Overseeing Overtime Practices

The Issues

The issues surrounding the updating of the FLSA regulations have received considerable attention over the last couple of years. But, at least until the recent elections seemingly quelled the Democrat-led effort to have the updated regulations nullified, most of the commentary has focused on their relative merits as a matter of public policy and/or their effects on the overtime eligibility of specific types of employees. Less commentary has been devoted to the laws of at least 18 states — including New York, New Jersey, Connecticut and Pennsylvania — that officially remain in effect because they differ from the FLSA in material ways that benefit employees, such as New York's much longer 6-year statute of limitations.

Some such distinctions, and the ripple effects that the updated FLSA regulations are likely to have in states like these, are discussed in the Dec. 20, 2004, Labor and Employment section of the New York Law Journal. Notably, there has also been very little commentary devoted to the practical considerations of employers and their in-house counsel regarding how to deal with the changes and the resulting explosion of media attention on the general subject of overtime eligibility. This article endeavors to at least partially redress this imbalance.

Advantages of Being Proactive

Employers should be very concerned if they receive a notice from the U.S. or a state department of labor demanding an investigatory visit on overtime or more vaguely stated issues. And employers should be equally or even more concerned if they are served with a court action for unpaid overtime, especially if it is a collective or class action. The availability of liquidated damages and attorneys' fees in a court case typically raises the stakes four to six times.

Regardless of the forum, it is advisable for an employer to engage outside counsel experienced in dealing with these claims as soon as they are asserted, because the complexities are many. These laws differ from other employment ones not only in substance, but also in terms of litigation approaches most likely to produce effective results. For example, how should an employer deal with the official invalidity of releases for these claims unless approved by a court or department of labor? Moreover, wise and experienced counsel are invaluable in seeking to minimize the relative loss of control over events that is one of the most unnerving aspects in almost every litigation.

Of course, waiting for claims is not the only option. Employers may voluntarily review their overtime classifications and practices. The advantages of this proactive approach include: 1) typically maintaining far more control of the process in myriad ways (timing, positions reviewed, who is contacted, communications, etc.); 2) having more options to correct, or at least minimize, risk; 3) forestalling the accrual of damages, including by ensuring that new hires are not misclassified and that all appropriate policies have been followed, such as the safe harbor endorsed by the updated regulations; 4) potentially avoiding or limiting back pay and other damages; and 5) increasing the chance of preventing litigation threats from spreading among employees and departments.

Nevertheless, some employers attempt to rationalize stasis based upon: 1) the costs of conducting an audit; 2) the fortuity of avoiding complaints so far; and 3) fear that an audit may stir up trouble by opening the Pandora's Box. In all but the most unique circumstances, these arguments are shortsighted and should be resisted. Indeed, as the above-listed benefits of proactive measures suggest, hesitant employers generally learn the hard way that the overtime-litigation boom will eventually catch up with all non-compliant employers, and, when it does, they will end up paying substantially more than the cost of implementing proactive risk and liability minimization measures.

Planning a Voluntary Audit

If the decision is made to undertake an internal audit of overtime policies and practices, one of the first steps is deciding when it should begin. As soon as possible is almost always the best answer from a risk-reduction perspective. However, it may be advisable under rare circumstances to wait for a window of opportunity that is expected to open soon. In this context, window of opportunity means any explanation or explanations that can be given for the audit process and resulting reclassifications for overtime eligibility other than “we just realized that we have, for a long time, denied you overtime pay incorrectly.”

Thankfully, the recent implementation of the new regulations creates just such a window. They are still so new that no published court decisions or opinion letters have addressed them yet. Thus, the near future will be a very good time for all employers who have not yet done so to conduct overtime audits. Other examples of windows of opportunity include evolutions or more sudden changes in job responsibilities, mergers of companies or departments, or job-level reclassifications for pay or other purposes.

Another important early decision is whether the audit should be conducted organization-wide or for one or more sub-groups such as a location, department, or position. Typically it is far more efficient to audit the entire organization at once. The holistic approach also minimizes the likelihood of complaints of disparate treatment. This is a valuable benefit because, like in all other areas of employment law, complaints are most often triggered by perceptions (accurate or not) of unfairness. On the other hand, an example of a situation where a more limited scope may be sensible would be if the changes in the operations of a single department or facility presented the only window of opportunity.

