRIMINAL DIVISION

g-139.230 Restitution

Following conviction under

section 216(a) for a monetary

violation, every effort should

be

made to

secure

restitutxon as a

condition of. sentence.

Thus, probation maybe conditioned with

the

reguirement

that

the

defendant

make

restitution.

Postponement of sentencingpending restitution is

an

alternative

procedure.

In

this regard, see 18 U.S.C. 3651, & BC~., and

United States v.

F?=P

145

F.Zd 888

(C.A.

2, 1944).

In no

instance,hawever,

s ou d voluntary restitution by the defendant

be

regarded as a guidpro

uo for dismissal of a criminal action.

P-

Finally,

as

a matter of po icy,

the court imposition of a fine

accompanied by a suspension of

an amount

equal tothedelinquent

back-wage

payments, pending restitution, should be opposed as

without support

by

Federal or state case law, notwithstanding

the broad sentencing powers of

the

Federal judiciary.

93

APPENDIX V

CommisslonerS:

James G. O’tlara. Esq.

Chairman

WiMam D. Byrum

Jay H Foreman

S. Warm Robmson

Clara F. Schloss

Or Michael L. Wachter

Dr. Phyllis Ann Wallace

Sandra L. Willett

Minimum Wage Study Commission

1430 K Street, N.W.. Suite 500

Washington, D.C.20005

(202)376-2460

March 5, 1981

Mr. Gregory

J.

Ahart, Director

Human Resources Division

United States General Accounting Office

GAO Building

441 G Street, N.W., Room 6864

Washington, D.C. 20548

Dear Mr. Ahart:

Enclosed are two copies of cosnnents drafted by the staff of the Mini-

mum Wage Study Commission in

response to your letter of

February 3,

1981,

which requested Commission review and conments on

GAO's draft report entitled,

"Legislative and Administrative Changes

Needed to Deter Recordkeeping, Minimum Wage, and Overtime Violations

and Prevent Employers from Retaining Back Wages Owed to Employees."

We appreciate the opportunity to review your report and as the en-

closed comments indicate,

the staff was generally most favorably

disposed toward your report and its recommendation to both the

Congress and the Department of Labor.

Hopefully, the critique will

enable you to strengthen your final submission to the Congress.

Should you have any questions regarding the comments, please contact

Mr. Stephen W. Welch, Senior Economist, or Mr. Robert

J.

Miller,

General Counsel.

Sincerelyyur>

c;/louis E. McConnell -

Executive Director

Enclosures

GAO note:

The critique of our draft report by the Commission staff

has been excluded from this appendix because it does not

represent the formal views of the Commission.

Technical

and content improvement changes suggested by the Commis-

sion staff have been incorporated in this report when,

in our opinion, such changes were warranted.

94

APPENDIX VI

JOSEPH F SPANIOL. JR

DEPVT” DlRECTOR

ADMINISTRATIVE OFFICE OF THE

UNITED STATES COURTS

WASHINGTON, D.C. 2OS44

March 17,

1981

Mr. William J. Anderson

Director, General Government

Division

United States General Accounting

Office

Room 3836

441 G Street, N. W.

Washington, D. C.

20548

Re:

"Legislative and Administrative

Changes Needed to Deter Record-

keeping, Minimum

Wage,

and

Overtime Violations and Prevent

Employers From Retaining Back

Wages Owed to Employees"

Dear Mr. Anderson:

Thank you for the opportunity to comment on the above-

captioned proposed draft report.

The recommendations affect

the Federal Judiciary by providing for judicial review of

administrative assessments of the recordkeeping, minimum

wages,

and overtime provisions of the Fair Labor Standards

Act and by changing the point at which the statute of

limitations is tolled for purposes of maximizing the

recovery of back wages.

In addition, the Federal courts'

jurisdiction over actions by the Labor Department for

criminal sanctions and injunctive relief would remain sub-

stantially the same.

An increase in the workload of the

Federal courts might be expected to occur if these recommen-

dations are implemented; however, the degree and extent of

the increase is not susceptible to precise measurement. With

respect to the proposed draft report as a whole, we have no

additional comments at this time.

