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The Million Dollar Consequences of Worker Misclassification

Employers often wonder what the consequences would be if they are found misclassifying their employees as exempt under the Fair Labor Standards Act (FLSA).  Recently, Levi Strauss agreed to pay $1,011,413 in back pay to 596 (about 12%) of its employees who were improperly classified as exempt from the FLSA and therefore not paid overtime. 

The FLSA requires most employees be paid overtime for all hours worked over forty.  The law exempts certain categories of employees from these overtime requirements.  In this case, the company classified certain employees, such as its new assistant store managers, as exempt from overtime.  The United States Department of Labor (DOL) investigated and determined these workers were actually not exempt from the FLSA and therefore should have received overtime for the past several years.

Since the Company treated these employees as exempt, they did not record their hours worked.  Further, it required these assistant managers work without additional compensation during early morning and late night shifts, as well as when covering for a staff shortage.  While federal law requires employers to keep time records for nonexempt employees, there is no such requirement for exempt employees.  However, if an employee is found to be improperly classified as exempt, and there are no records of the hours worked by that employee, the employer has now violated the recordkeeping requirements of the FLSA.  In addition, this leads to a “he said, she said” situation, where an employer has no way to contradict an employee’s claim for unpaid overtime.  Oftentimes the DOL will take the employee’s word on the overtime hours he claims he worked, leading to larger back pay awards than truly warranted. 

Overall, Levi Strauss was lucky, as it was able to come to a settlement agreement with the DOL.  If this issue had gone to trial, not only might the award be higher (based on the inclusion of penalties, interest, liquidated damages and the hours calculation itself) but the legal fees expended by the company would have been significant.  Employers should be vigilant in properly classifying their employees as exempt from overtime.  The classification implicates how you will handle the employee’s payroll records, and how you will track the employee’s hours.  It is highly advisable to consult an attorney regarding these matters, as we see damages for mistakes can be huge. 

Brody and Associates regularly advises management on complying with state and federal employment laws including wage and hour laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.