Misclassification of
Employees Can Lead to
Large Class Action Lawsuits
In recent years, overtime lawsuits have proliferated, often
leading to multi-million dollar judgments against employers. The largest number of overtime pay disputes arise from
misclassifying employees as exempt when they are not exempt under the law.
Recently, Longs Drug Stores reached a preliminary $11 million agreement to
settle a class action lawsuit relating to the calculation of earned
overtime wages for certain of the company's former and current managers and
assistant store managers in 400 locations throughout California . These employees claimed they were misclassified as
exempt from overtime. The employees claimed they spent more than 50% of
their time performing non-exempt duties, such as stocking shelves and
running cash registers.
The
settlement addresses claims dating back to 2000 and is still subject to
court approval. Longs will make a cash settlement payment of $11 million to
cover claims by eligible class members, plaintiff's attorneys fees and
costs, payments to the named plaintiffs and costs to a third party
administrator. Longs will also incur costs associated with its defense of
the litigation and employer payroll taxes.
History of Large Overtime Settlements in California
Multi-million dollar settlements of overtime claims have made
numerous headlines over the past several years. In July of 2001, a jury
awarded $90 million to 2,400 claims adjusters at Farmers Insurance Exchange
for misclassification resulting in unpaid overtime. Other settlements
involving misclassification of employees and unpaid overtime include:
Pacific Bell ($35 million); Radio Shack ($30 million); Rite Aid Corporation
($25 million); Bank of America ($22 million); Starbucks ($18 million); and
Perdue Farms ($10 million).
Taco
Bell was
also faced with a class action lawsuit brought by over 3,100 Taco Bell
employees for overtime violations. The case was settled after four weeks of
trial for $3 million. Previous settlements by Taco Bell for overtime
violations have amounted to $12 million to employees in California
and Washington.
Because
California law is much more stringent than
federal law in this area, California
continues to be fertile ground for these type of
class action wage and hour lawsuits. As General Counsel for Longs, William
J. Rainey, stated: "Given the unique aspects of California wage and hour laws, which
differ significantly from federal and other state laws, we believe this
settlement is in the company's best interest."
In
California,
plaintiffs can reach back four years to recover damages. Moreover, most
overtime cases are to not class actions, but lawsuits against a small
employer.
Misclassification of Employees
In
California,
employers are required by law to pay time and a half after eight hours of
work in one day. California
allows an exemption to the overtime rule for employees who spend more than
50% of their time on duties that are managerial
and require use of discretion and judgment. Overtime must be paid even to
so-called "salaried" employees, if they spend more than half of
their times performing non-managerial tasks.
Job
title is irrelevant; actual job duties performed are the key.
For
an employee to be exempt as a manager he or she must:
- have primary
duties and responsibilities that involve the management of the
enterprise;
- customarily and
regularly direct the work of two or more other employees;
- have the authority
to hire or fire other employees or make suggestions and
recommendations as to the hiring or firing and as to the advancement
and promotion or any other change of status of other employees that
will be given particular weight;
- customarily and
regularly exercise discretion and independent judgment;
- spend more than
50% of his or her time engaged in managerial duties which meet the
above tests; and
- earn a monthly salary
equivalent to no less than two times the state minimum wage for
full-time employment (40 hours per week). The current minimum salary
to be categorized as an exempt employee is $2, 340 a month, which is
two times the starting minimum wage for full time employment.
What Are Examples of Managerial Duties?
In
order to meet the executive exemption, the employee's duties must clearly
be related to managerial work: interviewing and selecting employees,
directing work, handling employee complaints, planning work, setting work
schedules and pay rates, disciplining employees, deciding on types of
merchandise.
The
Division of Labor Standards Enforcement defines the phrase
"customarily and regularly exercises discretion and independent judgment"
to mean the comparison and evaluation of possible courses of conduct and
acting or making a decision after the various possibilities have been
considered. The employee must have the power or authority to make an
independent choice, free from immediate direction or supervision and with
respect to matters of significance. An employee who merely applies his or
her memory in following prescribed procedures or determining which required
procedure out of the company manual to follow, is not exercising discretion
and independent judgment.
Employees
who spend more than fifty percent of their time engaged in clerical duties,
bookkeeping, cashiering, filing, sales, replenishing stock, or maintenance
work are generally non-exempt. For instance, in the settlement involving
Radio Shack managers claimed they spent most of their time making sales and
performing tasks like vacuuming the store and cleaning the bathrooms.
Starbucks "managers" and "assistant managers" claimed
they spent more than half their time ringing sales, cleaning out cappuccino
machines, mopping and other chores. Longs Drugs "managers"
claimed to have spent more than half their time ringing sales and stocking
shelves.
Even
employees who are solely in charge of an establishment during certain work
hours may not be exempt if they do not meet the test. For instance, a
service station manager who spends the majority of time ringing up sales,
cleaning, keeping records, pumping gas, and stocking will not be exempt.
Assistant managers are often non-exempt because they do not exercise
discretionary judgment, are in training, and do not supervise employees.
Wage and Hour Audits Are an Employers Best Defense
California employers
must make certain that they comply with the stringent wage and hour laws
and have not misclassified employees. Even under the recent amendments to
the FLSA, California law is more favorable
to workers than federal law when it comes to determining who is eligible
for the executive exemption and California
employers will continue to be hit with class action suits. The passage of
the recent so-called "bounty hunter law" will only increase wage
and hour claims.
Employers
should regularly review the job descriptions and actual daily duties of
employees to determine if they have been properly classified as exempt,
closely focusing on those labeled managerial employees. This can be done
annually or whenever there has been a reorganization or significant change
in job classifications.
Due
to the complex state and federal laws governing overtime pay, audits are
best conducted by, or directed by, outside legal counsel. Use of outside
legal counsel may also allow companies to protect sensitive information,
such as advice regarding classification problems, under the attorney-client
privilege.
As
part of the audit, job descriptions, organizational charts, payroll
records, time cards, and employee handbooks should all be examined.
Individual employees may need to be surveyed through interviews or written
questionnaires. The audit may be characterized as a review of
organizational efficiency.
Employers
should not assume that employees should be classified as exempt simply
because others in the industry classify the employees as exempt. Industry
standards will not be taken into account in determining exempt status.
Obtaining
a clear understanding of the law and regularly evaluating employees' exempt
status can avoid costly damages, penalties and litigation.
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