Polk Law Blog

When classifying employees as exempt or non-exempt, how important is it to speak to an attorney?

I just got back from Denver, CO where I was attending the ABA‘s Labor and Employment Law Section annual CLE conference. One session on wage and hour compliance generated what was, for me, a scary thought. One of the panelists posited that, in order to show that a classification under the FLSA was made in good faith, one MUST consult an attorney for advice about it. 

For the uninitiated, here’s the deal: the federal Fair Labor Standards Act (“FLSA”) governs overtime and other wage and hour matters in the U.S. Employees can be classified as either exempt or non-exempt. Exempt employees are “exempt” from some aspects of the FLSA ( you do not have to pay them overtime), while “non-exempt” employees are (drumroll…..) not exempt from these rules (you DO have to pay them overtime). Whether an employee can be exempt or not is based on confusing sets of criteria, such as whether the employee exercises  ”discretion” in “matters of significance.”

Here’s the fun part. If you mess up and classify a non-exempt emloyee as an exempt, and that employee sues you for all the overtime you should have been paying them, you get to pay them DOUBLE DAMAGES. That’s right. If you owe them $10,000, they get $20,000. As you might imagine, that’s bad for you. The good news is that you can get out of paying double damages if you can show that you acted in “good faith” in classifying them as non-exempt. One of the best ways to show good faith is to show that you consulted with an attorney to get advice about making the classification. 

But do you HAVE to consult with an attorney to show good faith? Is it an absolute requirement every time you classify an employee? The cases on point hint at that, but do not come out and say that. 

I can’t argue with the thought that consulting with a lawyer is a great way to show good faith, but it just is not practical for the small business. As I read the relevant cases, there are many factors that help show good faith. While consulting an attorney might be a matter of course for a big company reviewing the classification of hundreds of people, it isn’t practical for a small company looking at a handful of employees. I generally recommend the following to my small business clients:

1. The MOST important thing is to pay your employees fairly. Above all else, make sure you are treating them right. 
2. Make sure someone in the office attends seminars and is up to date on the latest in HR compliance issues. Having that person become a certified HR professional is also helpful.
3. Review the classification of every employee at least once a year. The annual performance evaluation is a good time.
4. Review the job description of each employee once a year with the employee and have the employee sign off that the description is an accurate description of what they actually do from day to day.
5. Refer to comprehensive, reputable guide to employement compliance that you keep updated on a regular basis.
6. Include multiple people in the review (for example, the supervisor and the HR person).
7. Have a policy to consult with an attorney if you aren’t sure.
8. Document the whole process.

Here in the real world, where lawyers don’t get consulted on every single decision, sometimes you just have to do the best you can. If there is any doubt, believe me, a few hundred bucks spent on a consultation and evaluation is far less expensive than the many many thousands you will spend if you get sued.