Could we be penalized for misclassification? — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Could we be penalized for misclassification?

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in Employment Law,Human Resources

Q. We have some employees that have been misclassified as exempt. We are working to rectify the situation, but could we still be penalized for the time the employee was misclassified?

A. Yes. For that reason, when you reclassify employees,

it is a good idea to make them whole for the time that they were misclassified—to pay them for any overtime they worked during the prior two years but for which they were not paid.  

If the employees were not paid the minimum wage, you should also pay the employees the difference between their pay rate and the minimum wage for the same two-year period.

The reason to use a two-year time frame is because that is the statute of limitations for recovery of back pay under the Fair Labor Standards Act—unless the violation was willful, in which case the statute of limitations is three years. If you knowingly misclassified the employees, you should make them whole for three years of overtime. If the misclassification was a good-faith mistake, the two year time frame would be appropriate.

If you do not make the employees whole and they bring a lawsuit, you could also be liable for their attorneys’ fees and liquidated damages in the amount of the employees’ back pay (so that they could recover two times their back pay).

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