Benefits and Compensation

Exemption Audits: Should You Involve Employees?

If you are doing more with less (and who isn’t?), employees are putting in extra hours, and exempt workers are likely to question whether they’re really exempt from overtime. It’s probably wise to do a self-audit, but is it wise to include employees in the process?

If you do include employees in the exemption audit, you’ll get better information, but you’ll also alert them that there might be a problem. With a nod to our sister publication, the California Employer Advisor, we’ll get some expert guidance from Allen Kato and Saundra Riley, employment lawyers with San Francisco’s Fenwick and West. "There’s no easy answer," he says, but he does offer tips to help you weigh the risks and make an intelligent decision.

Initial Stage: No Incumbent Involvement Recommended

It’s wise to limit the initial stage of a self-audit to document reviews and interviews of the at-issue employees’ managers, either by counsel or at counsel’s direction.

Maintaining confidentiality of the self-audit allows you to candidly assess the propriety of the classifications without raising red flags that something might be amiss. You’re also preserving the privileged nature of the audit in case you’re sued and the employee’s attorney wants to scrutinize self-audit records.

However, this initial stage has its limitations. Managers often don’t monitor exempt employees’ daily activities. Job descriptions frequently don’t have the necessary detail. At this critical juncture you must decide to what extent to involve incumbent employees.

Positive Results: Involving Incumbents Recommended

Where your initial analysis suggests most or all at-issue employees are properly classified, consider interviewing incumbents to, hopefully, confirm that assessment. Bring a list of job duties to the interview, and discuss with the employee his or her duties (whether on your list or not) and the amount of time spent on each duty during the week.


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Assuming the interview confirms the exemption, document the results in your notes. Have the employee sign a certification of the job duties and how much time he or she spends on them. In the event of future litigation by the employee charging that the position really was nonexempt, signed certification may go a long way in your defense.

Be prepared, however, for another outcome: That is, the incumbent’s input may give you new insight that leads you to question the exempt classification. The problem is that the incumbent is now aware of the audit, and you must determine how to resolve the situation.

Position Most likely Misclassified: Three Options

Where your initial assessment suggests many of the at-issue employees may have been improperly classified or where you lack sufficient information to make that assessment, you have three options.

1. Do nothing. One option is to do nothing and hope that no employee or government agency brings an enforcement action to challenge the misclassification. Here, an employer would not want incumbents involved (which underscores the importance of conducting an initial assessment without the employee). The audit will remain confidential and largely privileged.

However, this decision can be risky because it ignores a legal liability, which will continue to grow until corrected.

2. Reclassify with backpay. You could instead bite the bullet, reclassify the incumbents as nonexempt, and compensate them for back overtime. In this situation, it is advisable to interview the incumbent—first to confirm the proper classification for the position and subsequently to determine the estimated overtime owed. After completing the process, document the change to the classification and the payment of the overtime wages.


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Obtain the employee’s acknowledgement that the estimated overtime hours are accurate to his or her best knowledge. In the event the employee later sues for additional overtime, the employee will be hard-pressed to explain why his or her best estimate at the time should be set aside in favor of his later "recollection."

While the audit, or at least portions of it, may lose the protection of any privilege, paying the back pay does provide several benefits. It stops any further liability from accruing on the misclassifications and demonstrates your good faith if your classification practices are later challenged. Further, it locks in the employee’s agreement to the estimated overtime.

In tomorrow’s Advisor, we’ll get Kato’s third option—reclassify with no back pay—and his suggested answers for tough employee questions about misclassification. We’ll also take a look at a compensation management program that answers all your tough compensation questions.

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