Understanding and preventing wage theft in your organization

When employees put in a hard day’s work for their employer, they expect fair compensation for every hour they spend on the clock. Unfortunately, that doesn’t always happen. There are countless cases of employers altering employee paychecks, failing to pay back wages, and withholding final wages — which are all forms of wage theft.

What is wage theft?

Formally defined, wage theft occurs whenever an employer fails to provide any type of benefit earned by an employee. The word ‘benefit’ is crucial here, as wage theft is not limited to unpaid wages. Other benefits, such as meal breaks, workers’ compensation, and overtime pay, also qualify as wage theft when they’re withheld from workers who rightfully earned them.

It’s a problem that’s unfortunately all too common in the United States, with the Economic Policy Institute (EPI) reporting that workers in the US have $50 billion stolen from them by their employers every single year.

There are many reasons why wage theft occurs, and they aren’t all nefarious. Some employers are taking advantage of the fact that wage theft cases often go unpunished and willfully steal wages to fatten their bottom line. Others are unaware they’re committing wage theft due to accounting errors or misunderstanding local labor laws.

Regardless of the cause, instances of wage theft are almost always labor law violations — and can lead to costly lawsuits.

As managers and HR professionals, you’re the first line of defense for preventing wage theft, both for the sake of your organization and employees.

Read on to learn everything you need to know about wage theft, including how to prevent it at your organization.

Understanding wage theft (it’s more than withholding pay)

Many HR professionals think that they understand wage theft, but they’re only familiar with one form of it — which is usually underpayment. However, wage theft comes in many variations, and not all of them are obvious.

For instance, if an injured employee is denied worker’s compensation, it counts as a form of wage theft. Why is that? It’s because the employer withheld a benefit (worker’s compensation) from an employee who earned it (by getting injured at work).

Withholding breaks, like meal breaks and rest breaks, is another form of wage theft. As stated before, wage theft takes place whenever an employer withholds a benefit (which could be money, breaks, benefits, and privileges) from an employee who earned it.

Another tricky form of wage theft is an employer misclassifying an employee as an independent contractor. Due to the misclassification, the employee doesn’t receive the same benefits as they normally would, such as a lower pay rate, lack of overtime pay, or not receiving health insurance.

Wage theft laws in America

Certain labor laws, such as the Fair Labor Standards Act (FLSA), apply to specific types of wage theft. For instance, it’s illegal to pay workers rates lower than the federal minimum wage as defined by the FLSA (which is still $7.25 per hour as of July 24th, 2009).

The FLSA also dictates that employees must receive overtime pay when they work more than 40 hours per week. The overtime rate cannot be less than one and one-half times the employee’s regular pay. Given the protection by federal law, you’d think that employers wouldn’t be able to get away with blatant wage theft.

Unfortunately, most wage violations go unpunished, even when victims of wage theft win their cases. According to an in-depth investigation by CBS News, the systems designed to protect workers from wage theft often fail. Even when victims win cases, compensation is wildly inconsistent — with some victims waiting years for a resolution – and others never seeing so much as a dime.

The U.S. Department of Labor’s Wage and Hour Division (WHD) is infamous for how slow it is to investigate wage theft claims. Rodrigo Camarena, the director of the Justicia Lab, had this to say about filing a DOL complaint relating to wage theft:

“The process for filing a wage theft complaint form is very onerous and cumbersome, so there’s an immediate obstacle in the process itself. But once the form is filed, it takes months if not years for the Department of Labor to even investigate it.”

While that’s unfortunate news for victims of wage theft, filing a complaint with the federal government is only one option for resolving the issue. Victims can also turn to state regulators to file wage theft cases, which may speed things up.

Who’s most affected by wage theft?

Research shows that certain demographics and industries are more susceptible to wage theft. In particular, low-wage workers, women, people of color, and immigrants are disproportionately affected by instances of wage theft.

Local economies and tax revenues also take a hit whenever wage theft occurs, as the victims have less money to spend on things like taxes, food, and other goods.

