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

This special report by Business Management Daily, publisher of The HR Specialist and HR Specialist: Employment Law, will help you review your overtime pay policy and double-check your FLSA exempt employees’ status.

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

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Employers, beware: The Department of Labor recently proposed the biggest overhaul to U.S. overtime law in history. The proposed new regulations would more than double the salary threshold that makes white-collar managers eligible for overtime pay.

The last time the DOL revised the Fair Labor Standards Act exemption regulations in 2004, overtime lawsuits exploded nationwide. And now, experts predict that trend will likely continue when the new overtime regulations take effect sometime in 2016.

For years, the DOL has continued to issue a somber report card on employers for violating the FLSA’s wage-and-hour rules. For example, in fiscal 2014, the department’s Wage & Hour Division recovered nearly $241 million in back wages for employees, up 22% from fiscal 2004. The top mistake for employers—and the most costly one—is wrongly labeling employees as exempt from overtime pay, according to the DOL.

For employers, the stakes are high. Employees misclassified as exempt can be eligible for two years’ worth of back wages (three if the violation was “willful”) at 1.5 times the hourly rate, plus liquidated damages equal to the unpaid wages. That means employees can collect up to three times their regular rate of pay.

How can you avoid becoming another target of an employee lawsuit or a DOL audit? The key is to regularly audit your workforce classifications and job descriptions to ensure you’re correctly classifying employees as exempt under the current overtime rules—and preparing for the new salary exemption thresholds coming in 2016. Use this special report, Overtime Labor Law, as your blueprint to do just that.

Editor's Note: For more essential information to help your organization properly classify employees, visit Exempt vs. non-exempt: FAQs.

Overtime Labor Law: FLSA Compliance Tip #1

Guidelines on classifying FLSA exempt employees

In 2004, revised DOL regulations took effect, constituting the most dramatic changes to federal overtime law in more than 50 years.

Those federal overtime rules clarify and alter both the “salary test” and the notoriously confusing “duties tests” that are used to determine employees’ FLSA exemption status.

Exempt positions generally fall into five categories:

1. Executive
2. Administrative
3. Professional (both learned and creative professionals)
4. Computer professional
5. Outside sales

Learn more about the revised overtime regulations, including the new “highly compensated” employee exemption, in Overtime Labor Law.

Overtime Labor Law: FLSA Compliance Tip #2

Salary-basis test for FLSA exempt employees

Being paid on a salary or fee basis is the quid pro quo of exempt employees. They aren’t paid overtime for working more than 40 hours a week; in exchange, their employer must provide a guaranteed salary, which can’t be reduced when they work fewer than 40 hours.

This reflects the understanding that exempt employees have the discretion to manage their time and are not answerable for hours worked or the number of tasks performed.

Under the DOL’s revised FLSA regulations, the minimum salary a worker must earn to qualify as exempt is $455 per week, $910 biweekly (every other week), $985.83 semimonthly (every 1st and 15th of the month), $1,971.66 monthly or $23,660 annually.

Make sure you abide by the salary rules. If you don’t, the employee is no longer exempt, no matter what his or her duties and responsibilities are. And remember: Destroying a person’s exemption can make you liable for two years’ overtime pay for any hours worked beyond 40 per week.

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

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Overtime Labor Law: FLSA Compliance Tip #3

Duties tests for the 5 FLSA exemption categories

Workers who earn at least $455 a week may be exempt from overtime pay if they also meet the appropriate tests for their classification, as outlined in this section.

1. Exempt executive employee

Primary duty: manages the enterprise or a customarily recognized department or subdivision of the enterprise.

2. Exempt administrative employee

Primary duty: performs office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.

3. Exempt professional employee

Learned professional exemption:

Primary duty: performs work requiring advanced knowledge, defined as work that’s predominantly intellectual in character and requires consistent exercise of discretion and judgment.

Creative professional exemption:

Primary duty: performs work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. The exemption doesn’t apply to work that a person could perform with general manual or intellectual ability and training.

4. Computer-related professional exemption

  • Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications.
  • Design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.
  • Design, documentation, testing, creation or modification of computer programs related to machine operating systems.

5. Outside sales employee exemption

Outside sales employees also may be FLSA exempt if their primary duties are one of the following:

  • Making sales or
  • Obtaining orders or contracts for services or use of facilities for which a consideration will be paid by the customer and
  • Who are customarily and regularly engaged away from the employer’s place or places of business while selling or obtaining orders or contracts for services.

Get the FULL rundown on employee exemptions in Overtime Labor Law.

Online Resources for FLSA Exemptions: The DOL offers two interactive e-tools, FLSA Coverage and Employment Status Advisor and FLSA Overtime Security Advisor, to help you determine the status of a particular position. Safeguard your organization by using them to classify new positions and audit your existing worker classifications.

Overtime Labor Law: FLSA Compliance Tip #4

4 legal safeguards for FLSA exemptions

1. Adopt a safe-harbor policy

When the DOL rewrote the overtime regulations in 2004, it created a “safe harbor” defense for employers that unintentionally make improper deductions from exempt employees’ salaries. That provision allows you to correct improper-deduction mistakes without losing an employee’s FLSA exempt status.

To use that defense, you must adopt a policy that bans improper deductions and provides an avenue to raise complaints.

