“Borderline” Overtime Exemptions Require Careful Analysis and Precautionary Measures

Q: We have an employee who we believe is properly classified as exempt from receiving overtime under the Fair Labor Standards Act (FLSA) but it is a “borderline” case.  In other words, we realize it is possible that a U.S. Department of Labor (DOL) investigator might disagree with our analysis and conclude that she is misclassified and should be receiving overtime.  What should we do?

A: First, you should work closely with an employment lawyer to analyze the employee’s actual job duties and functions;not just what the employee’s job description states.  Many times, a job description will fail to include key functions which can make or break an exempt classification. (Obviously, if you find those missing key functions, it is essential that you update the job description accordingly.)  Then, you should carefully document your analysis and keep it in the employee’s personnel file should you later need to produce it in an audit or during litigation.  

Second, if the employee is still on the “borderline” between exempt and non-exempt employee classifications, you should consider recording her hours of work.  If the DOL ultimately decides that an employee has been misclassified as exempt, they will want to know how many hours of overtime the employee worked over the last few years.  If the employer does not have those records, the DOL will take the employee’s word for how many hours she actually worked.  As you might imagine, there is a temptation to exaggerate this number of hours, given the potential for large overtime back-pay awards.  

Third, you may want to consider having a written policy — or including a phrase in your employment offer letters — which states that the employee’s weekly salary covers all the hours that she works in each week.  This becomes critical in misclassification cases because of the way that the DOL will calculate the amount of overtime that a misclassified employee is owed. In these cases, the DOL will determine an hourly wage rate for the employee after-the-fact because the employee was not paid on an hourly basis. If the salary covered only the first 40 hours of the employee’s workweek, the employee did not receive any pay for her overtime hours.  Consequently, the employee would be owed 1.5 times the hourly wage rate, which would bedetermined by dividing the weekly salary by 40. But if the salary was the employee’s straight-time compensation for all hours worked in a workweek, including overtime hours, then the employee is due only the half-time overtime premium.

As you might imagine, this difference in calculation methods can have a tremendous effect in situations – such as class actions – involving large numbers of overtime hours.