Misclassifying Employees Can be an Expensive Mistake

Businesses across the country are being hit by overtime class-action lawsuits filed by employees who claim they are legally entitled to extra pay. Overtime disputes are one of the hottest areas of litigation and they are costing businesses a fortune. For example:

In 2002, Starbucks agreed to pay up to $18 million to settle a lawsuit filed by more than 1,000 managers who claimed they were forced to do non-managerial tasks outside of their regular work hours but not paid overtime for them.

Mervyn’s department store chain in California agreed to pay $11.3 million in 2000 to settle allegations that it cheated thousands of managers and assistant managers out of overtime. Rather than performing managerial chores, the employees said they spent extra time stocking shelves and ringing up sales.

These are just two of the many companies hit with overtime litigation in recent years. Similar actions have been taken against corporations including Wal Mart, Tyson Foods, Rite Aid, U-Haul, Taco Bell, Pacific Foods and Farmers Insurance.

To complicate matters even more, as of August 23,2004, the federal law defining who should be exempt has changed significantly. To protect your company, it’s prudent to review all employment practices to ensure you are in compliance with the Fair Labor Standards Act.

Generally, under federal law, the only people who are exempt from overtime pay are certain salaried employees who supervise two or more people, perform management functions, make strategic decisions, and possess hiring and firing authority or influence. But in this Information Age, it’s not uncommon for executives to be hooked up to a computer, writing their own letters and e-mails, and answering their own voice mail messages. As more technology emerges to help manage the workday, the number of actual supervisors is dwindling. And with that comes confusion about who is a manager.

It’s important to define the primary duty of an employee. If your employees are called general managers, for example, and are required to work a 60-hour week without overtime, they’d better be spending the majority of their time managing. Otherwise, you could be legally vulnerable.

Keep in mind that some court judgments against companies with misclassified employees have ordered the payment of up to four years of back overtime, plus interest, damages and legal fees

How to avoid landmines. First, determine if federal overtime laws apply to you. Ask your attorney to perform an audit of exempt employees to ensure that they are exempt under the law.

Generally, if your annual sales total $500,000 or more, you must pay overtime. If your company is smaller, you still must pay if your employees are involved in interstate commerce, including making phone calls to another state, handling merchandise that came from, or is being shipped to another state and sending mail out of state.

Next, review your management job descriptions to make them comply with federal (or local) requirements. If you’re paying management salaries for supervisory work, you’re likely in the clear. If not, you probably need to reclassify and pay overtime.

Here’s a brief rundown of the basic legal tests to determine exceptions to the overtime rule:

Professional employees. Professional employees earn a minimum of $455 per week on a fee or salary basis (or $23,660 annually). These people are highly trained, usually have advanced degrees, and perform work requiring advanced knowledge acquired through specialized instruction. Their work is often defined as “intellectual,” consistently requiring exercise of independent judgment. They make major decisions with little supervision. The class includes lawyers (but not paralegals), doctors, dentists (but not hygienists), registered nurses (but not practical nurses), accountants, architects, and teachers.

Administrative employees.  These employees also must earn at least $455 per week paid on a salary or fee basis (or $23,660 annually) and, with little supervision, perform duties that include the exercise of independent judgment and discretion in significant matters.  The primary duties of an administrative employee must be performing office or non-manual tasks that are directly related to the management or operations of the employer’s business. An employee who doesn’t do all these things is probably not an administrator under the law.

Executive employees. Executives must meet all the following requirements: They make at least $455 a week paid on a salary basis (or $23,660 annually) regularly supervise at least two full-time employees and their main duties must include authority to hire or fire, or have significant input into the decisions to hire or fire other employees.

Outside salespeople. The primary responsibilities of outside salespersons who are exempt include making sales and securing contracts for their employers.   The majority of their work must be performed away from the employer’s place of business.  There is no salary requirement

Other exempt employees. This category includes, among other jobs, most truck drivers, most live-in domestic employers, and some agricultural employers, as well as independent contractors, and some computer specialists.

Compensatory Time

Many employers don’t know that it’s generally illegal to give employees time off for extra work, rather than paying overtime. “Comp” time, in the eyes of the law, precludes employees from collecting pay they are entitled to receive.

However, there are options if you want to adopt a comp time policy:

- Rearrange an employee’s schedule during a workweek. As long as an employee works no more than forty hours in a week, there is no overtime. (Check your state for any daily overtime limits.)

- Rearrange an employee’s schedule during a pay period. If someone works more than forty hours a week, you can give comp time if the time is taken within the same pay period as the overtime.