Wage and Hour Litigation is Increasing at Exponential Rates

What You Should Know Before Classifying Positions as Exempt or Nonexempt

In my first Insight, I provided some historical context on how the Fair Labor Standards Act (FLSA) is the law requiring employers to classify employees as either exempt or nonexempt from the overtime pay requirements. We also delved into the FLSA classification process.

Under the FLSA, employees are presumed to be nonexempt, which makes them subject to the overtime pay provisions. Each business has the burden to show that it has correctly classified an employee as exempt (from overtime pay provisions) in accordance with the rules under the FLSA.

This issue is especially important during times like this—when we are experiencing an economic downturn. At times like this, there can be an increase in complaints by employees who have been laid off. They may claim that they were misclassified and, because of that, they are due overtime pay going back for two or even more years, not to mention other damages and penalties recoverable under the FLSA. Employers may also be tempted to treat employees as exempt to avoid paying overtime. This can be a costly mistake. So, it is very important that businesses carefully review their employee classifications on at least an annual basis or when they are considering employment actions such as layoffs.

This review process should begin by determining the primary duties of the employee’s position. For instance, are the duties primarily managerial, professional or related to outside sales? Incidentally, there are specific exemptions that may apply to these types of positions although each position must be carefully evaluated to see if they meet all of the requirements of the exemption tests. You should also note that most exemptions have a salary requirement so that employees paid hourly or making a salary of less than the minimum ($455 per week under federal law but higher under many state laws) are not exempt even if they meet the duties test. Employees must meet both the salary and the duties tests.

Now, here are a few steps that an employer can take to get started, when determining if a position should be classified as exempt or nonexempt:

1. Review the job description in order to help assess the primary duties.  What are the significant duties?  What are the most important duties that the employee performs in their role? Note that, while a job description may be useful in determining whether a position is exempt, it is not determinative. The real question is what the employee’s job duties really are. Some employers make the mistake of thinking that a well drafted job description is all that is needed to show exempt status.
2. Observe employees performing their work. You can also interview the supervisors and managers. Does the job description accurately reflect the duties and position responsibilities that you are observing?
3. Update job descriptions on a regular basis. Companies grow and positions can rapidly change which make some job descriptions become out of date. When the job description is used as a basis for classification and it is not updated, it will not accurately reflect the employee’s day-to-day work.
4. Consult with and reference the U.S. Department of Labor’s (DOL) resources. The DOL assists employers by providing fact sheets and exemption test guidelines on their Web site at http://www.govst.edu/uploadedFiles/flsa.exemption.analysis.guidelines.doc

The DOL also helps companies determine if a job meets the requirements of the classification criteria that were previously mentioned such as the executive, administrative, professional and outside sales positions by providing helpful guidance and tools including tutorials, PowerPoint presentations, checklists, etc. With the resources provided by the DOL, you can learn about exemption criteria and be guided through specific questions to help you reach your decisions. For example, “Does this position pay at least the minimum salary requirement?” and, “Are the primary duties exempt in nature?”

As stated on my previous Insight, it is important to recognize that some states have more stringent labor and overtime laws than those of the federal government. For more information about state and federal labor laws, visit www.dol.gov/esa/contacts/state_of.htm and www.dol.gov/.

All this said—employers are finding it increasingly difficult to keep up with the hundreds of pages of regulations. As a final word of caution—especially because wage and hour litigation is increasing at exponential rates—in order to minimize risks, employers must be very careful when classifying employee positions. It is always best to consult with legal counsel when making decisions relating to employment law. This is an area where a little prevention can go a long way.

Each business has the burden to show that it has correctly classified an employee as exempt in accordance with the rules under the Fair Labor Standards Act.