Whether your employee conveniently “forgets” to clock out or systematically falsifies timesheets, wage fraud is tricky to address. Clearly, preparing a false timesheet with the intent to receive unearned wages is fraud. If the employer is a government entity or contractor, the employee can and will be prosecuted criminally for falsifying timesheets. Here are some examples:
- United States v. Richard Vogel – Amtrack employee indicted for “routinely report[ing] working regular and overtime hours to Amtrack in New Jersey when he was not actually present….”
- Brown v. State of Georgia – Racketeering conviction upheld for employee’s systematic falsification of time sheets and kickbacks.
- United States v. Walsh – Employee of county sheriff’s office indicted for overstating regular and overtime hours worked on timesheets.
- United States v. Lynette Jackson – NSA contractor pled guilty for submitting false timesheets.
- Schroeder v. United States – False Claims Act suit filed against CH2M Hill based on widespread employee billing fraud.
Alleging timesheet fraud can also be a viable strategy for private employers. However, unlike government entities, private employers face additional challenges when employees commit timesheet fraud because of the Fair Labor Standards Act (FLSA), which:
- Requires employers to pay at least minimum wage plus overtime at 1.5x the regular rate of pay to all non-exempt employees (regardless of whether the employer believes it is entitled to recover an overpayment of wages by making a deduction from the emplopyee’s next paycheck); and
- Prevents employers from retaliating against employees who claim that they have not been paid all of the wages they are owed.
Assume an employee claims to have worked 60 hours one week, but the employer believes they only worked 45. If the employer refuses to pay for the extra 15 hours of overtime, the employee may file a lawsuit under the FLSA for two times their alleged back wages plus their attorney’s fees and costs of court. If the employer counterclaims for wage theft, fraud, and abusive litigation, the employee will likely claim that this constitutes illegal “retaliation” for their exercise of legitimate legal rights under the FLSA. The legitimacy of the retaliation claim depends entirely upon the legitimacy of the wage theft and fraud counterclaims.
If the Court believes the counterclaims are frivolous, i.e., they seek to punish the employee for exercising legal rights rather than to settle the amount of wages the employee is actually owed, then the retaliation claim will stand. This is what happened in Cruz v. Don Pancho Mkt., LLC, 167 F. Supp. 3d 902, 912 (W.D. Mich. 2016), in which the Court allowed the employee to add a claim for FLSA retaliation because, “at a minimum, Defendants’ frivolous ‘abuse of process’ claim essentially sought punish the Plaintiff (or deter others) with the prospect of attorney’s fees for the mere filing of a federal claim under the FLSA, which is unquestionably “a protected activity.”
However, if the employer can prove that the employee was intentionally padding their timesheets, the fraud counterclaim will stand and the retaliation claim will not be viable. In Phipps v. Accredo Health Group, Inc., No. 2:15-cv-02101-STA-cgc (W.D. Tenn. June 20, 2016), the federal court ruled:
Based on the results of the investigation, management found that 184 hours of Plaintiff’s on-call time for this period could not be confirmed when checked against company cell phone records. Accredo concluded that Plaintiff had falsified her time entries. This is obviously a legitimate basis for ending Plaintiff’s employment. “Fraud and dishonesty constitute lawful, non-retaliatory bases for termination.” The Court holds then that Accredo has carried its burden to produce a legitimate, non-FMLA reason for Plaintiff’s termination.
Similar results were achieved in several FLSA cases in which employees were alleged to have padded their timesheets:
- Ahle v. Veracity Research Co., 641 F. Supp. 2d 857, 863–64 (D. Minn. 2009) (in an FLSA case, ruling that the Court would allow “counterclaims for breach of the duty of loyalty and honesty, forfeiture or disgorgement, intentional misrepresentation, and negligent misrepresentation” based on false timesheets).
