While employers can sometimes avoid extra liability in wage and hour claims by showing that they tried to comply with the law, that defense was of no use to an employer who, despite using an accountant, falsified employee time records.

Because the restaurant, El Tequila, could not show it acted in good faith, it was liable for liquidated (or double) damages, in addition to the workers’ back pay. Going a step further, a district court also found that the violations were willful—a conclusion that extends the law’s statute of limitations from 2 years to 3.

The restaurant appealed, but the 10th U.S. Circuit Court of Appeals—which covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming—agreed with the lower court’s judge and upheld a $2.1 million award for the employees (Perez v. El Tequila, LLC, No. 16-5002 (10th Cir. Feb. 7, 2017)).

Facts of the Case

After receiving a complaint, the U.S. Department of Labor (DOL) launched an investigation into the pay practices at the Tulsa, Oklahoma, restaurant. At a scheduled meeting, the DOL reviewed pay records and interviewed employees and ultimately determined that the employer had complied with the Fair Labor Standards Act’s (FLSA’s) minimum wage and overtime provisions.

When the DOL continued to receive complaints, it conducted a second, unannounced investigation and found several violations. The department determined that the records provided the first time were inaccurate and that the real timesheets had been edited to reflect compliance with the FLSA.

Moreover, employees had been coached before their interviews with the DOL investigator. During the second investigation, employees reported working 60 to 70 hours per week for a straight salary. Moreover, they were forced to sign the fake timesheets, workers told the DOL.

The owner agreed to adopt an hourly pay structure, implement an electronic timekeeping system, and pay the workers their unpaid wages. However, when the DOL found the same violations at three more of the restaurant’s locations, the owner refused to pay the back wages to those workers and the agency filed suit.

A district court found that El Tequila had violated the law and ordered it to pay the back wages plus liquidated damages. A jury initially determined that the employer’s actions were not willful, but the judge set aside the verdict, finding that the evidence presented at trial proved the opposite.

Appeals Court Weighs In

El Tequila appealed, but the 10th Circuit upheld that lower court’s ruling.

The DOL was able to show that the restaurant’s owner willfully violated the FLSA when it—among other actions—falsified payroll records, withheld records requested by the DOL’s investigator, lied to the DOL’s investigator, and instructed employees to lie to the investigator.

The employer first argued that it shouldn’t be liable for liquidated damages because it relied in good faith on its accountant. The jury could have reasonably found its accountant was solely to blame for any FLSA violations, it said. “This inference is unreasonable based upon the evidence and the law,” the 10th Circuit said. The employer, not its accountant, adjusted the payroll records and timesheets to reduce hours, misrepresented facts to the DOL investigator, and instructed employees to do the same. Furthermore, employers, not third-party accountants, are ultimately responsible for FLSA compliance, the appeals court said.

El Tequila’s owner then argued that, at most, his actions were “negligent”—not “willfull.” He didn’t know how to comply with the FLSA, he said. The court, however, was not persuaded. The owner took affirmative steps to create the appearance of FLSA compliance, the court said. “A reasonable jury could not conclude El Tequila's violations were negligent,” it concluded, upholding the judge’s application of a 3-year statute of limitations.

Employer Takeaway

The FLSA allows for two good-faith defenses. The first is “absolute good faith,” which is a narrowly-tailored defense that involves reliance on a DOL interpretation of the law. The second is a good-faith defense to liquidated damages, which is what El Tequila argued in Perez.

This allows courts to reduce or deny liquidated damages based on an employer’s showing that it reasonably believed its actions were not violating the FLSA. This can include, for example, reliance on a knowledgeable attorney’s advice (Perez v. Mountaire Farms, Inc., (650 F.3d 350, 375 (4th Cir. 2011)).

Courts have noted, however, that this isn’t an easy argument to make. In Chao v. Barbeque Ventures, LLC, 547 F.3d 938 (8th Cir. 2008), the court held that outsourcing a company’s payroll functions to a third party was not enough to show a good-faith effort to comply with the law. “Lack of knowledge is not sufficient to establish good faith,” the 8th Circuit said in that case. Rather, that defense requires an “honest intention” to comply with the FLSA. The employer’s actions did not, however, cross the line into “willful” in that case.

In Perez, not only did the employer fail to show good faith but it also willfully violated the law, the courts determined. In announcing the $2 million award in mid-January, the DOL said El Tequila’s owner went to great lengths to avoid paying employees in compliance with the FLSA.

Obama’s DOL also issued a warning: “Employers who violate the law should know: [T]he department has been enforcing the [FLSA] for more than 75 years and will continue to use all tools at its disposal, including the assessment of liquidated damages and, when necessary, litigation, to ensure that workers are properly paid.”