Guttman, Buschner & Brooks

Justin Brooks

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What to DOGE about Fraud, Waste, and Abuse?

Unless you’ve been living under a rock, you’ve seen the headlines. “Department of Defense pays $32,000 to replace 25 coffee cups.” “Boeing overcharges Air Force by 8,000% for soap dispensers.” While there is much room for debate as to whether DOGE – as currently constituted – is the right watch dog, and whether Inspectors General should have an oversight role, these allegations are alarming. Yet, they are not surprising. Fraud on a busy and complacent government is nothing new.

The original False Claims Act – also known as Lincoln’s Law – was enacted in 1863 in response to rampant fraud encountered by the Union Army in connection with its procurement of military equipment and supplies. For example, it was common for the military contractors of the day to fill munitions with sawdust instead of proper explosives to reap huge windfalls under their contracts.1 Lincoln’s Law, which initially had a robust qui tam provision to incentivize company insiders to come forward with fraud and share in the resultant government recovery following a lawsuit, significantly reduced such fraud. But fast forward to the 1980s, by which time the qui tam provisions had been weakened substantially, abuse was on the rise.

As the military-industrial complex grew, reports of flagrant abuses permeated the halls of Congress. Contractors to the United States Navy were especially abusive, charging the Navy $7,000 for coffee pots, $660 for ashtrays, $16,571 for a three-cubic-foot refrigerator, $400 for socket wrenches and hammers, and $640 for aircraft toilet seats.2 The Secretary of the Navy, Secretary of Defense, and Secretary of the Air Force all raised complaints of profit-gouging by the defense industries.3 In the wake of such exorbitant charges, the False Claims Act was substantially strengthened in 1986, including its qui tam provisions to incentivize reporting of fraud by company insiders.

To the extent outrageous mark-ups continue to be seen, it is clear that more must be done. Either by statutory law (i.e. Medicaid) or contract, many government contracts already have “most favored customer” or “best price” clauses. For example, a contractor that that sells goods to the Department of Defense must treat the Government as the “most favored customer” and provide it with the contractor’s best pricing.4

Questions remain as to whether these clauses appear only in products essential to the Department’s mission or also appear in contracts for ordinary goods that any business needs. Investigations must take place to determine how compliance with such provisions is assessed during and after the contracting process. While the False Claims Act plays a critical role, it is a tool to pair with Government diligence in contacting. Possible contracting requirements could have government contractors provide the terms of their most favored private sector contracts annually to the government and require that government officials entering into contracts affirmatively certify – on an annual basis – that they have determined that products are being provided at reasonable costs commensurate with all contract provisions.

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1. First Session on § 1562 A Bill to Amend the False Claims Act, and Title 18 of the United States Code Regarding Penalties For False Claims And For Other Purposes, Hearings Before the Subcommittee on Administrative Practice and Procedure of the Committee of the Judiciary of the United States Senate, 99th Congress (1985) (Statement by Sen. Charles Grassley); see also https://kkc.com/wp-content/uploads/2020/03/FCA-hear-j-99-52-1985.pdf

2. 131 Cong. Rec. 17818 (1985); Bill Keller, Navy Pays $660 Apiece for Two Ashtrays, N.Y. TIMES, May 29, 1985, at A-14; Fred Hiatt, Now, the $600 Toilet Seat, WASHINGTON POST, Feb. 5, 1985, at A5.

3. Richard Halloran, Contractor Penalties Harsher, N.Y. TIMES, Mar. 29, 1985, at D4; Navy Investigating Bills for $660 Ashtrays, $400 Wrenches, ASSOCIATED PRESS NEWS ARCHIVE (May 28, 1985); see also NAVY RELIEVES 3 OF DUTY OVER $659 ASHTRAYS, available at https://www.nytimes.com/1985/05/31/us/navy-relieves-3-of-duty-over-659-ashtrays.html.

4. Government Contractor Pays $4 Million to Resolve Pricing and Sourcing Allegations Brought Under the False Claims Act | GSA Office of Inspector General, available at https://www.gsaig.gov/news/government-contractor-pays-4-million-resolve-pricing-and-sourcing-allegations-brought-under

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Courts Affirm Constitutionality of FCA Qui Tam Provision

On September 30, 2024, Judge Kathryn Mizelle in the Middle District of Florida granted a defense motion for judgment on the pleadings and dismissed an FCA case after concluding that the FCA’s qui tam provision is unconstitutional.   U.S. ex rel. Zafirov v. Fla. Medical Assoc. LLC, No. 19-cv-1236, Dkt. No. 346 (M.D. Fla. Sept. 30, 2024).

