Exempt workers present a special risk for employers; on one hand, having employees who are exempt from overtime pay can be beneficial, but on the other hand, the employer risks fines from misclassification issues if they get it wrong. The Department of Labor has estimated that nearly 70 percent of employers are not in compliance with the Fair Labor Standards Act (FLSA). In 2010 alone, it set aside $25 million for an enforcement crackdown, adding 350 FLSA investigators with the goal of seeking out employers who commit wage and hour offenses – especially exemption misclassifications.

In a BLR webinar titled "2012 Exemption Checkup: How to Find and Fix Pay Practice Problems with An Easy Audit," Susan G. Fentin, and John S. Gannon outlined some of the risks of misclassification, giving us the reasons to be certain when determining who to classify as exempt workers.

Risks of Misclassifying Exempt Workers

"Perhaps the most complicated area of the FLSA is the issue of exempt and non-exempt status," noted Fentin during the webinar. "In recent years we have seen a big uptick in wage and hour employment litigation. Employees who have been misclassified as exempt can file a lawsuit seeking their lost wages for the overtime pay that they claim they earned working more than 40 hours in a 7-day workweek."

These types of FLSA lawsuits often arise if individual is terminated, and can often turn into class-action suits, making it very expensive to get the status of exempt workers wrong!

Besides the threat of lawsuits, employers have the risk of being caught by the Department of Labor (DOL) if they misclassify employees. The DOL has stepped up enforcement with their P3 Initiative – plan, prevent, protect. The goal of this program is to get employers to create Compliance Action Plans (CAPs) to address employment law compliance. The DOL is likely to propose rule that will require covered employers to notify workers of their exemption status and perform a classification analysis on workers classified as exempt. To be in compliance, employers covered by the Wage and Hour Division need to develop written plans for identifying wage and hour violations (plan), create a process for implementing the plan (prevent), and test the process for compliance (protect).

Risks of Misclassifying Exempt Workers: Individuals Can Be Held Liable

"As you can see, there are plenty of reasons – big dollar reasons – why your employer needs to be certain that it has properly classified its workplace. In addition, the FLSA provides for individual liability for officers or agents whose decisions result in improper classification or unpaid wages." Fentin explained.

Under FLSA, all "employers" are jointly liable for FLSA damages. In this situation, "employer" is defined broadly, and includes "any person acting directly or indirectly in the interest of an employer in relation to an employee." That might even include HR professionals, under certain circumstances.

The courts, however, have come down with varying interpretations of the level of personal liability. They generally consider the level of financial control that the individual has over the workforce, and/or what role the individual had in determining pay policies and exempt status. That said, it’s important to know that this liability is probably not covered by Employment Practices Liability Insurance (EPLI).

For more information on non-exempt vs. exempt workers, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Attorney Susan G. Fentin is a partner in the labor and employment firm of Skoler, Abbot & Presser, P.C. Her practice concentrates on labor and employment counseling, advising large and small employers on their responsibilities and obligations under state and federal employment laws, and representing employers before state and federal agencies and in court.

John S. Gannon is an associate with Skoler, Abbott & Presser, P.C., and practices in the firm’s Springfield, Massachusetts, office. Prior to joining the firm, he served as a judicial clerk to The Honorable David M. Borden and George D. Stoughton at the Connecticut Appellate Court.