Exempt or Non-Exempt? Employee Misclassification...
Transcript of Exempt or Non-Exempt? Employee Misclassification...
Exempt or Non-Exempt?
Employee Misclassification Challenges Identifying Vulnerabilities and Minimizing Liability Under FLSA and State Law
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TUESDAY, MAY 8, 2012
Presenting a live 90-minute webinar with interactive Q&A
Mark E. Tabakman, Partner, Fox Rothschild, Roseland, N.J.
Brent E. Pelton, Esq., Pelton & Associates, New York
Daniel J. McCoy, Partner, Fenwick & West, Moutainview, Calif.
Christine W. Johnston, Partner, K&L Gates, Boston
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FLSA Exemptions
© 2009 Fox Rothschild
EXEMPT OR NON-EXEMPT? EMPLOYEE
MISCLASSIFICATION CHALLENGES
Positions Most Vulnerable to FLSA and State Claims
Mark Tabakman, Esq.
Fox Rothschild LLP
http://wagehourlaw.foxrothschild.com
May 8, 2012
FLSA Exemptions
© 2009 Fox Rothschild
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FLSA EXEMPTIONS:
EMERGING CLASS ACTION THREAT
AT-RISK POSITIONS
Financial Services Industry
I.T. Workers/Computer Programmers
Assistant Managers
Clerical/Administrative Employees
Sales Staff
FLSA Exemptions
© 2009 Fox Rothschild
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FLSA SECTION 13(a)(1), GENERALLY
Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for individuals employed as bona fide executive, administrative, professional, and outside sales employees. Sections 13(a)(1) and 13(a)(17) also exempt certain computer employees.
- To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week.
- Job titles do not determine exempt status. - In order for an exemption to apply, an employee’s specific job
duties and salary must meet all the requirements of the DOL’s regulations.
FLSA Exemptions
© 2009 Fox Rothschild
ASSISTANT MANAGERS
To qualify for the executive employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
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FLSA Exemptions
© 2009 Fox Rothschild
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ASSISTANT MANAGERS (cnt’d)
The duties and responsibilities of assistant managers vary and may be determined by the industry in which the assistant manager works, the size of the business and/or the structure of the business (e.g., single establishment versus multi-establishment). An assistant manager whose primary duties or functions are ordinary production work or routine, recurrent or repetitive tasks is not exempt under the Regulations, Part 541.
However, to determine whether a worker employed as an assistant manager who regularly supervises the work of others meets the duties tests for exemption from the FLSA's minimum wage and overtime pay requirements, begin with the Executive Employee analysis.
FLSA Exemptions
© 2009 Fox Rothschild
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ASSISTANT MANAGERS (cnt’d)
The Assistant Manager classification has always been problematic from an FLSA exemption perspective. These employees must be endowed with some actual/real authority relating to hiring and firing as well as other employee terms and condition or the employer will be an easy target for a class action suit. Moreover, they must supervise and manage the majority of the time.
- This becomes a fine line that often gets crossed in the hectic world of store operations, where the job has to get done.
Plaintiffs claiming to be misclassified as exempt Assistant Managers often assert that they were compelled to perform non-exempt duties a disproportionate amount of their work day and this amount of rank-and-file work destroyed the exemption.
On the Assistant Manager issue, the best defense is that these workers are truly exempt. The second best defense is that the class certification motion must fail because individualized assessment of each Assistant Manager is needed because some might have exercised more managerial duties than others. The need for individual scrutiny is the antithesis of a class action .
FLSA Exemptions
© 2009 Fox Rothschild
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ADMINISTRATIVE EMPLOYEE EXEMPTION
To qualify for the administrative employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
FLSA Exemptions
© 2009 Fox Rothschild
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PROFESSIONAL EMPLOYEE EXEMPTION
To qualify for the professional employee
exemption, following must be met: - The employee must be compensated on a salary or
fee basis at a rate of not less than $455 per week, exclusive of board, lodging, or other facilities; and
- Whose primary duty is the performance of work: Requiring knowledge of an advanced type in a field of
science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or
Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
FLSA Exemptions
© 2009 Fox Rothschild
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FINANCIAL SERVICES
Over the last several years there has
been a torrent of litigation concerning the
exempt status of positions in the financial
services industry (mortgage brokers,
originators, etc.).