It is also advisable to define the audit's fundamental goal early on. The most realistic goal is typically to reduce the risk of incorrectly denying overtime pay significantly without too much cost and disruption. Another option is to seek to reduce the risks of overtime-eligibility misclassifications as close to zero as possible. The biggest problems with the latter approach are that it typically requires the interviewing and shadowing of every targeted employee and immediate supervisor, as well as extensive document review, resulting in too much cost and disruption while drawing attention to non-compliant past practices.

Of course, it is also important to determine as early as possible who will be involved in making decisions regarding the audit and which other executives should be “bought in” to the process. In simplest terms, “buy in” from all levels of the organization should be promoted at the appropriate time and in the appropriate manner. Preferably, senior executives should be sold on the value of the audit before it begins because they set the organization's tone. Shoring up their support before implementation minimizes the chance that they will pull the plug after the expenditures of time and money and the development of a trail of unfollowed (and potentially discoverable) recommendations.

Additionally, the managers to be interviewed will be less likely to push back if they know that executives require their full cooperation, with the quality of their responses being evaluated as a component of their performance. For example, this knowledge decreases the likelihood of “push-back” from a manager worried about the budget implications of increased overtime.

Conducting the Audit

Where possible, attorneys (both in-house and outside) and human resources professionals should cooperate on the audit team. While the latter can make valuable contributions, these audits hinge upon the types of legal judgments that only attorneys should make. Further, most employers prefer the increased chance (though not certainty) of confidentiality protection for certain communications that only attorney involvement can provide. The most important qualifications will then be experience with and understanding of the overtime laws and their application, as well as the time and dedication to complete the audit in an efficient and timely manner.

A typical audit begins by winnowing down the number of positions deserving increased attention by: 1) eliminating as nonexempt all employees earning under the $23,600 annually that the updated FLSA regulations identify as the minimum to be even considered for exemption; 2) eliminating as exempt all but the clearly misclassified employees earning at least the $100,000 annually that the updated FLSA regulations identify as the highly compensated employee threshold; and 3) eliminating additional employees as either clearly exempt or nonexempt from the overtime requirements based upon titles and/or other descriptors of work responsibilities (job descriptions, recruitment notices, etc.), verified to be accurate.

For each remaining distinct position (which may be occupied by multiple employees fulfilling the same duties), an interview should then be conducted with the manager at the highest level possible who still has a solid understanding of the day-to-day duties of the position. Doing so minimizes the number of interviews necessary, cost, disruption, and chances that a low-level manager will violate the audit instructions to maintain confidentiality. Following these interviews, the targeted positions are classified as “likely exempt,” “likely nonexempt,” or “warrants further consideration” (which may include follow-up interviews with the same or different managers, further document review, etc.).

In considering the above course of action, some employers ask words to the effect: “Can't we just have our managers and/or potentially misclassified employees fill out simple questionnaires instead?” The questionnaire route is certainly possible, but virtually always inadvisable for at least four reasons. First, the responses are almost never very helpful because the application of the FLSA and state overtime laws is too complicated and circumstance-specific for non-experts to be able to illuminate through check boxes and/or filling in some short blanks. Second, managers (let alone potentially misclassified employees) are far more likely to give answers shaded to satisfy the buzzwords of the regulations if those buzzwords are fed to them in writing, as they inevitably must be, in a questionnaire. Third, as the first two reasons suggest, interviews are likely to be necessary after questionnaires anyway. Fourth, the completed questionnaires, which lack the judgments of expert attorneys, will certainly be discoverable and often damaging in a misleading way in a litigation.

A far more frequent communication from employers is a lament that many applications of the overtime laws seem nonsensical. (Although this is largely true, the law is the law). For example, it is common for an employer to resist classifying the executive assistant to the CEO as eligible for overtime. One potential response is that the reclassification may be unnecessary if the employer is willing to adjust the executive assistant's duties to conform to the law on a go-forward basis. Of course, this type of “re-jiggering” of responsibilities does not automatically remove the potential back-pay liability. Still, it can effectively cut off future liability and go a long way toward discouraging any complaints in the process.

