Internal Audit Used to Demonstrate FLSA Misclassifications

​The 5th U.S. Circuit Court of Appeals permitted employees to introduce evidence relating to their employer's internal audit to demonstrate that their positions had been misclassified under the Fair Labor Standards Act (FLSA).

Shipcom Wireless Inc. is a supply-chain management and technology company. In 2013, the Department of Veterans Affairs (VA) awarded Shipcom a contract to implement its inventory-management software system at VA hospitals around the country.

To meet the needs of the contract, Shipcom grew from about 25 employees to over 200 employees. Shipcom hired the four plaintiffs as trainers during this period of growth, requiring them to travel to various VA hospitals to instruct staff on how to use the new system. The plaintiffs were hired at an annual salary rather than an hourly wage and treated as exempt from the overtime requirements of the FLSA.

In 2015, Shipcom engaged in an audit to re-evaluate whether positions in the company were properly classified as exempt or nonexempt from FLSA overtime rules. Shipcom ultimately decided to reclassify the trainer position as nonexempt going forward and to pay its trainers at an hourly rate. Using past hours logged by the trainers, the company made the following determinations: Two plaintiffs who were still working at Shipcom were made whole, one who no longer worked at Shipcom was not given back pay, and one whose position was not reclassified continued to be paid as an exempt employee.

All four plaintiffs alleged that they had been misclassified as exempt employees and sought liquidated damages, contending that their original classification was not made in good faith. Shipcom moved to exclude evidence related to the audit and reclassification, claiming that this evidence was inadmissible because it was a "subsequent remedial measure."

[SHRM members-only toolkit: Understanding Overtime Exemptions Under the FLSA]

The rules of evidence provide that "when measures are taken that would have made an earlier injury or harm less likely to occur, evidence of the subsequent measures is not admissible to prove culpable conduct." The court construed the phrase "injury or harm" narrowly, explaining that "the admission of evidence of changes made merely to improve a product, as distinguished from remedial measures that make an 'injury or harm less likely to occur,' is not barred by the rule."

The court explained that the audit itself did not amend the job duties of employees to fit within the administrative exemptions but instead left it up to Shipcom to determine how to classify these employees going forward. Even assuming Shipcom conducted the audit solely to ensure that its employees were properly classified, the 5th Circuit declared that the audit, standing alone, did not make the "earlier injury or harm less likely to occur" and so was not a "subsequent remedial measure."

The court concluded that the evidence related to the audit was relevant to the issue of whether the plaintiffs' job descriptions fit within the FLSA's administrative exemption. Several of the exhibits discussed and analyzed the job duties of the plaintiffs or provided information that would be useful to the jury in classifying them.

Additionally, letters and e-mails regarding Shipcom's decision to reclassify its trainers and provide them with back pay were also relevant because they suggested that, upon review, Shipcom determined that they were nonexempt.

Novick v. Shipcom Wireless Inc., 5th Cir., No. 19-20056 (Jan. 7, 2020).

Professional Pointer: Employers should consider auditing their positions over time to ensure that they are properly classified exempt or nonexempt. Failure to adhere to audit recommendations to reclassify positions could expose the employer to liquidated damages.

Roger S. Achille is an attorney and a professor at Johnson & Wales University in Providence, R.I.