Judge Mizelle first concluded that FCA relators are “officer[s] of the United States,” because they 1) “exercise significant authority pursuant to the laws of the United States,” in the form of possessing civil enforcement authority on behalf of the United States, and 2) “occupy a ‘continuing’ position established by law,” because “the position of relator does not depend on the identity of the person initiating the action, as any ‘person’ can be the relator if she satisfies the statutory prerequisites.”  Based on the foregoing, she determined that qui tam relators must be appointment in a manner consistent with the Appointments Clause, which is not satisfied by a relator’s “self-appointment.” The opinion was predicated almost entirely on dicta by Justice Thomas in a dissent in the case of United States ex rel. Polansky v. Exec. Health Res., 599 U.S. 419 (2023). The dicta questioned but did not answer whether the qui tam device violates Article II’s appointments clause because this determination was unnecessary to rule on the matter before the Court. Justices Kavanaugh and Barrett concurred in the query.

At odds with longstanding appellate precedent, the Zafirov opinion ignores the oversight mechanisms and safeguards built into the FCA to ensure the Government can maintain control of declined cases as the real party in interest. It has gotten little traction in the ensuing weeks. In early November, a federal court in the Eastern District of Tennessee criticized it as an “outlier” that relies “chiefly on selections of dissents, concurrences, and law review articles” while “whistl[ing] past precedent.” United States ex rel. Adams v.Chattanooga Hamilton Cty. Hosp. Auth., 2024 U.S. Dist. LEXIS 209546, at *7-9 (E.D. Tenn. Nov. 7, 2024). Other district courts in the Eleventh Circuit have reached the same conclusion. E.g. United States ex rel. Butler v. Shikara, 2024 U.S. Dist. LEXIS 181390, at*40-41 (S.D. Fla. Sep. 6, 2024) (rejecting Thomas dicta as basis to find qui tam unconstitutional).

Indeed, prior to Zafirov, the Sixth Circuit, Ninth Circuit, Tenth Circuit, and Fifth Circuit (en banc) have all affirmatively upheld the constitutionality of the qui tam provisions with robust discussions as to why there is no violation of the appointments clause. See United States ex rel. Kelly v. Boeing Co., 9 F.3d 743, 751-58 (9th Cir. 1993); United States ex rel. Taxpayers Against Fraud v. Gen. Elec. Co., 41 F.3d 1032, 1040-42 (6th Cir. 1994); Riley v. St. Luke’s Episcopal Hosp., 252 F.3d 749, 753-58 (5th Cir. 2001) (en banc); United States ex rel. Stone v. Rockwell Int’l Corp., 282 F.3d 787, 804-07 (10th Cir. 2002). Prior to Zafirow and Justice Thomas’s dicta, these appellate courts and district courts nationwide have been near unanimous in concluding relators are not officers subject to the appointmenta cause because (1) their duties are temporary; and (2) they do not wield government power, instead being subject to significant government oversight during the pendency of a qui tam that leaves in place government ability to intervene, monitor and limit discovery, and dismiss or settle the action over relator objections. United States ex rel. Wallace v. Exactech, Inc., 703 F. Supp. 3d 1356, 1366 (N.D. Ala. 2023) (summarizing appellate cases and rejecting argument).

Zafirov acknowledged the statutory provisions that allow the Government to control qui tam litigation but took issue with the fact that judicial review remains and courts must give qui tam relators an opportunity to be heard and express their position. This ignores that the standard is highly deferential and a Court must nearly always acquiesce to the Government’s determination that dismissal or settlement is in the best interest of the United States absent evidence the Government is engaged in active malfeasance. Zafirov is on appeal with the Eleventh Circuit. It seems unlikely that the Eleventh Circuit will break rank with other appellate decisions, but if it does, the case is poised for Supreme Court review.

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Corporate Compliance Programs: Pretext or Panacea?

Proponents of corporate compliance programs loudly sing their praises while detractors point to ceaseless prosecutions and a parade of civil suits—often resulting in multi-billion dollar verdicts or settlements—as evidence that they are ineffective. So, are corporate compliance programs a panacea or a pretext? The truth lies somewhere in between.