This leaves what may be the biggest-dollar question. Does back pay need to be offered to employees you reclassify voluntarily? The simple answer is that an employer need not offer it, but any employee who has been incorrectly denied overtime for any period remains free to demand it. Therefore, one of the implementation strategies that fits within an audit's fundamental, cost-minimization goal is often to conduct the audit in a coordinated, sensitive, confidential, and fairly applied manner that will minimize the risk of stirring up back-pay demands. Because of the intricacies attendant to effecting such goals, it is often beneficial to discuss these strategies thoroughly before beginning any audit and reevaluating its progress as circumstances dictate.

Conclusion

At bottom, neither inertia nor a random, half-hearted approach can ensure that an employer will wholly avoid, or be able to extricate itself from, the overtime eligibility snake pit. This increasingly important goal is more likely accomplished through the measured application of a coordinated and strategically astute series of actions. The guidance suggested above should provide a useful foundation for formulating an action plan customized to the unique and shifting culture and circumstances at any organization.

Overtime eligibility has developed into a snake pit for employers. The rate of claims for unpaid overtime compensation in court cases and agency proceedings has been increasing faster than that of any other type of employment litigation for several years now. During this period the number of federal overtime collective actions has been more than the number of federal class actions for all types of employment discrimination combined. The cumulative damages awarded to current and former employees for these claims have been enormous.

Not surprisingly, the availability of this money has fueled an explosion in overtime litigation. The plaintiffs' bar has become increasingly aware that overtime claims lend themselves especially well to collective and/or class actions in which attorneys' fees, liquidated damages, and other relief are available in addition to back pay. The explosion is also due in part to the overtime laws being among the most misunderstood, and correspondingly most violated, employment laws. In addition to their lack of clarity and logic, the overtime laws rely on a framework seemingly best-suited for the New-Deal era in which it developed. In other words, plaintiffs' attorneys see money to be made from employers whose internal awareness of their overtime problems lags far behind their awareness of traditionally higher profile employment-law issues such as sexual harassment.

All of these factors contributed to the U.S. Department of Labor's issuance, on March 31, 2003, of proposed revisions to its regulations governing the main exemptions from overtime pay under the Fair Labor Standards Act (FLSA). The most sweeping efforts in the proposed regulations to alter the outdated framework met with a firestorm of opposition, primarily from labor unions and other employee representatives. In response, the Department of Labor scaled back what certain commentators viewed as the most employer-friendly proposals before publishing the new “final” regulations, which became effective on Aug. 23, 2004. These final regulations essentially retained the old framework while managing some updates by codifying clarifications from existing court decisions and opinion letters. Thus, although the updated regulations attempt to adapt the overtime eligibility rules to better suit the 21st-century workplace, the bulk of the framework remains intact out of political necessity.

The Issues

The issues surrounding the updating of the FLSA regulations have received considerable attention over the last couple of years. But, at least until the recent elections seemingly quelled the Democrat-led effort to have the updated regulations nullified, most of the commentary has focused on their relative merits as a matter of public policy and/or their effects on the overtime eligibility of specific types of employees. Less commentary has been devoted to the laws of at least 18 states — including New York, New Jersey, Connecticut and Pennsylvania — that officially remain in effect because they differ from the FLSA in material ways that benefit employees, such as New York's much longer 6-year statute of limitations.

Some such distinctions, and the ripple effects that the updated FLSA regulations are likely to have in states like these, are discussed in the Dec. 20, 2004, Labor and Employment section of the New York Law Journal. Notably, there has also been very little commentary devoted to the practical considerations of employers and their in-house counsel regarding how to deal with the changes and the resulting explosion of media attention on the general subject of overtime eligibility. This article endeavors to at least partially redress this imbalance.

Advantages of Being Proactive

Employers should be very concerned if they receive a notice from the U.S. or a state department of labor demanding an investigatory visit on overtime or more vaguely stated issues. And employers should be equally or even more concerned if they are served with a court action for unpaid overtime, especially if it is a collective or class action. The availability of liquidated damages and attorneys' fees in a court case typically raises the stakes four to six times.

