Overtime claims continue to dominate class action filings and cause significant exposure for companies in all industries.  In July alone, plaintiffs filed more than 200 class action complaints alleging overtime violations in federal courts across the country (not counting the number also filed in state court).  And because courts calculate back wages at time-and-a-half the regular rate, plus liquidated damages and other penalties, overtime mistakes can cause significant damage to a company’s bottom line.

This post kicks off a series for Steptoe’s Labor & Employment blog on the top five overtime pay violations alleged in class action complaints. The first in the series focuses on one of the most common (and most expensive) kinds of overtime blunders: misclassification of employees as exempt.

Employers routinely struggle with properly classifying employees as exempt under the FLSA’s nuanced tests.  In the last year, the issue earned special attention because of the DOL’s attempts to make significant changes to the salary threshold test.  In addition, some states impose even higher thresholds before the exemptions apply. (See, for example, California’s definition of “primarily engaged in” under the executive exemption, which requires the employee to spend more than 50% of their time engaged in exempt duties.)

You don’t have to look far to find examples where back wages add up to staggering amounts. Bank of America recently paid $6.6 million to settle disputed claims that it wrongly classified 478 employees.  Supermarket chain Price Chopper spent $6.5 million to a settle misclassification claims of 317 leaders and managers. And HR provider Zenefits settled a DOL investigation into 743 misclassified account executives and sales representatives for $3.4 million.

At the same time, paying overtime to otherwise exempt employees can needlessly drive up labor costs.  Thus, companies must accurately classify employees to remain competitive.

Although no company can stop a plaintiffs’ class action attorney from targeting them, companies can take steps to ensure they properly classify employees as exempt to ward off DOL investigations and present strong defenses to class claims.

  1. Carefully structure new employee roles. When creating pay practices for new groups of employees, carefully analyze what the employees actually do and whether they meet any exemptions.  Job descriptions should accurately reflect exempt duties, and performance evaluations should assess those duties.  If the company never conducted that analysis in the first instance, take the time to examine the full workforce.
  2. Perform routine wage-hour audits. Routine audits should check for whether exempt employees actually perform exempt duties. Sometimes what companies think their employees do fails to match up with the on-the-ground truth.  Remember that the exemption analysis is individualized—just because one manager qualifies does not mean every employee with the same job title meets the test.  For that reason, thorough audits must include employee interviews.
  3. Train managers on exemption issues. In-the-field managers can serve as invaluable eyes and ears, but only if they know what to watch for.  Periodic refresher training keeps wage-hour issues at front-of-mind.  Moreover, managers who control pay and working hours must understand that they have just as much incentive to ensure pay compliance as the CEO because the FLSA and state laws make it relatively easy for plaintiffs to hold managers individually liable.
  4. Craft policies that encourage employees to report pay concerns and take those concerns seriously.  Employees often express pay concerns to their supervisor first before turning to the DOL or a lawyer.  But if the company fails to take action in response to the employees’ concerns, employees can use that failure as evidence of a willful violation—extending the statute of limitations from 2 to 3 years under the FLSA.