A collective action lawsuit filed Wednesday in Dallas accuses ailing video rental giant Blockbuster of intentionally refusing to pay overtime to a large number of its office employees.

The lawsuit presents more bad news for Blockbuster in the midst of a board proxy fight with financier Carl Icahn and on the heels of a wave of recent setbacks, including a $630,000 settlement of a different class action for misleading consumers in its No More Late Fees campaign, a failed merger with Hollywood Video, and the announced layoffs of 20% of Blockbusters corporate staff from its Dallas and McKinney offices.

The lawsuit, filed by a former employee on behalf of numerous current and former employees, describes an alleged plan by Blockbuster to trick its employees into believing that they were not entitled to recover for overtime they worked.

Under federal law, merely paying an employee on a salary basis instead of hourly does not deny the employee a right to overtime. Instead, unless an employee falls within one of the narrow categories outlined by law, even a salaried employee is entitled to extra pay for hours worked over forty.

Last year, the Bush administration implemented new regulations governing what employees are entitled to overtime. According to the lawsuit, Blockbuster converted a large number of employees from salaried to hourly in August 2004, telling them in meetings, memos and publications that they were entitled to overtime only under the new regulations.

Blockbuster did not tell its employees, the lawsuit claims, that the converted employees had been entitled to overtime before the new regulations. Blockbuster began paying employees only for overtime they worked after August 2004, leaving uncompensated, the lawsuit contends, all overtime worked before the conversion.

Employers are always afraid to admit they are wrong and begin paying employees overtime, pointed out Matt Hill, an attorney representing the employees in the lawsuit. Once an employee finds out he’s entitled to overtime, he’s more likely to want his employer to pay him what he’s already earned.

Unfortunately, what Blockbuster did has not been an uncommon strategy, explained Hill, who previously defended large corporations. Here, Blockbuster tried to get the best of both worlds, Hill claimed. It was able to correct its illegal practices to avoid future lawsuits. At the same time, it used the Bush regulations for cover to avoid paying its employees what it already owed them.

The primary effect of the regulations was to give overtime to some very low-salaried employees and to take it away from some high-salaried ones, Hill said. For most employees who work in offices, like the ones at Blockbuster, there was no change. Another collective action lawsuit pending in Florida addresses whether Blockbuster store employees were illegally denied overtime.

Blockbuster again tried to mislead its employees, the lawsuit claims, by soliciting releases from newly laid off workers that would appear to surrender the employees right to pursue the overtime Blockbuster owes without conforming to the law on the release of wage claims. That release is unconscionable, Hill said. Its yet another attempt by Blockbuster to trick its employees out of the overtime they earned. It is completely unenforceable for overtime lawsuits.

The lawsuit seeks to recover overtime wages for hours worked by all employees who were converted from salaried to hourly in Blockbusters corporate offices in Dallas and McKinney. Because Blockbuster intentionally misled its employees regarding their overtime rights, the lawsuit claims, each employee is entitled to recover double the amount that Blockbuster should have paid in the three years leading up to the August 2004 switch. Moreover, because Blockbuster failed to keep time records, Hill notes that the employees are entitled to a presumption that their own reasonable estimates of the hours they worked are correct.

Hill has not been able to learn from Blockbuster yet how many Blockbuster employees were affected by the actions the lawsuit alleges. Based upon the information he has obtained, though, he believes that number to be in the hundreds. With a potential recovery for some employees who worked a great deal of overtime exceeding $100,000, Hill believes the total amount available to employees in the lawsuit could be several million dollars.

It all depends on how many employees sign up, Hill said. Unlike the class action Blockbuster settled resolving consumer claims that Blockbuster misled them regarding late fees, employees must contact Hill early in the lawsuit to claim any overtime awards they are due.

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