Director

APPENDIX VII

March

fifth

19 81

Mr. William J. Anderscn, Director

General Government Division

United States General Acoounting Office

Washington, D.C. 20548

Re:

Proposed Report of GAO re: Legislative and Administrative

Changes Weeded to Deter Recordkeeping, Mininuzn Wage, and

&ertime Violations and Prevent hployers fran Retaining

Back WagesCUed toRt~loyees

Dear Mr. Anderson:

This relates to the subject propcsed report concerning portions of

the Fair Labor Standards Act Mj other legislaticm under the supervision

of the Department of Labor, which you sent to me for study and ccmrnents.

I have studied the proposed report and discussed its az&nts with

several of the judges of this court whose cpinions in this area of

law would be valuable to me in preparing to ccement cn it.

I also

have had the report studied and analyzed by the Chief Clerk of my

court, Mr. Ii. Stuart Cunningham.

Mr. Cunningham is our statistician,

and his records keep me advised of the rises and falls of filings

in various types of cases and the reasons

for them.

Iobeervethatyourr

eammer&ticns are well s-ted by the

facts your study reveals.

The report describes in detail the difficulties

in administering the present laws.

To assist myself in discxlssing your

r

ecarmerdations may I capsulize

here the major areas about which you have ooncern. They are:

(a) nrployers often fail to maintain the records required

by the Act. As a result of this failure, Labor has problems

bringing cases to Owrt, particularly if qloyees are unwilling

to testify or cannot be found.

As many of the eqloyers involved

did not seem adverse to threatening employees who cooperated

with Labor with the loss of their job, Labor’s difficulties in

bringing suit were further ccqax&d.

(We have found no evidence

here of unwillingness on the part of employees to testify.)

96

APPENDIX VII

(b) In many instances ths amounts involved while of significance

to the s@oyees, were small in axparisom to the amounts involved

in many of the cases brought in federal oourts. You mentioned

in several places the possibility that Fair Labor Standards Act

cases were accorded low priority in federal district courts.

(Our court gives them the sams priority it gives other civil

cases to which the statutes give m especial priority.)

(c) The Portal-to-Pay Act of 1947 provides that up to two

year’s illegally withheld wages can be recovered. A 1966 anem3nent

permits three year’s wages where willful violations are involved.

The

effect

Of

this

Statute, hWeVer, Still iS

to limit, in many

instances, .Labor ‘s ability to recover illegally withheld wages.

For exanple, i

f an enployee complains that wages were illegally

withheld during the preceding 18 mths and then it takes the

Labor Department 12 months to investigate the claim, negotiate

and then file suit, only the mst recent 12 nkmths of wages

of

the employee will fall within the statute.

(!Ms can and should

he remedied as you indicate.)

(d) You faml that a number of the employers against whcm

cases were filed had had previous cases filed against them.

Labor apparently lacks a program of systematically reviewing

past violators for current aonpliance.

(e) Even where wages have been recovered, the a@oyes often

fails to get full rfmovery bscause ths matter is settled. The

mount in a settleskant is always less than the amunt at issue.

This generally happens bscause ths -loyes csn no lcngex bs

found, and because there was no interest charge plxed cc ths

amounts involved. The time that lapses between failure to pay

and settlement payments were often at least several years.

(f) For a variety of reasons, the Labor Department has rarely

used the criminal provisions of the statute.

(g) Various factors have made the liquidated damages provisions

of the Act ineffective.

The changes you reamneud

should bring about a much sure effective,

vigorous arrd equitable approach to enforcament.

You recomnend variers changes in tbs law and in Labor’s policy.

You rsccmmeti that (a) provide for civil penalties administered under

administrative procedure in Labor reviewable by the Court of Appeals,

(b) include provisions for interest cm any assessmsnts mads against

enplayers; and (c) change the point at which the statute is tolled

to that where a violatim is formally assessed by Labor. YUI remmend

(a) requiring the third year’s back wages to bs conplted in willful

violatim cases; (b) reinvestigating firm before there is a settlment

to assure that there is current appliance; and (c) instituting a

program of systematically reviewing firms found in violation of the

act.

