Employee Misclassification Can Be Costly

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In recent years, the U.S. Department of Labor (DOL) has been cracking down on the issue of employee misclassification. This renewed gusto comes in response to an increased number of wage-and-hour lawsuits filed by employees against their employers (over 7,000 filings in the first half of 2012 alone), many of which are challenging their exempt employee status.

Under the Fair Labor Standards Act (FLSA), employees in a "bona fide executive, administrative, or professional capacity" are designated "exempt" and therefore not eligible for overtime pay. In other words, exempt employees (sometimes known as "salaried employees") receive the same amount of pay regardless of how many hours they work.

During a tough economy, employers can be tempted to classify an employee who actually performs only non-exempt duties as an exempt employee to avoid paying them overtime. That could result in an employee being cheated out of a significant amount of money. Of course, the government also misses the opportunity to collect payroll taxes, so this type of purposeful employee misclassification is what the DOL is trying to eradicate.

The FLSA sets forth a three-prong test to determine whether an employee's duties can be considered "executive, administrative, or professional" functions and he or she should be classified as exempt:

  1. The employee must be paid on a "salary" or "fee" basis
  2. The employee's primary duties must be office-related and non-manual
  3. The employee's primary duty must allow for the exercise of discretion

Employers have the burden of showing that all three prongs are met for a court to agree that an employee is properly classified as exempt.

Exempt employees must be paid a set amount annually that is not based on the number of hours they work, but their salary must be the equivalent of at least $455 each week. An exempt employee's job requirements must be directly related to the business' management and/or operations, so they must directly assist with the running or servicing of a business. Courts will analyze an employee's job description, job function and how the position fits into the larger company when making an employee classification decision.

As the FLSA regulations state, "the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered." This is usually the most difficult prong to establish, as it is analyzed on a case-by-case basis and hinges on several different factors.

Employee misclassification is a serious problem that costs the government hundreds of millions of dollars in lost tax revenue annually. Unfortunately, it costs employees even more. Employers violating the FLSA by misclassifying workers may not only be responsible for unpaid overtime wages, but also for administrative fees, court costs, attorney's fees and penalties as well. If you believe your employer has misclassified your position, contact an experienced employment law attorney to discuss your situation and your legal options.