FLSA Exemptions
© 2009 Fox Rothschild
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FINANCIAL SERVICES (cont’d)
Prior to the DOL’s issuance of its 2010 White Paper (guidance statement) on the matter, employees were deemed exempt as administrative if their duties included work such as collecting and analyzing information regarding a customer’s income, assets, investments, or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of financial products; and servicing, promoting, and marketing the employer’s financial products.
FLSA Exemptions
© 2009 Fox Rothschild
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FINANCIAL SERVICES (cont’d)
Per DOL’s 2010 White Paper, except in certain circumstances, mortgage loan officers will not qualify for the administrative exemption under the Fair Labor Standards Act.
If mortgage loan officers perform supervisory duties, they may still fall under the executive exemption, but the most commonly urged exemption for them, i.e. administrative, is now foreclosed.
The DOL concluded that “mortgage loan officers typically have the primary duty of making sales on behalf of their employer; as such, their primary duty is not directly related to the management or general business operations of their employer or their employer’s customers.”
- Mortgage loan officers will not qualify for the administrative exemption because their primary duty is production work, i.e. sales.
FLSA Exemptions
© 2009 Fox Rothschild
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I.T. WORKERS/COMPUTER PROGRAMMERS
Computer systems analysts, computer
programmers, software engineers, and other
similarly skilled workers in the computer field
who meet certain tests regarding their job
duties may be exempt from minimum wage and
overtime requirements of the FLSA. - To be exempt, these employees must be paid at
least $455 per week on a salary basis or paid on an hourly basis, at a rate not less than $27.63 per hour.
FLSA Exemptions
© 2009 Fox Rothschild
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I.T. WORKERS/COMPUTER PROGRAMMERS
(cont’d)
To qualify for the computer employee exemption, the following tests must be met:
- Employee must be paid at least $455 per week on a salary basis or paid on an hourly basis, at a rate not less than $27.63 per hour;
- Employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
- The employee’s primary duty must consist of: The application of systems analysis techniques and procedures, including
consulting with users, to determine hardware, software or system function specifications;
The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, or of programs related to user or system design specifications; or
The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
A combination of the aforementioned duties, the performance of which requires the same level of skills.
FLSA Exemptions
© 2009 Fox Rothschild
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I.T. WORKERS/COMPUTER PROGRAMMERS
(cont’d)
The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment.
Exemption also does not apply to employees whose work is highly dependent upon computers, but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations.
FLSA Exemptions
© 2009 Fox Rothschild
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I.T. WORKERS/COMPUTER PROGRAMMERS
(cont’d)
Martin v. Indiana Michigan Power Co., 9 WH Cases2d 1505 (6th Cir.2004):
- Computer help desk employees who provide computer maintenance and support do not qualify for administrative exemption, as they are not designing or creating computer systems and their primary function is to assist in keeping the computers and the network running to the specifications and designs of others.
Jackson v. McKeeson Health Solutions, 19 WH Cases2d 374 (D. Mass.2004):
- Computer support employees who spend the predominant amount of their time troubleshooting computer problems encountered by various company departments and entities was not exercising discretion and independent judgment required under the regulations, but rather highly technical skill.
FLSA Exemptions
© 2009 Fox Rothschild
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I.T. WORKERS/COMPUTER PROGRAMMERS
(cont’d)
Pellerin v. Xspedius Mgm’t Co., 432 F.Supp. 2d 627 (W.D. La. 2006):
- Exemption applies to employee responsible for maintaining and supporting software applications by adding input fields, correcting bugs, and changing codes.
