Shamanda Joseph

This April, the U.S. Department of Labor (DOL) will issue a Notice of Proposed Rulemaking that will require employers to disclose the exemption analysis to every employee that is not subject to overtime. The new rule is being touted as the Right To Know rule and is an effort on behalf of DOL to foster openness and transparency to workers about their compensation rights. In addition to the disclosure to employees, employers will be required to maintain a copy of the exemption analysis under new recordkeeping requirements for Fair Labor Standards Act (FLSA) compliance purposes.

The new requirement will now place employers in jeopardy of a private lawsuit and regulatory penalties. The existing penalties for FLSA violations include double back wages, attorney’s fees and court costs. The cost consequences for compliance failures can be astronomical because double back wages could extend back as far as three (3) years for willful violations. With the new Right To Know rule, other penalties may also apply. Therefore, it will behoove employers to begin reviewing their FLSA classifications immediately.

A recent poll conducted by a leading Human Resources (HR) online information source shows that employers estimate that the FLSA classification analysis could take anywhere from one month to over six months depending on the size of the organization. This means that such a large scale matter would have to occur in tandem with other day to day HR activities like recruitment and selection, performance appraisals, managing reorganizations, tracking leave and all the other compliance and employee relations matters that churn the HR function. Although the rule is only being proposed now and will be followed by a public comment period lasting anywhere from thirty days to six months, time is still of the essence for employers to ensure that employee are properly classified.
Momentum has been steadily gaining over the past couple of years to heighten the scrutiny on employers that have misclassified employees, whether as exempt or as independent contractors, and thereby avoiding overtime liability. Several pieces of federal legislation have been introduced to deal with this issue but have so far ended up dying in committee or before getting to that stage. Now the issue is being carried forth at the agency level. And this is not an issue to be taken lightly based on the increasing staffing levels that are simultaneously occurring at DOL.

In Fiscal Year 2011, DOL announced the Misclassification Initiative, a multi-agency program that targets employers that have misclassified employees as exempt from overtime liability. To adequately prepare for this initiative, DOL added 200 field investigators in Fiscal Year 2010 and is proposing an additional increase in staff to enforce compliance with the FLSA. In addition, there was a recent announcement by DOL about its newly launched “Bridge to Justice” program, an attorney referral system through the American Bar Association (ABA). This program has been specifically designed to assist employees whose rights may have been violated, but when the DOL is unable to resolve the issue due to a lack of capacity. The program is geared toward both FLSA and Family and Medical Leave Act (FMLA) violations.

With increased DOL Field Investigators positioned to tackle more complaints as well as increased enforcement efforts and with DOL working directly through a referral system to further amplify private lawsuits, employers should be giving high priority to proactive compliance measures in their compensation practices more now than ever. The financial impact on businesses for FLSA-related compliance failures will be substantial. Just take the 2010 case where Pilgrim’s Pride paid $10 million to settle an FLSA case and the $900,000 damages award to approximately 16,000 employees at the City of New York, for example. Also consider the trend in private lawsuits that shows a steady rise in FLSA lawsuits in the past decade with 1,854 lawsuits in year 2000 and 6,761 lawsuits in year 2010. These statistics now have FLSA class actions outpacing employment discrimination and ERISA claims, and the increase in DOL Field Investigators with the new Bridge to Justice Program through the ABA-referral system is sure to keep the FLSA claims rising. This is clear justification for making proactive compliance with FLSA both an urgent and a serious matter.
The best course of action for employers is to start preparing for increased scrutiny by DOL and increased likelihoods of private actions by employees. In so doing, employers should begin reviewing their FLSA classifications in job descriptions to ensure they reflect actual job duties. Where it is determined that an employee has indeed been misclassified, employers should take immediate corrective action to properly pay the employees. Taking such actions early will allow the employer to assert the “good faith” defense in the event of a DOL investigation. Being proactive will likely also mitigate the impact of damages for willful conduct and thus allow employers to avoid FLSA compliance cost consequences during these already economically challenged times.

If you would like more information about how to conduct an FLSA Classification Analysis, contact Comprehensive Development Strategies today at 713.840.6435. You can also email us at sjoseph@cdstrategiestx.com. To learn more about our company or the services offered by Comprehensive Development Strategies, please visit our website at www.cdstrategiestx.com.