Which of your employees are exempt from being paid overtime? Which are not?

Although the exemption rules are clearly laid out by the Fair Labor Standards Act (FLSA), in each exemption category—executive, administrative, computer, professional, and outside sales—there is a gray area between positions that clearly qualify as exempt and those that clearly do not.

That gray ground can be expensive real estate! For lack of a better term, call it Lawsuit City. Who lives there?

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Mostly people who are called managers but who spend most of their time doing routine work. Examples: assistant managers of convenience stores; all those people between workers and managers who supervise a little but work a lot more; and people like insurance adjusters or loan processors, who have white collar jobs that appear managerial, but who follow such strict rules that there is little judgment required. (An exempt employee makes independent judgments.)

In evaluating whether these jobs are exempt, great minds can differ. So the most important thing you can do is to show good faith. That is, show that you made a responsible, reasonable analysis of the position and that you reached your exemption conclusion rationally.

This will do two things:

First, It will assure government agencies or courts that you did your best to find the correct answer, defusing any indication that you intended to break the law or commit fraud. Second, it shows employees that you treat the question carefully. That, in itself, should mean fewer complaints and charges.

If you do classify jobs as exempt that clearly don't meet the standards for exemption, you will likely pay a high price. For example, in one recent case, a food manufacturer classified its "retail merchandising specialists" as outside sales employees, exempt from FLSA coverage. To qualify for the outside sales exemption, an employee's primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services; and the employee must be regularly engaged away from the employer's place or places of business. These employees did work away from the employer's place of business, and they did some order-taking and selling, but most of their job was delivering goods to supermarket shelves. The company’s classifying them as exempt wasn’t reasonable to government eyes. So, for this employer, fines and up to 3 years of back overtime payments likely loom ahead.

Avoid the Double Whammy

Then there's the double whammy—if you misclassify employees as exempt, you likely don't keep records of the hours they worked. That's going to come back to bite you twice.

First, because the FLSA requires you to keep careful track of hours worked for nonexempt employees, you're likely to get fined for recordkeeping violations. Second, in the absence of records, guess who gets to say how many hours were worked? It’s the employee. Although most employees seem to report honestly, some could really boost you for hours not worked.

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Avoid the Temptation

Lesson to be learned here: There's a certain temptation to classify any gray-area job as exempt—to think, ”Hey, we don't have to pay overtime, what's the problem with that?”

The problem is that it's going to cost you in the end … big-time! Today's employees know their rights and, if they don't, there are plenty of lawyers to help them to figure it out. And the longer you wait to classify your jobs correctly, the more expensive the penalty can be.

In our next issue, we show you one expert's recommended exemption evaluation chart, and cover an extraordinary tool for developing meaningful job descriptions—the basis for all exempt-nonexempt decisions.