Bergquist v. Fidelity Info. Servs., Inc., 399 F.Supp. 2d 1320 (11th Cir. 2006):
- Exemption applies to computer programmer responsible for designing programs, assisting the business analyst with technical details of computer programs, and working on a project team to design pieces of programs that would be integrated into the work of other team members.
FLSA Exemptions
© 2009 Fox Rothschild
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SALES STAFF
To qualify for the outside sales exemption, all of
the following tests must be met: - Employee’s primary duty must be making sales (as
defined in FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- The employee must be customarily and regularly engaged away from the employer’s place or places of business.
FLSA Exemptions
© 2009 Fox Rothschild
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SALES STAFF (cont’d)
The salary requirements of the regulation
do not apply to the outside sales
exemption. An employee who does not
satisfy the requirements of the outside
sales exemption may still qualify as an
exempt employee under one of the other
exemptions allowed by the FLSA.
FLSA Exemptions
© 2009 Fox Rothschild
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SALES STAFF (cont’d)
Primary duty: - Principal, main, major or most important duty that the
employee performs.
Making sales: - “Sales” includes any sale, exchange, contract to sell,
consignment for sales, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.
Away from employer’s place of business: - An outside sales employee makes sales at the customer’s
place of business, or, if selling door-to-door, at the customer’s home. Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls.
FLSA Exemptions
© 2009 Fox Rothschild
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SALES STAFF (cont’d)
Some states recognize a formal inside sales
exemption. For instance, New Jersey’s inside
sales exemption covers any employee whose
primary duty consists of sales activity and who
receives at least 50% of his or her total
compensation from commissions and a total
compensation of not less than $400 per week.
FLSA Exemptions
© 2009 Fox Rothschild
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SALES STAFF (cont’d)
Martin v. Cooper Elec. Supply Co., 940
F2d 896 (3rd Cir.1991):
- Court holds that employer violated FLSA, as inside salespersons were not bona fide “administrative” employees and thus were not eligible for statutory exemption from Act’s overtime and record keeping requirements.
FLSA Exemptions
© 2009 Fox Rothschild
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CLERICAL EMPLOYEE EXEMPTION
An executive assistant or administrative
assistant to a business owner or senior
executive of a large business generally meets
the duties requirements for the administrative
exemption if such employee, without specific
instructions or prescribed procedures, has
been delegated authority regarding matters of
significance.
FLSA Exemptions
© 2009 Fox Rothschild
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Contact Information
Mark Tabakman, Esq.
973.994.7554
[email protected] http://wagehourlaw.foxrothschild.com
Exempt or Non-Exempt? Employee Misclassification Challenges
Current Trends & Vulnerable Positions
Brent E. Pelton, Esq. Pelton & Associates, PC 111 Broadway, Suite 901
New York, New York 10006 www.peltonlaw.com
5/8/2012
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Assistant Managers
What percentage of the workforce is “managerial”?
Different color shirt is not enough – job duties must truly include managerial responsibilities
Looks bad if paid less than what non-managerial crew members would have earned with overtime (unofficial smell test cross-check)
Not allowed to pro-rate salaries!
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“Analysts” or “Associates”
Recent college graduates
Positions that require employees to “pay their dues”
May work with significant amounts of $ but position does not exercise significant independent judgment or control
Finance – reconciliations & trade confirmations
Accounting – new unlicensed “accountants”
Interns
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Financial Services
Employees who have risen through the ranks but still perform ministerial duties
Assistants and highly-compensated employees who have not been delegated significant authority regarding matters of significance
Mortgage loan officers – most companies have resolved this change
IT employees
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Computer Workers
Help desk & other “break fix” employees
Hedge fund computer employees work on systems used to control billions of dollars, but simply because the work they perform is important does not mean that it is exempt!