As a threshold issue, corporations are for-profit institutions. Indeed, most corporations have a mandate to maximize profit for shareholders. This can encourage senior management to operate in grey areas, and regulators may later deem their actions (and board oversight of such actions) to violate a wide array of laws. Second, formalistic compliance programs are not enough to ensure internal reporting of potential fraud and are not enough to inspire companies to take appropriate corrective actions. Instead, as set forth below, companies must take steps to ensure effective implementation of compliance programs and foster a culture of corporate compliance.

The countervailing factors that motivate officers and directors to engage in or acquiesce to fraudulent conduct or, alternatively, devise and implement an effective compliance program warrant in-depth treatment in a standalone piece. Here, I turn to answering the specific questions posed with these general principles in mind.

Question 1: Do corporate compliance programs actually suppress information from regulatory oversight?

Response: Yes, often appropriately. But meritorious—and sometimes non-meritorious—allegations of misconduct tend to get reported externally where internal responses are inadequate or the company has not created a culture of compliance and reporting.

Recent reports, compiled through surveys of hundreds of senior executives from a broad range of industries, indicate that roughly two-thirds of United States companies are affected by fraud. 1 Costs to companies, including reputational damage, can be substantial as can costs associated with remediation and investigation of fraudulent practices.

Internal reporting programs such as corporate compliance hotlines represent a company’s first line of defense against corporate fraud. Internal whistleblower hotlines are a key component of a company’s anti-fraud program: where such hotlines are implemented, tips are typically the most common method of detecting fraud. 2 Moreover, the Sarbanes-Oxley Act (“SOX”), international guidelines from the European Union, and the U.S. Federal Sentencing Guidelines have deemed hotline reporting programs a good and necessary business practice. At the same time, internal compliance hotlines serve to screen out frivolous and baseless claims.

In my experience counseling and defending large corporations on employment matters and corporate compliance, reports to company ombudsman, managers, or human resources and compliance personnel often lack merit or do not implicate fraud. Employees often file malicious or fictitious complaints against fellow employees or the organization to ward off pending termination or to seek revenge for perceived slights. But treating employees with respect, even in these situations, can dissuade employees from unwarranted external reports.

Unfortunately, despite strong incentives to self-report credible evidence of wrongdoing, companies may conceal such evidence. Like companies, whistleblowers have incentives under various statutory regimes to report internally. For example, under the SEC whistleblower program established by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, a whistleblower’s participation in internal compliance systems will generally increase an award and interference with or bypass of those systems can decrease an award. 3A whistleblower who reports conduct to the SEC within 120 days of reporting internally will also receive credit for any information the company later self-reports to the SEC. 4

In our experience, external reporting typically follows internal reporting when an employee felt the company response was not adequate. As of 2014, 80% of company insiders who reported potential misconduct to the SEC first raised their concerns internally to compliance personnel or their supervisors. 5 Likewise, Guttman, Buschner & Brooks attorneys have represented countless whistleblowers bringing cases under the False Claims Act and have helped recover billions of dollars on behalf of federal and state governments. In our experience, these whistleblowers typically reported internally first and only sought representation after the company responded inadequately or dismissed concerns as “this is the way we do business.” Thus, while corporate compliance hotlines and related reporting mechanisms serve as the first line of defense against fraud, the False Claims Act, Dodd-Frank and other whistleblower protection statutes effectively incentive employees to report fraud externally when a company’s response has been ineffective or where a company has not created a culture where employees feel comfortable reporting misconduct internally.

Companies are most likely to dissuade external reporting by creating and implementing effective compliance programs as well as self-reporting credible allegations of misconduct. Such self-reporting may also result in cooperation credit. Indeed, on September 9, 2015, Deputy Attorney General Sally Yates issued a memo instructing the DOJ to seek individual accountability from individuals perpetrating wrongdoing in the course of fighting corporate fraud and misconduct. 6 The memo was sent to every United States Attorney, the Assistant Attorney General heading up each DOJ division, the Director of the Executive Office for United States Trustees, and the Director of the FBI.

Consistent with the Yates directives, we have seen renewed focus on individual accountability in the False Claims Act cases we have litigated alongside the government over the past year. This has manifested in the government’s decision to name individual executives as defendants in complaints in intervention, the structure of settlements, and a myriad of other ways.

In keeping with its renewed focus on individual liability, the Yates memo articulated several changes to DOJ policy regarding the definition of “cooperation credit” for corporations. These changes are applicable to criminal as well as civil enforcement matters. Corporations historically have received and continue to receive more favorable settlement terms when the government concludes they provided material cooperation with respect to a government investigation. But companies have struggled to understand what it means to “cooperate” in a post-Yates world.

