Guarding Against Wage and Hour Litigation

Wage and hour laws — the federal and state laws that regulate overtime pay and other work conditions — present significant challenges to human resources professionals.

Class-action lawsuits related to wage-hour violations are on the rise, and payouts are reaching record amounts. From 2001 to 2012, there was a more than 500 percent increase in the number of multiple-plaintiff wage-hour lawsuits filed in U.S. federal court, according to a 2012 white paper by San Francisco-based law firm Littler Mendelson.

A recent study by NERA Economic Consulting found that employers paid out a total of $2.7 billion in wage-hour settlements between 2007 and 2012, with settlements totaling $467 million in 2012 alone.

The Fair Labor Standards Act specifies provisions that regulate minimum wage, overtime pay, child labor and record-keeping requirements. The overtime pay provision is arguably the most confusing aspect of the law — and the one that is most commonly violated.

Judith Kramer, a management attorney with law firm Fortney & Scott in Washington, D.C., said the guidance regarding who qualifies for overtime involves many gray areas and that “even the most conscientious employer can get into trouble.”

Compounding the issue is the fact that these laws are often revised. The regulations were revised in 2004 and are on track to be updated once again. In March,

President Barack Obama directed the U.S. Labor Department to “modernize and streamline” federal overtime regulations.

Despite the uncertainty, there are sensible approaches to avoid wage-hour difficulties. The first step is to understand what qualifies an employee as “exempt” from overtime and the issues associated with that decision.

The Meaning of ‘Exempt’

The FLSA assumes all workers are eligible for overtime pay but allows companies to exempt some workers  from overtime based on the specific work done in their jobs. Under federal regulations, workers who are deemed executive, administrative, professional, computer professional or outside sales employees can be exempted from overtime pay. There is no requirement that a company classify any employee as exempt. Because it is the employer’s choice to classify a position as exempt, employers who do so must justify their decision.

Although many employers believe that simply paying a position on a salary basis — or labeling it a “manager” job — qualifies it as exempt from wage-hour law, that classification alone is not enough. Exemption is based on both employee compensation and work duties.

The salary-level test specifies that only salaried workers who make more than $455 per week can be classified as exempt. In general, the duties test requires that exempt workers exercise significant discretion, independent judgment and authority over decisions. Other duties-test criteria may be specific to a given exemption. Hiring and firing authority, for example, is a component of the duties test for the executive exemption.

Furthermore, the FLSA requires that exemptions occur on an individual basis — a job is not exempt; the people who perform it are — and must be based on an examination of the work as it is actually done, not based on the manager’s opinion.

Challenges in Classifying Employees

Classifying employees into exempt and nonexempt categories can produce concerns for several reasons.
First, employers must create a process and documentation that justifies the claim for exemption. Human resources, finance and legal departments often have separate, sometimes overlapping, responsibilities for classifying jobs. This distribution of responsibility tends to decrease focus and diminish compliance.

Second, many workers who previously exercised broad discretion and professional judgment are now constrained by regulations — namely, the Sarbanes-Oxley Act of 2002 — or workload such that they no longer meet the criteria for exemption. Many organizations, for example, have reduced staffing levels to a point where managers often engage in nonexempt activities that may restrict the discretion and judgment they exercise.

Finally, regulations are written vaguely so they apply to a wide variety of jobs. This creates disputes over what constitutes discretion and authority.

Inadequate Reactions to Wage-Hour Concerns

The U.S. Labor Department, which administers wage-hour law, estimated in 2008 that at least 70 percent of employers are not fully compliant with federal wage-hour law. A major cause of noncompliance, according to Laura Ho, a plaintiffs attorney and partner with law firm Goldstein, Borgen, Dardarian & Ho in Oakland, California, is lack of initiative.

“Employers often just do what they have always done” and do not critically evaluate the basis for their decisions about a position’s exemption from overtime pay, Ho said. She recommends that organizations take clear steps to verify employees meet the requirements.