Setting up computers & phone systems
Watch out for “on call” work and working from home
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Other Misclassification Issues Day-rate industries (E.g., construction)
Piece-rate workers get overtime too
Clerical workers – being paid a salary is not enough
Household help – drivers, chefs, housekeepers & nannies
E.g., Hedge fund founder requires his Hamptons staff to work 15+ hour days and to sleep in the basement!
Hourly managers
Partial-day salary deductions are always impermissible!
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Exempt or Non-Exempt?
Employee Misclassification
Challenges
Identifying Vulnerabilities and Minimizing
Liability Under FLSA and State Law
Daniel J. McCoy, Esq.
Partner and Co-Chair, Employment Practices Group
650-335-7897
Fenwick & West LLP
May 8, 2012
SELF-AUDIT STRATEGIES
Selecting the Auditor
Pay Practices and Policies
Job Descriptions
Post-Merger Integration
Documentation
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SELF-AUDIT STRATEGIES Selecting the Auditor
Factors in Selecting:
• Skill
• Preserving Atty-Client Privilege
• Optics Of Internal vs. External Resource
– Evaluate Pros And Cons Of Having “Outsiders” Conduct Audit
Engage an auditor with solid knowledge of federal
and state law, and the skill to critically look beyond
job descriptions and questionnaires to ask hard
questions.
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SELF-AUDIT STRATEGIES Pay Practices and Policies
The duties test is merely half the battle.
Employers must meet the salary test as well to
establish the exemption.
In general, “supplemental” wages beyond base
salary will not defeat the exemption, while
deductions from base pay generally will.
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SELF-AUDIT STRATEGIES Pay Practices and Policies
Hours-based bonuses are risky and should be
avoided.
MBOs and other performance/merit-based
bonuses are generally permissible, i.e.
consistent with the salary test.
Time-tracking: if you are tracking exempt
worker’s time, is there a good reason for doing
so (e.g. customer billings)?
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SELF-AUDIT STRATEGIES Job Descriptions
They are Exhibit A in the employer’s exemption
defense, but they are of little value if they do not
reflect a reality and/or are embellished.
Every employer should have a gatekeeper who is
responsible to keep JDs current.
Are internal and external descriptions of exempt
positions consistent? Review job postings and
compare against internal (e.g. JDs, performance
reviews, offer letters, etc.) for consistency.
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SELF-AUDIT STRATEGIES Post-Merger Integration
It is vitally important for the Acquiror to assess exempt
classifications within the Target’s organization.
Ideally, this is vetted and assessed during the diligence process
and prior to the close, but time and other practical limitations
may prevent this from happening until post-close.
Employers must implement a strategy to explain, in a non-
provocative manner, why employees may be converted from
exempt to non-exempt status.
The Acquiror should use a purchase price escrow and/or strong
indemnification provisions to deal with potential post-close
overtime claims based on alleged misclassification.
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SELF-AUDIT STRATEGIES Documentation
At the outset, the employer should prepare a clear and
comprehensive scope document, setting forth the
groups/positions that will be analyzed and the general plan of
action for the analysis.
Auditor’s primary sources of information:
• Job Descriptions
• Performance Reviews
• Supervisor Input (through interviews and questionnaire responses)
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SELF-AUDIT STRATEGIES Documentation
Attorney-Client Privilege:
• Evaluate up front, i.e. before pen is put to paper, how to involve legal counsel in the audit so as to preserve privilege.
• Counsel need not lead or even be directly involved as an auditor or investigator, but must have meaningful involvement in the review of questionnaire responses, preliminary conclusions, etc., to credibly establish privilege with the audit.
Audit Report:
• Scope/extent will be dictated by the nature of the audit.
• Decisions – to maintain exemption or reclassify – should be supported by clear and cogent description of primary duties and time analysis.
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Exempt or Non-Exempt? Employee Misclassification Challenges
Self-Audit Strategies
Brent E. Pelton, Esq. Pelton & Associates, PC 111 Broadway, Suite 901
New York, New York 10006 www.peltonlaw.com
5/8/2012
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Self-Audit
Most wage & hour complaints arise from unhappy workers
Electronic discovery may provide significant evidence of willful violation
Does the company hire independent contractors?
