What You Don’t Know Could Cost You $18 Million

Overtime issues have cost some companies millions of dollars.

Don’t let that happen to your business.

Employers should put in overtime research to make sure they are in compliance with the Fair Labor Standards Act (FLSA) or face the prospect of costly law suits.  The FLSA is a federal law that guarantees pay at time-and-a-half for overtime work for most employees.  In recent years, employers such as Starbucks, Bank of America, and Rite Aid have paid $18 million, $22 million, and $25 million respectively to settle FLSA claims by employees who claimed they were improperly designated as exempt from the FLSA overtime requirements.  So what do you need to know?

Your Liability

Employers who have misclassified employees and denied overtime payments are liable for double damages comprised of the amount of overtime pay the employee should have received plus an equal amount in liquidated damages.  The employer is also liable for all attorney’s fees and costs incurred by the employee in recovering the denied wages.

To avoid liability, employers should conduct an in-house audit of wage practices and job classifications in order to make sure that all employees are correctly designated as overtime exempt or non-exempt and are receiving the appropriate overtime payouts.  Good opportunities for this kind of self-evaluation occur following an internal reorganization, the hiring of new employees, or an increase in business that affects the number of hours worked by employees.  Some employers who conduct an audit also end up determining that employees who were not classified as exempt actually qualify for exemption from overtime pay, thus allowing the employer to reclassify the position and eliminate some overtime wages.

Know Your Exempt Status

One effective way that a company can conduct such an audit begins with the development or updating of detailed job descriptions by its own human resources department or by a consultant.  Next, there should be a thorough review of initial exemption determinations by an attorney with expertise in this area of the law.  In addition to conducting periodic audits, employers must keep a careful record of all hours worked by their employees so as to comply with the FLSA and to maintain proper records in case an employee challenges his overtime pay.

Employees in executive, administrative, professional, certain computer, or outside sales positions can be exempt from FLSA overtime requirements, but each employee needs to be evaluated on a case-by-case basis and not solely by job title.  This distinction is an important one, as some employees with the same job title actually do different jobs and may require different classifications.

Employers may think that it is self-evident what types of employees are entitled to overtime pay and which are not, but the line is not as clear as many may think.  For example, employees “employed in a bona fide administrative capacity” typically comprise the majority of a company’s overtime exempt employees.  Determining whether an employee works in an administrative capacity, and thus qualifies as exempt from overtime pay requirements, is a multi-layered process.  The first and simplest layer of analysis requires examination of the employee’s salary.  Only administrative employees earning more than $455 per week have the potential to be exempt from overtime pay; however, that determination will depend on the types of duties performed by the employee.

Once it has been determined that an administrative employee makes more than $455 per week, the analysis becomes more nuanced.  Federal Department of Labor regulations provide that, in addition to the salary requirements, the employee’s “primary duty” must be the performance of office or non-manual work “directly related to the management or general business operations of the employer or the employer’s customers.”  Additionally, in performing those primary duties, the employee must exercise “discretion and independent judgment with respect to matters of significance.”

Department of Labor regulations provide further explanation of the requirements, and many employers might be surprised how stringent the criteria can be for an administrative employee to qualify as overtime exempt.  For example, simply because an employer will suffer financial losses if the employee fails to perform the job properly does not mean that the employee exercises discretion and independent judgment.  Rather, the exercise of discretion and independent judgment “involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.”  Furthermore, the employee must have the authority to make her independent choice free from immediate direction or supervision.  An employee who relies on a company’s established policies is typically not exercising discretion or independent judgment sufficient to be exempt from overtime requirements.  The requisite degree of discretion and judgment must be exercised in regard to “matters of significance.”

The regulations provide insight into the other criteria, such as what constitutes an employee’s “primary duty” and when work is “directly related to the management or general business operations of the employer or the employer’s customers,” as well as examples of types of activities that typically do and do not satisfy the different requirements.

Separate criteria come into play when determining whether an employee qualifies as overtime exempt as an executive employee, a professional employee, an employee engaged in outside sales, or a qualified computer employee.  If an employee acts in multiple roles, there are special provisions for combining duties considered exempt under one classification with those that are exempt under another, thus potentially permitting classification of the employee as overtime exempt.

For example, if an administrative employee does not spend sufficient time in her primary administrative duties to qualify as overtime-exempt, if she performs additional overtime-exempt executive and/or computer duties, all of her exempt duties may be combined and the employee classified as overtime exempt.

The FLSA is stacked in favor of employees and allows them up to 2 years to claim an employment violation, 3 years in the case of willful violations.  Employers can protect themselves from potentially costly law suits by conducting periodic audits as their businesses continue to grow and evolve.

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