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Fair Labor Standards Act lawsuits are increasing. Are your classifications in order?
A steady stream of wage and hour litigation threatens to inundate employers. Collective claims of employee misclassification as exempt or not exempt from overtime pay under the Fair Labor Standards Act (FLSA) have increased a whopping 77 percent during the first half of the decade, according to researchers at
Trial magazine, citing statistics from the Administrative Office of the U.S. Courts. The numbers surpass equal employment opportunity litigation under Title VII of the Civil Rights Act, and yield verdicts in the hundreds of millions of dollars for employees who were misclassified as exempt and due overtime pay.
Insurance adjusters, assistant managers in stores and restaurants, and call-center employees have all brought lawsuits. Recent activity focuses on pharmaceutical salespeople and loan originators in the financial services industry. Who’s next? The next misclassification lawsuit may be as close as the nearest administrative assistant.
The U.S. Department of Labor (DOL) estimates that as many as 70 percent of employers aren’t in compliance with the FLSA in some material way, according to attorney Tammy McCutchen, who ought to know -- she’s a former administrator of the DOL’s Wage and Hour Division enforcing the FLSA and now a shareholder in the Washington, D.C., law office of Littler Mendelson.
The plaintiffs’ bar knows it too. “It’s like shooting fish in a barrel,” says Wes Redmond, a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz in Birmingham, Ala.
Employers need to find out where they make their biggest misclassification mistakes—and how to correct them without facing lawsuits. Furthermore, the FLSA provides employers no shortage of complexities for the process of determining exempt positions. Some examples include those listed in “Where Are You Vulnerable?”
Defending an FLSA misclassification claim requires confronting the issue early and conducting regular audits of your job descriptions. Educate yourself on the FLSA. If you can prove that you made a sincere effort to comply with the law, your company can avoid significant additional liability—on top of whatever back wages it may owe. For example, if an employee can prove that your misclassification was willful, the period of maximum liability extends from two years to three. Also, in the presence of a willful violation, many courts will hold companies liable for liquidated damages in amounts equal to the back pay owed. The following actions can prevent that situation.
Decide where you’re at risk. “Jobs in the lowest exempt pay band in the corporate structure are the most vulnerable,” says McCutchen. Those jobs are at the border of the employer’s distinction between exempt and nonexempt, so they’re most at risk of misclassification.
“Know where the gray areas are, and focus on them first,” adds Paul DeCamp, a Jackson Lewis LLP partner in Washington, D.C.
Begin with an audit. “Confront the issue squarely, and early, and do it with experienced counsel,” DeCamp advises. Review pay practices and policies. How is overtime computed? Does it include bonuses such as production bonuses? Bonuses should be part of the employee’s regular rate for calculation of overtime unless they’re specifically excluded by federal law and regulations.
“Look at the job description—there’s often a disconnect between what’s on paper and what an employee is actually doing,” DeCamp says.
Develop a regular system of reviewing and updating job descriptions. “Too many employers don’t invest resources in wage and hour compliance until after the fact,” DeCamp observes. “It’s worth investigating before there’s a problem. It needs to happen on an ongoing basis, especially if there’s been a lot of change in the organization. The frequency depends on the nature of the business.”
Consider bringing in outside experts to conduct the ongoing reviews. “If the audit is done in-house, the person who’s doing it may be inclined, or face internal pressures, to justify existing practices,” says DeCamp. Performance appraisals constitute a good time for regular reviews.
Educate yourself, advises Lee Schreter, a shareholder with Littler Mendelson in Atlanta. “The educated employer belongs to SHRM (the Society for Human Resource Management), goes to seminars, keeps informed, makes better decisions and is in a better position to fight the possibility of liquidated damages under the FLSA,” says Schreter. “The FLSA favors employers who can show that they made a sincere effort to comply with the law and that they acted in good faith.”
Mary Willoughby, SPHR, HR director for the Center for Disability Rights in Rochester, N.Y., notes that, through organizations like SHRM and her local chamber of commerce, professionals in her company have the opportunity at least once a year to meet with DOL representatives. It’s possible in such meetings to ask questions—without identifying the employer— and receive expert advice on classifying positions. The DOL officials “will walk you through,” says Willoughby.
DeCamp adds that employers can call local offices of the DOL’s Wage and Hour Division, but should not ask questions that identify their companies. Asking questions isn’t a problem, explains DeCamp. “But if you make the DOL aware that you may have a violation and that you want to settle the matter with them, you can’t really get partway through the process and then withdraw and expect the DOL not to continue to pursue the matter. Be prepared to see it through.”
