Talent Management Column

Who's Breaking Wage-and-Hour Laws?

A new study finds low-wage workers are suffering rampant violations of the Fair Labor Standards Act -- and it's hurting both workers and employers. The violations do not seem to be oversights in the service industry where demands are more variable. The most violations were actually in manufacturing, where the old stereotype of sweatshops lives on.

Monday, September 14, 2009
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Labor Day has just passed and it was time again for the annual stories about how employees are doing in the workforce. In recent years, the focus of attention has been on the bottom tier of jobs in terms of pay, and not surprisingly, things haven't been very good.

I was surprised, however, to read the results of a recent study sponsored by the Ford Foundation about compliance with wage, hour and related protections, those mainly associated with the Fair Labor Standards Act. Most of the employers I know have been tearing their hair out of the last few years struggling to comply with wage-and-hour requirements and the conflicts they generate with the more 24/7 orientation of business.

But it looks as though a lot of others are not.

The Fair Labor Standards Act of 1938 is a New Deal law that establishes minimum wages, sets overtime and hours requirements, and requires reporting. It was enacted at a time when most jobs were full-time, when hours of work were regular and when the important division in the workplace was between blue-collar and white-collar jobs: White collar workers were already protected by their employers, so it was only the production workers who needed the government's help.

In the last two decades, the pressure for flexibility to meet less predictable business demands has led employers to keep operations open longer -- not necessarily on predictable shifts, though -- and also to vary staff levels in response to peaks and valleys in demand.

It has also led to empowered workers who operate with less supervision in order to respond more quickly to problems. The divisions between supervisors and supervisees have blurred, the idea of a regular 40-hour work week eroded and conflicts with wage-and-hour requirements inevitable.

Many companies got caught up in conflicts between these practices and wage-and-hour requirements, most notably those that converted employee positions to independent-contractor roles who ended up paying significant fines.

These examples of big companies creating ways of working that conflicted with wage-and-hour laws got the attention, but a recent study of more than 4,000 low-wage workers suggests that the far bigger problem is employers who just ignore the laws altogether.

Previous studies by the U.S. Department of Labor found that only about 40 percent of employers in low-wage industries were in compliance with the FLSA, a figure that one might attribute at least in part to the complex requirements of the Act. But this new survey, Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in American Cities, suggests that violations are widespread even on the most basic provisions of the Act.

One-quarter of these workers, for example, were paid wage rates below the mandated minimum wage in the previous week, so these violations are happening frequently. An amazing three-quarters were not paid overtime and the amount of overtime hours worked was tremendous -- 11 hours per week.

Two-thirds of the workers experienced violations in requirements of breaks for meals. Fifty-six percent did not receive pay stubs that would allow them to check on their pay.

Yes, it's possible that the descriptions the workers gave of their circumstances weren't accurate and exaggerated the true extent of the violations (the researchers, not the respondents, determined whether there were violations).

But these figures are like Wilt Chamberlain's claims about his sex life: Even if they are off by 100 percent, the numbers are still big.

Nor is it likely that these are innocent oversights. They are happening with frequency, at least once in a typical week, and they are happening not with the minutia of the law but with its most basic provisions.

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The violations were not limited to service jobs where demands are more variable. The most violations were actually in manufacturing, in the apparel and textile manufacturing where the old stereotype of sweatshops in this industry lives on.

Violations are disproportionately in small operations that hire immigrants, often illegal immigrants who cannot complain to the authorities. One reason there are so many of these small operations, even in industries like manufacturing, is that so much of the work of even big companies is now outsourced to small operators. Janitorial services are a prominent example.

Why do employers seem to be so scrupulous about enforcing the Act and yet violations overall are so common?

Because the employers we tend to see are the large ones who are active in the communities and who want to be in compliance if for no other reason than they are concerned about their reputations.

Those who are not in compliance -- remember that the violations are blatant -- apparently aren't concerned enough about getting caught. The budgets for enforcement have been cut quite sharply, while the number of employers continues to grow, especially among small employers who come and go and are hard to track.

Enforcement is easier at big employers, who cover more workers. So the odds on being caught if you are a small operator are slim.

Here's the big point. This is a really bad situation whatever your views are on the regulations themselves and even if you're not concerned about the employees. Allowing employers to break the law gives them a huge cost advantage that undermines the competitiveness of those who follow the regulations. As long as we have laws, they need to be enforced.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School.


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