Is the company trying to do the right thing? Courts are impressed where companies are able to explain the
work that was put into arriving at a classification.
Has the company responded to recent lawsuits and trends?
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Self-Audit Watch out for: Variations as to classification within departments & across the
industry; Unlawful payroll deductions, meal & rest breaks & accurate
timekeeping systems; Comp-time policies & hourly employees who are automatically paid
based on an 8-hour day; On call & time spent performing work that is not within the regular
workday; and Unpaid prevailing wages within construction and building services
industries.
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Copyright © 2012 by K&L Gates LLP. All rights reserved.
EXEMPT OR NON-EXEMPT: Employee
Misclassification Challenges
Correcting Errors and Limiting Liability Exposure
May 8, 2012
Christine Watts Johnston
K&L Gates LLP
48
Possible Damages
Damages include:
Minimum wage and overtime
Liquidated (DOUBLE) damages
Prejudgment interest
Reasonable attorneys’ fees
Injunctive relief
Civil Money Penalties per violation
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Government Enforcement
Civil enforcement by Secretary of Labor
Criminal prosecution by Department of Justice
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DOL Enforcement Agenda
Goal = Good Jobs for Everyone
Compliance strategy = Plan/Prevent/Protect
Strict construction for application of exemptions
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Avoid Finding of Willfulness
Statute of Limitations—extends from 2 to 3 years
for “willful” violations
Willfulness = employer knew or showed reckless
disregard for whether conduct was prohibited
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Establish Good Faith Reliance Defense
29 U.S.C. §259: employers actions were taken in good
faith conformance with and in reliance on an
administrative regulation, ruling approval or
interpretation of WHD or enforcement policy of WHD
Must be a written ruling, policy, regulation or order
Employer’s actions must be based on reasonableness
under same or similar circumstances
Good faith = bar to action
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Establish Good Faith Defense
29 U.S.C. §260 Good faith requires:
Subjective good faith belief proceeding lawfully; and
Objective reasonableness
Strong presumption of doubling damages UNLESS
employer establishes good faith
Employer must have taken affirmative or active steps to
ascertain statutory requirements
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What areas should be covered in a compliance
program:
Are exempt employees properly classified?
Does the employer have appropriate policies?
Are appropriate wages being paid?
Are non-exempt employees paid required (state and federal) minimum wage?
Are exempt employees paid on a “salary basis”?
Are non-exempt employees paid required overtime?
Do non-exempt employees accurately record working time?
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What areas should be covered in a compliance
program (continued):
Does the company have required postings properly
displayed?
Is the company compliant with record-keeping
requirements?
Is the company following applicable child labor law
restrictions?
