DTCI: The Sanctity of the Hoosier Paycheck

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By Alex C. Bowman and George C. Lepeniotis

Wage and labor litigation is the hot new cottage industry. With a mandatory award of attorney fees and risk for substantial defense costs, lawsuits for unpaid wages arising under state and federal law should heighten employers’ review of just what goes in, and what gets taken out of, one of the most sacred covenants of employment: the paycheck.

The Historical Development of Paycheck Protections

The paycheck is the quintessential manifestation of the delicate bargain between labor and capital. For centuries, workers have exchanged their labor for payment. Early industries often overlooked workplace quality and safety to keep costs low. Industrial capitalism in the first part of the 20th century was no different and took a substantial physical toll on laborers and their families. Indeed, American labor standards in the pre-Depression era were characterized by low standards and wages, long hours, and seeming ignorance of workplace hazards. While legislative bodies across the country attempted to raise labor standards and install protections for workers, such efforts were stymied by numerous U.S. Supreme Court decisions upholding freedom of contract as an impenetrable shield to reform. See, e.g., Lochner v. New York, 198 U.S. 45 (1905) (invalidating New York Bakeshop Act for restricting bakers’ freedom to contract for more than 60 hours of work in a week); Hammer v. Dagenhart, 247 U.S. 251 (1918) (invalidating federal law prohibiting interstate sale of goods produced by children); and Adkins v. Children’s Hospital, 262 U.S. 525 (1923) (invalidating District of Columbia law establishing minimum wage for female hospital workers).

The New Deal era brought state and federal protections to Hoosiers and their paychecks. Indiana first adopted wage payment legislation in 1933, at about the same time federal legislators began grappling with instituting a federal minimum wage and other wage protections. After President Franklin D. Roosevelt’s 523-8 electoral vote victory in the 1936 presidential election, legislators energized with new resolve for improvement finally passed the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. § 201, et seq., 52 Stat. 1060. Although the FLSA and related state laws have undergone numerous subsequent amendments, the spirit of the New Deal remains embodied in these statutes. It is through this lens that present-day protections for workers’ paychecks must be viewed.

Indiana Law Punishes Employers for Failing to Timely Pay Full Wages

Indiana law dispels any illusions: employers must fully pay employees on time to avoid liability under the Indiana Wage Payment Statute (IWPS). I.C. § 22-2, et seq. Under the IWPS, every person, firm, corporation, limited liability company, or association doing business in Indiana must pay the amount due an employee and must do so at least semimonthly. I.C. § 22-2-5-1(a); see also St. Vincent Hospital and Health Care Center, Inc. v. Steele, 766 N.E.2d 699, 703-704 (Ind. 2002).

The IWPS contains a stiff penalty provision for employers who offend the spirit and text of the statute by failing to fully and timely compensate employees, although recent amendments have left the penalties partially declawed. In derogation of common law, the IWPS penalizes employers for failing to pay the full “amount due” to an employee by awarding mandatory attorney fees and court costs to the prevailing employee, therefore, the statute must be strictly construed. Wells Fargo Insurance, Inc. v. Land, 932 N.E.2d 195, 204 (Ind. Ct. App. 2010).  Before July 1, 2015, the IWPS required an employer to pay as liquidated damages an additional 10 percent of the unpaid wages for each day the amount remained unpaid, up to double the amount of wages due. Liquidated damages were in addition to a mandatory award of attorney fees. In 2015, however, the Indiana General Assembly adopted employer-friendly amendments to the IWPS that eliminated the mandatory award of liquidated damages.

The current version of the statute allows employees to recover only the amount of unpaid wages, along with an award of reasonable attorney fees. The amended IWPS requires a plaintiff employee to allege and prove that actual “unpaid wages” are owed in order to maintain a suit under the IWPS. See Brown v. Bucher and Christian Consulting, Inc., 87 N.E.3d 22 (Ind. Ct. App. 2017). Such a suit must be brought within a two-year statute of limitations. I.C. § 34-11-2-1. Proof of wages owed is essential, regardless of how late the employer’s payment of wages to the employee may have been. In essence, the amended IWPS allows an employer to extinguish an employee’s claim under the IWPS by paying the “unpaid wages” at any time before suit is filed. See Brown, 87 N.E.3d at 27-28. Regardless, the mandatory recovery of attorney fees proves a sufficient incentive for counsel to prosecute such cases, even when the unpaid wages are nominal.

While the 2015 amendments to the IWPS eliminated mandatory treble damages, they did not eliminate treble damages completely. The amendment added a provision conditioning treble damages on evidence of “good faith,” or more correctly, the lack thereof. The statute states, “In addition, if the court in any such suit determines that the [employer] that failed to pay the employee … was not acting in good faith, the court shall order, as liquidated damages for the failure to pay wages, that the employee be paid … two (2) times the amount of wages due … .” I.C. § 22-2-5-2. At present, there is no helpful case law to guide counsel on whether the plaintiff must present evidence of bad faith or the employer must demonstrate good faith. It may behoove counsel for an employer to adduce evidence of good faith in the face of an employee’s all-but-assured claim of bad faith.

Unpaid Wages and the Pitfalls of Wage Assignments

Unpaid wages are a particularly acute issue in industries where wage assignments are commonplace. Businesses large and small participate in the practice of wage assignments, also known as paycheck deductions, which are offered to employees for numerous reasons, not least of which is mere convenience to both the employee and the employer. (“Like that company-branded hat? Great, we’ll just take it right out of your next paycheck!”) Every employee is familiar with paycheck deductions, such as those required by law; for example, state and federal taxes, or deductions such as child support or wage garnishments ordered by a court. Given these commonplace deductions, many employees and their employers believe incorrectly that voluntary (or involuntary) deductions for other things, such as an end-of-day shortage of a cash register or the cost to replace a lost work cellphone, are permissible. The law governing such assignments, however, is strict and highly technical, and even the most innocent of violations may subject an employer to back wages and attorney fees.

