This month’s expert is
Kurt A. Franklin, a partner in the
Francisco
Vlahos & Rudy.
As more and more
employers get slapped with wage and hour lawsuits that often challenge exempt
classification, it’s becoming critical for employers to take a close look at
their own operations and policies to determine what they can do to keep from
becoming the next target. Last month, in the first installment in this two-part series
on preventing wage and hour suits, we examined strategies for avoiding
lawsuits. In this second installment, we’ll look at how to conduct a
classification audit and what to do if your audit turns up problems. By
conducting an effective audit, employers can identify, and sometimes fix, problems
before they are discovered by plaintiffs’ attorneys, the California Division of
Labor Standards Enforcement (DLSE), the U.S. Department of Labor (DOL), and the
courts.
Audit Basics
With help from counsel
to protect reports under the attorney-client privilege, businesses should begin
audits of potential misclassification claims by gathering information to
prepare an employee roster going back four years. This roster should include
wage/salary information; wage and hour exemptions; job titles; job movement
within the company (departments and subdivisions); hire, reemployment, and
termination dates; and the number of employees supervised. Next, you will want
to compare job descriptions and organizational charts with day-to-day actual
job duties (and estimates of how much time is spent on each activity) for
exempt positions.
If you come across
positions you suspect have been misclassified as exempt, you will want to
interview employees in these positions about the type of work they do. Ask
about their workplace autonomy, management duties, estimates of time spent on
various tasks (including nonmanagement tasks), the persons they supervise, and the
total hours they work each day and week. Ask also about down time, rest breaks,
and meal periods.
You might
want to soften the blow for an employee losing exempt status or change the job
so the person can remain exempt
Begin the interview
using talking points that you have developed with your lawyer and follow this framework:
1) ask open-ended questions to help get the fullest picture of the job; 2)
establish time frames; 3) determine if this person is similarly situated to a substantial
number of other employees in the workforce (more than 20 such employees could
indicate a class action problem); 4) ask the toughest questions last; 5) remind
the employee about the company’s no-retaliation policy.
Next, if you determine
an employee has been misclassified, you will want to assess potential backpay by
reconstructing the days and hours worked. You might not have timecards for
employees who have been classified as exempt, but you can still estimate hours.
Review schedules, computer logins, security card swipes, cash register logins,
building security activation (alarms), sales activity, e-mails, the Internet, Outlook
calendars, vacation schedules and holidays, and phone records. Experts in
information technology forensics can help you organize this information so that
it is in a usable spreadsheet format.
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After the Audit
Faced with bad news
after an audit, an employer’s choices (other than doing nothing) include: 1)
correcting the problem areas and reclassifying employees, without giving them
back pay, and hoping that the statute of limitations of up to four years runs
out before a suit is filed or 2) correcting the problem areas, changing exempt
classifications as necessary or modifying job duties so that they do qualify as
exempt, and making back pay and interest payments. Also, keep in mind that a
strategy involving a change in exempt status should also consider the people
side of the change. That is, notwithstanding back pay, many employees enjoy the
autonomy and status of being a manager or exempt professional who does not have
to punch a clock. Thus, you might want to soften the blow for an employee
losing exempt status or change the job so the person can remain exempt.
The approach endorsed by
the DOL and DLSE when faced with wage-and-hour wrongdoing is to make the
changes and award back pay. Done right, this approach may allow your company to
garner favorable employee morale and make the problem area less attractive to
plaintiffs’ class-action attorneys. If the plaintiffs’ attorneys still come,
the company will be in a better position to challenge punitive damages and Fair
Labor Standards Act liquidated damage claims and to challenge excessive
attorneys’ fees demands.
Should You Self-Report?
In anticipation of
correcting any problem, the employer should also consider whether to
self-report to the appropriate agencies (the DOL and DLSE) with an admission
that you made some mistakes. Earlier this year, retail behemoth and experienced
class action defendant Wal-Mart self-reported to the local DOL office in
failed to include a periodic bonus in determining some of their employees’
overtime. After self-reporting, Wal-Mart agreed to correct the underpayments to
nearly 90,000 workers going back five years (which was three years beyond the FLSA’s
two-year statute of limitations), for a total of $33 million. Separately, the
California DLSE has sued Wal-Mart for similar
violations affecting approximately 50,000
state officials are still negotiating.
Even though there was a
large settlement, the company may have saved millions of dollars in court fees and
legal hassles by self-reporting this mistake. Once the DOL files an action for
back wages, an employee’s right to commence or join a private action is
terminated. Moreover, DOL-supervised settlements work as a waiver of employees’
right to sue.
The Bottom Line
Shaping a potential wage
and hour problem toward a favorable resolution requires an understanding of
wage and hour basics. If your company determines through an audit or otherwise
that there is misclassification or other exposure, it is wise to work with your
attorney to estimate class action exposure and understand the benefits associated
with a vigorous defense versus the risks associated with not resolving a claim
early.