Employer Self-Audits of Exempt Status Aren’t Universal

Significant costs anticipated if proposed rule adopted

By Allen Smith October 29, 2015

Most employers say they perform regular self-audits of their classification of employees as exempt or nonexempt from overtime protections, according to a Society for Human Resource Management (SHRM) survey—HR Perspectives on Overtime Exemptions—released Oct. 29, 2015. That’s good news, because all employers should be reviewing each position’s exempt status, given the proposed rule from the Department of Labor (DOL) that would modify which employees are considered eligible for overtime pay. The survey revealed great concern among employers that the proposed overtime rule will result in a significant increase in organizational costs.

In its proposed overtime regulations, the DOL would raise the salary level for employees to be considered exempt to the equivalent of the 40th percentile of weekly earnings for full-time salaried workers. The department estimated that the 40th percentile would be $970 per week or $50,440 in 2016, when the rule is expected to take effect.

The proposed rule would add a new provision automatically updating the salary level every year.

The threshold salary level for exempt status currently changes only through the rulemaking process. The last change to the salary level was in the 2004 Fair Labor Standards Act (FLSA) regulations when the Department of Labor set the minimum salary for exempt status at $455 per week or $23,660 annually.

Some Never Review Classifications

Of 337 HR professionals answering how often their organization reviews exempt and nonexempt classifications, 53 percent said they review when a position becomes open. Thirty-nine percent said they review the classifications annually. Two percent said they review monthly and 6 percent said they never conduct a review.

James Swartz Jr., an attorney with Polsinelli in Atlanta, said he wasn’t surprised to hear that 6 percent never review their employee classifications. “It is my experience that many smaller businesses lack the human resources or legal support to appreciate the impact of the FLSA on exempt classification,” he noted. “The fewer employees an employer has, the less likely it is that the company engages in classification reviews.”

But the DOL audits even smaller businesses’ exemption decisions, he cautioned.

So periodic employer self-audits “are critical,” said Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich., calling the fact that some employers never review classifications “quite troubling.”

“Jobs evolve, case law develops, regulations change. Employers need to do reality checks to reduce their exposure to liability,” Boonin added. Also, if employers do these audits, they may be able to overcome a willfulness claim, which otherwise increases the statute of limitations to bring lawsuits by a year. If these self-audits have been conducted, though, the employer may use the good-faith defense, which reduces exposure to liquidated damages that double a plaintiff’s damages award.

Swartz said that a monthly review of exempt classifications could be useful in states with a more quantitative rule for assessing the employee’s duties, such as in California, where at least 50 percent of an exempt employee’s time must be spent on exempt duties. More frequent reviews “could provide an employer greater assurance that the exemption duties requirements are met,” he said.

But in Boonin’s view, “Monthly reviews of all jobs would be overkill. If less often periodic reviews are performed correctly and thoroughly, it will be unlikely that jobs will change greatly from month to month so as to change the outcome.”

“Monthly reviews should not be necessary except in limited circumstances,” said Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., and former acting administrator of the Wage and Hour Division. “One example may be for positions newly classified as exempt, and an employer wants to ensure that the classification is correct and the duties are in fact performed.”

In any event, “The proposed methodologies to automatically update the salary level required to qualify for the exemptions would likely require annual reviews,” Swartz noted. But compared to California’s duties test, “an annual salary level review would provide bright-line rules for businesses to apply.”

Costs of Reclassifying

Surveyed HR professionals also were asked how significant an impact there would be if their organizations had to reclassify exempt positions to nonexempt jobs.

They responded that there would be a real impact:

  • 76 percent said reclassifying may result in previously unbudgeted overtime costs.
  • 70 percent said reclassifying may lead to an increase in employees’ opportunities to earn overtime pay.
  • 61 percent said reclassifying would result in less workplace flexibility for employees and less autonomy over choosing hours and setting schedules.
  • 42 percent said reclassifying may result in reduced opportunities for career advancement within the organization.

Duties Test

The DOL has not proposed changes to the duties test, but HR professionals were asked about the potential impact of such a change.

If the final overtime rule required that, as in California, employees who spend more than 50 percent of their time on nonexempt tasks be classified as nonexempt:

  • 76 percent said that less than 25 percent of the workforce would need to be reclassified.
  • 20 percent said that between 25 percent and 50 percent would need to be reclassified.
  • 3 percent answered that between 51 percent and 75 percent would have to be reclassified.
  • 1 percent answered that more than 75 percent would have to be reclassified.

Of those surveyed, 66 percent said exempt employees regularly engage in nonexempt activities. Among these employers, 80 percent said that 40 percent or less of their workforce regularly engages in exempt and nonexempt duties. Fifteen percent said between 40 percent and 70 percent do both. And 5 percent said that more than 70 percent of their workforce engages in both kinds of duties.

Even if the DOL doesn’t require exempt employees to perform exempt tasks at least 50 percent of the time, employers still will have to ensure exempt employees perform some exempt duties—just not a specified percentage.

Robinson noted, “It is always wise to review periodically the duties performed by exempt employees to make sure that they satisfy the various tests and that exempt employees in fact perform the exempt duties.”

And Swartz said, “Regardless of the language of the final rule, those job positions with duties that marginally qualify for an exemption will remain subject to scrutiny by the DOL and likely are targets of misclassification lawsuits.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.


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