The following article was recently published by JD Supra here.
In 2021, the U.S. Department of Labor (DOL) collected a whopping $234 million in back wages for nearly 200,000 employees who the DOL determined were not paid in accordance with the Fair Labor Standards Act (FLSA). Experts report that more than 6,000 lawsuits alleging FLSA violations are filed each year in federal courts throughout the country, and that private settlements of FLSA lawsuits cost employers hundreds of millions each year. These figures confirm what every human resources professional already knows: misclassification of employees under the FLSA can be a costly mistake. In this alert, we highlight some of the most common mistakes that employers make when classifying their workers as “exempt” from the FLSA’s minimum wage and overtime provisions.
Under the FLSA, all employees must be classified as either “exempt” or “non-exempt” from the FLSA’s minimum wage and overtime provisions. Non-exempt employees are entitled to a federal minimum wage (currently $7.25 per hour), as well as overtime pay at a rate of one and one-half times the employee’s regular rate of pay for all hours worked beyond 40 hours in a workweek. Employees who are properly classified as exempt are not subject to these requirements. As most employers are acutely aware, satisfying all of the requirements of the applicable “white collar” exemptions presents many challenges and is not always intuitive. In our experience, it is difficult for an employer to properly classify all of its employees and comply with its obligations under the FLSA without the assistance of experienced employment counsel. Here are some of the most common mistakes that employers make when classifying their employees under the FLSA.
1. Classifying all “salaried” employees as exempt
Many employers incorrectly assume that employees who are paid on a salary basis automatically qualify for an FLSA exemption. It is true that generally most exempt employees must be paid a predetermined amount of compensation that does not fluctuate based on the quantity or quality of work performed (e.g., a set annual salary). In addition, such salary must be at least $684 per week ($35,568 per year) or more. However, employers sometimes fail to realize that the analysis does not end with the satisfaction of this salary test. Most FLSA exemptions also require that the employee meet one of the specified job duties tests, such as the tests for the Executive, Administrative, or Professional Exemptions. Each of these duties tests has a nuanced set of criteria that must be satisfied in addition to the salary test in order for an exemption to apply to a position.
2. Making classification determinations based on position titles
A common mistake made during the classification process is to place undue reliance on position titles, or even job descriptions that do not accurately reflect an employee’s day-to-day duties and responsibilities. The job duties test looks to the actual work performed by the employee. Any employee whose primary duties do not satisfy one of the applicable duties tests will not qualify for an exemption.
3. Assuming that all “administrative” positions qualify for the Administrative Exemption
One of the most commonly asserted exemptions under the FLSA is the Administrative Exemption. The duties test of the Administrative Exemption requires that the primary duty of the position be the performance of office or non-manual work directly related to management or general business operations of the employer or the employer’s customers. Many companies incorrectly assume that all of their administrative and office staff qualify for this exemption because of its name. However, administrative staff typically do not qualify for the Administrative Exemption because the second prong of the duties test for this exemption further requires that the employee’s primary duty involve the exercise of discretion and independent judgment with respect to matters of significance. The FLSA regulations list numerous non-exclusive factors that are relevant to whether an employee exercises discretion and independent judgment, including the authority to formulate, affect, interpret or implement management or operating policies; the authority to deviate from such company policy without prior approval; and the authority to commit the employer in matters that have significant financial impact, among others. Because many administrative and office positions do not have the authority to make such decisions, but rather follow established policies and procedures, such positions do not satisfy the duties test for the Administrative Exemption.
4. Assuming that all supervisors qualify for the Executive Exemption
Another commonly asserted FLSA exemption is the Executive Exemption. An employee may qualify for the Executive Exemption if the employee’s primary duty involves managing the business or a customarily recognized department or subdivision of the business. However, many employers make the mistake of assuming that all managers and supervisors qualify for this exemption without considering the other two prongs of the duties test. To qualify for the Executive Exemption, the employee must also customarily and regularly direct the work of at least two or more full-time employees or their equivalent and have the authority to make hiring and firing decisions (or the manager’s hiring and firing decisions must be accorded particular weight by the company decision maker).
5. Assuming that all employees who work with computers qualify for the Computer Employee Exemption
Yet another common mistake is based on the misunderstanding of the Computer Employee Exemption. This exemption is available to employees whose primary duty involves the (1) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications; (2) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or (4) some combination of these criteria. Many employers incorrectly assume that an employee qualifies for this exemption simply because the employee regularly works with computers or because their job is highly dependent on computers and computer software programs. Employees whose primary duty involves repair or general servicing of computer systems, including “help desk” technicians, will generally fall outside the scope of this exemption.
6. Relying on incidental or occasional duties in making classification determinations
Most job positions will not fall clearly into one of the available exemptions. Many employees will perform a mix of both “non-exempt” work, and “exempt” work that meets the criteria for one of the duties tests. Employers often make the mistake of assuming that a position is exempt because it involves incidental responsibilities that satisfy one of the duties tests, without properly considering whether such responsibilities are truly the “primary duty.” As a general matter, a primary duty is the principal, main, major, or most important duty that the employee performs. It will often take up a majority of the employee’s work time, and/or be more important relative to other responsibilities.
7. Failing to consider state law
The FLSA is the primary federal statute that governs classifications of employees for overtime purposes. That said, some state and local jurisdictions have enacted their own laws governing employee classifications, some of which impose different or more restrictive standards or obligations. For example, some states require that, in order to be exempt from applicable state wage and hour law, an exempt employee’s salary must be higher than the salary threshold required by the FLSA. Employers should always verify that their classifications are consistent not only with the FLSA, but with any applicable state and local laws.
Consequences of Misclassification
Improperly classifying employees as exempt under the FLSA and applicable state law can lead to a variety of significant and costly consequences. The FLSA permits employees to file suit to recover unpaid wages, including overtime, and contains a “liquidated damages” provision that allows employees in some circumstances to recover twice their actual back wages. Some jurisdictions even provide for treble damages. The damages for such wage and hour suits can add up quickly, particularly for class actions involving multiple number of employees. In addition, employees who prevail on such claims are typically entitled to recover their attorneys’ fees. Employers may also face the risk of a DOL or state agency audit of the company’s classification determinations, which can potentially expand to a review of other wage and hour issues, such as classifications of independent contractors.