- within Employment and HR topic(s)
- with Inhouse Counsel
- in Canada
- with readers working within the Accounting & Consultancy, Basic Industries and Business & Consumer Services industries
Employee classification errors remain one of the most common – and costly – compliance mistakes employers make.
When employers misclassify employees as exempt from overtime, the consequences can be significant. As wage and hour litigation continues to rise, it is important for employers to understand these legal distinctions and the risks associated with misclassification.
Exempt v. Non-Exempt
Under the Fair Labor Standards Act ("FLSA"), employees are presumed to be non-exempt, meaning they are entitled to minimum wage and overtime pay, at one and a half times their regular rate for all hours worked over 40 hours in a workweek. To classify an employee as exempt, an employer must satisfy certain legal tests. More specifically, the employee must be paid a salary that meets the minimum statutory threshold (salary basis/salary level test), and the employee's primary job duties must fall into one of the recognized exemption categories (duties test). Job titles alone are irrelevant, and employers must examine the employee's actual job duties and not what appears in a job description. When auditing your own compliance what the employee does (and says he or she does) should control the exemption analysis in determining whether the employee is exempt from overtime. Armed with a clear view of both duties performed and the employees understanding of his or her duties will allow you to make the necessary adjustment and pay corrections. Taking this approach with internal compliance sets the employer up for success in the event of a governmental audit, during which investigators will focus on what duties the employee actually performs on a regular basis.
Remember that individual states can have separate employee classification requirements that are more stringent than the federal rules. More stringent means more favorable to employees (more difficult exemptions). State laws must be looked at in conjunction with the federal laws. For instance, a state may generally track the federal duties test but impose a higher salary basis/salary level test. Some states simply do not recognize certain federal exemptions, which can create inconsistency among the same positions in different states.
Employer Exposure & Risk Mitigation
The financial exposure for misclassification can be substantial and often extends beyond unpaid wages. Employers operating in Pennsylvania must comply not only with the FLSA, but also with the Pennsylvania Minimum Wage Act ("PMWA") and the Pennsylvania Wage Payment and Collection Law ("WPCL") – both of which can expand potential exposure.
In addition to unpaid wages, employees may also be able to recover back pay, liquidated damages (essentially doubling liability) and attorney's fees and costs and interest. Depending on the severity of the violations, employers may also be subject to civil penalties imposed by federal and state agencies, as well as possible criminal prosecution. It is important to note that under both the FLSA and WPCL, individual officers and agents of the company may be held personally liable for unpaid wages.
Employee classification is often misunderstood. However, this is one area where employer decisions have significant financial consequences. Misclassification is the primary driver of wage and hour litigation and exposure can escalate quickly. A complaint by one employee can expose companies to a review of all employee wages, for as many as three years.
Because the classification analysis is highly fact-specific, periodic review and a proactive approach to compliance is critical. Employers should review and update job descriptions when appropriate, evaluate actual duties performed and train their HR and managers on classification requirements.
Look for a series of posts on this topic to include understanding the regular rate of pay, misclassification corrections and independent contractor determinations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