In a September 27, 2016 speech, Principal Deputy Associate Attorney General Bill Baer provided some insight as to what such cooperation now entails, highlighting the importance of prompt and material assistance. 7 Merely responding to a subpoena or civil investigative demand (“CID”) will not qualify as cooperation. Rather, a company hoping to obtain cooperation credit is expected to provide specific information about any and all employees involved in wrongdoing that is unknown to DOJ and that materially assists in its investigations. Thus, while meritless claims not implicating fraud are properly vetted and disposed of through company screening without ever coming to the attention of government regulators and investigators, an effective compliance program will also develop mechanisms to affirmatively identify and provide material information to regulatory agencies investigating the company.

Question 2: Do corporate compliance programs create an environment where employees are led to believe that wrongdoing in the corporate environment is implausible because a compliance program exists?

Response: No. But implicit or explicit directives from management can lead to false beliefs that particular actions comport with the law.

A corporate compliance program should and generally does sensitize employees to the fact that wrongdoing isplausible. A strong compliance program often identifies the relevant laws applicable to an employees’ day-to-day activities and may include fact patterns the company has identified as violative of relevant laws. For example, compliance training for pharmaceutical sales representatives is likely to and should inform employees that promoting off-label uses of company drugs can be deemed to be a violation of the Federal Food, Drug, and Cosmetic Act and likewise expose the company to liability under the False Claims Act. 8

Having said that, we have represented relators in False Claims Act cases in which company management has been warned by its own third-party regulatory consultants that certain conduct and types of interactions with physicians is proscribed. These companies have nonetheless directed such conduct in business plans, training documents, and other written directives to sales representatives. Similarly, employee performance reviews may—in writing—encourage conduct that is deemed by the government to be unlawful. Managers may also encourage such conduct when accompanying employees on sales detailing visits.

Thus, the existence of written policies and a compliance program does not itself create an environment where employees believe wrongdoing is implausible. But written directives, communications, and training by management can cause employees to believe that particular conduct is appropriate and in conformity with stated company policies and cause them to ignore other signs or evidence that such conduct is—in fact—unlawful.

Question 3: From a practical viewpoint, what kind of corporate compliance programs work better than others?

Response: Corporate compliance programs that incorporate the principles of communication, responsiveness, and transparency

Above all, compliance programs should be transparent and comprehensible to employees (and management), and the goals of enforcement mechanisms should be clearly communicated. Measures also must be implemented to ensure prompt and efficient responses to allegations of corporate wrongdoing. How this manifests will vary from industry to industry and company to company. It largely depends on the service or product a company offers, specific rules and regulations that govern the company, the size and geographic breadth of a company, and a myriad of other factors.

In addition to general principles of communication, responsiveness, and transparency, certain key factors tend to underlie effective compliance programs:

1. Guidelines: companies should have explicit guidelines that instruct employees how to perform their jobs in a legal and ethical manner, including training programs, codes of conduct, and written performance standards.

2. Surveillance: companies should have official policies and procedures that detail the manner in which they will monitor employees and how (and to whom) employees can report wrongdoing.

3. Sticks and Carrots: companies should identify and implement sanctions for wrongdoing as well as rewards in the form of promotions and positive reviews for demonstrated competence and compliance with company guidelines. A program can be well-drafted on paper but useless in practice if a company does not punish misconduct or reward behavior it wishes to incentivize.

4. Leadership: it is not enough to have formal procedures in place to foster compliance. The “water cooler” conversation and conduct of top-level management are equally important. The “tone at the top” and informal communications as set by leadership behavior is critical, but it is equally critical for top management to monitor and instill the same behavioral norms in middle management.

5. Independence of compliance personnel. Local management are rarely trained as investigators, and may be part of the problem. Likewise, local human resources personnel may appear to employees to be aligned with management and unlikely to take employee concerns seriously, disincentivizing employees from raising concerns about potential misconduct. Accordingly, effective compliance programs often provide mechanisms for employees to report concerns to independent third parties (such as ombudsmen) specifically trained in addressing employee concerns. Depending on the nature of the complaint, legal personnel, compliance officers, or human resources personnel may need to become involved after the initial investigation has begun.

Corporate compliance programs play an important role in modern corporate governance. But they are only as good as management’s commitment to effective resolution of employee concerns and implementation of corrective action when credible misconduct has been identified. Companies have strong incentives to get it right.

