Change Exempt Status To Non-Exempt Status Without Violating The FLSA

Given the Department of Labor’s (DOL) increased focus on enforcing wage and hour laws (the agency announced in November that it has increased its staff by more than one third by hiring 250 new wage and hour investigators), and the high price of losing a wage and hour lawsuit (in one case, a company agreed to pay $517,000 to 60 misclassified workers), auditing employees’ exempt classifications is a smart move.

But what happens if you discover that an employee has been misclassified? What steps should you take to correct their status without sparking a Fair Labor Standards Act (FLSA) claim? (Note: State laws may vary.) For answers, we went to Morris Jennings, a consultant in Austin, TX (www.flsa-sca.com), who is a former DOL Wage and Hour Division investigator. He warned that “the resolution of possible misclassification issues is complicated, and employers should not attempt this without expert guidance. It is not just a matter of discovering misclassifications — how to comply and compute back pay are just as important and often even more complex.”

Changing Exempts To Non-Exempts

The process for changing an employee’s status from exempt to non-exempt is situation-specific, said Jennings. “There are not many pay plans from which to choose. The most common are: 1) hourly, 2) salary for a designated number of hours, and 3) guaranteed salary for whatever hours are worked.”

Each plan has advantages and disadvantages, so the employer needs to determine the plan that would best fit the needs of the organization. “I find that employers are less likely to get into future trouble with the DOL or the courts if they keep it simple. This means using one of the first two methods,” said Jennings.

Calculating Back Overtime Wages

“The correct method to use in computing back wages is dependent on a number of factual considerations,” said Jennings. Particularly relevant:

• Was there a clear understanding that the salary was intended to compensate for all hours of work?
  
  
• Did the weekly salary always compensate the employee at minimum wage or above?
  
  
• Was the full salary always paid, even if the employee did not work their full schedule?
  
  
• Was the salary ever docked for any reason?
  
  
• Were there policies, understandings, or practices that conflict with the overtime regulations, §778.114? “For example, if the salary is subject to reduction or docking as permitted by the exemption regulations, §541.602, this means that there is no understanding that the salary is compensation for all hours of work, barring application of the fluctuating workweek computation method.”

The least expensive approach is the fluctuating workweek method, in which the employer takes the position that the salary covered all of the “regular” wages and all that is owed is the half-time premium pay. The DOL has confirmed this is acceptable in Opinion Letter FLSA 2009-3. (Note: Opinion letters are very case-specific, and the federal courts are divided on the use of this method retroactively.)

A more expensive method is to pay time and one-half for all hours worked per week over 40, but this is often necessary. According to Jennings: “If the facts indicate that the salary was paid for 40 hours weekly, the overtime hours are owed at time and one-half.”

Jennings stressed that every case is different, and an employer should examine the overtime regulations and scrutinize the facts before picking a calculation method. He added: “The employer should probably utilize some type of release when back wages are paid. No employer should formulate a release without assistance from an employment law attorney.”

Communicating The Change To Workers

When it comes to explaining all of this to the affected employees, again, the specific scenario determines the best approach, said Jennings.

If the reclassification is for the purpose of avoiding future claims, and no back wages will be paid, inform employees that the default classification is non-exempt; an employer is not required to classify any position as exempt. While the employee may qualify for an exemption, a decision has been made that they will receive overtime pay in the future.

On the other hand, if it is clear that back wages are owed, inform the affected employees that “they are no longer classified as exempt and that back wage checks will be issued promptly.”

Either way, “it is best that the employer say — orally or in writing — as little as possible,” advised Jennings, although it’s a good idea to have an open-door policy so that employees come to you with questions, instead of the DOL or an attorney. “A specific management official, such as the HR director, should be designated to take questions from employees regarding classifications and computations of back wages.”

Should You Get The DOL Involved?

Jennings said there is one advantage to having the DOL oversee the conversions: The employer can advise employees that the changes were made “under DOL supervision.”

One advantage to asking the DOL to conduct an investigation, versus overseeing a self-audit, is that when back wages are paid as a result of a DOL investigation, employees give up the right to sue for back wages and liquidated damages.