MISUNDERSTANDING LEADS TO MISCLASSIFICATION – WHY UNDERSTANDING THE OVERTIME EXEMPTION RULES OF THE FAIR LABOR STANDARDS ACT IS SO IMPORTANT

Robin Foret
June 3, 2009 — 1,822 views  
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In the recent case of Morgan v. Family Dollar Stores, Inc., the United States District Court for the 11th Circuit affirmed a jury award of over $35 million dollars against Family Dollar Stores (“Dollar Stores”) in unpaid overtime wages for over one thousand employees who had been misclassified as exempt from overtime.  Unfortunately, many employers like Dollar Stores operate under the mistaken belief that employees who are paid salaries and given managerial or executive titles are automatically exempt from the overtime requirements of the federal Fair Labor Standards Act (“FLSA”).  To the contrary, these are misconceptions that can have severe consequences if it is later determined by the Department of Labor (“DOL”) or by a court that certain employees were misclassified as exempt when in fact, they were entitled to overtime pay under FLSA.   Courts have upheld substantial monetary awards in favor of misclassified employees and against employers who have improperly denied overtime pay based on one of the FLSA overtime exemptions that did not apply. 

Generally, the FLSA requires that employees be paid time and one-half for all hours worked over 40 in any given workweek.  Certain employees are exempt from the overtime requirements of FLSA.  The exemptions from overtime, however, are narrowly construed and the burden is on the employer to show that a particular exemption applies to s particular situation.  Although there are a variety of overtime exemptions, the exemptions most commonly misused are the executive exemption and the administrative exemption.   While it is true that one of the requirements for either exemption is payment of a salary of at least $455 per week, there are other requirements that are not as easily satisfied.  Both the executive and the administrative overtime exemptions contain a primary duties test to evaluate whether the employee’s position qualifies for the exemption. 

The executive exemption requires that the employee’s primary job duty be to manage the enterprise or a recognized department of the enterprise.  It also requires that he or she direct the work of two or more other employees with the ability to at least recommend the hiring and firing of other employees.  The administrative exemption requires the performance of non-manual office work directly related to the management of business operations, and must include the exercise of discretion and independent judgment with respect to “matters of significance.”  These descriptions prevent employers from simply giving fancy titles to employees with the expectation that an exemption will automatically apply.

The most common problem arises when employees are given titles, without the required level of responsibility to qualify for an overtime exemption.  In Morgan v. Family Dollar Stores, Inc., the 11th Circuit court concluded that over one thousand store managers were entitled to damages for unpaid overtime because neither the executive nor the administrative exemptions applied.  The award of $35 million dollars actually represented two times the amount of unpaid overtime calculated, which is called liquidated damages.  Liquidated damages were awarded based on a finding of willful conduct on the part of Dollar Stores.  The evidence revealed that the store managers worked approximately 60-70 hours per week without any additional compensation for hours worked in excess of 40 hours per week.  The employees successfully showed that they had been managers in name only.  Approximately 80-90% of the employees’ time was spent on manual tasks with almost no actual management responsibilities.   The majority of their job involved stocking shelves, running cash registers, cleaning the store, unloading trucks, as well as other manual, non-managerial tasks.  The managers had no discretion over decisions such as merchandise to be purchased or promotional store items to be displayed.  The smallest of details were governed by manuals that had to be strictly followed.  Moreover, the company’s detailed job descriptions listed more manual, non-managerial duties, which also supported a finding that the store managers were improperly designated as exempt from overtime pay.  

This case does not mean that all store managers are non-exempt employees.  In fact, other cases have determined that store managers who had discretion over day to day operations, and the ability to hire and fire employees for example, were true managers exempt from overtime pay.  The bottom line is that the overtime exemptions are evaluated on a case-by-case basis.

What can be done to avoid problems?

Proper classification – the Dollar Store case emphasizes the importance of classifying employees correctly.  Remember that for an employee to be exempt from overtime pay, the requirements of the particular FLSA overtime exemption must be satisfied.  Be sure that the majority of the employee’s time will be spent on activities that qualify for the exemption.

Record keeping – it is the employer’s responsibility to keep accurate time records, and to retain those records for a period of three years.  If a dispute concerning overtime arises, the DOL will generally look at the last two years of records, three years if the employer’s conduct is determined to be willful.  In the absence of any records, the employee’s own record of the hours worked may be used as evidence.  

Job descriptions – it is extremely important to draft job descriptions carefully and accurately.  In the Dollar Store case, a job description that listed mostly manual, non-managerial tasks was used against the employer.  However, it is important to note that a job description that does not truly reflect the day to day activities of an employee may not protect the employer from a finding of misclassification.  

Exercising too much control – In the Dollar Store case, the company exercised an enormous amount of central control over the managers.  Detailed manuals were used to make almost every decision.  This should be avoided if possible.  Employees classified as exempt should be given discretion to make decisions that are important to the organization. 

Pay overtime when required – if the employee does not meet any of the FLSA overtime exemptions, he or she must be paid overtime.  It should also be noted that many states have overtime regulations that provide protections in addition to the federal rules.  Therefore, it is important to check your state for any state requirements.  

 

The information contained in this article is not designed to address specific situations, and does not include rules or regulations that apply to all states.  If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on various fact specific matters. 

Robin Foret

The Foret Law Firm

Robin Foret practices in the areas of employment law, commercial litigation and specialty insurance defense claims. She handles a variety of employment matters such as theft of trade secrets, breach of employment agreements, non-competition agreements, wage and hour issues under the Fair Labor Standards Act (FLSA), discrimination and harassment issues under Title VII of the Civil Rights Act of 1964 (Title VII) and the Texas Commission on Human Rights Act (TCHRA), the Americans with Disabilities Act (ADA), Family Medical Leave Act (FMLA) issues, and the Sarbanes-Oxley Act (SOX). Robin has handled a wide variety of employment law matters for employers, as well as for executive-level employees, before agencies, and state and federal courts.