2. If you reclassify an employee, do so with finesse

Whenever you reclassify an employee as nonexempt, you will likely encounter one of two reactions:

  • Some employees, especially those who view themselves as “management,” will view a reclassification as a demotion or an insult.
  • Others may use reclassification to complain that they should have received overtime for as long as they’ve been employed.

To soften these reactions, consider “selling” reclassification by explaining that the organization has changed the way it compensates certain employees in an effort to recognize their contributions.

Draw the spotlight away from reclassifications by implementing them at the same time as other organization changes, such as new fringe-benefit programs.

In any event, don’t say the organization is changing a classification to comply with the wage-and-hour labor law. Doing this would effectively invite employee complaints.

3. Fine-tune your payroll record-keeping

The FLSA’s record-keeping requirements for exempt employees differ from those for nonexempt workers. Because you don’t pay exempt employees by the hour, you shouldn’t track the exact number of hours they work on a daily basis. Doing so could make it seem to a wage-and-hour Labor auditor that you are indeed basing pay on the number of hours worked, which might raise the question of whether the employee is truly exempt.

However, just because a worker is exempt doesn’t mean your company is freed from keeping records on him or her. With exempt employees, you should keep records that describe the workweek and the wages paid for that period.

Specifically, you should keep these records on FLSA exempt employees:

  • Personal information, including name, home address, occupation, gender (for equal pay laws), birth date for workers under age 19 (for child labor laws) and the person’s workplace identification number
  • Time of day and day of week when the employee’s workweek begins
  • Total wages paid each pay period
  • Date of payment and the pay period covered by each payment

Your records for exempt employees can also track which days are used for sick days, vacation days or personal days.

4. If exempt employee status is in question, issue a ‘good-faith’ reply

If employees come forward to protest that you owe them overtime pay because they should truly be nonexempt, it pays to act fast and be able to show good cause why you classified them as exempt in the first place.

The FLSA allows employees to collect double (or “liquidated”) damages unless you can show your mistake was made in good faith and you honestly intended to classify the employee correctly.

To head off such complaints, host an annual classification review. Have a team compare all employees’ job descriptions (and actual duties) against the FLSA exemption regulations. (Some states set their own rules. Get a legal opinion if you’re stumped about an employee’s status.)

If any positions should be switched to hourly, make the change as soon as possible and start paying overtime. Then, do your best to calculate what you owe for past unpaid overtime.

Bottom line: If an employee files an overtime suit, your annual classification audit would likely be enough proof of your good-faith efforts to ward off double damages.

Case in point: A group of technical writers sued Indiana Michigan Power, alleging it had wrongly classified them as exempt. The court agreed. It then had to decide whether the utility made the mistake in good faith. At stake were double damages and attorneys’ fees. The three strikes against the employer: (1) It couldn’t explain why it made the writers exempt. (2) The decision-makers weren’t familiar with the FLSA overtime rules. (3) The employer didn’t seek outside help when it received the original complaint, but waited until it was sued.

All this indicated a lack of good faith. As a result, the company’s liability doubled from $215,000 to $430,000. Plus, the court ordered it to pay another $111,000 to the attorneys. (Renfro, et al., v. Indiana Michigan Power Co., No. 1:99-CV-877, WD MI)

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

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Overtime Labor Law: FLSA Compliance Tip #5

What to do when a DOL auditor comes a-knocking

Suppose an employee has complained to the DOL about possible wage-and-hour or overtime violations in your workplace. Once you’ve been notified that an auditor is coming, get prepared by conducting your own audit.

DOL auditors have plenty of latitude to inspect records and interview employees, so make sure you’ve done everything possible to discover and correct any compliance problems, as well as gather documents to defend your decisions.

If faced with an audit, you should:

  • Review the differences between federal and state overtime labor laws to ensure you’re complying with the stricter of the two.
  • Reread the job descriptions of any positions that might be in question. Interview people in those jobs and their supervisors to ensure their job descriptions are accurate. Find out what the workers actually do, and check timekeeping records. Promptly correct any errors.
  • Interview exempt employees to find out how much time they spend on duties typically done by hourly employees. If it’s more than 20% (or in retail, 40%), consider reclassifying the employee as nonexempt. (There’s no liability in classifying too many people as nonexempt; it’s the opposite that plunges employers into hot water.)
  • Check to see that employees are performing their jobs as assigned and working the hours designated by management. If they’re not, insist they start doing so.
  • Train supervisors and managers on how to determine who’s an exempt employee and who’s not.
  • Check your overtime records. If you discover unpaid overtime, pay it immediately—even if the overtime wasn’t approved.
  • Review your policy manual with an experienced employment attorney to make sure it’s complete and in line with the law.
  • Enlist help with all of this from a consultant or attorney. Many of the regulations are difficult to interpret, and the wrong call could cost you plenty.
Protect your organization from costly lawsuits. For more information on employee classification, visit: With DOL cracking down, get employee classification right.

Overtime Labor Law: FLSA Compliance Tip #6

Self-Audit: FLSA exempt or nonexempt employee?

To be considered FLSA exempt from overtime, employees must generally be paid on a salary basis, and their job duties must meet the DOL’s standards for one of six exemption categories. Take the self-audit in Overtime Labor Laws to test whether you’re properly classifying exempt employees.

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

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