FLSA Deadly Sin #1: Misclassifying employees

Misclassifying Non-Exempt Employees

What is the difference between exempt and non-exempt employees? Are your workers misclassified?

Meet Our Experts

Attorney Maria O. Hart from Parsons, Behle & Latimer.

Maria O. Hart

Parsons, Behle & Latimer

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Attorney Staci Ketay Rotman from Franczek Radelet.

Staci Ketay Rotman

Franczek Radelet

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Labor and Employment Attorney Charles A. Rudgel.

Charles A. Krugel

Labor & Employment Attorney

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Are your exempt or non-exempt employees classified correctly?

If you’re thinking, “I’m not sure,” or “What does that even mean?” – you’re among the millions of business owners guilty of committing the No. 1 Deadly Sin of the FLSA: Misclassifying Non-Exempt Employees.

Why so deadly? For starters, most business owners don’t even realize their employees are classified incorrectly. And if it’s been awhile since you’ve audited your employee classifications, you could be one of them. Unfortunately, ignorance is not an alibi, and the penalties for misclassification are fierce.

2016 is expected to be a record year for FLSA lawsuits and misclassifying employees is seen by many as the fastest way to get hit with one, so we reached out to the nation’s top wage and hour experts to find out how business owners can avoid committing this deadly sin – and what to do if you find yourself at risk. Keep reading for the answers to your most pressing misclassification questions.

We reached out to the nation’s top wage and hour experts to find out how business owners can avoid committing this deadly sin – and what to do if you find yourself at risk. Keep reading for the answers to your most pressing misclassification questions.

First things first, what does the exempt vs. non-exempt status really mean?

The exempt vs. non-exempt status refers to an employee’s eligibility for overtime pay. Non-exempt employees are typically paid hourly and are expected to be paid overtime wages. Exempt employees are generally paid a salary, as such, they do not receive overtime pay. Many misclassification situations aren’t black and white – an employee’s status is dependant on not just their level of compensation, but also their duties and responsibilities, which is why it’s always a good idea to seek the advice of your employment counsel when it comes to correctly classifying your team.

What penalties can employers expect to see if they have misclassified employees?

Attorney Staci Ketay Rotman from Franczek Radelet.
“If an employer fails to pay any overtime worked to a misclassified employee, the employee may be owed backpay for the time worked but not paid, liquidated damages (which is essentially doubling of the backpay), statutory penalties, and the employees’ attorneys’ fees if a claim is made.”
Labor and Employment Attorney Charles A. Rudgel.
“Payment of unpaid back taxes, interest and fines/penalties on unpaid taxes. Sometimes, the amount of money assessed varies based on willful or unwillful violations.”

Key Takeaway

The penalties for misclassification are extremely costly and can reach back 2 to 3 years. Correcting your mistake before it reaches a lawsuit is always the better (and often cheaper) option.

Does most misclassification occur willingly or unknowingly?

Attorney Maria O. Hart from Parsons, Behle & Latimer.
“Misclassification happens most often unknowingly. But if you have a good structure and understanding of your employees, any employment law attorney will be able to help you make sure your classifications are on point. It’s always good practice to keep those classifications in mind and check that your employees are classified correctly – but it’s important to double check with a knowledgeable employment attorney.”

Key Takeaway

Most misclassification occurs unknowingly. Job titles change, responsibilities shift, and suddenly an employee who was once classified correctly is now a victim of misclassification.

What can employers do to prevent a situation in which employees are misclassified ignorantly?

Labor and Employment Attorney Charles A. Rudgel.
“At all costs, employers should avoid arbitrarily classifying workers as either independent contractors or employees. Arguably, the best first step to take is to start with a job or project description. This is a general description what needs to be done; how it gets done; and what type of qualifications are needed to do the work. A job or project description doesn't have to be too formal or detailed, but it should discuss what is ESSENTIAL for doing the work, tools, qualifications, etc.”

How can an employer determine if they have their employees classified correctly?

