A wage and hour settlement ends a claim for unpaid wages. 4 things to know about them are:
- you may be entitled to more than just your unpaid wages,
- class action settlements can take longer to disburse,
- you generally have to sign a release to get paid, and
- most of your settlement will be taxable.
1. You may be entitled to more than your unpaid wages
Wage and hour lawsuits brought under the federal Fair Labor Standards Act (FLSA)[1] may be eligible to recover liquidated damages. Known as double damages, you can recover twice the amount of your unpaid:
- overtime pay rate, or
- minimum wage.[2]
Awarding these damages is at the discretion of the court.[3] These liquidated damages are meant to compensate you for the delay in getting your rightful pay caused by your employer’s FLSA violation.[4]
However, employers can avoid making liquidated damage payments if they can show that they:
- acted in good faith, and
- were under the reasonable belief that they were complying with the FLSA.[5]
This requires employers to take steps towards determining how to comply with the FLSA. Those steps have to be objectively reasonable, like relying on guidance from the U.S. Department of Labor (DOL) or an employment lawyer.[6]
In 2023, the U.S. Department of Labor’s Wage and Hour Department recovered more than $274 million in back wages and damages for more than 163,000 workers.[7]
Additional damages
In addition to these liquidated damages, you may also be entitled to recover the following damages in a successful FLSA claim:
- attorneys’ fees, and
- court costs.[8]
Some courts may even award you punitive damages if your employer retaliated against you for invoking your FLSA rights.[9]
Because these damages may be available to you if you took your FLSA claim to court, your settlement should reflect them. By getting the legal advice of an employment law attorney, you can make an informed decision about how much to seek when settling a wage and hour case that is based on the FLSA.
Statutes of limitations
There is a time limit to bring wage claims. For federal claims under the FLSA, you typically have two years from the date your employer committed the wage violation. In some states, the statute of limitations can be one year or less.
2. Disbursing settlement funds can take longer in class actions
If your wage and hour claim was a class action, disbursing the settlement funds can take longer. Because there are numerous plaintiffs in your case, your employment attorney will have to:
- deduct court costs and attorneys’ fees, if they were not covered by the employer in the settlement,
- apportion each plaintiff their proper amount,
- resolve claims against the settlement,
- handle disputes about the amount, and
- disburse the funds into each plaintiff’s account.
This can take several weeks after the settlement is struck.
3. You often have to sign a release to finalize the settlement
When wage and hour claims settle, your employer will often require you to sign a release form before the settlement goes into effect. This form releases your employer from further legal claims.
The settlement form is often the culmination of a wage and hour lawsuit. It details:
- how much compensation your employer will pay, and
- which legal claims you agree to drop in order to receive that compensation.
The settlement form will require you to drop your current wage and hour claims in order to receive the payment. However, many settlement forms require you to drop other claims against your employer as well. If you agree to do so, you can waive your rights to bring a subsequent wage and hour claim.
Waiving FLSA claims
The Supreme Court of the United States, however, has stated that the FLSA does not allow you to waive your rights to statutory wages or to liquidated damages.[10] This is because employers have more bargaining power, putting workers at risk.
Instead, you may only be allowed to waive FLSA claims in a settlement form if there is a bona fide dispute about your employer’s FLSA liability.[11] Broad release forms in cases unrelated to the FLSA may not be enforced.[12]
4. Your settlement may be taxable
Because a wage and hour lawsuit demands unpaid wages, and because wages are taxable, most of your settlement proceeds can be taxed.
According to the Internal Revenue Code, all income is taxable unless it is explicitly excluded.[13] It is up to you to prove that your settlement proceeds are not taxable.[14] For lawsuit settlements, the only damages that are excluded are those for your personal physical injuries or sickness.[15] This means that payments for the following are taxable:
- back wages,
- front pay,
- liquidated damages,
- civil penalties,
- punitive damages,
- emotional distress damages,
- attorneys’ fees, and
- interest on other payments.
You will want to keep these tax payments in mind before agreeing to a wage and hour settlement.
What is a wage and hour claim?
