Lawsuit Prevention for Employers

The problem of misclassifying employees as exempt from overtime compensation regulations is widespread in California.  It would be instantly cured, if employers had any idea of the legal exposure they invite with this common mistake.

In a nutshell, employers must pay time and one-half to employees for any work performed over eight hours in a day, or 40 in a week.  This is what lawyers call black-letter law.

It doesn’t matter if the overtime work is not productive, was not requested, or even if it was counter-productive and expressly prohibited.  The employer must pay for all overtime worked at the applicable overtime rate.  It’s only recourse against those performing unauthorized overtime is by resort to company discipline procedures.

There are limited exceptions to the basic rule overtime rules, which are called exemptions.  The most common exemptions apply to executive, administrative and professional employees.  Others apply to employees engaged in outside sales, inside sales and “learned and artistic professions.”

The following observations will address the administrative exemption, because it is by far the most often-utilized overtime exemption.  In order to qualify as an administrative employee, a worker must 1) receive a salary consisting of at least two times the minimum wage, which may not be reduced as a result of the quality or quantity of work produced, and 2) must be “primarily engaged” in activities requiring the regular exercise of discretion and independent judgement.

Significantly, partial day absences may not be deducted from the salary of such employees, although full day absences may be if no paid leave is available. If partial days are deducted, the employer risks having the exemption nullified, exposing it to unpaid overtime compensation for the preceding four years.

The term, “primarily engaged,” means an employee must spend most of his/her time performing duties which require the regular exercise of discretion and independent judgment.

Under California law, to be exempt as an administrative employee typically requires that a worker perform duties closely related to management policies, to the exclusion of work involving the production of goods or services offered by the employer, which is normally performed by hourly employees.

Decisions requiring the exercise of discretion and independent judgment are those which involve the power to evaluate alternative possible courses of action and to make decisions, free from any supervision, concerning matters of significance to the employer.  Whether an employee has the sole decision-making authority to hire or fire, or to commit significant sums of the company’s money to purchases of his/her own choosing are questions that are typically relevant to this determination.

However, if a superior of the “exempt” administrator reserves the right to be informed about the decision in advance, this will likely be interpreted as the reservation of veto authority, which would have the effect of depriving the “administrator” of the discretion indispensable to exempt status.

It is important for employers to remember that, in litigation involving overtime compensation claims, the parties almost always hotly contest the extent of the claimant’s decision-making authority.  This is predictable, for the reason that how disputed testimony on this subject is resolved will typically determine the outcome of the claim.

For this reason, it is highly recommended that employees who work considerable overtime as exempt administrators be required to sign an employment agreement, including a detailed job description, establishing the kinds of decisions that the employer will be relying on to demonstrate the exemption.  As an aside, it is imperative that such a job description accurately describe the employee’s decision-making authority, because courts invariably credit substance over form, and an exaggerated job description will quickly be exposed, and the employer’s credibility lapses with it.

In short, employers who are unwilling to withstand this kind of scrutiny are much better off simply regulating who works overtime, how much overtime they work and properly paying for it.

This is because employees who later sue for overtime based on a misclassification often include claims that can quickly eclipse the overtime issue, although this alone can devastate an employer. Such claims include those for unpaid meal and rest breaks at the premium overtime rate, plus daily penalties for failure to provide required breaks, failure to accurately record hours worked as required by law (since “exempt” employees often do not complete time cards) and failure to comply with the detailed requirements imposed in connection with legally-mandated wage statements.  The failure to properly include all required information on wage statements presently forms the basis for perhaps more class action lawsuits and representative actions than any other labor code violation.

If this doesn’t “awaken” employers, there’s more.  Overtime violations have similarly proven to be a lucrative source for representative and class action lawsuits, where several similarly-situated employees make related claims.  In such cases, claimants often act as each other’s corroborating witnesses. This can be very disconcerting for employers, when they realize that the witnesses best-situated to assist with the employer’s defense are not only in the opposition’s camp, but have a significant monetary stake in facilitating the employer’s demise as well.

In these cases, an employee who wins an award in any amount is potentially entitled to reimbursement of all attorneys’ fees and costs incurred in the lawsuit.  The employer, by contrast, is entitled to no reimbursement of defense costs, in the event it should prevail at trial.

This one-sided reimbursement of attorneys’ fees is required by law, even when the employee is represented by lawyers provided at taxpayers’ expense by the state Labor Commissioner.

In such cases the employer will be required to pay the prevailing hourly rate for lawyers of similar experience in the community for each of the hundreds or thousands of hours spent on the prosecution of the case.  It is not uncommon for attorneys’ fees awards in these cases to far exceed the amount of wages awarded to the employee.

Employers, consider yourselves forewarned, and proceeding at your own peril…

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Jay G. Putnam is a Petaluma labor lawyer who has specialized in representing California employers for over three decades. His practice is devoted to preventing lawsuits against his clients, without sacrificing workplace authority or management prerogatives.

While no one can guarantee a future free of lawsuits, Putnam has compiled a remarkable record of success: Not one employer-client has been sued in 36 years with his system of precautions in place.

For those clients who have arrived with pending lawsuits, Putnam has established an excellent track record of success as well. 

You are invited to visit Mr. Putnam’s website, where you will find in-depth discussion of the most common mistakes made by California employers, and how to avoid them. www.jaygputnam.com/articles-by-jay-g-putnam/