Wal-Mart managers were told in 2000 that employees were not taking breaks required under company policy and state laws, but ignored the findings of the company's own internal audit, court documents show.

"Stores were not in compliance with company and state regulations concerning the allotment of breaks and meals," said the report, referred to as the Shipley Audit. A judge said Wal-Mart's management, instead of responding to the audit's findings, "put their heads in the sand."

Wal-Mart Stores Inc. now faces more than 70 lawsuits across the country accusing the Bentonville retailer of failing to award rest or meal breaks to its employees or forcing employees to work off the clock without pay.

Since December 2005, Wal-Mart has lost all three of the wage and class-action lawsuits it has faced in courtrooms, with damages now totaling nearly $400 million. And the third case, which hasn't concluded, has the potential to reach $2 billion in damages.

In April 2009, three more wage and class-action lawsuits are scheduled to go to trial in courts in Missouri , South Carolina and Washington .

A review by Arkansas Business of court records from several of the lawsuits shows Wal-Mart had received complaints from employees and knew of managers' concerns that hourly employees weren't getting required breaks.

Plaintiffs' lawyers have used the Shipley Audit as a key piece of evidence against Wal-Mart. The attorneys argue that Wal-Mart regularly understaffed its stores and, to compensate for the labor shortage, made its employees work through their earned rest and lunch breaks to complete the assigned tasks.

Wal-Mart has denied the allegations of wrongdoing. Wal-Mart said in court filings that employees didn't miss breaks or meals, or if employees did miss breaks, they did so voluntarily for reasons unrelated to the demands of work.

"Our policy is to pay every associate for every hour worked and to make rest and meal breaks available for our associates," Daphne Moore, a Wal-Mart spokeswoman, said last week. "And any manager who violates either of these policies is subject to discipline - up to and including termination."

Moore didn't want to comment specifically about the facts in the cases because they are pending or on appeal.

In a class-action case in Minnesota , District Court Judge Robert King Jr., in a 151-page order released June 30, found that Wal-Mart breached its contract and violated state labor laws by not giving its employees breaks. He awarded the class of about 56,000 workers $6.5 million. (King's order is available here (large pdf).)

The next phase of that trial is scheduled to start Oct. 20. Wal-Mart faces a penalty of up to $1,000 on each of the 2 million state labor violations. Under Minnesota law, money assessed for the labor violation penalties goes to the state, not the class members. But punitive damages, or those imposed to punish the wrongdoer, will be decided during the trial and will go to the class if awarded.

"I don't know if it's going to be $2 billion," said Bill Sieben, a Minneapolis attorney who represented the employees in the Minnesota case. But, he said, even if the jury fines Wal-Mart only $100 per violation, "then it's a $200 million exposure. They've got a very serious risk of a huge verdict against them."

If Wal-Mart receives the maximum $2 billion in penalties, it would be almost 16 percent of its net income for the year ending Jan. 31. Wal-Mart reported record revenue of $378.8 billion and net income of $12.7 billion for its year ending Jan. 31.

"Payroll Pressure"
Wal-Mart's managers throughout the country were under pressure to keep labor costs down.

Between September 1998 and January 2004, Wal-Mart attempted to control payroll costs by having managers stay at or below the previous year's wages as a percentage of sales in each of its stores, according to King's order.

"The importance of this wage percentage goal was communicated from the very highest levels of the company," King wrote in the order.

Regional, district and store-level managers who failed to meet Wal-Mart's expectations on payroll could be disciplined, King said.

King said that Wal-Mart should have known "this constant payroll pressure" could lead to understaffing a store, "which might in turn have made meal and rest break compliance more difficult."

Also, managers would receive bonuses based on profits of the store, said Justin Pearl, a Minnesota attorney who helped handle the case for the plaintiffs.

"But they wouldn't get paid or wouldn't get rewarded in any way, shape or form for making sure people were getting their breaks and meals," Pearl said. "That was just given very, very low priority. So what gets measured is what gets done."

Wal-Mart would survey its employees during what it called Grass Roots meetings. After such a meeting, store managers were supposed to talk about the results of the meeting and create an action plan.

"A major issue from Grass Roots was that our associates are not receiving scheduled breaks and lunches," said an Aug. 3, 1998, memo from Kendall Schwindt, a senior executive, to Wal-Mart's senior managers. "Not only is this against Company policy, it is also a violation of Federal law."

Wal-Mart then started studying the issue more closely in 1999 and 2000. A number of individual store audits showed that employees were being "denied large numbers of breaks," according to the brief by attorneys seeking class-action status in a Massachusetts court.

The Shipley Audit
In 1999, a judge in Las Animas County District Court in Colorado approved class certification for Colorado Wal-Mart workers who charged they weren't getting paid for rest and meal breaks.

To see if employees were missing breaks, managers commissioned an audit, which would come to be called the Shipley Audit and which was conducted by Wal-Mart auditor Bret Shipley.

In June 2000, 128 Wal-Mart stores across the country were audited. Part of the audit called for a review of time clock records to determine if the stores were in compliance with company policy and government regulation.