Even employers who take steps to meet the FLSA exemption requirements can miss the mark. Some organizations inadvertently make decisions that affect compliance because they fail to consider fully the consequences of those decisions. One unthinking reaction to a classification concern, for instance, is simply to reclassify the employee — say, by making an exempt employee nonexempt — without changing the employee’s duties or responsibilities.

Exempt employees suddenly transitioned to nonexempt status might ask why they failed to receive overtime prior to the reclassification when their work duties are unchanged. Similarly, nonexempt employees transitioned to exempt status are likely to be concerned about their loss of overtime.

Other organizations unthinkingly adopt processes that appear to address wage-hour concerns, but in reality lead to less-than-optimal decisions.

One unsatisfactory approach is to have HR or compensation representatives conduct unstructured interviews or compensation/market analyses to determine exemption status. Unstructured interviews are generally undocumented and inevitably result in inconsistencies.

Using compensation/market analyses to classify positions is also problematic, because it is essentially the equivalent of determining exemption status by looking at another company’s job titles rather than examining the work as it is actually performed.

Failure to maintain records in this area is a significant risk. Employment attorneys Lawrence Ashe, Trish Treadwell and Paul Barsness with law firm Parker, Hudson, Rainer & Dobbs, headquartered in Atlanta, said that the ability to document the basis for a classification decision is the biggest concern their firm has when engaging with a client. Documentation to support exemption decisions is critical when faced with legal action or an audit by the Labor Department.

Proactive Reactions to Classification Concerns

Three key steps employers can take to significantly improve their wage-hour risk posture are conducting rigorous job analyses, establishing a governance structure to administer company policy related to exemption status and regularly auditing exemption status.

The best sources of evidence to support exemption decisions use input from employees to affirm work duties. Job analysis  is the most rigorous and defensible method of determining and managing exemption classification decisions, because it uses input from the incumbents who do the work and assesses critical job components.

Using job analysis to limit wage-hour exemption risk requires determining the target of the job analysis, using multiple approaches to describe work and analyzing the data against the exemption criteria.

First, an employer must identify the positions that present the most wage-hour risk. Ho said these are typically positions that are subject to regulations that restrict the exercise of discretion, like accountants or financial roles; use technology to routinize the job, like computer technicians and software testers; or are management positions that mix exempt and nonexempt activities, like assistant store managers or team leaders.

Next, engage job experts using multiple methods to comprehensively assess the work. Conduct focus groups in which experts identify work activities and competencies. Follow up with a survey of incumbents and their direct managers to gather individual-level data and information on what, how and when work is done.

Analysis can then determine how employee time is spent on various activities, including those that may or may not allow discretion and judgment to be exercised. Not only does the job analysis provide a documented rationale for making exemption decisions, but it can also identify other sources of problems.

According to Ashe, Treadwell and Barsness, even when positions are designed to be exempt and most individuals are classified properly, some managers will undermine the classification by not permitting the employees who report to them to exercise discretion and authority. Job analysis can identify these anomalies and allow the organization to take action.

Maintaining a governance structure involving HR and other company stakeholders to administer wage-hour policy guidance is also an alternative to the uncoordinated and inconsistent approaches that characterize many companies’ efforts to manage exemption decisions.

Providing company guidance in a policy manual, coupled with quality controls such as training users and monitoring decisions, are important aspects of governance. This will minimize noncompliance and facilitate accurate and consistent implementation.

Finally, regular audits of exemption status should be conducted to ensure employees are appropriately classified and there is proper evidence to support the claimed exemptions. Audits are most effective when conducted at the direction of counsel to ensure they are unbiased and are protected by attorney work product privilege.

Managing the risk associated with exemption decisions requires knowing the target job and classifying individuals appropriately. A proactive program of identifying, classifying and managing work duties, activities and responsibilities, strong audits and clear governance are crucial interventions that will generate clear and actionable data to avoid and manage exemption issues. Such a program has the added advantage of identifying critical job content and requirements, which can be used to establish a solid foundation for a variety of company HR programs.

Robert E. Lewis is an industrial psychologist and vice president of human resources consultancy APTMetrics Inc. Toni S. Locklear is an industrial psychologist and managing director and litigation practice leader at the firm. They can be reached at editor@talentmgt.com.

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