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There is a new trend of claims over wage disputes that is forcing small business owners to defend themselves in actions brought by their employees, many of them former employees, with their lawyers.

These are tough economic times for the hospitality industry. The economy has taken its toll, with tourism down in many areas, regular customers staying at home more, and rising fuel costs resulting in rising food costs. To add to the mix, lawyers are filing lawsuits against small businesses on behalf of their clients (namely former employees), looking to prove that all deserved employee wages were not paid.

The claims are particularly attractive to plaintiffs because attorneys are handling the claims on a contingency basis. Brought many times as "collective actions" or "class actions," there is a potential under federal and state laws for the plaintiffs to also collect attorneys' fees. The cost of defending against a collective or class action can be exorbitant for a small business owner, particularly if uninsured.

There is an option, particularly with smaller claims, to seek an administrative review of the wage issue by the Department of Labor, rather than resort to litigation. However, plaintiffs, often with encouragement from attorneys seeking to do this type of work, have incentive to see their cases proceed through litigation because they do not need to pay for their attorneys' fees up front. If successful with a suit, those fees are collectable from the defendant. Tara C. Fappiano from the firm, Havkins, Rosenfeld, and Ritzert claim, "Often the attorneys' fees far exceed the value of one individual claim. While not every claim lacks merit, small business owners are often finding that it is less expensive to settle even meritless claims to avoid the pitfalls and expense of being involved in a long, drawn-out class action litigation." Indeed, the costs of such a litigation have the potential to put some business owners out of business.

Under Federal Law, there is a unique procedure in which representative employees are allowed to bring an action for and on behalf of themselves and "other employees similarly situated." Even before discovery is completed, these representative employees may ask the Court to "conditionally certify" the action. This means that the employees' lawyers are then permitted to send out notices to the business' "similarly situated" employees, current and former, which essentially invites those employees to join the lawsuit. The standards for granting this request are relatively liberal and difficult to defeat. Certainly, this procedure, which has its own price tag for defendants, and for which plaintiffs may be reimbursed fees, creates a financial and administrative hardship for business owners, not to mention an issue with their business reputation, particularly in cases that lack merit.

What can a restaurant owner do to protect themselves from these claims?

Certainly, the first step is to become familiar with the applicable wage laws and make every effort to comply. This includes keeping accurate records. Businesses should consider retaining a lawyer to perform an employment law compliance review, to stave off potential suits, and demonstrate that the business made good faith efforts to comply with applicable laws, in the event of a suit. Such a demonstration may defeat a claim for attorneys' fees and liquidated damages.

There is also insurance available to cover employer practices liability (EPL). According to the LRP Jury Verdict Research Database, small employers with 15-100 employees were the targets of 41% of employment-related claims. In recent surveys, 74% of businesses defended an employment related lawsuit in the last three years, mostly wage and hour dispute and discrimination claims. Indeed, employment matters have become the number one cause for litigation in the last three years.

Such insurance is far more affordable than defending against such suits. Basic EPL insurance coverage can be purchased for as little as $600 per year, for legal defense and $100,000 of liability coverage. This coverage may include wage and hour disputes, discrimination claims, sexual harassment claims, wrongful dismissal claims, retaliation claims, and several other areas of risk for restaurants. Actual costs depend on the number of employees, type of business, and dollar amount of coverage, but are certainly more cost effective than defending against an lawsuit, which odds suggest is inevitable.

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