HR Audit – Fair Labor Standards Act (FLSA)

The majority of employers in the U.S. are obligated to follow the protocols for paying employees as prescribed by the Fair Labor Standards Act (FLSA). Even if the employer isn’t a covered entity, the individuals working for the organization may still be protected by this law if they engage in interstate commerce. According to the DOL Fact Sheet regarding Covered Employers:

“Examples of employees who are involved in interstate commerce include those who: produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state, regularly make telephone calls to persons located in other States, handle records of interstate transactions, travel to other States on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the State.”

When a person assumes the role of a HR Manager or Director in a new company, they will typically begin the process of evaluating all of the HR systems and policies currently in place to ensure compliance. One of the areas audited is in regard to assuring employees who are designated as “exempt” from minimum wage and overtime pay truly meet one of the exemptions allowed under the FLSA.

Many times, this includes meeting with managers and employees to ensure the job descriptions are up-to-date before performing the analysis regarding exempt status. After that task is completed, then the HR professional will review the job duties to compare them to those articulated in the Department of Labor’s Fact Sheets regarding Overtime Exemptions. It’s recommended as this review is being made and it is determined a job is exempt from overtime pay, that the specific exemption(s) under which that job falls be identified.

Once that task is completed, and the HR professional has identified jobs that were improperly classified, the next step is to determine the strategy to 1) estimate the cost of making those individuals whole for the past 2 years of overtime, and 2) consult with the executive team and an attorney to determine how the company will transition these employees to non-exempt and whether or not it will be proactive in paying them retroactively for the 2 years the person wasn’t properly paid for their overtime. While that may not be strictly in compliance with the law, it is a strategy to discuss with an employment law attorney before making a decision as to how this will be rectified. Additionally, the employer will want to consult with an employment law attorney as to how and when to communicate the change in status as well as any retroactive pay that may be provided to a misclassified employee.

The key here is don’t panic. Gather all of the facts and then discuss with an attorney and the executive team to determine how the organization will ultimately resolve this situation. The misclassification has likely been in place for years and resolving this problem isn’t going to happen overnight.

The company and the executives do need to be aware of the risks that come from misclassification of an employee. In a DOL audit, the employee would be awarded double damages and the company will be assessed fines/penalties…not only for the misclassification but for recordkeeping violations since it did not maintain proper time records for those misclassified workers.

The greater expense is if an employee feels they’ve been paid improperly and decide to call up that friendly attorney that advertises on television. In that circumstance, the attorney can file a civil lawsuit in court on behalf of that individual. If that case goes to litigation and the company wins, the company’s attorneys’ fees will be somewhere in the ballpark of $125,000-$150,000. If the company loses, those attorneys’ fees double because the company will then be obligated to also pay the employee’s attorneys’ fees plus the double damages to the employee. Even if the case is settled out of court, the company can easily be looking at attorneys’ fees of $50,000+. The company may think that their Employment Practices Liability Insurance (EPLI) will cover this cost. However, most EPLI policies specifically exclude FLSA lawsuits.

In addition to reviewing how employees are classified with respect to exempt/non-exempt status, it’s also recommended that audits of time-keeping systems and protocols for calculating overtime also be done. For example, is the employer including the value of non-discretionary productivity bonuses in the calculation of overtime? FLSA Fact Sheets on Hours of Work and Overtime are available from the DOL website.

Periodic auditing of HR practices is always time well-spent. They key is to approach any compliance or potential compliance issues with calmness and to discuss with an employment law attorney how to mitigate these issues with minimal impact to the company.

EAF responds to hundreds of hotline calls and emails monthly. We would be happy to answer any interesting questions you may have too! Contacts us at [email protected] or 407.260.6556

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