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With DOL cracking down, get employee classification right

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in Human Resources,Overtime Labor Laws

In the past year, the U.S. Department of Labor (DOL) has renewed its focus on combating employee misclassification, and there has been a recent significant increase in the number of wage-and-hour lawsuits. In many of these cases, workers are challenging their designation as exempt employees under the Fair Labor Standards Act (FLSA).

A recent case, Mullins v. Target Corp. (No. 09-07573, N.D. Ill., 2011), illustrates such a situation and emphasizes the need for employers to properly classify their employees.

In July 2002, Christine Mullins began working in the Target retail chain’s Assets Protection Division as an assets protection team leader, an exempt position. Employees in the division work to prevent employee theft and customer shoplifting in an effort to enhance profitability, minimize loss and business disruptions and provide a safe and secure environment.

About two years later, Mullins was promoted to investigator, the position at issue in this case.

As an investigator, Mullins was responsible for identifying and conducting investigations of fraud and theft at several Target stores. Her duties included analyzing information, evaluating potential strategies for approaching investigations, interviewing informants and suspects, and developing case plans that she would recommend to her supervisor. Mullins conducted several in­ves­­ti­ga­tions that helped Target recover thousands of dollars of lost revenue.

Unpaid overtime?

Mullins sued Target for unpaid overtime wages under the FLSA and the Illinois Minimum Wage Law.

Target moved for summary judgment on both of her claims. At issue was whether the FLSA exempted Mullins from eligibility for overtime under the “administrative employee” provision.

The district court held that Mullins was an exempt administrative employee and granted summary judgment for Target.

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Case of the retail detective

The exemption’s 3 tests

The FLSA exempts those employed in a “bona fide executive, administrative, or professional capacity” from overtime pay. The regulations provide a three-part test to determine whether an employee falls under the administrative employee exemption.

1. First, the employee must be compensated on a salary or fee ­basis at a rate of not less than $455 per week. Mullins met that requirement and it was not in dispute.

2. The employee’s primary duty must involve office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. To meet this test, an employee must perform work directly related to assisting with the running or servicing of the business.

Overtime Labor Laws: 6 compliance tips to avoid overtime lawsuits, wage-and-hour Labor audits and FLSA exemption mistakes

The court determined that Mullins’ work was nonmanual, emphasizing that she analyzed data from stores, identified possible investigations of theft and conducted investigations.

The court then analyzed whether Mullins’ primary duties were directly related to assisting with the general business operations or the running or servicing of its business. The court held that Mullins did not participate in the sale of retail goods. Rather, by investigating and preventing theft and fraud, Mullins assisted in servicing Target’s retail operations. Accordingly, Mullins met the second requirement.

3. The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. The regulations specify that “the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.”

The court determined that Mullins exercised independent judgment and discretion in selecting cases, planning strategies for investigations and carrying out those investigations.

The court pointed out that the employee does not have to have unlimited authority. Accordingly, even though Mullins had to obtain her supervisor’s approval during investigations, she also made decisions that were free from immediate supervision and discretion. The court was not persuaded that Mullins’ extensive training and the expectation that she had to follow directives implied she lacked direction or judgment. Consequently, the court held that Mullins met the third requirement.

What employers must do

Target prevailed in this case. Even so, it serves as a cautionary tale that emphasizes how important it is for employers to properly classify their employees.

Employers bear the burden of proving that an employee is exempt under the FLSA. They must be prepared to justify their classifications.

To minimize your FLSA liability, carefully review your wage-and-hour practices and policies. Make certain that employees are properly classified based on the job duties they actually perform. Failure to do so may lead to significant costs. You could be liable for overtime, attorneys’ fees and penalties—in addition to the potential for a class-action lawsuit.

Do your overtime pay practices put your organization at risk?

If you aren't confident about what you can and can't do under the FLSA, your business could be open to audits, lawsuits and fines. Overtime Labor Law: 6 compliance tips helps you put an end to the guess work. With this FREE report, you'll get:
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  • Guidelines on classifying FLSA exempt employees
  • Salary-basis test for FLSA exempt employees
  • Duties tests for the 5 FLSA exemption categories
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  • What to do when a DOL auditor comes a'knocking
  • How to compensate vacation days and sick leave
  • Self-Audit: FLSA exempt or nonexempt employee?
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