Exempt or Non-Exempt: Are You Willing to Bet Your Company on the Answer?

June 5, 2014

 

Sue had been with PMP Company for more than five years. She did a great job at the large variety of tasks she performed. Sue was the office administrator and the only office staff in this seven-person organization. She entered the payables and receivables in QuickBooks for PMP's outside CPA to review. Sue answered the phones, talked with customers and venders, and collected and prepared the payroll numbers for PMP's management approval. She did anything she was asked.

When management required Sue to work nights or weekends, she was happy to pitch in. She even took some work home from time to time and checked her company blackberry each night, answering any important e-mails that came in.

 

Sue loved her job at PMP - that is,until she received her performance review. Sue's manager gave her a "less-than-perfect" mark in attendance, citing her tardiness on several occasions. When Sue pushed back, reminding her boss of all of the extra hours she had worked, he stated that the company still expected her to be "on time" in the mornings. Sue steamed about the performance rating for a couple of days. The poor mark in attendance meant she would only get a two percent raise rather than the larger five percent she had been expecting.

 

That evening, Sue saw a commercial on TV advertising a local law firm. The ad said employees should receive extra compensation for working overtime and that they could get "back-pay" for the hours they had already worked.  The workers featured in the ad said they had received money and been able to keep their job. This sounded good to Sue and only fair, she thought, considering how hard she had worked for PMP. She went to her computer, opened a new window in her browser, and started searching for the law firm's phone number.

 

One of the most frequent errors we see in small companies is employee misclassification. This occurs when management wrongly determines that a worker is exempt from overtime and other rules under the Fair Labor Standards Act (FLSA) or incorrectly classifies a worker as an independent contractor. Actually, most workers should be classified as non-exempt employees. This means, among other things, that they must make at least minimum wage and must be paid overtime for hours worked in excess of 40 in a work week. Only a small number of workers can be classified as exempt or independent contractors under current regulations.

Since 2004, FLSA claims have increased by 77 percent. Most of these have to do with employers:

  • Misclassifying employees as exempt when they are actually non-exempt and subject to overtime pay;

  • Allowing employees to work off-the-clock;

  • Calculating overtime pay based on hourly wages only;

  • Refusing to pay for overtime that has not been approved in advance;

  • Docking hours of exempt employees; and

  • Failing to maintain complete and accurate time records.

 

Should small businesses be concerned about the astronomical increase in FLSA claims being filed as private lawsuits? Absolutely! However, we must also look to our government for increases in audits, fines and litigation. In fiscal year 2011, The Department of Labor (DOL) announced a Misclassification Initiative. This multi-agency program targets employers that have misclassified employees as exempt. DOL hired 200 field investigators in 2010 and made additional hires in 2011 to help enforce compliance. Moreover, DOL has created programs specifically designed to assist employees whose rights may be been violated under FLSA. The best course of action for employers is to prepare for increased scrutiny by DOL and private actions by employees. Review your wage and hour policies and make sure employees know and comply with the rules. Train your supervisors and managers to understand the basics of wage and hour rules and your company's policies to mitigate risk.  Finally, if you haven't had an employment-law attorney or a competent HR professional review your policies, practices and your specific jobs and how they should be classified, now is the time. Don't bet your company's assets on this losing game.

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