An Employer’s Duty to Preserve Documents Beyond the FLSA’s Record Keeping Requirements

Benton, Lori - 300dpi
Lori Benton

Executive Summary:  The Fair Labor Standards Act (“FLSA”) requires a covered employer to maintain and preserve certain records for different classifications of employees. See 29 CFR § 516. Many states have similar record keeping requirements. Notwithstanding these statutory record keeping requirements, an employer in compliance can still be subject to sanctions for failure to preserve documents relevant to an employee’s wage and hour claim.  

Case Background: On October 4, 2018, in Schultze v. 2K Clevelander L.L.C., 2018 U.S. Dist. LEXIS 172625, *23-24 (S.D. Fla. Oct. 4, 2018), a Magistrate Judge entered a report and recommendation to a District Court Judge recommending sanctions against an employer for failing to preserve “cash out envelopes” relevant to the employee’s FLSA claim. More specifically, in Schultze, the employee claimed he was denied overtime under the FLSA, and was not paid for all hours worked under Florida law based on the employer’s use of incorrect hours to calculate pay. Id. at *2. In its defense, the employer denied the allegations and asserted the employee was exempted from overtime under the FLSA’s “7(i) exemption,” 29 U.S.C. § 207(i), because he was a commissioned employee. Id. At issue was whether the employer’s destruction of cash out envelopes constituted spoliation. “”Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.”” Id. at *8-9 (quoting Graff v. Baja Marine Corp., 310 Fed. App’x 298, 301 [11th Cir. 2009] [quoting West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999)]).

After each shift, the employee in Schultze was required to provide the employer with an envelope, referred to as a “cash out envelope.” Id. at *4. The cash out envelope included, among other information and documents, the dates and times the employee worked and “point of sales” summaries that were generated by the employer and were the employer’s only records of the actual amount of total sales, collected service charges, and gratuities broken down by cash or credit card payment. Id. at *3-4. The employer transferred manually the information in the cash out envelopes to a commission spreadsheet, which was used by the employer to determine the employee’s commissions – the employee’s only form of compensation.  Id. at *2. The employee’s commission was based on total sales, collected service charges, and hours worked during a particular period of time. Id. at *2-3. The employer shredded the cash out envelopes after the employee filed the lawsuit as part of its regular process of destroying documents every six months. Id. at *6, *19.

The Magistrate determined the destroyed evidence was “crucial” to the employee’s ability to support his unpaid wage claim and to calculate damages; without the original documentation, the employee had to “rely on a second level of data in the form of spreadsheets.” Id. at *14-16. The Magistrate further determined the contents in the destroyed envelopes were relevant to the employer’s overtime exemption affirmative defense because they contained dispositive evidence as to whether the employer inconsistently applied the service charge to all customer checks as the employee argued, which would defeat the exemption. Id at *16.  The Magistrate found the employer had a duty to preserve the cash out envelopes at the time it destroyed them, and the employer acted in bad faith. Id. at *17-19.  The Magistrate rejected the employer’s argument it was “unreasonable” to require it “to incur the burden of storing these records indefinitely.” Id. at *19. The Magistrate concluded that spoliation occurred, sanctions were warranted, and the prejudice to the employee could be cured with an adverse inference instruction to the jury that “Defendant destroyed the cash out envelopes and that it may infer that the documents destroyed were unfavorable to Defendant and favorable to Plaintiff.” Id. at * 20-24.

Discussion:

Although at this stage, the Schultze decision represents only a recommendation to the District Court Judge, who may or may not adopt it, this recent case provides an opportunity to address the importance of an employer’s duty to preserve documents and electronically stored information (“ESI”) in native format, which includes emails, text messages and all other data stored in all types of electronic storage devices. An employer’s duty to preserve is triggered upon notice of a pending, threatened, or reasonably foreseeable claim. Upon such notice, an employer should immediately institute a litigation hold by suspending routine destruction of relevant documents and ESI, and to preserve relevant documents and ESI. A litigation hold memorandum should be provided to the employer’s IT department or someone who performs IT services on behalf of the employer, and to all persons believed to be in possession of relevant documents and ESI. The employer should also periodically remind them of their duty to preserve.

The litigation hold memorandum should identify the relevant categories of documents and ESI to preserve, where and how to search for the documents and ESI, and additional preservation instructions. The relevancy of the documents and ESI are based on the actual, threatened, or anticipated allegations along with all possible defenses to the claims. Accordingly, an employer’s obligation to preserve can become a significant undertaking in threatened and pending class and collective actions that involve multiple locations and employees. Further, the litigation hold may have to be revised based on new allegations and defenses.

Documents and ESI relevant to FLSA claims typically relate to the employee’s hours worked, compensation, commissions, tips, and job duties. This includes, but is not necessarily limited to, (1) payroll records (including commission records, tip records, corrected or edited records, and computation worksheets or spreadsheets), (2) timesheets, timecards, and other documents showing hours the employee worked or could not have worked as alleged, including corrected or edited time; (3) work schedules, (4) payroll registers; (5) paycheck stubs; (6) W-2s and/or other accounting-related documents; (7) GPS logs from company provided telephones; (8) computer logs to show when the employee started and left work, and took breaks; (9) job duties and job descriptions; and (10) similar documents and ESI for comparator employees. As demonstrated in the Schultze case, all original documents and data upon which a relevant spreadsheet is based should also be preserved.

Lastly, Federal courts are authorized to impose sanctions against a party who fails to preserve ESI. “[U]pon finding that the party acted with the intent to deprive another party of the information’s use in the litigation [the court] may: (A) presume that the lost information was unfavorable to the party; (B) instruct the jury that it may or must presume the information was unfavorable to the party; or (C) dismiss the action or enter a default judgment.”  Fed. R. Civ. P. 37(e)(2). Many state courts have similar authority to impose sanctions.  In fact, courts in several jurisdictions have imposed sanctions without a finding of bad faith.

Bottom Line: In addition to complying with all record keeping obligations under the FLSA and state law,  employers have a duty to promptly implement procedures to suspend the destruction of all potentially relevant evidence and to preserve all potentially relevant evidence upon notice of a pending, threatened, or reasonably foreseeable claim, including a claim under the FLSA or a state wage and hour law.  To ensure compliance with the duty to preserve all potentially relevant evidence and that the proper litigation hold is in place, employers are encouraged to work with their IT department and legal counsel.

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