On July 17, 2000, Wal-Mart's auditors issued its findings: "Wal-Mart may face several adverse consequences as a result of staffing and scheduling not being prepared appropriately," the report said.

Wal-Mart's policy was to provide for two 15-minute paid rest breaks for every six hours worked. Wal-Mart's contract provided for an unpaid 30-minute meal break for every six hours worked.

Labor laws on work break time vary in each state, but most states require employees to receive a lunch break if they work more than seven hours a day.

Auditors found violations in 127 out of 128 stores studied during a one-week period, listing 15,705 "too few meals" and 60,767 "too few breaks."

The Shipley Audit (pdf) also found extensive violations of child-labor laws. The allegations of child labor violations aren't a part of the class-action lawsuits.

More than 50 members of Wal-Mart's senior management team in Bentonville received the report, including Wal-Mart's then-president, Tom Coughlin, and Charlyn Jarrells Porter, a senior member of Wal-Mart's Human Resources Department and Policy Committee. (In an unrelated matter, Coughlin would later plead guilty in 2006 to wire fraud and tax evasion. He was sentenced to 27 months of home detention and ordered to pay $461,000 in fines and restitution.)

"Rather than addressing the audit methodology or the results, Wal-Mart executives chose to ignore the results, based, at least partially, on the rationale that exception reports were not accurate, and therefore the audits must be flawed," King said.

If an employee didn't clock out for a meal or rest break, the missed time would show up in an exception report. The discrepancies are supposed to be investigated before payroll is finalized, but weren't, plaintiffs' attorneys argue.

Wal-Mart downplayed the importance of the Shipley Audit and said the auditors failed to interview employees to find out the reasons for the missed breaks.

Wal-Mart argued that there were many exceptions contained in the reports and the exceptions were not necessarily policy violations. For example, Wal-Mart said, the employee could have voluntarily failed to take a break to leave early to care for a sick child.

"Piece of Evidence"
Wal-Mart's management, however, decided to make a policy change regarding breaks.

On Sept. 29, 2000 - a little over two months after the Shipley Audit was released - Wal-Mart began discussing eliminating the policy of clocking in and out for breaks.

One note from the discussions about clocking in and out said: "Breaks - Piece of Evidence."

"No Wal-Mart witness took responsibility for writing these comments or shed any light on why they were written," King said. "Accordingly, the Court reads them at face value."

On Feb. 10, 2001, Wal-Mart changed its break and meal policy and stopped employees from recording their breaks by clocking in and out, leaving Wal-Mart without "a systematic method for determining whether employees were receiving their rest breaks," King said.

In 2001, staffing problems continued at Wal-Mart stores, the plaintiffs' attorneys said. The plaintiffs argued in the cases that the environment of chronic understaffing led to missed breaks.

Starting in 2002, Wal-Mart asked employees to agree or disagree with this statement: "Where I work, we have enough associates to get the work done."

In 2002 and 2003, more than half of all employees who responded said there weren't enough employees to get the work done. The plaintiffs' attorneys argued that the high negative responses indicate a "serious and chronic staffing shortage that Wal-Mart's managers allowed to persist." King found, though, that it is "typical human behavior to complain about the amount of work one has to do, and that one does not have enough help."

Still, "the Court does find that the high rate of negative responses should have alerted Wal-Mart of a potential problem," King said.

By 2003, lawsuits against Wal-Mart were starting to pile up.

In 2004, the Colorado wage-and-hour lawsuit settled for $50 million, published reports said.

Other class-action cases across the country were making their way toward juries. The first verdict against Wal-Mart came in December 2005. A California jury awarded Wal-Mart employees $172 million in damages because they weren't provided breaks required under California law. The judgment was the 10th-largest verdict in 2005 according to The National Law Journal. The judge in the case later tacked on another $26 million to cover costs and attorneys' fees.

In 2006, Wal-Mart faced another jury in Philadelphia, where Wal-Mart employees also said they weren't paid for their breaks. While the jury found in favor of Wal-Mart on the plaintiffs' meal-period claims, the jury found the employees worked off the clock and missed rest breaks. The jury awarded the workers $78 million for back pay. The judge increased the judgment to $188 million to cover the costs of other damages and court costs and attorneys' fees.

Wal-Mart has appealed both rulings.

Wal-Mart "believes it has substantial factual and legal defenses to the claims at issue," the company said in its 2008 annual report.

Violations "Pretty Obvious"
One law professor who has been following the Wal-Mart cases said the chances of winning on appeal are possible, but not probable.

"My sense is the violations alleged seem to be pretty obvious to the jury," said Carl Tobias, a professor at the University of Richmond School of Law in Virginia . "I think it's unlikely that they would be overturned on appeal, but it could happen."

Still, it could take years before the cases play themselves out, he said.

Most states have two levels of appeals, a state court of appeals and then a state Supreme Court, which the cases could go through.

"At some point, maybe Wal-Mart will decide not to fight them, but settle," Tobias said. "Even that would be a lot of money. And then you've got to be willing to do it."

© 2008 Arkansas Business

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