97

APPENDIX VII

I observe that during the year ending June 30, 1980, 1,378 cases

were filed by the govertment under the Fair Labor Standards Act out

of a total of 168,789 cases filed nationwide. This represents 0.82

of me percent of the total, and indicates a reluctance on the part

of governzent to pursue the smaller cases. In this District Court

there were only 41 such cases filed out of the total 12,106 cases

filed during the two years ending September 30, 1980. This was 0.34

of one percent of total. The impact of removing this mall group

of cases fran the filings in the district courts would be minimal,

at least insofar as it muld effect the mrkloads of our judges.

Gn the other hand to change the procedures to mve more of the cases

up through government prosecution in the courts would be excessively

costly and laborious to the point of being self defeating.

Given (a) that many of the e@.,qers mentioned in the report

are either in marginally profitable situations and/or are involved

in industries which have traditicmlly hired a sizeable percentage

of their staffs at or near minimun wage levels, (b) that many of the

enplayers who are foumd to have been in violation at one point in

time are subsequently found to be in violation, (c) that the amunts

involved are often small (though of importance to the employees),

and (d) that the evidence and investigatim/negotiation times involved

work very rmch to the favor of the esployer and against Labor and

the employee, the use of an administrative forum to handle these cases

appears far mre

-aii=iz

long as judicial review is maintais toazure due process, the change

should expedite Labor’s processing of the cases, and bring about much

better aonplianos by industry with the law ard the standards of the

Department.

Finally I ccncur enthusiastically with your 1:

eccmehdations that

there not only be effected a change in the point at which the two

or three-year period is tolled, but that also there be brought about

a maxims use of civil fines and interest.

Very truly yours,

98

APPENDIX VIII

U.S. Department of Labor

Office of Inspector Gereral

Washington. D.C. 20210

Reply to the Attention of,

MAR 6 1961

Mr. Gregory J. Ahart

Director

Human Resources Division

U.S. General Accounting Office

Washington, D.C.

20548

Dear

Mr.

Ahart:

This is in reply to your letter to the Secretary requesting

comments on the draft GAO report entitled, "Legislative

and Administrative Changes Needed to Deter Recordkeeping,

Minimum Wage,

and Overtime Violations and Prevent Employers

from Retaining Back Wages Owed to Employees".

The Department's response is enclosed.

The Department appreciates the opportunity to comment on

this report.

p+==rely ,

&Bpector General

99

APPENDIX VIII

U. S. Department of Labor's Response To

The Draft General Accounting Office Report

Entitled ---

Legislative and Administrative

Changes Needed to Deter Recordkeeping,

Minimum Wage,

and Overtime Violations

and Prevent Employers from Retaining

Back Wages Owed to Employees

Recommendation Yl:

I

. ..the Secretary of Labor make

more use

of FLSA criminal

sanctions for willful minimum wage and overtime violations,

after consulting with Justice officials to coordinate criminal

and civil litigation strategies."

Response:

The Department does not concur.

Regional Solicitors have found that the resources of their

offices are better devoted, on the whole, to seeking civil

remedies which include restitution of back wages in the

great majority of cases.

The maximum criminal penalty which

can be imposed on a first conviction is only $10,000. Apart

from the fact that such a maximum penalty would rarely if

ever be imposed,

it is considerably less than can often be

recovered in back wages. Criminal penalties were more

frequently invoked between 1949 and 1961, when the statute

authorized only injunctive relief (without any back wages)

under Section 17.

Recommendation #2:

"Issue instructions requiring compliance officers to compute

the third year's back wages in willful violation cases.

While Labor can do more to identify and recover back wages

withheld during the third year in

some

cases, we believe it

will have only limited success until the legislative changes

to stop the running of the statute of limitations and

strengthen enforcement authority are adopted."

Response:

To the extent that this recommendation would require legisla-

tive action,

the Department is not in a position

to comment

at this time for the reasons provided below (see "Additional

Comments" section).

100

APPENDIX VIII

To the extent that this recommendation suggests computing

the third year's back wages in all willful violation cases,

the Department does not concur.

