The High Cost of Misclassification

Misclassification of employees can be extraordinarily expensive. According to Houston-based law firm Fulbright & Jaworski’s “Annual Litigation Trends Survey Report,” wage-hour claims are considered by attorneys to be the top area of financial exposure for companies.

Management attorney Judith Kramer with law firm Fortney & Scott in Washington, D.C., said employers found in violation of the Fair Labor Standards Act are liable for paying two years’ worth of back wages — three if violations are found to be “willful” — as well as “liquidated” damages that can double the back wages owed.
That means that if an employer is found liable for $1 million in back wages, liquidated damages of $1 million can be assessed, totaling a $2 million fine.

In 2011, business technology company Oracle Corp. settled a wage-hour class-action lawsuit spurred by the company’s decision to change the status of its quality assurance engineers, customer support engineers and project managers from exempt to nonexempt. According to court records, workers claimed that it did so without an examination of the work done by individual employees in these positions or a reassignment of tasks and responsibilities.

Current and former employees in these jobs charged that back pay was required for the years they were classified as exempt workers. According to news reports, the case was ultimately settled for $35 million, equating to an average payout of $14,000 per class member on record in the lawsuit. Efforts to reach an Oracle spokesman were unsuccessful.

According to plaintiffs attorney and employee advocate Laura Ho, whose firm, Goldstein, Borgen, Dardarian & Ho, brought the case against Oracle, “an appealing target [of litigation] is a company who should know better, who can afford to pay its workers and a judgment, and who can help change the industry if there is an industrywide practice that is illegal.”

Attorneys Lawrence Ashe, Trish Treadwell and Paul Barsness of law firm Parker, Hudson, Rainer & Dobbs said that situations such as Oracle’s can be avoided by:

  • Correcting problems immediately to prevent mounting damages. Addressing issues can freeze damages and eliminate expensive punitive damages for continuing to act in violation of the FLSA after you have become aware of your misclassification.
  • Reassigning tasks to ensure compliance with classification guidelines. This requires coordination among several departments to identify exempt activities and redesign jobs.
  • Confirming each employee’s scope of work by evaluating him or her on critical duties that qualify as exempt. This requires a job analysis that documents the importance and frequency of work activities.
  • Conducting job and classification audits under the direction of counsel to ensure handbooks, policies, job descriptions and daily responsibilities are consistent.

— Robert E. Lewis and Toni S. Locklear