Overtime Liability

by Michael A. Holzschu

Unpaid overtime to workers who have been misclassified as exempt employees is a ticking financial time bomb just waiting to explode in the face of employers. Is your company at risk?

Unpaid overtime to workers who have been misclassified as exempt employees is a ticking financial time bomb just waiting to explode in the face of employers. A worker earning $65,000 a year, who worked 50 hours a week for three years - just 10 hours of overtime a week - will be due $146,250 if the unpaid overtime is doubled as a penalty for "willful violation" of the law. (The two-year statute of limitations is also extended to three years for "willful violation.)

This explosion could cost a company "thousands or even millions of dollars" depending on the company size and number of violations. It only takes one disgruntled employee to file a complaint with the Wage and Hour Division of the US Department of Labor or the State Department of Labor to open an investigation into your classification system.

In the past five years, more than 450 class-action “wage-and-hour” lawsuits have been filed throughout the nation and companies continue to be inundated with them. Executives should not expect a receptive ear in court, either, as overworked employees who are seeking payment for overtime find a sympathetic forum from the courts.

The quality of life issue has created an environment where our workforce is angry about the amount of hours that are worked. The backlash, especially in times of reduced staffing, causes employees to respond in ways that are normally not seen such as contacting government agencies to “get even” for the perceived company indifference.

Companies hit by such lawsuits read like the Fortune 500. Settlements so far, include Starbucks paying its store managers $18 million, Pacific Bell paying engineers $35 million and $27 million to its sales managers, and Farmers Insurance paying $130 million to claims adjusters. Wal-Mart has 28 separate lawsuits pending against it. Although the list looks like all of the big companies, small and medium sized organizations need to be vigilant and proactive in their pay structures and overtime pay issues. The big pocket book to afford the legal defense necessary in these types of cases, is often not available to small and medium size organizations.

 



One would think that these large companies would have a staff that should know what they are doing. If these kinds of companies can be hit with a class-action overtime suit, what's to say that your organization cannot also be hit with an overtime class-action suit? Or at minimum a visit from the Wage and Hour office? Do you really want the DOL going through your records?

Human resource professionals or senior management need to review the job responsibilities of everyone at the company and compare that information to the exemptions contained in the Fair Labor Standards Act (FLSA) to determine if the exempt workers are correctly classified. If not, corrective action should be taken at once.

Many CEO’s and HR professionals mistakenly believe that if an employee is salaried, then he or she is correctly classified as exempt, but much more information is needed to make a proper determination. An executive, for example, must have management as his or her primary duty, supervise two or more full-time-equivalent employees, exercise independent judgment and discretion, and earn at least $250 a week (salary level may be higher based on State law). These are the bare bones areas needed to qualify as exempt. The FLSA also has different requirements for various other job categories such as administrative, professional, inside or outside salespersons and computer professionals. There is a “short” test as well as a “long”test to help determine if the employee is exempt.

If a company believes it has misclassified workers who are due overtime pay, it should first survey its employees to ask them to list their overtime hours for the past two years (the federal statute of limitations) - and then pay them while having them sign a legal release. You have a legal obligation to pay them the money. There is no legal way around that.

Moreover, if your CEO or CFO do not appreciate your concern, you should determine the extent of the company's liability as a way to get their attention. A worker earning $65,000 a year, who worked 50 hours a week for three years - just 10 hours of overtime a week - will be due $146,250 if the unpaid overtime is doubled as a penalty for "willful violation" of the law. (The two-year statute of limitations is extended to three years for "willful violation.)

With these types of dollar amounts you will have your executive's immediate attention. You are talking about major potential liability.

The statistics for 2001 covering all areas of investigated complaints for Michigan are:

Fiscal Year 2001 Summary for the Wage and Hour Division of CIS in Michigan

  • Investigated 5826 Complaints
  • Collected just over 2.8 million dollars, up 37% from fiscal year 2000.

So the activity is not solely resting on large companies when it comes to filing complaints.

If the executive staff ignores the situation, somewhere along the line if the issues are investigated, there will be someone that will be the “scape goat” for the organization.

Take the time to analyze your situation. For help and or a Compliance Audit for your firm, contact the author at the information below.

copyright © 2002

Michael A. Holzschu is the managing principal in the firm of Holzschu, Jordan Schiff & Associates specializing in Human Resource Systems, with a special focus on employee handbooks, job descriptions, performance appraisal systems, harassment training, safety and quality issues. He can be contacted at (248) 476-6907 or by email at mholzschu@hjsa.com or the Company website at www.hjsa.com. The company’s client base is primarily small to medium employers from all types of industries located throughout the United States.

 
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