The current guidelines

state that the third year's computations be made only when

the Compliance Officer "is specifically instructed to do

SO

in a particular case by the Area Director after consultation,

as appropriate,

with the Assistant Regional Administrator

and the Regional Solicitor." This review is needed because

cases must be examined on the basis of their meeting

potential litigation criteria.

Requiring that all willful

violations cases be computed would also do away with the

needed flexibility to decide when to do the third year's

computation.

The Portal-to-Portal Act in Section 6(a) permits a third

year of back wages only where the violations have been

"willful". The courts in some jurisdictions have pro-

vided guidance as to what circumstances amount to willful

violations. However,

the issue generally requires careful

scrutiny, particularly if the case arises in a jurisdic-

tion which has no prior court precedent on the issue of

willfulness.

As a result,

the Regional Solicitor's input

is needed,

on a case-by-case basis. This is particularly

important in order not to expend our limited resources in

extending the investigation period to a third year unless

there is a strong probability that a court would agree with

an allegation of willfulness.

Therefore,

until we receive

more guidance from the courts we feel it is preferable to

continue our present policy of consulting with the Regional

Solicitor before computing the third year's back wages.

Recommendation X3:

"Reinvestigate firms before settling cases referred to the

Regional Solicitor's offices to assure that employers have

come into compliance and to calculate any additional back

wages owed employees."

Recommendation C4:

"Establish a program to systematically monitor firms found

in violation of the Act.

All firms considered likely to

again violate the Act,

and a sample of other firms that

have violated the Act should be reinvestigated within the

three year statute of limitations period to assure that

employers do not profit from continuing violations and

that illegally withheld employee back wages are fully

restored."

101

APPENDIX VIII

Response:

The Department concurs.

These two recommendations share

a common

requirement for

more

resources if they are to

be

effectively implemented.

We agree that investigations should be updated at the time

of settlement and, in many cases, this is being done now.

It is certainly prudent to encourage such a practice when-

ever possible and we will continue to do so,

Recommendation

#4 involves the establishment of a continuous "monitoring"

program.

Firms which have a history of non-compliance or

which have indicated that their future compliance is less

than assured would be systematically scheduled for investi-

gation.

The resource requirements for such an undertaking

are evident. We do schedule firms for reinvestigation when

there is any doubt concerning future compliance and,

more

importantly, in accordance with

our

available enforcement

resources.

The latter consideration has precluded any

commitment

to a systematic rescheduling program but it has

been done whenever

serious

questions have been raised as

to an employer's

assurance

of future compliance.

The WR-136,

Investigation Transmittal Form,

provides an action box

for

"Consider for reinvestigation".

Reinvestigation is a key-

stone to any effective enforcement program and should

be

given

serious

consideration.

Unfortunately, demands from

the complaint backlog,

special directed enforcement programs

and other priorities create a drain on resources that pre-

cludes reinvestigations on a regular basis although we

intend to continue to schedule reinvestigations whenever

the facts warrant.

Additional Comments:

In the Cover Summary,

the GAO draft report states that the

"Fair Labor Standards Act,

established to protect the wages

of American workers,

is not accomplishing its objective."

We find little

or

no support in the GAO draft for this

conclusion,

except for isolated,

anecdotal bits of evidence

selected in a highly unscientific

manner.

There is no

evidence whatever in the report that more than a small

minority of employers seek to avoid their obligations under

the Act. The Minimum Wage Study Commission will shortly

publish the

results

of its non-compliance

survey,

which

will constitute the

most

reliable

measure

of compliance

with the

statute.

The overall conclusion of the GAO

report is thus premature, to say the least, and surely not

justified on the basis of the evidence presented in the

report.

102

APPENDIX VIII

GAO concludes, on the basis of data for fiscal years 1978

and 1979, that DOL obtained restitution of approximately

60 percent of the amounts of back wages found due in the

course

of Wage and Hour investigations. Apart from the

fact that 60 percent is a respectable figure for any law

enforcement program,

it is also important to

bear

in

mind that the back wage figures resulting from Wage and

Hour investigations are only a rough measure of amounts

which are recoverable in a legal sense. These figures

oftentimes include amounts attributable to violations

which turn out not to be provable in court, usually

be-

cause

of insufficient evidence, and sometimes because the

court does not accept the legal theory on which the case

is based.

