Overtime Rule Changes May Reveal Misclassified Employees

Employers should conduct regular wage audits to avoid FLSA errors

Overtime Rule Changes May Reveal Misclassified Employees

​As HR departments focus their attention on reclassifying employees or raising their salaries in accordance with the new federal overtime rule, they may discover that certain employees have been misclassified as exempt for some time.

For employees to be properly classified under the Fair Labor Standards Act's (FLSA's) administrative, executive or professional exemption, they must earn a minimum salary and perform certain duties.

FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

· FLSA Overtime Rule Resources Guide
· Compliance Checklist· Infographic

Effective Dec. 1, the salary threshold for these exemptions will rise from $23,660 to $47,476. Employees earning less than the threshold must be paid time-and-a-half for all hours worked beyond 40 in a workweek.

Although no changes have been made to the duties tests, as employers make reclassification decisions based on the new salary threshold, they may realize that some employees don't perform the necessary tasks to qualify for an exemption.

[SHRM members-only toolkit: Determining Overtime Eligibility in the United States]

The laws governing how employees are classified and paid are complicated and varied, said Brett Bartlett, an attorney with Seyfarth Shaw in Atlanta. "It's not surprising, frankly, that when businesses turn their attention to one area of legal compliance they discover the need to focus on other risk points."

It's important to note that employees who may have been properly classified initially may not be properly classified now, explained William Horwitz, an attorney with Drinker Biddle & Reath in Florham Park, N.J.

He told SHRM Online that there are two main reasons why employees who were once properly classified may now be misclassified:

  • The job duties that employees actually perform and the amount of time spent on them often change as the needs of the business change.
  • The legal requirements for exemptions change.

Bartlett noted that the new FLSA overtime exemption rule presents the opportune moment to fix issues revealed through employers' compliance efforts.

Changes to Overtime Rule

"Dec. 1 is right around the corner," Bartlett said. Businesses that have not yet begun to assess how the new overtime rules will affect them should identify employees who fall under the applicable exemptions and are making less than $913 per week or $47,476 per year, he explained. Employers should determine whether to increase their pay or reclassify them to nonexempt status.

"For those remaining exempt, at the very least, businesses should confirm that the jobs and the employees in them perform duties that will satisfy the duties test for one of those exemptions," he added.

Horwitz noted that employers should also review their pay practices to ensure that properly classified exempt employees are actually being paid as exempt employees.

"For example, an employer should make sure it doesn't make unlawful deductions from an exempt employee's pay based on the number of hours he or she works," he said.

Addressing Misclassifications

What do employers do if they realize some employees have been misclassified? The obvious first strategy is to reclassify the relevant employees to nonexempt status, said Michael Abcarian, an attorney with Fisher Phillips in Dallas.

Employers should start tracking their time, paying them a regular rate and compensating them for overtime hours, he said.

[SHRM members-only toolkit: Calculating Overtime Pay in the United States]

Converting employees to overtime-eligible status may lead to increased payroll costs, he noted. Therefore, employers will need to decide if it makes more sense to hire additional staff or have current employees work the extra hours at the overtime rate.

Employers will have to calculate the overall cost of the changes and determine how it's going to fit into the budget, he said. When they get further into the analysis, they'll need to decide if any additional costs are going to be passed through to customers or if they are going to absorb the costs and consider being less profitable.

Some businesses can't remain competitive if they raise the price of goods and services, he noted.

Employers should carefully look at these issues to make sure they understand all the implications of their decisions, he said. A thorough audit and analysis is needed to make the best decisions for a particular business.

"Don't forget that anyone can be classified as nonexempt," Abcarian noted. "That's the default."

Regular Wage Audits

"Ideally, an employer should conduct regular audits to ensure that employees are properly classified," Horwitz said. "At a minimum, human resources or counsel should informally review employee classifications on a regular basis to avoid major surprises."

He said an audit of FLSA exemption classifications should include:

  • A review of job descriptions.
  • A review of policy and procedure manuals that describe the work or dictate how it is performed.
  • Interviews of employees and their supervisors.
  • Observations of employees performing their work.

"If employees with the same job title work at different locations, the employer should not limit the audit to the employees in one location," he noted.

He said employers should also be aware of differences in state laws. Under California law, for example, the executive exemption is more difficult to satisfy than under federal law.

[SHRM members-only HR Q&A: What is the difference between California overtime exemption requirements and federal overtime exemption requirements?]

"Systems and other compliance fixes can be undertaken carefully, with counsel's assistance, while protecting sensitive matters under privilege or other protections against later disclosure in litigation, if claims cannot be avoided," Bartlett noted.

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