How do you understand FLSA exemptions? Do you look at it as a matter of risk assessment? According to expert Kara Shea, there is a lot you can do to make sense out of this complex issue.
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The Cost of Compliance? Applying Risk Assessment to FLSA Exemptions
During her recent master class on the upcoming changes to the Fair Labor Standards Act’s (FLSA) white collar exemptions, Kara Shea shared a wealth of advanced, in-depth legal information on wage and hour compliance. She also shared a little of the practical business strategy that comes from her years of experience assisting, counseling, and representing employers of all sizes and industries.
Because the FLSA rules aren’t always intuitive, Shea explained that few organizations are fully compliant with the exemptions—even under the current rules. So, as discussed in a previous article, the upcoming changes provide a great opportunity for employers to conduct an internal audit and review all aspects of their employee classifications. (Yes, even the duties tests, which have not changed).
If conducting a classification audit is on your to-do list, you may appreciate these strategic, data-based tips for managing the otherwise squishy, subjective world of exemptions.
Clean-Up, Aisle Exempt
Shea notes that the questions that arise during a classification audit are usually quite fact-specific. Therefore, she recommends first tackling as much of the audit yourself as you can.
“Some of the concepts are apparent and obvious and you can quickly pick out the people who are correctly (or incorrectly) classified. Then you have the grey area—which is usually about 35% of your workforce. Don’t involve legal counsel until you’ve identified these grey area employees. There’s no need to have an attorney review and audit 100% of your workforce.”
She also points out that much of the “law” surrounding exempt classifications is quite subjective.
“Many [exemptions] are judgment calls and the person making that call is going to be someone from the U.S. Department of Labor (DOL) or a court. So an attorney’s job is to tell you how they think that judgment will go.” How will the DOL or local court apply the law to your specific employee?
People have different opinions. Judges have different opinions from the DOL, from each other, etc. These people may look at all of the same factors, but the answer is not always clear, and that’s why exemptions can be so difficult and frustrating.
Shea explains, “All you can really do is make a best guess based on what you think someone else’s judgment will be. This is where local counsel is helpful, as they will have a better handle on how the judges in your jurisdiction will interpret the law.”
Of course, many employers simply don’t have the money to invest in a 3-year litigation to fight what the DOL thinks the law is at that particular time. This is where Shea takes off the attorney hat and puts on the strategic hat.
“You Need to Assess Your Risk.”
Let’s say you seek assistance from your highly knowledgeable local counsel and, during your audit, your attorney points out a potentially problematic classification. You may be using an exemption about which your attorney only feels “pretty sure.”
Keeping in mind that these classifications are subjective, rather than forgo the exemption entirely because there is doubt (because there’s almost always going to be some doubt), instead, consider how much it would cost if someone disagrees.
“You need to assess your risk,” Shea notes. She points out that, unfortunately, most companies don’t do this, instead opting for a rather laissez-faire approach to classifications. However, “business executives understand the concept of risk assessment and exposure, so if you can explain classifications in those terms, your executives are more likely to understand.”
This means calculating your odds and determining whether your company can absorb the risk of failure (i.e., getting the exemption wrong).
She continues, “If you have happy employees, a business model that is working, and valid reasons for your classification, then you may be less likely to change a grey area duties assessment.”
On the other hand, consider the following:
- The classification is one we’re feeling 50/50 or less confident about;
- The classification covers a large group of similarly situated workers—say 100;
- We’re going to have a significant back pay assessment if we’re wrong;
- The employees are in a high turnover group; and/or
- We’re in an industry that’s being hit heavily by DOL audits.
There is considerably more risk in this scenario. Would getting the classification wrong destroy the company? If so, you can’t afford grey area and you need to err on the side of caution.
“This is the kind of analysis you need to be doing,” Shea notes. “Sometimes risk is acceptable if it’s helping your business thrive.”
“That’s practical, rather than legal advice,” Shea reminds us.
Tomorrow we’ll take a look at some of the legal considerations for these ideas.