The following industries see the most wage violations:

  • Food and beverage

  • Hospitality

  • Construction workers and independent contractors

  • Healthcare

  • Janitorial services

  • Nail salons

  • Gas stations

  • Retail stores

  • Child care

  • Hair salons

These workplaces all have widespread issues with failing to pay minimum wage, withholding overtime pay, and making illegal deductions from paychecks.

The most common types of wage theft

Now that you’re more familiar with what wage theft is let’s look at the most common types of wage violations that take place. That way, you’ll know what to keep an eye open for at your organization.

Asking employees to work off the clock

Sometimes, employers ask employees to clock out and then complete additional work, which is illegal and a form of wage theft. This is most common in the food and beverage industry, as managers will ask servers to clock out and complete their end-of-shift duties (like cleaning up) to cut back on labor costs.

Some employers will force employees to work off the clock to avoid overtime pay. Whenever a worker begins to approach the 40-hour mark for the week, they’re asked to clock out and complete the rest of their shift off the clock.

Breaks pose another opportunity for employers to commit wage theft. For instance, unpaid meal breaks are required by law. Therefore, employees must clock out for an unpaid meal break during their shift. However, employers sometimes encourage employees to work through the break while off the clock.

It’s crucial for managers and HR professionals NEVER to ask employees to work off the clock, as it’s illegal and can lead to lawsuits (especially if the employee gets injured).

Why would an employee agree to clock out and do unpaid work, anyway?

Often, workers will agree to work off the clock because they’re scared of getting fired. However, employees shouldn’t give into this fear, as the employer is entirely in the wrong. If an employee has worked off the clock, it’s within their rights to sue their employer for unpaid back wages.

Making illegal deductions from paychecks

As an employer, you do not have the right to make deductions from employee paychecks unless you have written authorization from the employee. Despite this, it doesn’t stop some employers from making deductions to pay for damaged property or other debt (such as violating a company policy). Once again, this is illegal without the employee’s permission.

Other common illegal deductions that show up on paychecks include the following:

  • Recouping a loan or advance pay

  • Charging an employee for their uniform

  • Charging an employee for tools required to do their job

If you’re considering deducting from an employee’s paycheck, get their written permission first. If the employee gives you consent, the deduction is perfectly legal, regardless of its purpose.

Paying less than minimum wage

I’ve already mentioned the FLSA’s set minimum wage of $7.25 per hour, but that’s not the whole picture. In addition to the federal minimum wage, individual states can also set minimum wages.

Certain states, such as Arizona and California, have a higher minimum wage than the federal standard. Other states chose to adopt the federal minimum wage, and 5 states decided not to adopt a state minimum wage.

This is where things can get tricky for businesses.

If they aren’t aware of their state minimum wage, they may pay employees less, which can land them in hot water. Let’s say your business operates in Texas, which uses the federal minimum wage of $7.25. As a result, you pay your entry-level workers $9.00 per hour.

After a few years of success, you decide to open a second location in Arizona. Assuming that Arizona also uses the federal minimum wage, you plan on paying your new employees $9.00 per hour, just like in Texas. The only problem is that Arizona’s minimum wage is $14.35, making your planned wage illegal.

That’s why employers must familiarize themselves with their state minimum wage and the federal standard.

(Here’s a list of each state’s minimum wage to make your life easier.)

Not providing overtime pay

The FLSA clearly states that employees who work over 40 hours a week are entitled to overtime pay. As soon as they exceed the 40-hour mark, every hour afterward is to be paid at the overtime rate, which is a minimum of time and a half. This is very costly for businesses, which is why they try to avoid it.

However, there’s a stark difference between proper time management and wage theft. Sometimes, businesses like restaurants are short-staffed, making avoiding overtime next to impossible. An example would be a busy cafe that is open 7 days a week and short on wait staff. As a result, they can’t provide two days off to each employee, meaning they have to work 6 days a week and exceed 40 hours.

In this scenario, the employees are entitled to overtime pay for the additional hours under FLSA. Any attempt on the restaurants’ part to avoid paying the overtime rate is considered wage theft.