Footnotes

∗Justin S. Brooks is a founding partner of Guttman, Buschner & Brooks PLLC. Mr. Brooks represents relators in qui tam litigation under the False Claims Act and other federal and state statutes and corporate clients in a wide variety of complex commercial and employment litigation. He also provides employment and compliance counseling to companies, represents institutional investors in shareholder derivative and corporate governance litigation, and represents employees in employment litigation of all types. He has represented clients in claims brought under the Federal False Claims Act, securities laws, the Worker Adjustment and Retraining Notification Act (WARN), Racketeer Influenced and Corrupt Organizations Act (RICO), and various employment discrimination, labor and environmental statutes.Prior to founding the firm, Mr. Brooks worked at Kirkland & Ellis LLP, Morgan, Lewis & Bockius LLP, and Grant & Eisenhofer P.A. He also served as law clerk for a federal judge. He has authored numerous articles on class action litigation and other topics.

1. Kroll, 2013/2014 Global Fraud Report, Who’s Got Something to Hide? 12 (2013), http://www.kroll.com/en-us/global-fraud-report.

2. See, e.g., Ass’n of Certified Fraud Exam’rs, Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study 19 (2014), https://www.acfe.com/rttn/docs/2014-report-to-nations.pdf.

3. 17 C.F.R. § 240.21F-6(a)(4); 17 C.F.R. § 240.21F-6(b)(3).

4. 17 C.F.R. § 240.21F-4(b)(7).

5. U.S. Sec. & Exch. Comm’n, 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program 16 (2014), http://www.sec.gov/about/offices/owb/annual-report-2014.pdf.

6 .See Memorandum from the Office of the Deputy Attorney Gen. to the Assistant Attorney Gen., Antitrust Div., the Assistant Attorney Gen., Civil Div., the Assistant Attorney Gen., Criminal Div., the Assistant Attorney Gen., Envtl. and Nat. Res. Div., the Assistant Attorney Gen., Nat’l Sec. Div., the Assistant Attorney Gen., Tax Div., the Dir., Fed. Bureau of Investigation, the Dir., Exec. Office for U.S. Trs., & all U.S. Attorneys (Sept. 9, 2015) https://www.justice.gov/dag/file/769036/download.

7 .See Bill Baer, Principal Deputy Assoc. Attorney Gen., Remarks at Society of Corporate Compliance and Ethics Conference (Sept. 27, 2016) https://www.justice.gov/opa/speech/principal-deputy-associate-attorney-general-bill-baer-delivers-remarks-society-corporate.

8 .The type of conduct that qualifies as “promotion” and the degree to which certain activity may be protected by the First Amendment involve a nuanced assessment, is largely unsettled, and varies from jurisdiction to jurisdiction. Detailed discussion is beyond the scope of this article.

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“Conscientious Objectors” to Arbitration Policies Can Proceed in Federal Court

The Third Circuit allows two employees to sue their employer in court even though the company’s dispute resolution policy requires binding arbitration because they objected to the policy at the time of adoption.

OVERVIEW
On October 18, 2016, the Third Circuit held that two employees could sue their employer in federal court even though the company’s dispute resolution policy required binding arbitration because these employees objected to the policy at the time of its adoption. The decision reverses the district court, which had dismissed plaintiffs’ ADEA and VII claims in light of their coverage by the policy.  The case is Scott v. Education Management Corporation, No. 15-2177.

FACTS AND REASONING 

Plaintiffs Scott and Jones worked as Assistant Directors of Admissions at the Art Institute of Pittsburgh, a subsidiary of Education Management Corporation (“EDMC”).  Plaintiffs filed virtually identical Charges with the EEOC, claiming they were subject to unfair performance evaluations on the basis of their age.  Additionally, Jones alleged discrimination on the basis of race.  After Scott and Jones filed their charges, EDMC instituted a company-wide alternative dispute resolution (“ADR”) policy, which included final binding arbitration.  The policy was designed to establish arbitration as the exclusive means by which all work-related disputes would be resolved, including disputes sounding in “discrimination, harassment, retaliation, wrongful termination or other alleged unlawful treatment under state, local, or federal law.”