Viewed in this context, a 60 percent recovery

figure is quite impressive.

1.

Recordkeeping Violations:

Although it is true that the failure by employers to main-

tain records complicates enforcement of the FLSA, it is

still feasible to prove violations where employee witnesses

are available to testify. In the landmark case of Anderson

v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), the Supreme

Court ruled that where employees produce sufficient evidence

to show the extent of improperly compensated work “as a

matter of just and reasonable

inference,’ the burden then

shifts to the employer to disprove such evidence.

This rule

has enabled the Solicitor to recover back wages in a large

number of cases where records were inadequate or lacking.

2.

Minimum Wage and Overtime Violations:

A. Liquidated Damages

Although at the time of the GAO study, the Section 16(c)

liquidated damages remedy may have been infrequently sought,

it is now much more common to file suit under this pro-

vision. In certain offices,

up to SO percent of FLSA

suits are brought under Section 16(c), seeking liquidated

damages for willful violations.

These cases tend to be

those in which witnesses are readily available and

violations are of a recurring nature.

8.

Statute of Limitations

The GAO report presents an unhappy picture of back wages

lost

by

reason of the running of the Statute of Limita-

tions, allegedly because of the time taken

by

the Regional

103

APPENDIX VIII APPENDIX VIII

Solicitor's offices to review investigative files submitted

for potential litigation.

The evidence of these asserted

delays, like most other evidence in the draft report, is

not scientifically based.

However, to the extent that

there have been delays in the past, significant steps have

already been taken to remedy this problem.

Standards are

now in place which set time deadlines for the Regional

Solicitors,

with respect to action taken on FLSA case files

received in their offices from the Wage and Hour Division.

As a result,

significant delays in handling trial litigation

files are not expected.

With regard to updating Wage and Hour investigations to

include violations occurring prior to settlement in the

Solicitor's office, it presently appears that such up-

dating is routinely sought, where appropriate. For the

most part, this would apply to cases where trustworthy

assurances of current compliance have not been obtained,

or where considerable time has elapsed since the close of

the Wage and Hour investigation.

The Wage and Hour

Division has been cooperative in updating case files,

where requested to do so by the Solicitor's office.

It is currently a common practice in Regional Solicitor's

offices to seek interest in connection with settlements

permitting installment payments.

3. Recommendations to Congress:

Recommendation 1

The Congress should amend FLSA to give Labor authority to

assess civil money penalties of sufficient size to deter

recordkeeping violations.

The legislation should provide

for a formal administrative process to adjudicate cases

when employers appeal Labor's assessments.

Recommendation 2

The Congress should amend FLSA to eliminate the liquidated

damage provision and in its place give Labor authority to

assess civil money penalties of sufficient size to deter

minimum wage and overtime violations.

The legislation should

provide for an administrative system for adjudicating cases

when employers appeal Labor's actions as recommended in

Chapter 2.

104

APPENDIX VIII

Recommendation 3

Amend FLSA to authorize Labor to formally assess a violation

as well as the amount of illegally withheld back wages due,

including interest.

Recommendation 4

Amend Section 7 of the Portal-to-Portal Pay Act of 1947 so

that the statute of limitations tolls when an FLSA violation

is formally assessed by Labor.

It would be premature for the Department to comment at this

time regarding legislative recommendations. The Department

will be examining those recommendations in conjunction with

any recommendations that result from the forthcoming reports

of the Minimum Wage Study Commission.

Any specific legisla-

tive activities which are decided upon will be presented at

the appropriate time as a part of the Administration's program.

(201600)

Request for copies of GAO reports should be

sent to :

U.S. General Accounting Office

Document Handling and Information

Services Facility

P.O. Box 6015

Gaithersburg, Md. 20760

Telephone (202) 2756241

The first five copies of individual reports are

free of charge. Additional copies of bound

audit reports are $3.25 each. Additional

copies of unbound report (i.e., letter reports)

and most other publications are $1.00 each.

There will be a 25% discount on all orders for

100 or more copies mailed to a single address.

Sales orders must be prepaid on a cash, check,

or money order basis. Check should be made

~ out to the “Superintendent of Documents”.

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