By Holly K. Jones, JD, Senior Legal Editor

During her recent master class on the upcoming changes to the Fair Labor Standards Act’s (FLSA) white collar exemptions, Kara Shea shared a wealth of advanced, in-depth legal information on wage and hour compliance. She also shared a little of the practical business strategy that comes from her years of experience assisting, counseling, and representing employers of all sizes and industries.

Because the FLSA rules aren’t always intuitive, Shea explained that few organizations are fully compliant with the exemptions—even under the current rules. So, as discussed in a previous article, the upcoming changes provide a great opportunity for employers to conduct an internal audit and review all aspects of their employee classifications. (Yes, even the duties tests, which have not changed).

If conducting a classification audit is on your to-do list, you may appreciate these strategic, data-based tips for managing the otherwise squishy, subjective world of exemptions.

Clean-up, aisle exempt

Shea notes that the questions that arise during a classification audit are usually quite fact specific. Therefore, she recommends first tackling as much of the audit yourself as you can.

“Some of the concepts are apparent and obvious and you can quickly pick out the people who are correctly (or incorrectly) classified. Then you have the grey area—which is usually about 35% of your workforce. Don’t involve legal counsel until you’ve identified these grey area employees. There’s no need to have an attorney review and audit 100% of your workforce.”

She also points out that much of the “law” surrounding exempt classifications is quite subjective.

“Many [exemptions] are judgment calls and the person making that call is going to be someone from the U.S. Department of Labor (DOL) or a court. So an attorney’s job is to tell you how they think that judgment will go.” How will the DOL or local court apply the law to your specific employee?

People have different opinions. Judges have different opinions from the DOL, from each other, etc. These people may look at all of the same factors, but the answer is not always clear, and that’s why exemptions can be so difficult and frustrating.

Shea explains, “All you can really do is make a best guess based on what you think someone else’s judgment will be. This is where local counsel is helpful, as they will have a better handle on how the judges in your jurisdiction will interpret the law.”

Of course, many employers simply don’t have the money to invest in a 3-year litigation to fight what the DOL thinks the law is at that particular time. This is where Shea takes off the attorney hat and puts on the strategic hat.

“You need to assess your risk.”

Let’s say you seek assistance from your highly knowledgeable local counsel and, during your audit, your attorney points out a potentially problematic classification. You may be using an exemption about which your attorney only feels “pretty sure.”

Keeping in mind that these classifications are subjective, rather than forgo the exemption entirely because there is doubt (because there’s almost always going to be some doubt), instead consider how much would it cost if someone disagrees.

“You need to assess your risk,” Shea notes. She points out that, unfortunately, most companies don’t do this, instead opting for a rather laissez-faire approach to classifications. However, “business executives understand the concept of risk assessment and exposure, so if you can explain classifications in those terms, your executives are more likely to understand.”

This means calculating your odds and determining whether your company can absorb the risk of failure (i.e., getting the exemption wrong).

She continues, “If you have happy employees, a business model that is working, and valid reasons for your classification, then you may be less likely to change a grey area duties assessment.”

On the other hand, consider the following:

• The classification is one we’re feeling 50/50 or less confident about;
• The classification covers a large group of similarly situated workers—say 100;
• We’re going to have a significant back pay assessment if we’re wrong;
• The employees are in a high turnover group; and/or
• We’re in an industry that’s being hit heavily by DOL audits.

There is considerably more risk in this scenario. Would getting the classification wrong destroy the company? If so, then you can’t afford grey area and you need to err on the side of caution.
“This is the kind of analysis you need to be doing,” Shea notes. “Sometimes risk is acceptable if it’s helping your business thrive.”

“That’s practical, rather than legal advice,” Shea reminds us.

Putting the attorney hat back on

Now, with all of this fantastic practical advice in your back pocket, there are a few legal caveats to keep in mind. If we’re going to embark upon a truly informed risk assessment, we have to keep these principles in mind.

Willful violations. First, note that the FLSA does assess additional damages if it finds “willful violations.” Employees who lost overtime wages as a result of a willful violation are entitled to compensatory damages of 3 years’ of back wages (rather than 2) and may also be entitled to liquidated damages (typically this will double the back wages paid).

So you can’t simply go into your workplace, classify everyone as exempt, then dare the DOL to come get you. This is not a good strategy.

Similarly, if your attorney tells you, “I have absolutely no doubt—this employee is flipping hamburgers and there is no way she is exempt,” then your failure to reclassify that employee is going to be a willful violation if you are sued or audited. You can’t claim you acted in good faith if you deliberately ignored the advice of your attorney.

Good faith. As with most employment laws, we savvy, sophisticated employers really can’t argue, “Well, I didn’t know that was the law” and expect an under-compensated employee to walk away empty handed.

Fortunately, the FLSA does provide a bit of relief to employers to help balance the subjective nature of the exemptions. If an employer can show good faith and reasonable grounds for its actions—in this case, its classification of an employee as exempt—then damages may be limited only to the back wages and attorneys’ fees (29 U.S.C. §260).

So just as acting willfully will subject you to more risk, if you (and your attorney) can build a strong case of good faith and reasonable compliance with the spirit of the law, then you may be able to limit the risk to a couple years’ worth of back wages you would have paid anyway (plus attorneys’ fees). This is where feeling “pretty sure” may still be good enough.

Bottom line

Shea said it best when she noted, “Sometimes risk is acceptable if it helps your business thrive.”

While considering the coming regulations, don’t immediately assume that your only option is spending thousands of dollars on billable hours and duties audits, meanwhile frustrating previously exempt workers with timekeeping requirements and strict prohibitions against checking e-mail during off hours.

Instead:

• Take a practical, business-minded approach to your classifications.
• Keep the audit process internal as much and as long as possible. Find the known exempt/nonexempt workers and get them in order first.
• Don’t mistakenly rely on job descriptions alone—especially if those descriptions aren’t quite accurate. Actual duties matter.
• Identify “grey area” classifications, then recruit legal assistance with those as needed.
• When assessing risk, consider supplemental data such as turnover, number of employees in the same role, hours of overtime an employee is likely to work, back wage estimates, etc.
• Don’t forget “hidden” costs that may arise with reclassification—loss of morale, lost productivity, interruption of business continuity and efficiency by limiting employee availability, changes to benefits eligibility, etc.

Additional resources:

• FLSA resource center
• Communicating transition article
• Classification checklist