Volume 37, Issue 4, April 2002


Employers Beware
        Payment of Wages Can Be A Trap for the Unwary
by David Barron

What do U-Haul, Starbucks and Rite Aid all have in common? All three of these large corporations have recently been forced to settle large multi-million dollar overtime lawsuits filed by former employees. These employees claimed that their employers misclassified them as exempt from receiving overtime pay. Employees who have been denied rightful overtime pay may bring suit to recover up to three years of unpaid back pay, plus interest and reasonable attorneys’ fees and costs. In addition, unless the employer can show that it acted in good faith in determining an employee’s exempt status, courts may award an additional equal amount of money as liquidated damages.

This new trend of large class action overtime lawsuits comes courtesy of a 60-year-old law called the Fair Labor Standards Act (FLSA). The FLSA is the most important source of wage and hour law in the United States and covers virtually all businesses, large or small. The law provides seemingly straightforward rules regarding overtime requirements, as well as identifies employees who may be exempt from those requirements. Even though the rules seem straightforward, many employers routinely misclassify salaried employees as exempt when they really do not qualify for the exemption.

The Law Under FLSA
Under the FLSA, all covered employers must pay their employees at least one-and-a-half times their regular rate of pay for each hour worked in excess of 40 hours per work week. Simple rule, right? It would be if it applied to everyone. However, the FLSA also provides exemptions from payment of overtime to employees regarded as white-collar, those people who perform executive, professional or administrative duties. While these exemptions seem fairly simple as well, the reality is that figuring out who qualifies for these exemptions is often tricky.

By claiming improper exemptions for employees you expose your company to costly liability. Just ask Farmers Insurance, which recently was hit with a $90-million judgment for overdue overtime to 2,400 claims adjusters the company had classified as exempt. Farmers claimed that its adjusters were not entitled to overtime pay because they were salaried employees who worked flexible hours and exercised discretion and authority. The employees, however, won the case, which was brought under California state law, arguing that their freedom was limited because they could not settle insurance claims without permission from their supervisors, and therefore did not qualify as exempt employees.

Defining Exempt
The exempt or non-exempt status of an employee is based on whether his duties, responsibilities and salary meet all of the requirements of the relevant exemption. The Department of Labor sees these exemptions as very narrow in scope and places the burden on the employer to show that the individual qualifies for an overtime exemption. As an employer you should keep in mind that an employee’s job title has little to do with whether he qualifies for an exemption. Rather, the Department of Labor looks at the employee’s actual job responsibilities to determine eligibility for an exemption. For example, an employee who is classified under an administrative exemption, which is the most commonly litigated exemption, must meet the following requirements:
    • Work directly relates to managerial policies or general business operations;
    • Customarily and regularly exercises discretion and independent judgment;
    • Regularly and directly assists a proprietor, or a bonafide executive or administrative employee;
    • Has a salary at the rate of not less than $155 per week.

Avoiding Lawsuits
Employers should take action to determine whether their salaried employees are truly exempt under the FLSA. Experts advise employers to take the following steps to ensure they are compliant with the law:
    • Carefully review the daily job activities of claimed exempt employees, especially borderline jobs such as secretaries and working foremen or supervisors;
    • Periodically, have exempt employees write down exactly what they do on a particular day to ensure they are not performing too much work outside of their          exemption;
    • Have experienced labor counsel perform an audit of exempt employees to ensure that they are exempt under the act;
    • Review written policies to ensure exempt employees are not required to perform non-exempt duties, and that the company does not have a policy that by itself         will jeopardize an employee’s exempt status; and
    • Do not be too creative, and think that you can cheat the system. For example, the FLSA strictly prohibits private employers from using comp time instead of          paying overtime. Ironically, the government only trusts itself to provide this benefit to employees.


David Barron is an attorney at Alaniz and Schraeder in Houston. He represents employers in employment-related matters.


Copyright Key Communications Inc. All rights reserved. No reproduction of any type without expressed written permission.