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Small to mid-size business owners are usually "real people" trying to do the right thing for their employees. With a small workforce, management/owners often know and work closely with their employees, with daily interactions. A reasonable weekly salary may be the norm, with flexibility for "comp time" when the demands of the business have resulted in an employee working extra hours during a busy period.  Near the yearend holidays, a bonus might be distributed reflecting a "good year" for the business.  A cost of living and merit raise follows on January 1. All is well, right?   Not necessarily.

Lurking just below the surface of this contented workplace is a potential blockbuster legal problem – a violation of the Fair Labor Standards Act ("FLSA") for failure to pay overtime compensation for work performed over 40 hours in a week.

Many employers are not aware that they cannot simply decide to pay every type of worker a salary, rather than an hourly wage plus time and half for overtime. Only "exempt employees" – those whose work is in a bona fide "executive, administrative or professional" role, or who are computer programmers or designers, or outside salespersons, can be paid on salary.  Most "blue collar" or manual labor occupations are non-exempt (e.g., construction workers, mechanics, and production workers), as are most law enforcement and first responder personnel. These workers must be paid an hourly wage plus overtime compensation.

But the challenge of employee classification is much more complicated than a simple "blue collar - white collar" distinction.  Only "white collar" employees who are truly managing the business, and exercising discretion and independent judgment with respect to matters of significance, may qualify as exempt, salary-based employees.  Each and every employee's actual job responsibilities, not just his or her job description, must be individually scrutinized to determine whether they are eligible for salary-based compensation, or instead must be paid on an hourly rate basis, plus time and half for overtime.  The Labor Department regulations and bulletins, case law, and legal handbooks delineating which employees are exempt or non-exempt fill many a bookshelf and electronic archive.

The risk of  misclassification is enormous.  Non-exempt employees who are not paid overtime compensation to which they are entitled have an absolute right to claim and collect the back pay that they are owed – plus liquidated damages equal to 100% of the overtime pay that they did not receive (double damages), and reimbursement of their attorneys fees in making the claim and bringing the lawsuit.  Employee misclassification is often not confined to one person, and opens the door to a multiple person or class action lawsuit. And yes, willful violations can constitute a criminal offense, with fines up to $10,000, and imprisonment after the first offense.

An employer's defenses to an FLSA claim are narrowly limited.  The FLSA applies to virtually every enterprise with more than $500,000 in annual business volume.  "Trying to do the right thing" for the employees is not a defense.  An assertion of "good faith" sufficient to escape just the liquidated damages portion of the liability requires objective proof that the employer sought out knowledgeable professionals, such as legal counsel, to evaluate the employee's proper classification, and relied on that advice.

Given the substantial risks involved, we urge all employers to carefully analyze each member of their workforce, and seek the guidance of legal, accounting  and human resource professionals concerning their FLSA compliance.

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The firm's Business and Employment Group (Michael McConville and Mary Ognibene), and its Employment Litigation Group (Peter Weishaar, Kevin Cooman and Peter Gregory) can provide compliance analysis and counsel, and litigation defense services with respect to FLSA matters.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.