Department of Labor Violates its Own Rule, Pays $7M

If you don't think overtime compliance is a pressing issue for your company, you might want to reconsider. As it turns out, taking overtime for granted is a luxury that not even the US Department of Labor (DOL) itself can afford, according to its recent $7M settlement. You read that right -- despite being the very entity that amends and upholds the FLSA, the DOL unintentionally violated its own overtime regulations, and is now paying a steep price.

Where the DOL went wrong

Under the Fair Labor Standards Act (FLSA), nonexempt employees "must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay." While this seems fairly straightforward, correctly determining which employees are exempt and nonexempt from overtime is not.

In 2006, the American Federation of Government Employees Local 12 filed a collective action complaint, claiming that the DOL had misclassified rightfully nonexempt workers as exempt from overtime. According to a statement made by Snider and Associates, the firm representing the union, "A large portion of the settlement is allocated to back pay and to compensate employees who, in some cases, worked overtime hours for years without compensation."

How to avoid their mistake

Note that the overtime salary threshold is changing

Starting December 1, 2016, your overtime policy is going to have to conform to new legislation, which increases the salary threshold for exemption from $23,660 annual salary, to $47,476. As the DOL has demonstrated, dealing with overtime retroactively can cost your business millions of dollars. Before the change goes into effect, take the time to review the annual salaries of all employees (this best practices overview, and this guide to navigating the new overtime rules can help), and re-categorize your exempt employees accordingly. You can also find resources provided by the DOL to further prepare your HR department for this change.

Revisit the duties tests
To determine exempt and nonexempt status for overtime, the FLSA provides the following tests:
  1. Salary level test: Employees paid under a certain amount annually are nonexempt)
  2. Salary basis test: This determines whether or not employees have a guaranteed minimum salary, and whether or not reductions made to their salaries are "permissible" or "impermissible"
  3. Duties test: Employees who meet the salary level and basis tests can still be exempt if they perform exempt job duties

The salary level and basis tests, though worth revisiting when updated, are nowhere near as subjective and convoluted as the duties test. The duties test outlines a variety of professional, executive, and administrative job duties that can exempt employees from overtime, and uses especially interpretative language when defining exempt administrative duties. According to the FLSA, a rightfully exempt administrative employee must "engage in office or non-manual work, directly related to management or general business operations, and a primary component of this work most involve exercising independent judgement and discretion about matters of significance."

For many primarily administrative employees, determining whether their duties involve "exercising independent judgement" on "matters of significance" requires careful scrutiny, and must be taken on a case-by-case basis. The FLSA website itself admits that the third duties test is "the most elusive and imprecise of the definitions of exempt job duties," so conducting an internal classification audit, or even hiring a lawyer can significantly help you navigate through these gray areas.

Clarify your overtime policies

Oftentimes, the obligation to pay overtime wages applies even if your company didn't specifically authorize overtime work. If your company knew or should have known that employees were working overtime, then you can still be held liable for those wages.

Revisiting, rewording, and clarifying your company's overtime can go a long way in avoiding these situations. Consider instituting a policy that requires supervisors to sign off on all anticipated overtime work, or implement more realistic deadlines to ensure that employees need not stay after hours to complete their workload.