Attorney Maria O. Hart from Parsons, Behle & Latimer.
“When in doubt, check with an attorney. Most employers have some sort of annual or biannual review process – some way to check in with an employee. During this process, ask yourself, ‘Are they still doing what they were hired to do? Have their responsibilities changed? Is it time to increase their salary? Would a raise boost them outside the overtime threshold?’ If the answer is ‘yes,’ it might be time to reclassify.”
Attorney Staci Ketay Rotman from Franczek Radelet.
“Employers should conduct an annual or bi-annual classification audit. This could (and should) entail reviewing compensation information, job duties, actual work performed, interviews with the manager or supervisor, a thorough review of organization or department charts and policies, and other information necessary to complete a review of all jobs classified as exempt.”
Labor and Employment Attorney Charles A. Rudgel.
“Usually a job or project description is the best way to determine classification issues. Once the employer understands a job's essential functions, responsibilities and qualification, they can then accurately determine classification.”

Key Takeaway

Employers should schedule recurring classification audits or employee reviews to constantly determine whether or not their employees are classified correctly.

What should an employer do upon realizing they have misclassified an employee?

Attorney Maria O. Hart from Parsons, Behle & Latimer.
“In short, fix it! It’s always better to fix it on the front end rather than have a dispute or fine come up on the back end. If you have a misclassified employee, just fix it. I always advise my corporate clients, if you need to change the employee's status, make a note in their HR file and require both the employee and the manager to sign and date it.”
Attorney Staci Ketay Rotman from Franczek Radelet.
“There are a couple of different options for employers. The safest option, with least risk, is to re-classify the employee, calculate any potential backpay owed, and pay that employee any backpay owed. The backpay could reach back 2 or 3 years depending on how much risk the employer wishes to avoid. Another option is to re-classify the employee, but pay no backpay. There is still a risk of a lawsuit, but a good communication plan and execution should lessen that risk. Of course, both of these options come with some risk attached, and there are certain precautionary steps employers will want to take before pursuing either option. Therefore, I suggest contacting your employment counsel first before re-classifying any employee.”
Labor and Employment Attorney Charles A. Rudgel.
“Immediately remedy the problem by re-classifying the employee, and offering to help them with any tax reporting or tax compliance issues. Also, contact your accountant or attorney to determine whether it's necessary to self-report the matter to the IRS or any other authority.”

Key Takeaway

If you discover a misclassified employee, reclassify them correctly as soon as possible. Avoid risk by paying the employee any owed backpay. However, there could be a few precautionary steps you need to take before making any major changes, so check with your employment counsel first to determine the best course of action.

In Short

  • Schedule regular classification audits to determine whether or not your employees are classified correctly
  • Check with your employment counsel to ensure your classifications are on-point
  • If you discover that one or more of your employees have been misclassified, check with your employment counsel first, then reclassify the employee as quickly as possible
  • The penalties for misclassification are costly – it’s always better (and oftentimes cheaper) to solve misclassification problems up front

Meet The Experts

Attorney Maria O. Hart from Parsons, Behle & Latimer.

Maria O. Hart

Maria O. Hart is a member of the Litigation, Trials and Appeals practice group at Parsons Behle and Latimer. Hart's practice focuses generally on commercial litigation and business law. She has experience representing businesses and individuals in both Idaho and Montana. Her practice involves litigation in both federal and state court pursuing or defending against a variety of issues related to health care law, employment law, and general commercial matters.

Attorney Staci Ketay Rotman from Franczek Radelet.

Staci Ketay Rotman

Staci Ketay Rotman is the Community Investment Officer and Co-Chair of the Wage and Hour Practice Team at Franczek Radelet Attorneys and Counselors. She's the editor and co-author of the firm's wage and hour blog (wagehourinsights.com) and she has also co-authored a number of articles on wage and hour topics. Staci advises and represents employers in all aspects of labor and employment law.

Labor and Employment Attorney Charles A. Rudgel.

Charles A. Krugel

Charles A. Krugel is a management side labor and employment attorney as well as a human resources counselor. He has more than 20 years of experience in his field and has been running his own practice for the past 15. He serves small to medium sized companies in a variety of industries. Besides providing traditional labor and employment law services, Charles has negotiated hundreds of labor and employment agreements and contracts.