Costly FLSA ‘hot goods’ lesson: Company pays $1.1M for contractors’ illegal wage practices

Beyond Yoga recently paid more than $1.1 million to cover back wages and damages owed to its contractors’ employees who were allegedly shortchanged on overtime pay.

You might be wondering: Why in the world would any company shoulder a seven-figure expense for its contractors’ mistakes?

A little thing called the “hot goods” provisions, tucked into the Fair Labor Standards Act (FLSA), probably influenced the company’s decision.

What are the ‘hot goods’ provisions?

As you well know, the FLSA requires covered employers to pay overtime wages when nonexempt employees work more than 40 hours in a single work week. That’s the part that most company leaders know about.

But there’s more to it in the fine print.

In Sections 12 (a) and 15(a)(1) of the FLSA, the “hot goods” provisions allow the DOL to seek a court order to prevent the interstate shipment of goods produced in violation of the FLSA’s wage and child labor provisions.

Moreover, the hold on the goods can apply not only to the employer who produced the goods but to anyone in possession of the goods, including manufacturers and retailers – unless a statutory exception applies.

To get the court order preventing shipment due to wage violations, the DOL must show the violations took place within 90 days before the goods were removed from the employer’s establishment.

For wage violations, a manufacturer or retailer (like Beyond Yoga in this case) can choose to pay the back wages owed by the employer, which will “achieve compliance and allow the shipment of goods,” according to the DOL.

Case study: Beyond Yoga pays $1.1M, makes other changes

So what happened in this specific case?

According to an investigation by the DOL’s Wage and Hour Division, four California sewing contractors – Good Cash LLC and its associated entities, Good Cash Inc., Premium Quality Apparel LLC, and Premium Quality Apparel Inc. Good Cash and Premium Quality Apparel – willfully failed to pay overtime wages for hours over 40 in a workweek to nonexempt employees who regularly worked an average of 52 hours per week.

A total of 165 workers were denied overtime pay, the agency found.

The investigation also found the contractors falsified payroll records and issued fake checks to mask their illegal pay practices.

When the department executed a court-authorized investigative inspection warrant, three owners attempted to interfere by pretending to be workers, shutting off the power to the facility, and ordering employees to leave the worksite, according to the DOL. (In our new Q&A feature, we covered the best way to handle a DOL investigation.)

During the investigation, the DOL enforced a “hot goods” hold on the apparel produced by the contractors’ employees for Beyond Yoga. This prevented the company from shipping its product that was produced by the contractors’ employees during the relevant time period.

When the DOL notified Beyond Yoga about the hold and the contractors’ violations, Beyond Yoga agreed to pay $582,317 in back wages to the affected employees and an equal amount in damages. Doing so lifted the hot goods hold, as per the provision requirements.

In addition to the financial payout, Beyond Yoga also agreed to make other changes to improve compliance in its product supply chain. Specifically, Beyond Yoga agreed to update its agreements with garment contractors, which will:

• Require full compliance with the FLSA
• Establish a monitoring program, and
• Direct all contractors to display info for workers on how to file labor law complaints confidentially, including through Beyond Yoga’s worker hotline.

“Garment workers are often subject to stringent production requirements and receive some of the lowest wages in the country,” Wage and Hour Administrator Jessica Looman said in a press release. “The garment industry employment model involves multiple layers of contractors and sub-contractors and leaves workers vulnerable to wage theft and exploitation. This case demonstrates that the Wage and Hour Division will hold to account employers across the supply chain to ensure that workers receive the pay they have earned and the rights they are afforded by the law.”

What about the real bad guys?

This wasn’t a get-out-of-jail-free card for the contractors. Even though Beyond Yoga covered the wages and damages, the contractors weren’t completely off the hook.

The DOL got a consent judgment from the court against the Good Cash and Premium Apparel entities and its owners. The judgment requires them to pay $200,000 in civil money penalties for the willful FLSA violations.

As an FYI, this wasn’t the first time Good Cash was cited for similar violations. In 2021, the DOL recovered $29,413 in back wages for nine workers and assessed $3,921 in penalties in a separate investigation.

HR’s next step: Strategic HR practices

Obviously, this isn’t your everyday FLSA violation, but it does highlight the need for HR to have a seat at the table during conversations about the company’s strategic decisions, like researching and choosing trustworthy, reliable contractors and suppliers.

Strategic HR practices go beyond the normal, everyday administrative communication and duties of an HR department. It allows HR teams to have real input in all aspects of the business.