HR Management & Compliance

An FLSA Q&A: How Do You Conduct a Compliance Audit?

By Holly Jones, JD
One of the hottest topics in labor law lately is the new changes coming to overtime exemption rules under the Fair Labor Standards Act (FLSA). The changes will be massive for some organizations, and many will be conducting audits to ensure compliance—but will they be auditing correctly? Here with a Q&A is BLR® Senior Legal Editor Holly Jones, JD.

Question: In preparation for the new regulations coming on December 1, we’d like to conduct a comprehensive FLSA audit of all of our positions. We expect that some positions will be reclassified based on salary threshold, but we may also have some positions that need to be reclassified based on job duties—even though the job duties tests have not changed. We are concerned that reinterpreting exemptions based on job duties could result in misclassification liability going back 2 or 3 years. How can we minimize the potential for liability of back pay claims?
Answer: This excellent question was a hot topic of discussion during a recent BLR® FLSA Master Class led by employment attorney and FLSA expert Kara Shea.
During her presentation,  Shea recommended using the upcoming deadline and FLSA changes as a catalyst to do just what this and many other employers are doing—to audit and, as necessary, reclassify positions. These realignments may be based on the upcoming salary changes or simply on a current, thorough review of the duties employees are actually performing and the amount/percentage of time spent performing those duties.
One benefit of reviewing and auditing all positions—not just those affected by the new salary minimums—is that employees are less likely to feel singled out or targeted if they understand that all positions (not just those making under the salary minimum) are being evaluated.

Sooner Rather Than Later

Of course, there is no way to completely remove potential FLSA liability for back wages if a misclassification has occurred. However, leaving an employee in an incorrect classification won’t reduce back wage liability, either.
On the other hand, if a U.S. Department of Labor (DOL) audit was to occur, an employer’s good faith efforts to comply with the law and, once errors were discovered, to make changes to classifications as needed can reduce liability for liquidated damages. With this in mind, you can also reduce the risk of back wage liability with good communication and handling of your classification audit.
Shea provided the following tips during her presentation:

  • People don’t like change. They’re suspicious of it and think they’re being singled out. To minimize this, conduct a comprehensive review and roll out all changes at the same time or in related groups so that employees don’t feel unfairly targeted. (After all, happy employees typically don’t file wage complaints.)
  • The law has changed—this is a fact. Exempt classifications can be debatable to begin with, so there’s no need to admit prior error or misclassification just because you are reclassifying employees. You don’t have to pay back wages. Rather, you’ve just done a review based on/in conjunction with the new law.
  • When changes occur, don’t go into a long treatise of explaining why. Stay succinct. “Based on a review of your current responsibilities, we have determined your current role is exempt/nonexempt.”
  • Give your supervisory workforce a heads up on changes affecting the employees they supervise.
  • Finally, provide specific training on the FLSA changes and communication of those changes to at least one point person. Have supervisors direct employees’ questions to that person.


Shift Happens

Additionally, keep in mind (and, as appropriate, explain) that a change in classification is just that—a change. It’s not an admission that the employee was incorrectly classified before.
The realities and circumstances of jobs—both exempt and nonexempt—are dynamic and may shift over time as responsibilities, experience, and business needs change. As we know, an employee’s job title is not dispositive in whether an employee is exempt or not, so even though an employee’s job title or salary level may not have changed, the work the employee performs (the duties that do matter for exemptions) may have shifted.
For example, an administrative employee may certainly start out performing tasks that require a significant amount of independent judgment and discretion with respect to matters of significance to the business. Yet, this employee’s duties may shift (or need to shift) to more routine, clerical tasks for any number of reasons—perhaps the employee prefers these tasks, perhaps the employee has assumed additional clerical duties while a colleague is on extended leave, etc.
So, a review of this employee’s current job responsibilities may reveal that, at this time, his or her primary duties have shifted away from the exempt tasks and he or she would be more accurately classified as nonexempt.
Similarly, you may find that a previously nonexempt employee has taken on supervisory responsibility that now entitles her to exempt status. Classification changes can, and usually do, go both ways.

Exemption Isn’t Mandatory

Finally, note that some employers may wish to reclassify employees as nonexempt simply for payroll and accounting purposes. In other words, there may be employees in your organization who do meet the duties test for one of the white collar exemptions, but for whom hourly pay and overtime entitlement would better or more fairly compensate them for the type or amount of work they do. Employers always have the option to forgo an exemption and pay employees on an hourly, overtime-eligible basis, instead.
Once you have completed your classification audit, you may also find this article on communicating employee changes from exempt to nonexempt helpful.

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