EEO and Wage and Hour Compliance and Improvements in Workforce Effectiveness :

1. EEO and Wage and Hour Compliance and Improvements in Workforce Effectiveness: Presented By: Ali Saad, Ph.D. and Robert Crandall, MBA

2. Overview • Statistical methods have a long history in discrimination litigation • Yet they are often treatedas ends in themselves, not means to an end • As far back as the landmark HazlewoodSupreme Court case, the Justices recognized the role of the labor market and a focus on the business setting. • However, statistical tests require a context – they are a tool, not the explanation • The emphasis on specific employment practices of the Court in Walmart v. Dukes heightens this requirement • In the past 40 years, labor economists have developed a rich literature of theory, methods, and empirical findings • These principles can answer critical questions in a litigation context, as well as provide structure to company EEO compliance efforts. • These same approaches can also help companies improve workforce efficiency. 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

3. Labor Economics 101The Origins of Modern Labor Economics • Modern labor economics began in the late 1950’s, with the seminal work on “Human Capital” pioneered by T. W. Schultz, Gary Becker, and Jacob Mincer. Gary Becker 1930 - Present Jacob Mincer 1922 - 2006 T. W. Schultz 1902 - 1998 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

4. Analysis of Employment Practices and the Labor Market Context • You have a shovel, now where do you dig? • Statistical tools are necessary, but they need the right hypothesis to focus them correctly • Where do we get the statistical hypothesis? • “Common sense equal proportions” approach (“EP”) OR: • Economic principles and specific business realities 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

5. Examples of the “EP” Approach and the Labor Economics Approach • Simple and well known example: Hiring and race • EP: Minorities are 31% of the applicant pool and therefore are expected to be 31% of the hires at company X OR: • Labor Economics: The job requirements of company X are consistent with 17% of the minorities in the applicant pool and therefore we expect 17% of hires to be minorities • Start with the job, not the demographic attribute 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

6. Examples of the “EP” Approach and the Labor Economics Approach • A less obvious example: Pay increases and age • EP: The average increase in pay is 4.3% for employees under age 40, and therefore the average pay increase for employees 40 and above should also be 4.3% OR: • Labor Economics: Human capital theory predicts that because of the non-linear investment profile in human capital over the life cycle, pay increases will also be non-linear in labor markets where pay is based on productivity. Older employees’ pay should increase according to benchmarks derived from comparable employees in other companies. • Start with the economic process that generates earnings, not the demographic attribute 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

7. Its all About the Benchmarks • The central role of “benchmarks” • Actual employment outcomes are known and therefore fixed – the only moving object in these studies is the “expected” outcome, or benchmark. Everything hinges on the benchmark. • The purely statistical approach to benchmarks • Equal proportions among incumbents, simple representation, “common sense” benchmarks • Economic agents are implicitly passive in this view – this is not reality • No consideration of incentives influencing economic behavior • Behavioral implications are ignored, especially on the employee (“supply”) side • “Demand side” is therefore the implicit, and often the explicit cause of all observed outcomes • All causality flows from the company to “cause” worker outcomes • Worker causes of observed worker outcomes are ignored 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

8. A Great Wage and Hour Example • Consider the Simple Example of Meal Breaks in California • Under the newly established Brinker standard, the company is obligated to provide for meal breaks • Suppose data shows that 28% of meal breaks are observed as missed • What are the Possible Explanations? • The company did not provide the meal breaks • The company provided the meal breaks but caused employees not to take them • The company provided the meal breaks but employees chose not to take them • Employees “not hungry” or on diets • Employees want to leave early (breaks are unpaid – 8.5 hours required to get 8 hours of pay) • Ignoring Employee Volition Eliminates “Labor Supply” Explanations • Modern labor economics is mostly a story about labor supply and incentives • Asymmetric Information, job matching and turnover, heterogeneity, non-market activity, etc. • These forces are critical to incorporate if analysts are going to test causality of specific company practices, as suggested by recent Court decisions. • Its not enough to point out statistical relationships – cause is implicitly at issue in every statistical test, even those that do not claim to be in a world with volitional economic agents and a need to identify specific company practices. 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

