Personnel(ly) Speaking
Personnel Management Systems, Inc.
Rising Tide of Wage and Hour Lawsuits – Will You be Swept Away?
*Morgan Stanley settles overtime lawsuit with financial advisors for $42.5 million
*Electronic Arts settles overtime lawsuit with software engineers for $14.9 million
*Automobile Club settles overtime lawsuit with “outside” sales agents for $19.5 million
*Starbucks settles an overtime lawsuit with store managers for $18 million
The once steady stream of wage and hour allegations has turned into a raging river of claims and settlements with enormous payouts. According to researchers at Trial magazine citing statistics from the Administrative Office of the U.S. Courts, claims for employee misclassification as exempt or not exempt from overtime pay under the Fair Labor Standards Act (FLSA) has increased a whopping 77 percent during the first half of the decade. In fact, in 2007, rulings in wage and hour disputes exceeded those in employment discrimination and ERISA. It is very likely that employers will see this trend continue throughout 2008.
Charting Your Way Through Classifications
All employees are classified as “non-exempt” and eligible for overtime pay unless due to their job duties and responsibilities they can be otherwise classified as exempt. As an employer, it is important to remember that the distinction between exempt and non-exempt employees is not a random assignment. “Misclassification” claims occur under FLSA when employees are wrongfully classified as “exempt,” and consequently denied overtime pay to which they are legally entitled. To appropriately classify an employee as exempt from overtime, the employee must meet two sets of requirements: 1) pass a duties test and 2) be paid on a salaried basis. The employee’s position must fall within at least one of the following federal categories to satisfy the exempt test:
Administrative Exemption Test
To qualify for this exemption, all of these standards must be met.
· The employee's primary duty office or non-manual work is directly related to the management or general business operations of the employer or the employer’s customers.
· The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
· The employee must be paid on a salaried or fee basis of at least $455/week ($23,660/year).
Executive Exemption Test
To qualify for this exemption, all of these standards must be met.
· The employee's primary duty is managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise.
· The employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent.
· The employee should have authority to hire or fire other employees, or their suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change or status or other employees should be given particular weight.
· The employee must be paid on a salaried basis of at least $455/week ($23,660/year).
There are also other Exemption Tests such as those for the Professional, the Computer Professional, the Outside Salesperson, the Highly Compensated Employee, and a Business Owner/Executive. In addition, some states (such as Washington) also have their own exemption tests and standards that must be met.
Use a Compass - Don’t Just Follow Where the Waters Take You
It can be challenging to maneuver through this issue so we are often asked to assist with FLSA-related questions. Here are some insights to help you navigate through some frequently asked questions.
Question: Everyone here is salaried - do we have to worry about exempt or non-exempt classifications?
Making employees salaried does not automatically make them exempt. If a non-exempt employee (salaried or hourly) works overtime they are entitled to overtime pay.
Question: Everyone here is a professional- doesn’t that make them exempt?
What an employer may view as a “professional” may be defined differently under the FLSA standards. We recommend reviewing the essential job duties for each position and their associated salaries to ensure they qualify for the exemption under this classification.
Question: We’re working on the job description for this position. How do we make the position exempt?
Giving an employee a different title or inflating his or her job description does not make an employee exempt. Employees' actual duties determine whether or not they are exempt.
Question: Since we are a small/medium-sized company, do we have to worry about the Department of Labor (DOL) conducting random wage and hour audits as often as they do with large companies?
The reality is that more audits are done as a result of a disgruntled employee making a claim. The claims can come from employees of any company, regardless of size.
Troubled Waters - Misclassification Penalties
In 1947, with the passage of the Portal-to-Portal Act, Congress amended the FLSA to include a uniform federal statute of limitations, giving plaintiffs two years to file claims for unpaid wages, overtime or liquidated damages. If a plaintiff can prove an employer willfully violated the FLSA, the maximum period of liability expands to three years. While FLSA legislation was drafted in decades past (1938 to be exact!) its legacy is still very applicable in today’s business environment.
To make matters worse, some states have also enacted laws that make awards of triple damages mandatory. These may even apply to inadvertent violations which do not require any evidence that an employer acted willfully.
Navigating the waters - How to reduce your risk
A periodic review of your organization’s payroll practices and procedures and your compliance with FLSA requirements makes good business sense. This kind of review can reveal most potential violations, as well as reduce an employer’s vulnerability to an FLSA misclassification lawsuit. Employers can also establish their good faith by building a solid foundation of well-drafted, consistently-enforced policies, and by relying on expert advice and counsel regarding compliance issues surrounding their FLSA obligations.
If you need assistance navigating through FLSA challenges or any other Human Resource issues, call on Personnel Management Systems.
Personnel(ly) Speaking is a monthly comment on HR issues of importance. It is intended to provide general information and must not be construed as legal advice. Reproductions are allowed as long as credit for this information is given to PMSI. We welcome your comments, questions, and concerns. © PERSONNEL MANAGEMENT SYSTEMS, INC., Corporate Office (425) 576-1900, Colorado Office (720) 497-0200, www.hrpmsi.com.