Within the past year, the number of lawsuits filed by employees seeking to recover unpaid overtime wages has dramatically risen, and in many states have actually surpassed the number of discrimination lawsuits filed by employees. The stakes and penalties in these lawsuits, based upon the Fair Labor Standards Act, ("FLSA"), can be extremely high and have resulted in a growing number of class action lawsuits.
The FLSA is a federal statute that sets the federal minimum wage and establishes fair labor standards for overtime pay, equal pay, record-keeping and child labor. Additionally, the FLSA exempts certain employees from its overtime and minimum wage requirements. It is regulated by the Wage and Hour Division of the Department of Labor. Although the FLSA was originally enacted by Congress in 1938 as a means of economic recovery from the Great Depression by creating a monetary penalty for employers who did not spread their existing jobs among a greater number of employees, the 85-year-old statute has reassumed a prominent role in class action lawsuits within the last year.
For instance, last year Farmers Insurance was hit with an adverse jury verdict in the amount of $90 million for its failure to pay overtime to approximately 2400 of its claims adjusters who were allegedly misclassified as exempt. Farmers Insurance is appealing this verdict. Wal-Mart is currently defending similar overtime lawsuits in over 25 states. Even the Wall Street Journal is contending with the issue of whether or not certain of its reporters are exempt from overtime.
Many of these lawsuits stem from the fact that employers have misclassified employees as exempt from overtime when, in fact, they are not. Pursuant to the FLSA, the burden of proof on the issue of exempt status is on the employer, and these exemptions are narrowly construed against the employer. Employers often wrongfully assume that if an employee is paid a salary that he or she is automatically exempt from the overtime. That is simply not the case. The FLSA provides that certain categories of employees are exempt from the overtime requirements of the statute. The five main exemptions include (1) executive, (2) administrative, (3) professional, (4) outside sales employees and (5) highly skilled computer professionals. To fall within one of these "white-collar" exemptions, the employee must satisfy both a salary test and a duties test.
Salary Basis Test:
First, the employee must be paid "on a salary basis" or "on a salary or fee basis." "Salary basis" is defined as "a predetermined amount constituting all or part of . . . [the employee's] compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed." A salaried employee must receive his or her full salary for any workweek in which he or she performs work, regardless of the number of days or hours the employee actually worked. As a general rule, salaried employees cannot be docked a partial day's pay. Docking any part of a salaried employee's daily compensation may result in the loss of exempt status.
Duties Test:
In addition to the salary test, the white-collar exemptions require that certain job characteristics inherent to that category rise to the level of a "primary duty" and that the employee exercise discretion and independent judgment. The Department of Labor has issued Regulations describing the substance of each of the exempt categories. The inquiry typically turns on an analysis of the employee's primary duties, whether their work requires the exercise of discretion and independent judgment, whether or not the employee has any supervisory duties, and whether or not the employee has authority to hire and fire or at least have significant input into those decisions.
The determination of exempt status is made by examining the employee's actual job duties, not solely his or her job title or written job description. Simply providing an employee with a fancy title without the true substance of the positions (e.g., Vice President of File Clerks) simply will not suffice in converting a non-exempt employee into an exempt one.
Why Such High Verdicts?
The penalties involved with FLSA violations can be staggering. Employers who violate the FLSA are liable for the unpaid overtime for two years preceding the complaint, and, if it is determined that the employer willfully failed to comply, the employer will be liable for overtime payments for three years preceding the complaint. As if that is not enough, the employer may also be liable for an additional amount known as "liquidated damages" for the non-compliance, effectively doubling the amount of the employer's liability.