Employment and Labor

Avoiding Costly FLSA Misclassification Errors

Avoiding Costly FLSA Misclassification Errors

FLSA Audits Can Help Employers Avoid or Minimize the Impact of Misclassification Claims

The Fair Labor Standards Act (FLSA) is one of the oldest employment laws in existence. At the most basic level, the FLSA requires covered employers to pay overtime for all hours worked over 40 per week and payment of at least the federal minimum wage. The law passed in 1938 when employers seemed to be forcing employees to work an extraordinary number of hours without proper compensation.   

The premise of that 85-year-old law is still at the heart of many FLSA lawsuits employers face today, most of which allege failure to pay overtime for one reason or another. The biggest issue for employers in FLSA cases is improper employee classification. Because employers typically do not track time worked for exempt employees, recordkeeping regarding hours worked may also become an issue. 

Improper Classification of Employees Can Be Costly

One recent settlement agreement highlights the costly mistake of improper employee classification. In January 2023, the United States Department of Labor (DOL) reached a settlement with a Chicago-area grocery store for alleged FLSA violations. While the nearly $400,000 settlement involved alleged child labor violations and failure to pay overtime, at least a portion of the settlement included misclassifying non-exempt employees as exempt.

Likewise, in many other misclassification cases, employers have broadly construed an exemption from the overtime and minimum wage requirements to their detriment. Employers should begin with the premise that ALL employees are entitled to overtime. While such a premise may seem a little bizarre, the courts review exemptions with an eye towards fairness, however, the burden of proof regarding the application of an exemption lies with the employer. As such, applying exemptions may be more precise if the employer is mindful that a careful initial analysis of an exemption could result in thousands of dollars of overtime if they are wrong.

Determining Exempt vs. Non-Exempt Employees

The more common exemptions for executive, administrative and professional roles should not be broadly applied or subject to the best guess. Employees may no longer be satisfied with titles and a “salary” that is subject to deductions, especially quasi-managerial employees who are scheduled to work many hours and paid minimal salaries, but who are without authority to make decisions that impact the management of the business. Some of these employees are paid less than or slightly more than the people they supervise who may be entitled to overtime payment. 

To determine whether an employee is exempt, there are two basic components to consider: 1) the employees must be paid a salary and 2) the primary duties of the position must be consistent with the regulations proscribed by the DOL. The DOL’s website provides tools for employers to identify what the primary duties must entail in order to meet the exemption. The DOL’s fact sheets provide guidance for a deeper dive into the regulations and should be the starting point for employers when reviewing existing positions or creating new ones to determine proper classification. 

FLSA Audits Can Help Employers Avoid or Minimize the Impact of Misclassification Claims

So, what should an employer do to avoid or at least minimize the impact of misclassification claims? The answer is simple, but the process is not easy! FLSA audits force employers to answer hard questions about how employees are classified and paid. An audit involves more than looking at job titles and what the employee prefers. 

An FLSA audit involves identifying a person with enough knowledge and skill to perform the audit. The FLSA auditor must see beyond what is written on a job description to determine what the employee does and their level of responsibility for making decisions that impact the organization. The FLSA auditor must also understand the organization and how a particular job fits into the organization. In other words, what is the primary duty of this position?  

What Employers Should Know About Salary Basis Requirements

The employer should also get the salary payment correct. According to the regulations, to qualify for exemption, employees generally must not be paid less than $684 per week on a salary basis. Being paid on a salary basis means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to specified exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a salary basis. 

If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.  The regulations do allow deductions for serious policy violations so long as the directions in the policy are clear.  Employers have to be clear about such violations and deductions. A full review of the salary basis requirement can be found here: “Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under FLSA.”

SCOTUS Clarifies Definition of Salary

On Feb. 23, 2023, the U.S. Supreme Court in a 6-3 decision in Helix Energy Solutions Group Inc. v. Hewitt, clarified that a salary is a “regular stream” of money that does not vary based upon how much the employee works. In Helix, the employee typically worked 84 hours per week and was paid a daily rate of pay. Although this case arose based upon the application of the provisions allowing an exemption for highly compensated non-exempt employees, the court was clear that the payment received must be consistent and not based on how many hours or days the employee works.  

The lesson for employers is that pay for exempt employees must be salaried regardless of the quality or quantity of work performed. If an employer has unique circumstances and desires to fashion a pay plan for those circumstances, the employer should contact an experienced employment lawyer to assist in drafting the plan.

Why Employers Should Care

Employers should pay careful attention to how employees are classified. FLSA cases don’t “settle” like other employment cases. If there is an adverse ruling against the employer and the previously classified exempt employee is found to be non-exempt, the employer is liable for overtime for a two-year lookback period – three if the failure to pay overtime is found to be willful. What this means is that the previously classified exempt employee that was working 60 hours per week will now be entitled to overtime for those 20 hours. The back pay and attorney fees add up. 

Employers would be wise to consider the audit route to ensure employees are classified correctly!

1Congress enacted the FLSA to eliminate both “substandard wages” and “oppressive working hours.” Barrentine v. Arkansas-Best Freight System, Inc., 450 U. S. 728, 739 (1981)

This article originally published in HR Legal & Compliance Excellence on March 2, 2023 and is republished here with permission from the publication.