- Nickle v. Astramed Physician, P. C., 2013 WL 782370, at *3–4 (E.D.N.Y. Feb.28, 2013) (permitting fraud counterclaim in FLSA case where defendant alleged that plaintiff did not actually work the hours he reported).
- Cordero v. Voltaire, LLC, No. A-13-CA-253-LY, 2013 WL 6415667, at *4 (W.D. Tex. Dec. 6, 2013) (recommending that “the District Court deny Plaintiff Cordero’s Motion to Dismiss Defendant’s fraud counterclaim” in an FLSA action).
- Rogers v. Harper Vehicles, LLC, 2006 WL 2708322, at * 1 (E.D.Tenn. Sept. 19, 2006) (fraud counterclaim permitted in case where the plaintiff was allegedly “‘padding’ her time and falsifying her time records which resulted in her being paid for time that she did not actually work”).
- Lombardi v. City of Cornersville, Tenn., 2007 WL 190324, at *1-2 (M .D.Tenn. Jan. 22, 2007) (court allowed defendant’s counterclaim that plaintiff wrongfully appropriated “funds, bonuses and wages to which he was not entitled” by padding timesheets).
- Herbst v. Ressler & Assocs., Inc., No. 4:13-CV-2327 CAS, 2014 WL 4205294, at *4 (E.D. Mo. Aug. 22, 2014) (allowing fraud and theft counterclaims in an FLSA suit becasue, “[t]o the extent Ressler’s fraud counterclaim alleges that it is entitled to recover compensation it paid to plaintiff for time he claimed he was working for Ressler but actually was not, the counterclaim raises similar factual and legal issues to the FLSA claim as both require a determination whether plaintiff actually worked when he claimed to have worked, and what he was paid”).
Notably, not every fraud counterclaim related to the plaintiff’s employment will be allowed in an FLSA case. In misclassification cases, in which the plaintiff claims to have been misclassified as an independent contractor in order to avoid the FLSA’s overtime requirement, employers have attempted (with varying degrees of success) to counterclaim based on the employee’s “fraudulent inducement” of the independent contractor agreement.
In Hunter v. Kenaday Med. Clinic, Inc., No. 8:11-CV-643-T-23TGW, 2011 WL 2600656, at *1 (M.D. Fla. June 30, 2011), the district court allowed a fraudulent inducement counterclaim in an FLSA misclassification case, stating, “in this instance, the defendants assert a compulsory counterclaim for fraud in inducing an alleged contract governing the employment that supports the FLSA claim. Although the counterclaim, if successful, may effectively reduce the plaintiffs’ final damages award, the counterclaim is not a prohibited ‘set-off’ as contemplated in Brennan.”
Other district courts in other jurisdictions have not allowed the fraudulent inducement counterclaims, finding that the employers were attempting to seek indemnification from their employees for the employer’s classification decisions:
- Ruffin v. Entm’t of the E. Panhandle, 845 F. Supp. 2d 762, 770 (N.D.W. Va. 2011) (dismissing counterclaim that the plaintiff defrauded the employer into treating her as an independent contractor by signing the independent contractor agreement with the intention to file an FLSA misclassification lawsuit later).
- McFeeley v. Jackson St. Entm’t, LLC, No. CIV.A. DKC 12-1019, 2012 WL 5928769, at *5 (D. Md. Nov. 26, 2012) (dismissing fraud counterclaim in misclassification suit based on the allegations that “Plaintiffs intended to receive the benefits of independent-contractor status before repudiating that status and claiming in this lawsuit to be employees”).
The take-home message for employers is that they have remedies for timesheet fraud even if they have already been sued under the FLSA, but the employer’s claims should be related to the employee’s wages and hours, and should not seek to recover so much in damages that the employee’s pay rate would be reduced below minimum wage for any given pay period.
If you would like assistance evaluating your obligations to, or rights against your employees under the FLSA, please feel free to call (404.849.0394) or write (firstname.lastname@example.org). We will be glad to provide a preliminary consultation without charge.