Ways companies try to skirt paying overtime include asking employees to work off the clock and falsifying time cards.

Stealing tips

This method only applies to tipped positions, such as bartenders or bellhops at a hotel. Stealing tips can take several different forms, the most obvious and direct of which is when a manager steals a server’s tips straight out of their tip jar. Another method involves pooling all employee tips and then lying about the total amount.

From there, employers use some of the tip money for other purposes, such as paying hourly staff, purchasing supplies, or pocketing the difference. Some employers will try to credit tips toward a server’s hourly pay to cut back on labor costs, which is wage theft.

A sneaky way some restaurants will steal tips is to claim that new employees aren’t able to earn tips until they complete their training process — which can last as long as the employer wants (a typical example is two weeks). This is a form of wage theft because the server earns tips honestly, only for the restaurant to take them away since the server earned them during their training period.

It’s also illegal for an employer to steal or withhold tips as a form of punishment. The FLSA makes it clear that employers cannot keep a portion of an employee’s tips for any purpose, so it’s crucial for tipped staff to know their tips are protected under employment law.

Not paying final paychecks or PTO

No matter the circumstance of an employee leaving, you aren’t allowed to withhold their final paycheck. Some companies withhold final wages due to a grievance, such as an employee not returning a piece of company property like a laptop.

However, this is illegal and counts as a form of wage theft. Employees who were denied their final paycheck are entitled to file a wage claim with the DOL, which is something employers should bear in mind.

As far as PTO is concerned, no federal law exists. Still, many state laws require employers to pay out unused paid time off that employees have accrued — regardless of how they leave the company (i.e., voluntarily leaving or getting fired).

How HR professionals can prevent wage theft

Employees don’t take kindly to getting their wages stolen, so it doesn’t take long for the word to get out whenever it happens. Even if most wage theft cases go unpunished, it doesn’t mean that the guilty organizations didn’t take a considerable blow to their reputation.

If you want to attract top talent to your company, then you should avoid committing wage theft at all costs. Here are some ways to ensure no wage theft occurs at your organization.

Know your local labor laws

Familiarizing yourself with federal labor laws isn’t enough, as you’ll need to get to know your local state labor laws equally as well. As stated before, states can set their own minimum wage independent of the federal standard.

Other state laws apply to wage theft, such as the laws surrounding paying out unused PTO. If your HR team knows federal and state employment laws inside and out, you’ll significantly reduce the chances of wage theft.

Enact transparent wage policies and pay rates

Once you know the law, you should implement clearly documented employee pay rates and policies in a place everyone can see, such as in your employee handbook. It’s integral that everyone in your organization knows your policies surrounding PTO, overtime, bonuses, and tips.

While not paying overtime is illegal, encouraging managers not to schedule employees over 40 hours a week is not. Proper time management allows you to avoid paying overtime without breaking the law. You’re not obligated to pay overtime rates as long as your employees don’t exceed 40 hours a week (or 80 hours every two weeks).

There’s evidence to support that employees who work overtime experience adverse side effects, such as dips in productivity, a lack of sleep, moodiness, and depression (working overtime doubles your chances of experiencing depression). Therefore, limiting your employees to 40 hours a week is beneficial for your organization (not having to pay overtime) and for your people (not experiencing burnout due to being overworked).

Accurate recordkeeping

Lastly, you should keep clear records of the employee’s hours, pay rates, any deductions (with written consent from the employee), and pay stubs. This dramatically reduces the chances of unintentional wage theft, which is a plus. You should also encourage your employees to keep track of their hours to double-check your management team — as honest mistakes can always happen.

Final thoughts: What is wage theft?

Wage theft is a serious issue that primarily affects low-wage workers in industries like construction, food and beverage, and retail. As HR professionals, we must ensure that no wage theft occurs at our workplaces – as that’s what’s best for employees and organizations alike. If you keep accurate pay records, comply with federal and state labor laws, and remain transparent with your employees, you shouldn’t have any trouble with wage theft in your organization.