Set up complaint policies and procedures. Employers usually have sophisticated compliance programs for Title VII, says McCutchen. Have the same for the FLSA, using the same or similar procedures used for Title VII. With FLSA actions now outstripping Title VII actions in the federal courts, proactive steps under the FLSA make sense in the current climate. Mc- Cutchen says a compliance program should include:
McCutchen plans compliance programs for her clients. “Setting up policies and procedures like these addresses the good-faith defenses and cuts the likelihood of double damages,” she observes. “Why not do it? With wage and hour violations, there’s always a violation until you reclassify.”
Consider whether to pay back wages. “There’s disagreement about that,” says Schreter. “At a minimum, by paying back wages, you bring yourself into compliance and avoid the allegation that you allowed the misclassification to continue.” That might help an employer avoid having to pay up to three years’ worth of back wages under the FLSA’s statute of limitations.
DeCamp explains the ramifications of voluntary payment of back wages: “That payment doesn’t bar a future FLSA claim, except in the limited sense that the company would be entitled to an offset in the amount of whatever was already paid. For an FLSA settlement to be enforceable, you need to have it supervised by the DOL or by a court, and then your payment is a bar to future litigation. If you think that there is a significant likelihood that you will be sued and the choice is to face the DOL or a private plaintiff’s attorney, go to the DOL,” DeCamp advises. “The DOL may be willing to settle without potential additional damages, and without imposing the three-year statute of limitations. A private attorney has to get everything he or she can for the employee. In addition, the DOL doesn’t recover attorneys’ fees, whereas a private attorney who prevails under the FLSA is entitled to recover them.”
Inform employees. DeCamp suggests that when a company decides to reclassify positions, HR professionals might tell employees that the company plans to update its practices to ensure compliance with the law. Or, the company can roll out the reclassification as part of a broader package of changes, such as a compensation plan.
“If you make these changes and pay back wages, you won’t get the DOL release, but you do lessen employees’ incentive to sue because they’re receiving money. If you are making a change that signals that your previous practices might not have been compliant with the FLSA or other laws, then paying employees their back wages will generally make them happier than not paying them their back wages,” DeCamp explains.
Bottom line: If employees think the company is being fair, they seldom go to plaintiffs’ counsel, but exempt status remains a potential problem with no magic way to correct mistakes. The decision should be based on the employer’s assessment of the proclivities of the people in the workforce.
In the natural world, there may be little a victim can do to prevent or protect against a flood. But in the world of workplace law, employers can indeed take proactive steps to protect their organizations against the inundation of FLSA litigation that might otherwise engulf their companies.
Diane Cadrain, an attorney and writer, has been covering workplace law for 20 years and is a member of the Human Resource Association of Central Connecticut.
Online sidebars:Why Are Exemption Rules So Difficult?
More Mistakes Employers Make
Litigation Hot Spots
SHRM article:Step by Step(HR Magazine)
Fact sheet:Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act(U.S. Department of Labor’s Wage and Hour Division)
Opinion letter:Exemptions under the Fair Labor Standards Act(U.S. Department of Labor)
Press release:Fourth Annual Workplace Class Action Litigation Report from Seyfarth Shaw Notes Significant Growth in High Stakes Litigation at State Court Levels(Seyfarth Shaw)
Where Are You Vulnerable?
Employers sometimes have trouble determining whether certain positions fit into the following available exemptions.
Administrative exemptions. U.S. Department of Labor officials say that the administrative exemption has sparked more litigation than any other under the Fair Labor Standards Act (FLSA). In 2006, back wages resulting from misclassifications exceeded $4.5 million and represented the greatest dollar amount collected for an FLSA misclassification violation.
“It’s the most difficult exemption to define,” says Wes Redmond, a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz in Birmingham, Ala.
“The classic example is clerical and administrative support personnel, like secretaries. Most administrative assistants don’t make the kinds of decisions necessary for the exemption,” says Lee Schreter, a shareholder with Littler Mendelson in Atlanta, who was an HR professional for years before getting her law degree.
“Employers put ‘administrative’ into the title and think that makes a person exempt,” says Mary Willoughby, SPHR, HR director for the Center for Disability Rights in Rochester, N.Y. “That’s wrong. The person has to have decision-making authority that impacts the organization financially.”
Executive exemptions. Companies commonly misclassify “the manager, supervisor or team leader who doesn’t qualify for the executive exemption by not supervising sufficient employees or not supervising a discrete group,” says Redmond. “A true executive employee has to supervise two or more and can’t share that supervisory responsibility with others.”
Professional exemptions. “In social service organizations, frequently misclassified jobs might have titles like caseworker or service coordinator,” says Willoughby. “Most require a four-year degree, but they’re not social workers. They may exercise discretion, but it’s discretion about individual clients, not basic business decisions.” The actual exemption requires work predominantly intellectual in character and requires consistent exercise of discretion and judgment.
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