9. Economics is the Study of the Impact of Incentives on Behavior • Basics of the economic approach to benchmarks • Identify specific incentives in the business setting. How do they influence choices and influence what is “expected”? • Incentives on BOTH employer side as well as worker side • Worker side is labor supply, broadly defined • Acknowledgement that economic agents are volitional, not passive • Causality of an observed outcome can be better identified with a source • Company causes separated from worker causes • Other types of underlying economic forces • The age phenomenon – unobserved heterogeneity • Selection mechanisms – self-selection in particular • The human capital model and optimal investment processes • Impact on worker choices for training • Impact on company investment choices • Either way a concave earnings profile is implied 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

10. The Economic Approach - Age • Promotions: • The “equal proportions” approach suggests that if employees age 40 and above are 52% of job grade C then they should also be 52% of those promoted to job grade B. • Terminations: • The “equal proportions” approach suggests that if employees age 40 and above are 52% of job grade C then they should also be 52% of the terminations from job grade C in a RIF. • Both statistical hypotheses are incorrect, except in strict “up of out” employment settings. • Unobserved heterogeneity - the “Peter Principle” is the answer. An inevitable correlation between age and productivity evolves in heterogeneous (i.e., real world) worker populations • Pay Increases: • The “equal incidence of all practices” approach would hypothesize that percentage increases in pay should be unrelated to age category. • While it sounds good on the surface, this hypothesis conflicts with the most commonly observed empirical relationship in all of labor economics: The human capital model predicts, and we universally observe a concave or decreasing percent change shape to the life cycle of earnings. 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

11. The Economic Approach - Gender • Representation does not equal availability – a well known concept with special applicability to gender • The economics of labor supply • Impact of allocation of time between market and non-market activities • Does not rely upon different “preferences” or different “interests” • Instead, the focus is gender differences in economic/time constraints • A recent academic study of MBA graduates examined earnings over time for men and women, holding constant occupation and education • Findings are that female and male pay start equal, but a difference emerges over time, which the authors attribute partially to labor supply and differential time allocation* *Dynamics of the Gender Gap for Young Professionals in the Corporate and Financial Sectors”, Bertrand, Goldin, and Katz, Working Paper 14681, NBER, January 2009 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

12. Concluding Observations • Labor Economics contains many insights that are useful for understanding historical employment dynamics in a litigation and compliance context, as well as for prospective performance improvements. • The common denominator is that incentives are analyzed and modeled, and only then are statistical tools applied. • Without the correct hypothesis, statistical analysis will only mislead. • Economics provides the optimizing framework for getting the most out of a workforce. 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

13. What is wage and hour litigation? • Wage and hour litigation is focused whether the employer’s pay and scheduling practices comply with the FLSA and the state labor laws • Wage and hour cases typically fall into one of two categories: • Exempt status litigation – focus of the case is whether or not the work content for a group of employees meet the criteria for one or more exemptions from overtime • Hourly worker litigation – These types of cases most often relate to the amount of paid time, pay practices, and working conditions 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

14. Why should HR Professionals be concerned about class action wage and hour litigation? • Wage and hour is the largest category of class actions on the federal docket- over 6,500 new class actions are filed per year • Significant numbers of wage and hour class actions are also being brought under favorable state laws (California, New York, Illinois) • Large employers with deep pockets and whole industries are targeted under the same legal theory • With the present economy, there are more disgruntled workers who may go to a lawyer to file a complaint for something else (wrongful term) and end up as the lead plaintiff in a wage and hour class action • Plaintiff class action law firms are mining online resume sites to find new plaintiffs • Plaintiffs class action law firms have lists of clients from all the previous litigation (one plaintiffs’ lawyer boasted he now has over 600,000 clients) 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

15. Why do plaintiffs attorneys bring wage and hour claims? • Easier to prove than systematic discrimination claims • Often can rely upon documents and data • With a large enough group there often is at least some violations somewhere • The potential for huge economic exposure to force a settlement even when claims are weak • Average settlement is over $12 million • Median settlement is approximately $4 million • The legal fees can be huge since plaintiffs attorneys typically receive 25% to 33% of the settlement value • FLSA and state laws have an attorney fees provision – if they prove one violation they can get paid in full 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

16. Exempt Misclassification Claims • Types of exemptions: executive, administrative, professional, computer professional, outside sales, 7(i) commissioned sales • Determining whether a group of employees are misclassified as exempt often involves an examination of: • Time allocated to the duties the employees performed • Content and complexity of the work • The level of discretion and independent judgment the employees exercised • How the company paid them • Because they are exempt, there is often little to no data available that would directly answer legal questions • What are the hours worked – salaried employees do not punch a time clock • Systems are not set up to capture information related to the exemption • If plaintiffs prevail, employees in the class are declared “non-exempt” • This entitles them to back pay for unpaid overtime, liquidated damages, and other potential penalties (meal periods, rest periods, pay stub penalties, waiting time penalties, and PAGA penalties in CA) 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

