Classify Employees Correctly or Face the Consequences

Kathryn Carlson

Wage and hour law violations are already one of the most common causes of employment litigation and regulatory audits, and now the U.S Department of Labor along with multiple states, have announced new legislation and enforcement guidelines. It is more important than ever that employers ensure that all employees are correctly classified as exempt or non-exempt and are paid accurately according to the classification.

The U.S. Department of Labor (DOL) announced in May that as part of the Good Job Initiative, it is committed to fostering a culture of compliance rather than what was described as a “catch me if you can” system. The Department of Labor refers to this goal as “Plan/Prevent/Protect”. The Department of Labor’s Wage and Hour Division (WHD) has taken this mission seriously with an acceleration of enforcement proceedings as well as more rigorous reporting requirements and proposed new regulations.

Under the proposed WHD regulations, employers will be required to notify workers of their FLSA rights and provide them with information regarding hours worked and methods of wage computation. In addition to the proposed WHD regulations, Congress is considering The Fair Playing Field Act of 2010 and The Employee Misclassification Prevention Act of 2010. These acts are expected to pass in 2010 or early 2011.

Beyond the federal regulations, the states of New York, Alaska, Connecticut, Delaware, Hawaii, Idaho, and Illinois, require that all new hires be provided with written notice of: their pay rate(s); their overtime pay rate (if they qualify for overtime pay); and their regular payday. Additionally, New York requires that every employer who has employees classified as exempt must “perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to the WHD enforcement personnel who might request it.”

With the increased enforcement efforts and upcoming regulatory changes, employers should coordinate a review of their current employee classifications with their legal counsel. The two essential components of proper classification are:

• The amount and basis of wage payment (i.e. is the employee paid a guaranteed minimum or salary or on an hourly basis)
• The duties performed in the position (regardless of title).

The key steps to proper classification are:

• Make sure that complete and accurate job description are available for each position. This is a critical step because the determination of exempt or non-exempt is based on the job duties and time spent in the duties.
• Review each job description against the seven exemption categories under FLSA Section 13(a)(1) to determine if the position should be classified as exempt or non-exempt.
• Review wage payments for all positions to confirm the proper payment methods are being used for each position depending on the exempt or non-exempt classification.

KPA and our partner attorneys have already recommended that employers provide a copy of the job description and the pay plan to each employee. Under the proposed regulations, the compliance review will require a written evaluation be provided to the employee, and the evaluation must be kept on file in the event of a WHD audit.

For additional information on the Fair Labor Standards Act, employee classification, and wage payment, download the free webinars “Essential of Wage and Hour Law”, “Advanced Wage and Hour Law” or “California Wage and Hour Law for Dealerships” at www.kpaonline.com/news-and-events/webinars/recorded-webinars.html. HotlinkHR clients may contact the HR Advice Line for additional assistance in employee classification.