It Will Cost Me How Much? A Story of Misclassification and Improper Deductions

When you read stories of the US Department of Labor visiting companies I am sure many of you think “Well that is a big company, they will never visit me, I am a small company.” I am here to tell you that nothing could be further from the truth. I know of a twenty person company that got a visit and at the end of the “visit” with the USDOL the owner was asking “It will cost me how much?” This is a story of misclassification and improper deductions.
This small company made a number of mistakes that lead up to their problems with the USDOL, mistakes that I have found are common in a lot of small companies. First they did a very poor job of recording time. They had a haphazard method that just utilized email notification to the owner that you were at work. Not an accurate method, particularly for non-exempt employees. Even for exempt employees it is not the most efficient method of tracking time.
The second mistake they made was they had improperly classified some of their employees. They made the classic mistake of equating being paid a salary with being an exempt employee. It is true that to be an exempt employee you MUST be paid a salary, but that is not sufficient to be an exempt employee. There are other hurdles to get over to be able to claim an exemption from paying overtime, mostly dealing with job duties.
The third mistake they made was that the person in charge of payroll did not understand the Fair Labor Standards Act. They did not know that if you are claiming someone is exempt from overtime one of the rules is that you cannot make deductions from an exempt employee’s paycheck (outside of these exceptions). So the “payroll” person was deducting improperly from one employee who was properly classified as exempt. This had gone on quite a while.
Well one day their mistakes came to haunt them. The “payroll” person resigned, though she was probably reading the handwriting on the wall. She filed for unemployment but was denied because she had voluntarily resigned. She was unhappy so she then filed a complaint with the Department of Labor. In the investigation of the complaint the investigator then discovered the mistakes mentioned above. The investigator wanted time records for two years. This is very tough to do when all the time records are in emails. The investigator said the person that had improper deductions was no longer exempt and thus owed overtime for the past two years, and they had worked a lot of overtime. The payroll person also claimed she was improperly classified and was owed overtime. The investigator also questioned the exempt status of another employee.
This investigation has caused this small company a great deal of headaches and ultimately will cost them a great deal of money. Granted they would have been paying this out if they had been doing things properly, but to have to write a big check at one time will put them in a pinch, as it would many companies. In addition to the final check there has been the productivity lost due to the paperwork required and the time that had to be spent recovering records.
How can you save yourself these problems? Here are some pointers:

  • Have a system that makes it easy to accurately record time by all employees and from which you can easily recover information.
  • Have your employees properly classified based upon accurate and up-to-date job descriptions that reflect their job duties.
  • Educate managers and anyone responsible for payroll on the regulations found in the Fair Labor Standards Act.

This small company is going to pay out many thousands of dollars as a result. Larger companies would pay even more, if they had multiple incumbents in the jobs improperly handled.
And to answer your unspoken question, this is the type of work that can be done by Omega HR Solutions, Inc.  

4 thoughts on “It Will Cost Me How Much? A Story of Misclassification and Improper Deductions”

  1. Mike,
    Thanks for sharing good counsel. I oversee HR for our small firm and after discussing these issues with our employment attorney we adopted a simple time reporting process where we specifically tell our non-exempt employees they are not allowed to “volunteer” time to the firm and that they must record all time, even when using smart phones. We require the time sheets to be signed with the following statement: With my Signature I attest I have worked these hours reported and that I have recorded all hours worked, including time spent on the job away from the offices.
    We can’t be too safe. Thanks again for your wise counsel.

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