The Fair Labor Standards Act: Changes to Your Workforce in These Difficult Economic Times, Straightline

Most employers have a basic understanding of their obligations under the Fair Labor Standards Act or its state equivalent to pay both minimum wage and overtime pay. They also generally understand that certain positions may be exempt from minimum wage and overtime pay obligations, and that the most common exemptions apply to employees whose duties are those of a bona fide executive or of an administrative, professional, computer, or outside sales nature. However, many employers are unaware of the complexities of the various exemptions and the serious liability that can result from misapplication of the exemptions.

Specifically, a finding that an employer has misclassified an employee’s status may subject the employer to substantial wage repayment and penalties. In the past year or so, courts have seen an explosion in FLSA class action (“collective action”) cases brought by employees classified as exempt who allege they are non-exempt or by non-exempt employees who claim they have not been compensated for all hours worked. These lawsuits allow attorneys suing on behalf of the employees to go back as far as three years to examine the duties, work hours and pay of every employee who worked for the employer during that time. An employer’s failure to properly document duties, work hours and pay may also result in liability. These cases may be brought either on behalf of an individual or as a collective action on behalf of numerous individuals. Collective actions frequently result in judgments or settlements in the tens of millions of dollars.

Although employers often rely on a job description, an offer letter, and/or an employment agreement to establish the employee’s classification, none of these documents are dispositive. Instead of relying on a job description, which may not accurately reflect the employee’s actual job duties, or on an offer letter or employment agreement, which typically recite only that the employee’s position is “exempt,” the employer should identify in writing the employee’s actual job duties and periodically confirm that the employee continues to perform these duties. It is critical that employers continue to ensure their designations are accurate and documented.

Moreover, in these difficult economic times during which it may become necessary to reduce the company’s workforce and restructure existing job duties to allow for a smaller workforce, employers must be mindful that any change in duties may cause an “exempt” employee’s classification to become “non-exempt.”

Example A: In the case of a layoff, an employee who is classified as “exempt” under the Executive exemption (which requires, among other things, that the executive direct the work of at least two or more full-time employees or their equivalent in hours worked) and who has directed the work of two full-time employees, may lose exempt status if, after a reduction-in-force, the executive now directs the work of only one full-time employee and one part-time employee. In short, employers must review any revised job duties against the applicable FLSA exemption to confirm whether or not the exemption will continue to apply.

Example B: In the case where the employer seeks to avoid a layoff, the employer may decide to reduce the employee’s salary and/or work hours. A reduction in salary and/or work hours may change the employee’s job classification to be “non-exempt.”

Except for the outside sales and the computer professional exemption, all of the exemptions discussed above require pay to be on a salary basis and require a weekly salary minimum. At this time, the weekly salary minimum requirement is not less than $455 per week, or in the case of the computer employee exemption, either not less than $455 per week or not less than $27.63 an hour. Employers should review any employee’s revised salary to ensure that the salary reduction is not done on an hourly basis and does not drop the employee below the salary minimum threshold, either of which could destroy the employee’s “exempt” status.

Finally, keep in mind that an employee may be “exempt” under one or more exemptions. Therefore, if an employer determines that an employee is no  longer “exempt” under one exemption, the employer should review the employee’s duties and assess whether or not he is “exempt” under another exemption.