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What should a compliance program include:
Appointment of a compliance manager charged with
oversight of ongoing compliance efforts
Updated policies concerning overtime and pay practices
including safe harbor
Regular and systematic review of classifications and
auditing practices
Education and training of managers responsible for
overseeing pay practices
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What should a compliance program include:
A toll-free number for employee questions and
complaints
A process for investigating complaints
Payroll integrity policies that guard against practices
such as falsifying time records and working off the clock
Consequences for managers who do not follow company
policies
Regular communication with employees
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Window of Correction and Safe Harbor
Window of Correction –allows for employer reimbursement of isolated or inadvertent deductions from pay without loss of exemption
Safe Harbor—an employer may fall under if it:
has a clearly communicated written policy prohibiting improper deductions,
has a complaint mechanism to address improper deductions and
provides reimbursement
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Prompt Investigation and Remedial Action
Complaint response important part of compliance program
In Kasten v. Saint-Gobain Performance the Supreme Court
held that oral complaints of an FLSA violation are protected
conduct under the anti-retaliation provisions
Complaint must be “sufficiently clear and detailed for a
reasonable employer to understand” it as a request for
protection under the FLSA
Rejected notion that only complaints to governmental
agencies were protected
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Fixing a Problem—Changing Classification from
Exempt to Non-Exempt
Once a misclassification is identified, move toward
stemming damages
Consider appropriate timing for communicating and
implementing appropriate changes
Convey message to affected employees with a
clear understanding of how pay/job will be affected
Consider involvement of DOL
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Confidentiality Protocol for Compliance Assistance
Applies only to telephone inquiries not related to
any DOL investigation, inspection or other matter
where contact initiated by DOL
Information kept confidential “within the bounds of
the law”
No protection from inspection, audit or investigation
as a result of “ordinary” operations
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Voluntary Resolution of Claims
No prospective waiver of FLSA claims BUT
settlements of bona fide disputes are permitted
Out of court payments for unpaid wages IF
supervised by Secretary of Labor
Litigation settlement subject to scrutiny of courts for
fairness before stipulated judgment
No court approval required where back wages paid
in full (includes liquidated damages)
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Example—Walmart Settles for $5.29M
DOL announced settlement of claims on 5/1/12 for the time period from June 2004 to March 2007
Affected employees were vision center managers and asset protection coordinators (approx. 4500 employees)
Classifications changed in 2007 – 5 years to reach settlement on amount of payments
Settlement components
$4.6M in back overtime
$155K in damages
$465K in CMPs
Walmart = repeat offender
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Benefits and Risks of Involving DOL
An employee may NOT bring suit under the FLSA if
s/he has been paid back wages under supervision
of WHD or if Secretary of Labor has filed suit to
recover wages
Federal and state agency partnerships and
information sharing may mean that opening the
door a crack results in a flood of scrutiny
Union organizing campaigns may use knowledge of
compliance shortcomings to further own agenda
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DOL’s Mobile Tracking Application
Allows workers to track hours work
Summarizes total working time
Calculates wages including overtime
Provides information on wage laws and issues
screen alerts when violations may have
occurred
Does not handle items such as tips,
commissions, bonuses, deductions, holiday
pay, pay for weekends, shift differentials, or pay
for regular days of rest
Copyright © 2012 by K&L Gates LLP. All rights reserved.
EXEMPT OR NON-EXEMPT: Employee
Misclassification Challenges
Correcting Errors and Limiting Liability Exposure
May 8, 2012
Christine Watts Johnston
K&L Gates LLP
Exempt or Non-Exempt? Employee Misclassification Challenges
Correcting Errors & Limiting Liability
Brent E. Pelton, Esq. Pelton & Associates, PC
111 Broadway, Suite 901 New York, New York 10006
www.peltonlaw.com 5/8/2012
70
Correcting Errors & Limiting Liability Exposure
Use care in reclassifying employees or you will hear “the company admitted they were paying us improperly!”
Coordinate DOL investigation & private lawsuit – often DOL will forego its investigation if a federal lawsuit is pending
DO NOT RETALIATE – retaliation may result in additional claims and punitive damages!
Are there records? If not, back wage payments may be based upon employees’ best testimony.
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Correcting Errors and Limiting Liability Exposure
Is it company-wide or just a rouge manager or one division?
Informal discovery and mediation?
Agree to conditional certification with respect to a narrower class of employees? (job title or geographic location)
Avoid attorneys’ fees and negotiate liquidated damages
Admit mistakes – Judge Cogan recently praised defendant company for admitting misclassification error and negotiating a fair resolution that paid employees 100% of unpaid wages plus some liquidated damages.
Expect judicial scrutiny
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Correcting Errors and Limiting Liability Exposure
Unions may demand a seat at the table or threaten to object to a settlement
Release of claim must be supervised by the DOL or the court
Use available records to estimate claims
NY DOL will issue back payments but rarely releases – class settlement may be the only way to truly resolve the claim.
If not resolved quickly, FLSA claims tend to grow.
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