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. Below are some audit tips from attorney Kurt A. Franklin of the San Francisco office of Hanson Bridgett, LLP.
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.
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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 people they supervise, and the total hours they work each day and week. Ask also about down time, rest breaks, and meal periods.
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 back pay 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.
After the Audit
Faced with bad news after an audit, an employer’s choices (other than doing nothing) include:
- 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
- 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, you should also consider whether to self-report to the appropriate agencies (the DOL and DLSE) with an admission that you made some mistakes. This course of action may actually save you money and legal hassles; 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.
What Else?
So, is that everything you need to check on? Unfortunately, our advice here just scratches the surface of everything a full HR audit should cover.
But the fact remains that an HR audit is really the only way to dig down, find problems, and get them fixed before the feds find them. For most HR managers, the biggest hurdle is getting started with an audit—where do you begin?
To get your audits going, ERI’s editors recommend a unique product called HR Audit Checklists. Why are checklists so great? They’re completely impersonal, and they force you to jump through all the necessary hoops, one by one. They also ensure consistency in how operations are conducted. That’s vital in HR, where it’s all too easy to land in court if you discriminate in how you treat one employee over another.
HR Audit Checklists compels thoroughness. For example, it contains checklists on both Preventing Sexual Harassment and Handling Sexual Harassment Complaints. You’d likely never think of all the possible trouble areas without a checklist; but with it, just scan down the list and instantly see where you might get tripped up.
Find problems before the feds do. HR Audit Checklists ensures that you have a chance to fix problems before government agents or employees’ attorneys get a chance. Try the program at no cost or risk.
In fact, housed in the HR Audit Checklists binder are dozens of extensive lists, organized into reproducible packets, for easy distribution to line managers and supervisors. There’s a separate packet for each of the following areas:
- Staffing and training (incorporating Equal Employment Opportunity in recruiting and hiring, including immigration issues)
- HR administration (including communications, handbook content, and recordkeeping)
- Health and safety (including OSHA responsibilities)
- Benefits and leave (including health-cost containment, COBRA, FMLA, workers’ compensation, and several areas of leave)
- Compensation (payroll and the Fair Labor Standards Act)
- Performance and termination (appraisals, discipline, and termination)
HR Audit Checklists is available to CED readers for a no-cost, no-risk evaluation in your office for up to 30 days. Visit HR Audit Checklists, and we’ll be happy to arrange it.