Plaintiffs’ attorney emailed EDMC on behalf of Jones, suggesting the policy was “illegal” and violated Title VII.  Plaintiffs then amended their EEOC complaints to include a retaliation claim on the basis of institution of the ADR policy.  After requesting Right to Sue letters from the EEOC, plaintiffs filed complaints in federal court, alleging violations of the ADEA, Title VII as well as Pennsylvania common law.  The district court dismissed both cases with prejudice, holding that the claims fell within the scope of the ADR policy.  The district court further reasoned that plaintiffs manifested assent to the policy by continuing to work after it was instituted.

On appeal, the Third Circuit rejected the reasoning on mutual assent.  EDMC argued that an employee assents when the employee continues to work for the employer.  The court disagreed, reasoning that plaintiffs promptly voiced their specific objection to and rejection of the ADR policy, which precluded assent to the policy.  The court held that on these facts, the plaintiffs’ continuing to work did not manifest assent to the policy.  The court also stated that Pennsylvania law would dictate the same holding.

IMPLICATIONS 
Although the Third Circuit designated the decision as “not precedential,” employers can expert plaintiffs’ counsel to rely on the decision as persuasive authority.  The impact of the decision  will play out in the years to come, but the case indicates the Third Circuit may not be as deferential to agreements to resolve disputes through arbitration or mediation as other appellate courts.  On the other hand, the case is easily cabined on its facts and is likely only applicable to post-hoc changes meant to defeat judicial resolution of existing disputes.  There are parallels in other areas of law.  For example, then-Chancellor, now Chief Justice Leo Strine, has suggested that a company’s post-hoc enactment of forum selection clauses to defeat jurisdiction of actual or threatened shareholder litigation would be unenforceable because application would be unreasonable.  See Boilermakers Local 154 Ret. Fund v. Chevron Corp. (“Chevron”), 73 A.3d 934 (Del. Ch. 2013).

CONTACTS
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate employment matters on behalf of both employers and employees.

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Third Circuit Rules That Paid Meal Breaks Do Not Offset FLSA Overtime Liability

On October 7, 2016, the Third Circuit underscored the need for employers to compensate all hours worked by non-exempt employees even when employers pay employees for break time they could treat as non-compensable under the Fair Labor Standards Act (“FLSA”).

In Smiley v. E.I. DuPont De Nemours & Company, plaintiffs filed an FLSA collective action and Pennsylvania state law class action seeking compensation for unpaid time spent donning and doffing uniforms and safety gear and performing other activities before and after their shifts. Unpaid time averaged 30-60 minutes per day.

Under DuPont’s written policy, plaintiffs working 12-hour shifts were paid for a 30-minute meal break and two other 30-minute breaks per shift. DuPont classified paid break time as hours worked for overtime purposes even though the FLSA does not require it to do so. For the employees at issue, paid break time always exceeded the unpaid pre-shift and post-shift donning and doffing time.

DuPont argued plaintiffs’ claims for unpaid overtime failed because it voluntarily treated break time as hours worked, such that the time qualified as an offset against the 30-60 minutes of daily unpaid pre-shift and post-shift time. The District Court agreed with DuPont and dismissed plaintiffs’ lawsuit in its entirety.

On appeal, the Third Circuit rejected DuPont’s offset argument and overturned the dismissal. After focusing on the FLSA’s “broad remedial purpose,” the Court noted that employers have some flexibility when considering whether to treat bona fide meal breaks as hours worked but held the FLSA explicitly permits offsets against overtime pay only in three specific situations, none of which addressed paid meal breaks.

The Third Circuit concluded that nothing in the FLSA authorized an employer to offset discretionary compensation the employer included in calculating employees’ regular rate of pay. Even though the FLSA does not require DuPont to pay for meal and other breaks or to treat such time as hours worked, once it did so voluntarily, it could not use this time as an offset against other time spent working that it did not count for overtime purposes.

Smiley is an important lesson for employers to review pay practices and ensure that all hours worked by non-exempt employees are compensated. Even if an employer goes beyond what the FLSA requires and pays an employees for meal breaks, that generosity cannot be used to offset other potential overtime violations in the Third Circuit.

The Third Circuit’s decision underscores the need for technical compliance with FLSA requirements. If a pay practice is not expressly authorized by the FLSA or implementing regulations, the practice may be held to run afoul of its mandates and expose employers to class-based liability even if they have the best of intentions and are attempting to exceed its mandates. Smiley highlights the need for companies, particularly smaller companies and startups, to seek review of employment practices by sophisticated employment counsel.

CONTACTS

If you have any questions or would like more information on the issues discussed in this article, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate employment matters on behalf of both employers and employees.