Wage assignments are strictly governed by the Indiana Wage Collection Act (IWCA), I.C. § 22-2-6-2, which dictates not only the form and substance of a valid wage authorization but also limits the categories of valid wage assignments to 16 enumerated categories. As the text of the statute makes clear, a wage assignment is valid only if several statutorily prescribed conditions are met: the assignment is (1) in writing, (2) signed by the employee personally, (3) is by its terms revocable at any time by the employee upon written notice to the employer, and (4) agreed to in writing by the employer. I.C. § 22-2-6-2(a)(1). The signed assignment form must also be delivered to the employer within 10 days of the employee’s signature. I.C. § 22-2-6-2(a)(2). Further, any wage assignment must be for a purpose enumerated by statute. I.C. § 22-2-6-2(a)(3).

The 16 categories of permissible wage assignments range from the purchase price of merchandise sold by the employer, to premiums for insurance obtained for an employee by the employer, to union dues or advances for payroll or vacation pay. See I.C. § 22-2-6-2(b). Assignments for purposes other than one of the 16 enumerated categories are impermissible, and since such deductions are withheld wages, impermissible assignments may subject an employer to liability under the IWPS for unpaid wages. See Weil v. Metal Technologies, Inc., 2018 WL 1556174, at *6 (S.D. Ind., Mar. 30, 2018) (holding employees’ wage assignments for costs of voluntarily renting uniforms from employer was not within an enumerated category of permissible assignments, thereby subjecting the employer to liability for unpaid wages under the IWPS). It is important to note that the Southern District’s holding in Weil, is diametrically opposed to the Supreme Court’s holding in Lochner and Dagenhart, and indicates that employees may not contract around the statute to authorize wage assignments outside the enumerated categories.

Like the IWPS, the IWCA was also amended in 2015 to expand the number of permissible categories of assignments to include the purchase price of uniforms and equipment necessary to fulfill the duties of employment. See I.C. § 22-2-6-2(b)(14). Under the prior version of the statute, assignments for employee uniforms were wholly impermissible. See Weil, 2018 WL 1556174, at *7.

There is an interesting and important issue that arises when counseling an employer as to the permissible amount of a wage assignment under the IWCA. While assignments for the purchase price of uniforms or equipment necessary to fulfill duties of employment are permissible, these amounts are limited to the lesser of 5 percent of the employee’s weekly disposable earnings or $2,500 per year. No other category is so limited. This raises the question, in differentiating between an assignment for mere merchandise or a uniform or necessary equipment, who defines necessary? The purpose of the limiting language for uniforms and necessary equipment is clear: employees should not be compelled by their employer to purchase equipment necessary to perform their job at the expense of their disposable earnings. But for assignments for merchandise, no such limiting language appears. To date, no Indiana courts have opined on this distinction, and reconciling these subsections will likely require judicial interpretation.

Impermissible Wage Assignments Can Lead to a Litany of Litigation

Available data suggest impermissible wage deductions and underpayment of wages are all too common. In a case-in-point, the United States Department of Labor has recovered more than $1.3 billion in back wages for workers in the last five years alone, amounting to an average recovery of roughly $1,150 per worker. See https://www.dol.gov/whd/data/. The failure to pay these wages particularly affects workers in low-wage industries.

Wage assignments from minimum wage workers should be closely scrutinized to avoid violations of federal minimum wage laws under the FLSA. This is especially true of an hourly paid minimum wage employee’s final paycheck. Oftentimes, an hourly paid employee who resigns or is dismissed midway through a pay period may be subject to pre-existing voluntary wage assignments that are deducted from less than a full week’s pay. The result is a paycheck that pays less than the minimum wage and a surefire collective action complaint against the employer under the FLSA.

For the employer, perhaps one of the most concerning aspects of wage and labor lawsuits is the exposure to Rule 23 class actions and collective actions under the FLSA. See 29 U.S.C. § 216(b). Unlike class actions that require putative class members to opt out, collective actions under the FLSA require putative class members to affirmatively opt in. Class and collective action claims are particularly ripe in wage and labor cases because wage assignments and payments are dictated by company policies, thereby satisfying one of the essential elements of class certification that similarly situated employees be aggrieved by the same policy or practice. Eventual class certification means classwide notices to both current and former employees and a headache in the human resources department.

Employers must realize that the days of the presuit demand for unpaid wages have likely come and gone. The current mantra in wage and labor cases — and in light of the 2015 amendments to the IWPS — is to sue first and question later. This quick-draw approach preserves an employee’s wage claim and counsel’s statutory claim to fees, and gives the employer limited — if any — presuit notice of trouble brewing. The stakes are high in making sure paychecks are full and paid on time, and the first line of defense for any employer taking wage assignments other than those required by law (FICA, tax withholdings, etc.) is to carefully review the employer’s wage assignment form. Ensuring these forms comply with the statute may be the easiest way to avoid a six-figure demand for attorney fees.•

Mr. Lepeniotis and Mr. Bowman are associates in the South Bend firm of Lee Groves & Zalas. Mr. Lepeniotis is the publication chair of the DTCI Employment Law Section. Opinions expressed are those of the authors.

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