A wage and hour claim is a formal demand for unpaid wages. Employers can deprive their workers of their rightful wages in a wide variety of ways. The most common grounds for wage and hour claims are:
- you were misclassified as an independent contractor,
- you were misclassified as an exempt employee, or
- you are owed unpaid overtime wages for working too many hours in a workday or workweek.[16]
Other reasons for wage and hour claims are:
- your employer made you work off the clock,
- your employer did not follow tip pooling rules,
- your employer did not pay you for your hours worked,
- your employer did not give you your final paycheck (or they did not pay you penalties for being late with your final paycheck),
- you were not paid during rest breaks,
- you were made to work during your meal break,
- you were not given benefits you were entitled to,
- your employer made inaccurate deductions from your wages,
- you were not paid for mandatory training and other work-related activities,
- you were not paid the minimum wage, or
- your employer did not provide hazard pay.
These allegations can be based on federal law or on state law. Legal actions based on federal wage laws will go through federal court, while state claims go through state court. (Sometimes legal actions are based on city or county law, particularly if they have their own minimum wage standards.)
Some state wage and hour laws provide better protections for employees than federal law. For example, California law has more stringent rules regarding the misclassification of workers, which can support some additional wage and hour lawsuits.
Note that in some jurisdictions, you may be able to sue your employer’s payroll provider if they are the reason you were underpaid.
What is a wage and hour class action?
A wage and hour class action is a claim by numerous employees who have lost pay because of their employer’s policies. Because these claims are related and the facts are similar, they can be consolidated together.
The collective action behind these class action lawsuits streamlines numerous cases and increases the pressure on your employer to settle the case. Class members can also include former employees who suffered wage theft.
Having an experienced labor law attorney from a reputable law firm is essential for class action litigation.
Is there a way to avoid legal action?
Possibly. You can hire an employment attorney to send a strongly worded demand letter to your employer. In many cases, that will be enough to get them to pay you what you are owed. Employers understand that lawsuits carry risks of not only hefty judgments but also:
- reputational harm
- injunctive relief, and
- depleted morale among employees, which may cause increased turnover.
Furthermore, wage theft can be a crime. So fear of criminal prosecution and imprisonment may also prompt employers to pay you.
Additional reading
For more in-depth information, refer to these scholarly articles:
- Wage Settlements and Productivity – Proceedings of the Academy of Political Science.
- The Economics of Wage-Dispute Settlement – Law and Contemporary Problems.
- Wage Changes and the Frequency of Wage Settlements – Economica.
- The Settlement of Wage Disputes – MacMillan Company.
Legal Citations:
[1] 29 USC 201 et seq. Note that federal wage claims are made through the DOL’s Wage and Hour Division (WHD). The WHD can then pursue the complaint on your behalf. Alternatively, you can file a wage and hour lawsuit in court and bypass the WHD. Similarly, state or local wage claims are made through the state’s equivalent of the department of labor, or you can file a lawsuit instead.
[2] 29 USC 216.
[3] 29 USC 260.
[4] Overnight Motor Transportation Co., Inc. v. Missel, 316 U.S. 572 (1942).
[5] 29 USC 260.
[6] Brock v. Shirk, 833 F.2d 1326 (9th Cir. 1987). Samson v. Apollo Restaurants, Inc., 242 F.3d 629 (5th Cir. 2001).
[7] WHD by the Numbers 2023, U.S. Department of Labor.
[8] 29 USC 216(b).
[9] Travis v. Gary Community Mental Health Center, Inc., 921 F.2d 108 (7th Cir. 1990).
[10] Brooklyn Savings Bank v. O’Neil, 65 S.Ct. 895 (1945).
[11] See e.g., Martin v. Spring Break ’83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012).
[12] See Bodle v. TXL Mortgage Corp., 788 F.3d 159 (5th Cir. 2015).
[13] 26 USC 61.
[14] Getty v. Commissioner, 913 F.2d 1486 (9th Cir. 1990).
[15] 26 USC 104.
[16] Trends in Wage and Hour Settlements: 2019 Update, NERA Economic Consulting (June 4, 2020).
