During the past several years, lawsuits under the Fair Labor Standards Act (FLSA), which governs payment of overtime and minimum wage, have become increasingly prevalent. Plaintiffs’ lawyers have realized that “gotcha” cases are lucrative and difficult for employers to defend. Additionally, when the U.S. Department of Labor issued revised FLSA regulations on August 23, 2004, the resulting publicity led to an even greater focus on employer violations.

In most circumstances, the FLSA allows successful plaintiffs to recover twice their actual back wages. The Act also automatically entitles prevailing plaintiffs to recover their attorneys’ fees, and can impose personal liability on employer executives. Therefore, even a seemingly minor violation can be very expensive, especially when a case is brought as a collective action, such as a private class action or a lawsuit initiated by the Department of Labor.

Employers often run afoul of the wage hour laws in ways that can be easily remedied through a change in practice or policy. Below are five of the most common missteps:

1. Refusing to Pay for Overtime That Has Not Been Approved in Advance
   Many companies require employees to seek approval before working overtime. Although that is an acceptable policy, employers sometimes go a step further and refuse to pay for unapproved overtime. Under the FLSA, however, an employer must pay for all hours "suffered or permitted" to work (i.e., any work that employees perform with the knowledge of their employer, whether or not they have been asked to do the work). Because the FLSA does not distinguish between approved and unapproved overtime, employers must generally pay time and one-half the regular rate for that work. Employers are allowed, however, to discipline or even terminate an employee for violating an overtime approval policy.

2. Treating Salaried Employees as Exempt from Overtime Pay Merely Because They Are Not Paid on an Hourly Basis
   Some employers assume that all salaried employees are exempt from overtime. Not so. While it is true that exempt employees must be compensated on a fixed-salary basis, regardless of fluctuating hours, they must also qualify for one of the specific FLSA exemptions. These include the exemption for executive, administrative and professional employees, as well as the outside sales employee exemption.

   Each exempt category has a specific "duties" test by which salaried employees must be evaluated. To qualify under the executive exemption, an employee must meet each of the following: (i) his or her primary duty must be to manage the enterprise in which he or she is employed or a customarily recognized department or subdivision thereof; (ii) he or she must customarily and regularly direct the work of two or more other employees; and (iii) he or she must have the authority to hire and fire other employees or make recommendations as to the hiring, firing, promotion or any other change of status of other employees that are given particular weight.

   It is important to reiterate that it is the employee's actual duties—not the job title or even the job description—that determines whether he or she is truly exempt.

3. Docking Hours of Exempt Employees
   To qualify as an exempt executive, administrative or professional employee, an individual must be paid a predetermined amount each pay period that does not fluctuate based on hours worked or quality of work. (The sole exception is the computer professional, who can be paid hourly at a minimum rate of $27.63 per hour and will still qualify as an exempt employee.). Under the FLSA, an employer is not allowed to dock from an exempt employee’s pay for a partial day absence for any reason (except FMLA leave), or an absence due to jury duty, service as a trial witness or the employer’s operations.

   Certain deductions from pay, however, are allowed by the FLSA. These include a full day absence for personal reasons; a full day absence for illness (but only if a formal policy is in place governing paid sick leave); disciplinary suspensions of one or more full days imposed in good faith for workplace misconduct (excluding performance or attendance issues); full or partial day absences due to FMLA leave; and absences related to an exempt employee's accrued leave account.

   Even if an improper pay deduction occurs, the revised FLSA regulations include a safe harbor provision. As a result, employers can preserve their employees' overtime exemptions by (i) having a “clearly communicated policy” that prohibits improper pay deductions and includes a complaint mechanism; (ii) reimbursing employees for any improper deductions; and (iii) making a good faith effort to comply in the future.

4. Misclassifying Certain Assistant Managers
   It is not uncommon for an employer to incorrectly classify an assistant manager as an exempt executive employee. In a retail store, for example, a manager, assistant manager and several hourly employees are often on duty simultaneously. If the assistant manager does not direct the work of two or more employees (i.e., two or more full-time employees, or a combination of part-time employees whose hours are the equivalent of two or more full-time employees) when the manager is not present, he or she may not qualify as an exempt executive employee. Furthermore, if the assistant manager does not make recommendations as to the hiring, firing, advancement, promotion or any other change in status of other employees whom he or she customarily and regularly directs, or if those recommendations are not given particular weight, the assistant manager will not meet the test for being an exempt executive employee.

   Similarly, working foremen (who spend substantial amounts of time doing the same work as subordinates) and executive trainees may not qualify as exempt executive employees. 

5. Misclassifying Highly Skilled Technical Employees
   By definition, an exempt professional employee is one whose primary duty is to perform work "requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction" (e.g., accountants, architects, actuaries, engineers and registered nurses). Sometimes, however, employers treat highly skilled technical employees as exempt professionals, even when they have not achieved this type of "advanced knowledge." For example, paralegals, paramedics and field technicians generally do not qualify as exempt employees under the FLSA and are, therefore, entitled to overtime pay.

   It is also important to note that even if an employee has been trained as a professional, he or she is not necessarily exempt from overtime pay if his or her  actual job duties do not require the use of that training. For example, when a company employs an accountant in a position that does not primarily utilize his or her advanced accounting training, the employee might not qualify as an exempt professional.

All companies, no matter their size or industry, face a variety of pitfalls related to the Fair Labor Standards Act. To gain a better understanding of the regulations and ensure that your business is compliant, start by consulting with your attorney and undergoing a thorough FLSA audit. That way, you will minimize the likelihood of a violation and (hopefully) avoid the high costs of litigation.