17. Hourly Worker Claims • Hourly worker cases most often relate to the amount of paid time, pay practices, and working conditions • Paid time claims can include: • Off-the-clock work / Uncompensated time • Illegal time shaving/ auto-deductions • Unpaid time spent donning and doffing protective gear • Travel time (within a plant or facility) • Waiting time, on-call time • Practice and working condition claims can include: • Missed meal periods / missed rest periods • Uniform and expense policies • Unpaid vacation / vacation accrual • Unpaid wages at termination • Technical violations (checks drawn on out-of-state banks, pay card deductions, pay stub does not comply, etc.) 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

18. Why should HR Professionals actively manage wage and hour risk? • Because wage and hour risk relates directly to HR functions • HR is involved in job design • What tasks are performed, exempt status, what is the level of work content, level of discretion to make decisions, and span of control • Creates the labor model • HR is involved in pay decisions, pay policies, and payroll function • What is considered compensable time? • What is the overtime policy (Alternative Work Schedule?) • Independent contractor status • HR is involved in timekeeping decisions, policies and tracking hours worked • When are people allowed to clock in or clock-out? • What are the time editing and rounding policies • Auto-deductions / meal period policies 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

19. Why should you conduct a wage and hour audit? • Because HR departments generate the timekeeping and payroll data that often serves as the primary source of evidence plaintiffs lawyers will rely upon in building their case • Your data – your responsibility • Indentifying risks and issues and solving potential problems effectively cuts on-going liability and economic exposure • The Department of Labor estimates that 80% of employers violate at least one wage and hour provision – are you in the 80% or the 20%? • Because a legal finding of willful misconduct under the FLSA triples the damages • Extends the statute of limitations from a 2-years to a 3-years • Triggers liquidated damages (double damages) • At some point lawyers and upper management will be asking HR what steps were taken to monitor and mitigate during the time period before the wage and hour class action was filed • Reasonable expectation defense for exempt status cases 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

20. What hourly employee issues can be audited? Timekeeping practices audits: • Meal period clock-outs • Auto-deduct? • Did the occur, when did they occur, and how long? • Off the clock work: • Do managers / supervisors have the authority to edit time? • Compare business systems (video) to time-keeping data • Are employees asked to do anything before clocking in or after clocking out? • How long is the activity (duration) • Is the employee under the employer’s control? Payroll practices audits: • Was overtime paid correctly • Were employees paid for all hours worked 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

21. What are some other considerations before conducting a wage and hour audit? • Will it be discoverable? • Plaintiffs will ask for the production of all wage and hour audits that are not privileged (directed by outside counsel) • If you do it internally, it is far more likely to be discovered through the litigation process • Does the study meet scientific standards? • What are you going to do if a potential risk is discovered? • Change practices? • Back pay? • Wait out the statute of limitations? 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

22. Keys to Auditing Employment Practices • Create an electronic process • Organize and implement a document retention policy • Determine what other business process data can be used to track time worked? • Computer network log-in/log-out • GPS data • Email / blackberry • Security key card / parking lot access • Determine what business data is available related to work content • Performance evaluations (include self-evaluations where the employee sets goals, describes their projects, and describes accomplishments) • Project logs where employees provide information on work assignments • Determine what business data is available to track time allocation and decisions made by exempt workers • Electronic certifications? • Surveys / self-studies / time diaries / time and motion studies 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

23. Best Practices – Centralize Data Collection and Retention • Maintain centralized data collection and retention • Retain in electronic format timekeeping and payroll data • Make sure electronic copies remain of HRIS data during system migrations • Maintain an active copy of all data generated through outside processes • Retain in searchable electronic format HR paper records documenting the reasons for deductions, waivers, etc. that are signed by the employee • Retain in searchable electronic formats all records of alternative workweek schedule elections • Create systems to aid in monitoring compliance 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII

24. Contact Information Ali Saad, PhD Managing Partner Robert Crandall, MBA Partner Email: rcrandall@resecon.com Phone: 310-275-9137 Email: asaad@resecon.com Phone: 310-275-9137 2012 NATIONAL INDUSTRY LIAISION GROUP, AUGUST 29, 2012, HAWAII