Regardless of the forum, it is advisable for an employer to engage outside counsel experienced in dealing with these claims as soon as they are asserted, because the complexities are many. These laws differ from other employment ones not only in substance, but also in terms of litigation approaches most likely to produce effective results. For example, how should an employer deal with the official invalidity of releases for these claims unless approved by a court or department of labor? Moreover, wise and experienced counsel are invaluable in seeking to minimize the relative loss of control over events that is one of the most unnerving aspects in almost every litigation.

Of course, waiting for claims is not the only option. Employers may voluntarily review their overtime classifications and practices. The advantages of this proactive approach include: 1) typically maintaining far more control of the process in myriad ways (timing, positions reviewed, who is contacted, communications, etc.); 2) having more options to correct, or at least minimize, risk; 3) forestalling the accrual of damages, including by ensuring that new hires are not misclassified and that all appropriate policies have been followed, such as the safe harbor endorsed by the updated regulations; 4) potentially avoiding or limiting back pay and other damages; and 5) increasing the chance of preventing litigation threats from spreading among employees and departments.

Nevertheless, some employers attempt to rationalize stasis based upon: 1) the costs of conducting an audit; 2) the fortuity of avoiding complaints so far; and 3) fear that an audit may stir up trouble by opening the Pandora's Box. In all but the most unique circumstances, these arguments are shortsighted and should be resisted. Indeed, as the above-listed benefits of proactive measures suggest, hesitant employers generally learn the hard way that the overtime-litigation boom will eventually catch up with all non-compliant employers, and, when it does, they will end up paying substantially more than the cost of implementing proactive risk and liability minimization measures.

Planning a Voluntary Audit

If the decision is made to undertake an internal audit of overtime policies and practices, one of the first steps is deciding when it should begin. As soon as possible is almost always the best answer from a risk-reduction perspective. However, it may be advisable under rare circumstances to wait for a window of opportunity that is expected to open soon. In this context, window of opportunity means any explanation or explanations that can be given for the audit process and resulting reclassifications for overtime eligibility other than “we just realized that we have, for a long time, denied you overtime pay incorrectly.”

Thankfully, the recent implementation of the new regulations creates just such a window. They are still so new that no published court decisions or opinion letters have addressed them yet. Thus, the near future will be a very good time for all employers who have not yet done so to conduct overtime audits. Other examples of windows of opportunity include evolutions or more sudden changes in job responsibilities, mergers of companies or departments, or job-level reclassifications for pay or other purposes.

Another important early decision is whether the audit should be conducted organization-wide or for one or more sub-groups such as a location, department, or position. Typically it is far more efficient to audit the entire organization at once. The holistic approach also minimizes the likelihood of complaints of disparate treatment. This is a valuable benefit because, like in all other areas of employment law, complaints are most often triggered by perceptions (accurate or not) of unfairness. On the other hand, an example of a situation where a more limited scope may be sensible would be if the changes in the operations of a single department or facility presented the only window of opportunity.

It is also advisable to define the audit's fundamental goal early on. The most realistic goal is typically to reduce the risk of incorrectly denying overtime pay significantly without too much cost and disruption. Another option is to seek to reduce the risks of overtime-eligibility misclassifications as close to zero as possible. The biggest problems with the latter approach are that it typically requires the interviewing and shadowing of every targeted employee and immediate supervisor, as well as extensive document review, resulting in too much cost and disruption while drawing attention to non-compliant past practices.

Of course, it is also important to determine as early as possible who will be involved in making decisions regarding the audit and which other executives should be “bought in” to the process. In simplest terms, “buy in” from all levels of the organization should be promoted at the appropriate time and in the appropriate manner. Preferably, senior executives should be sold on the value of the audit before it begins because they set the organization's tone. Shoring up their support before implementation minimizes the chance that they will pull the plug after the expenditures of time and money and the development of a trail of unfollowed (and potentially discoverable) recommendations.

