A risky wager Featured

8:42am EDT November 26, 2002
Pizza Hut, $10 million. Starbucks, $18 million. Taco Bell, $13 million. Rite Aid, $25 million. Farmers Insurance, a whopping $90 million.

These verdicts are causing companies to take a close look at the Fair Labor Standards Act (FLSA), which requires overtime pay for all employees who work more than 40 hours per week. More than 60 years after its enactment, companies are violating the FLSA more than ever, usually without knowing it.

The problem is that the law exempts certain classifications of workers who are not compensated on an hourly basis, including executives (managers), administrators, professionals and outside sales representatives. Confusion over who is exempt can result in improper classifications and expensive lawsuits.

It takes only one complaint from one employee to trigger an investigation. To avoid litigation, a company should make sure employees are correctly classified under FLSA and corresponding state laws. The legal question is, "What do these employees spend most of their time doing?"

It's not as simple as giving the employee a managerial or professional title or paying a fixed, monthly salary. Generally, exempt workers manage, think, direct, supervise and establish. The more routine or mundane the position or the more manual the work, the less likely the worker is exempt. The lowest-paid salaried workers are misclassified most often, because their duties may veer into the routine or manual.

Employees should be classified as exempt only when they meet every exemption criteria. If there is doubt, it's best to classify the person as nonexempt.

To further complicate the issue, the U.S. Supreme Court has ruled that if an employer deducts a portion of exempt employees' pay for partial-day absences, those employees lose their exempt status. If a company has a policy stating it will dock salaried workers' pay for tardiness of more than 15 minutes, that creates a "significant likelihood" that an employee is not exempt, regardless whether any pay is ever deducted.

No employer is immune. Recent large settlements have encouraged plaintiffs' attorneys to scout for industries and companies to target. Once a big verdict is announced, they advertise in local newspapers and industry trade publications soliciting clients.

That means companies need to be more vigilant than ever and conduct an FLSA audit of all their employees. Kimberli Aboyade is a lawyer with Eckert Seamans Cherin and Mellott LLC.