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The Most Common Reasons for US Employees to Sue Their Employers

How does one prepare a European SME expanding to America for 3 tiers of employment law … federal, state and local … in such a way as to make the instruction useful and accessible?  One place to start is explaining the areas where employers in America are most likely to be sued by their employees.  For this, it’s best to start with federal laws and then move to state and local jurisdictions.

While there are at least 13 federal laws governing employment, for purposes of the average SME wishing to avoid a lawsuit, the most important one is the Fair Labor Standards Act (FLSA), which governs hours worked and wages. Wait, I can hear you say … what about federal laws on discrimination, family and medical leave, affordable healthcare, and disabled employees?  Yes, these do indeed have application, but only after a company reaches threshold number of employees, from 10 to 50, depending upon the law.  For that reason, claims based on discrimination, disability, etc. are often brought under the corresponding state laws which often have far lower thresholds.

The FLSA primarily governs minimum wage and overtime pay. It basically divides employees into two classes: Those that get the full protection of the law; and those that are exempt in whole or in part.  As you might imagine, the vast majority of employees are not exempt and have a right to be paid 150% of their hourly wages for hours worked in excess of 40 hours/week. The exempt employees fall into 4 categories, but are generally those with executive responsibilities, specialised or professional qualifications, or broad authority and leeway in judgment in carrying out their responsibilities.

Naturally, many employers want as many of their employees as possible to be exempt and thereby avoid the 150% wage rule, and that’s where the federal lawsuits come in.  The federal penalties and civil settlements can be significant. So, taking advice on the federal FLSA is important, but must be in combination with any state FLSA that may also apply. Yes, there are both federal and state versions of the FLSA and here’s where things start getting complicated.

The federal laws set minimum standards of compliance for not only the FLSA, but also discrimination, family medical leave, disabled employees, and so on.  But the states are free to establish higher standards as well as establish other protections not present on the federal level. It’s here, on the state level, that most employment law is found and where most lawsuits are filed.  Some of the most common bases, in no particular order, are:

Fiddling with Wages:  Withholding or docking wages; paying wages less than twice/month; and illegal reductions in overtime rates.  Very surprising to UK companies, many states require wages to be paid at least twice per month, unless the employee is exempt form the FLSA or signs a clear written consent.  Many states prohibit docking wages for losses or damage caused by an employee; all states prohibit lowering overtime pay below 150% of wages.

Misclassifying Employees as Independent Contractors. This is not only a violation of both state and federal laws, but also invites employee lawsuits.  Employers often do this to avoid payroll taxes as well as benefits payments.  Simply because a worker agrees to be treated as a contractor does not make him/her one.  Nor does it prevent a later lawsuit by that very worker.  In any such situation, the employer will always be vulnerable to serious fines and penalties as well as an employee lawsuit.  For more on this, see

Misunderstanding At-Will Employment.  The law says I can fire an employee for any reason, at any time and with no notice, correct?  Well, partially correct but in reality, mostly incorrect.  The At-Will employment doctrine doesn’t protect employers from implied contracts of employment that vitiate at-will status.  Implied contracts can be found in an employee handbook; or in actions taken or words spoken by an employer, even inadvertently. Moreover, under no circumstances can an employee be fired for illegal reasons, for instance, based upon illegal discrimination.  So, if you’ve fired an employee without having documented bad performance and without a written reason, you can be reasonably sure that the employee and his/her lawyer will find that the reason for firing was illegal.

Unlawful Pre-Employment Questions. Poorly drafted or administered interview questions can lead to a claim of discrimination or violation of other federal or state protection when the interviewee doesn’t get the job.  All questions need to be screened for such inadvertent fallout.  So, for instance, asking what year someone was born, whether they own their own home, whether they have any disability, whether they’re married, can all be interpreted and claimed as having illegal motivations.  Many jurisdictions make it illegal to ask about salary history as well as prior arrests. Running a credit check without proper written consent is illegal.

Failure to Follow Company’s Own Handbook or Policies.  If your handbook has a grievance or disciplinary procedure which the employer does not follow, that’s an invitation to a lawsuit.  A similar situation arises where there’s a review procedure in a handbook that isn’t followed.  The typical example is an employee whose poor performance is softened by a compassionate supervisor in his reviews and who is later fired.  A lawsuit can be based upon the discrepancy between the performance reviews and the termination.  Consistency and clear, transparent documentation are always key.

Discriminatory Treatment.  State employment laws vary.  California is probably the most protective of employee rights, with New York and Massachusetts following some distance behind.  Southern, midwestern and some western states tend to have a slightly more relaxed regulatory environment.  But in every case, state law must be researched and understood so as to avoid unnecessary litigation.

Poorly Handled Termination.  Just because you’ve managed to rid yourself of a poor performing employee doesn’t mean your troubles are over.  The manner in and documentation with which you terminate the employee are crucial.  Does the termination follow reasonably from poor performance reviews?  Are there any facts from which a claim of discrimination could be made? Have you obtained a mutual release through a valid separation agreement? If the employee is over 40 years old, have you protected yourself from a claim under the Older Workers Benefit Protection Act? The wrong answer to any of these can lead to expensive dispute resolution.

Once an employer has gained familiarity with the federal and state laws, local laws may also be important.  This is most often the case with large, “blue state” cities, such as New York City.  For instance, NYC, Chicago and Los Angeles all have their own minimum wage and paid sick leave laws, in addition to about 33 other cities.  New York City, Los Angeles and cities in at least 15 other states require employers to post employee rights in conspicuous areas; San Francisco requires paid parental leave and healthcare security ordinances.  The list is varied, extensive and must be researched and complied with to avoid litigation or penalties.

It’s important to bear in mind that US employment law is constantly evolving on the federal, state and local levels.  Employers must keep abreast on an annual basis of changes in their jurisdictions.  Such matters should always be part of an annual legal health check.  An ounce of prevention is worth a ton of cure.