In this economy, many HR departments and supervisors may decide that if they give an employee a new, more impressive-sounding job title, the move may cover a lot of ground: Given even a very small raise, the new title-holder may feel he or she has been given a meaningful promotion.

Employers may be tempted to inflate job titles for lots of reasons—many of them very understandable. For one, especially younger employees are anxious to feel they’re making career progress, and the bigger the titles on their résumés, the better their chances in the future are of landing a truly big job. Further, the employer may have felt constrained to lay off the majority of its lower-level support staff, such as clerks, secretaries, and assistants. The effect of that is to expand the responsibilities of mid-level managers; so employers hope that by boosting their titles, they’ll be more willing to take on the added work.

By contrast, other employers have focused on laying off higher-level managers—those with big salaries that, when eliminated, can save the employer significant money. Now you have mid-level managers reporting to top management, so why not give them more impressive titles? Here, too, the changes may make their bigger workloads seem not quite so onerous.

Finally, companies with very tight budgets for compensation often seek ways to reward high performers. Suppose, for example, that you have a sizable group of employees with the same job title—but 10 percent of them are high performers, 60 percent are just OK, another 30 percent are truly mediocre, and the last 10 percent are close to worthless. If they all have the same title, a director may wonder, how do they know where they stand if we don’t give pay for performance? How about if I give the top 10 percent bigger job titles, and maybe a few extra perks?

But one lawyer warns of the legal risks of job title inflation. He is John K. Skousen, partner in the Irvine, California, office of employment law firm Fisher & Phillips. Here’s the biggest problem, he says: Beware giving an employee a job title that implies functions of which he or she isn’t capable. Ordinarily, those functions will go to a higher-level manager. In some cases, they’ll be done by someone in another department with an unimpressve job title. But any mismatch between the job title and functions invites auditors from the state or federal level into your workplace to investigate.

In fact, stresses Skousen, three sets of factors should align for every employee’s job—the real functions, the title and its implications, and the wage or salary grade. The auditors will ask you to hand over all your job descriptions, and they may go through them line by line. If you’ve updated them to match job titles, the auditors will find the holes—the functions that some jobholders can’t perform. And if you change someone’s job title but not his or her job description, says Skousen, “You may be sunk.” Auditors will quickly spot the mismatches, and they’re also likely to see that you have descriptions for positions that don’t exist. Either way, not good.

There are two other serious problems with inflated job titles, says Skousen. One is disorganization throughout the workplace. Since not all, but only some or a few job titles have been inflated, the rest of your workers are in the dark about what’s going on, leaving them to ask questions such as “Who’s really doing what, and how do we tell? We now have some new functions and tasks, so to whom should they go? Where’s the right place for this responsibility?”

Most of all, what are the FLSA implications? Is the person with an inflated title a ‘frog’ or a ‘prince’? Princes aren’t always better; every company needs steady, reliable people in jobs that are crucial to the quality of the organization’s products or services. The real danger is in confusing exempt with nonexempt employees. Give someone a fancy title and you may be tempted to pronounce him or her exempt. Not only do you deprive the person of overtime but you could invite an investigation by the Department of Labor’s Wage & Hour Division. Class action suits for misclassification of workers are at an all-time high and can be very expensive.

“Well-crafted layoffs can get rid of much dead wood in a company,” says Skousen. “But make sure job titles match what people are really doing.”