Let’s say you, as an employer, in the course of preparing for the change in the DOL overtime regulations, are conducting an audit of your exempt job classifications and discover that a few of your exempt jobs really are not eligible for the overtime exemption after all. Maybe this is a result of a change in duties over time for the job title or just an inadvertent misclassification from the beginning. The problem is, of course, now that you know about this, you also know that you probably owe these employees some overtime pay. What do you do?
1. You could do nothing.
You would be surprised at how many employers consider this as their first option. Maintaining the status quo with employees who are generally happy with their jobs seems to follow the old adage of “let sleeping dogs lie.” The problem is that a three year statute of limitations exists for wage claims, so even if you change your overtime practices right this minute, as an employer you won’t be in the clear for three more years. Moreover, if you convert the misclassified workers to non-exempt now, you might raise suspicions and actually bring on a wage claim. Doing nothing is probably the riskiest option to take for these reasons, but if that’s the option you choose, it may be best to change their status to non-exempt when the new overtime rules go into effect on December 1st when a change seems natural.
2. You could pay the employees for the overtime you owe them.
This is the option that we advise, although we acknowledge some challenges exist with this course of action as well. The first reason to just pay the employees the overtime that you owe them is that federal and state laws required this from the beginning. Paying employees for unpaid overtime, even if they’re not complaining, is simply complying with the law. While it’s understood that the employees might not have been paid as much or received exempt employee perks had they been properly classified, the mistake occurred and you have to correct it. If you as the employer choose to pay the misclassified employees (we hope there are not too many of them) then we suggest the following process:
a. First determine how much overtime the employees worked.
This might be the trickiest part for employers because traditionally employers don’t keep time records for exempt employees (this might be a bad time to mention that since August of 2015 the Illinois Wage Payment and Collection Act has required employers to keep records of hours worked for exempt employees just the same as non-exempt ones, probably for exactly this reason). If you don’t have records of hours worked for your misclassified employees, you will have to make your best estimate of hours over 40 in a week that they worked (remember, holidays and benefit time used don’t count as hours worked). No doubt exists that this can be a tedious endeavor because it requires a week by week analysis for three years. Start by eliminating weeks in which the employee took vacation or used sick time unless you know that they worked significant time outside of the normal workday in that same week. If you know that the employee in question had regular recurring night meetings that they were required to attend, for example once or twice a month they had to be at an evening board meeting, add the length of the meeting into the hours worked for that week. The same holds true for any projects that you know required extra hours or any routine work outside of the regular work day. If the employee is an early riser and just likes to get to work an hour early every day to get a few things done, but doesn’t leave early at the end of the day, be sure to count that time as well. Do this for the past three years.
b. Figure out how much you owe each employee.
Since you were paying the employees in question a salary, you may be entitled to take advantage of the fluctuating work week rule. Simply put, under the DOL rules, an employer who pays a non-exempt employee a flat salary for hours that might fluctuate each week, is entitled to the presumption that the salary is intended to pay for all hours worked at a straight time rate. Therefore, the employer only owes the employee for an additional half time of pay, as opposed to time and one half pay, because the employer has paid for all of the straight time hours worked by virtue of the salary. This can reduce the amount owed significantly.
c. Create a spreadsheet of your calculations.
You want to be able to show the employee how you arrived at the calculation of the amount owed to them.
d. Meet with each employee to whom you owe money.
At the meeting, explain that a recent audit of job descriptions revealed that they have been misclassified as exempt and you are changing their status and giving them a check for what they are owed (have the check ready – people always like getting an unexpected check). Explain how you arrived at the amount owed, show them the spread sheet and be willing to make an adjustment if they remind you of the project that kept them at work all night last fall or some notable other work that was not part of your calculation.
e. Understand that someone might try to take advantage of the situation.
No guarantee exists that some worker[s] might decide to claim that they regularly worked from home at night on their laptop or routinely took or made telephone calls. This is difficult, but try to work with the employee to determine if any electronic or phone record evidence exists to support this claim. If evidence exists of work from home time, pay them for it. Remember, it’s the employer’s obligation to maintain records of hours worked, so you won’t win that battle if they can produce emails or documents that were created after regular work hours.
f. Don’t try to get the employee to settle for less than is owed.
The DOL and many courts take the position that an employee who was underpaid and settles for less than is owed to him or her, even with a fully executed release, still has a viable claim for the unpaid amount. Put simply, courts and the DOL frown on employers who attempt to get employees to take less than they are owed and will find a signed release to be invalid.
g. Have the employee sign a release and waiver of claims.
While this seems to be contrary to the caution given in the previous paragraph, if the employer pays the employee everything that they both agree is owed, the release and waiver will likely be valid and be a defense against any future claims for wages during that time period. Have a lawyer familiar with wage issues draft the release and waiver to ensure it is complete and lawful. Typically, employees are happy to do this in exchange for a check that they didn’t even anticipate getting.
h. Be thankful for the money you saved.
As we often remind our clients and readers, wage claims can be awfully expensive. Both federal and state laws have no exception for employers who just made a mistake. With rare exception (such as reliance on mistaken legal advice or the advice from the DOL) it really doesn’t matter what you, as the employer, were thinking when you misclassified or underpaid the employee. It also doesn’t matter that you might have given them a bonus at the end of the year, or let them take a car home every night. When an employee files a wage claim, he or she can not only recover double the amount of what they are owed, but can also collect the amount of their attorney’s fees. Compared to this penalty, the time it takes to conduct a wage audit and the amount you pay an employee for their unpaid overtime is time and money well spent.
With the implementation of the new overtime rules just around the corner, this is a good time to not only review the salaries of your exempt employees but also their duties to ensure total compliance with the law.