Additionally, the managers to be interviewed will be less likely to push back if they know that executives require their full cooperation, with the quality of their responses being evaluated as a component of their performance. For example, this knowledge decreases the likelihood of “push-back” from a manager worried about the budget implications of increased overtime.

Conducting the Audit

Where possible, attorneys (both in-house and outside) and human resources professionals should cooperate on the audit team. While the latter can make valuable contributions, these audits hinge upon the types of legal judgments that only attorneys should make. Further, most employers prefer the increased chance (though not certainty) of confidentiality protection for certain communications that only attorney involvement can provide. The most important qualifications will then be experience with and understanding of the overtime laws and their application, as well as the time and dedication to complete the audit in an efficient and timely manner.

A typical audit begins by winnowing down the number of positions deserving increased attention by: 1) eliminating as nonexempt all employees earning under the $23,600 annually that the updated FLSA regulations identify as the minimum to be even considered for exemption; 2) eliminating as exempt all but the clearly misclassified employees earning at least the $100,000 annually that the updated FLSA regulations identify as the highly compensated employee threshold; and 3) eliminating additional employees as either clearly exempt or nonexempt from the overtime requirements based upon titles and/or other descriptors of work responsibilities (job descriptions, recruitment notices, etc.), verified to be accurate.

For each remaining distinct position (which may be occupied by multiple employees fulfilling the same duties), an interview should then be conducted with the manager at the highest level possible who still has a solid understanding of the day-to-day duties of the position. Doing so minimizes the number of interviews necessary, cost, disruption, and chances that a low-level manager will violate the audit instructions to maintain confidentiality. Following these interviews, the targeted positions are classified as “likely exempt,” “likely nonexempt,” or “warrants further consideration” (which may include follow-up interviews with the same or different managers, further document review, etc.).

In considering the above course of action, some employers ask words to the effect: “Can't we just have our managers and/or potentially misclassified employees fill out simple questionnaires instead?” The questionnaire route is certainly possible, but virtually always inadvisable for at least four reasons. First, the responses are almost never very helpful because the application of the FLSA and state overtime laws is too complicated and circumstance-specific for non-experts to be able to illuminate through check boxes and/or filling in some short blanks. Second, managers (let alone potentially misclassified employees) are far more likely to give answers shaded to satisfy the buzzwords of the regulations if those buzzwords are fed to them in writing, as they inevitably must be, in a questionnaire. Third, as the first two reasons suggest, interviews are likely to be necessary after questionnaires anyway. Fourth, the completed questionnaires, which lack the judgments of expert attorneys, will certainly be discoverable and often damaging in a misleading way in a litigation.

A far more frequent communication from employers is a lament that many applications of the overtime laws seem nonsensical. (Although this is largely true, the law is the law). For example, it is common for an employer to resist classifying the executive assistant to the CEO as eligible for overtime. One potential response is that the reclassification may be unnecessary if the employer is willing to adjust the executive assistant's duties to conform to the law on a go-forward basis. Of course, this type of “re-jiggering” of responsibilities does not automatically remove the potential back-pay liability. Still, it can effectively cut off future liability and go a long way toward discouraging any complaints in the process.

This leaves what may be the biggest-dollar question. Does back pay need to be offered to employees you reclassify voluntarily? The simple answer is that an employer need not offer it, but any employee who has been incorrectly denied overtime for any period remains free to demand it. Therefore, one of the implementation strategies that fits within an audit's fundamental, cost-minimization goal is often to conduct the audit in a coordinated, sensitive, confidential, and fairly applied manner that will minimize the risk of stirring up back-pay demands. Because of the intricacies attendant to effecting such goals, it is often beneficial to discuss these strategies thoroughly before beginning any audit and reevaluating its progress as circumstances dictate.

Conclusion

At bottom, neither inertia nor a random, half-hearted approach can ensure that an employer will wholly avoid, or be able to extricate itself from, the overtime eligibility snake pit. This increasingly important goal is more likely accomplished through the measured application of a coordinated and strategically astute series of actions. The guidance suggested above should provide a useful foundation for formulating an action plan customized to the unique and shifting culture and circumstances at any organization.