6 compliance tips to avoid overtime lawsuits, wage-and-hour labor audits and flsa exemption mistakes

This special report by Business Management Daily, publisher of The HR Specialist and HR Specialist: Employment Law, will help you review your overtime pay policy and double-check your FLSA exempt employees’ status.

For years, the DOL has continued to issue a somber report card on employers for violating the FLSA’s wage-and-hour rules. The top mistake for employers—and the most costly one—is wrongly labeling employees as exempt from overtime pay, according to the DOL.

For employers, the stakes are high. Employees misclassified as exempt can be eligible for two years’ worth of back wages (three if the violation was “willful”) at 1.5 times the hourly rate, plus liquidated damages equal to the unpaid wages. That means employees can collect up to three times their regular rate of pay.

How can you avoid becoming another target of an employee lawsuit or a DOL audit? The key is to regularly audit your workforce classifications and job descriptions to ensure you’re correctly classifying employees as exempt under the current overtime rules. Use this special report, Overtime Labor Law, as your blueprint to do just that.

Editor's Note: For more essential information to help your organization properly classify employees, visit Exempt vs. non-exempt: FAQs.


Determining Exempt vs. Nonexempt Status

When a new hire comes on board, you must determine whether to classify him or her as exempt or nonexempt under the FLSA.

Generally, two requirements must be met before you can classify someone as exempt:

  1. You pay the worker on a salary basis.
  2. The worker holds a position with certain duties designated by the DOL as appropriate for exempt status. These positions include executive, administrative, professional, computer and outside sales as well as some highly compensated workers.
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Remember: An exempt worker must meet both the salary and the duties tests.

Every employer should regularly review job descriptions to ensure all workers are classified properly. You could do this annually in conjunction with performance appraisals for current employees. Compare their job descriptions to the exemptions allowed by the DOL. Then specify in every job description whether the position is exempt from overtime or is hourly, nonexempt.

When you create a new position, consider the implications of the classifications. If
you can design the job to fit an exemption, do so. That may mean raising the
minimum salary to meet the test or adding a minimum education requirement that
qualifies the position for the administrative or professional exemption.

Also, some states have more generous overtime rules than the federal ones. So, be
sure to check with your state labor department before making changes to employee
overtime classifications.


Being paid on a salary or fee basis is the quid pro quo of exempt employees. They aren’t paid overtime for working more than 40 hours a week; in exchange, their employer must provide a guaranteed salary, which can’t be reduced when they work fewer than 40 hours. This reflects the understanding that exempt employees have the discretion to manage their time and are not answerable for hours worked or the number of tasks performed. Rather, they’re paid for the general value of the services they provide. In addition, you may not deduct pay for time when work isn’t available if the salaried worker is ready, willing and able to work.

Other characteristics of being paid on a salary basis:

  • You pay the employee a set salary even if she works only part of the week.
  • You can’t dock her pay as a disciplinary measure unless the employee has committed a serious safety infraction (breaking a rule designed to prevent endangering the facilities or other workers). The DOL regulations state that you may deduct for “unpaid disciplinary suspensions of a full day or more imposed in good faith for infractions of workplace conduct rules,” such as sexual harassment or workplace violence. (You’ll need, however, a written policy that you apply uniformly to all workers.)
  • The employee can’t be docked for a partial-day absence.
  • You must pay the employee for any day he’s ready, willing and able to work.

Make sure you abide by the salary rules. If you don’t, the employee is no longer
exempt, no matter what his duties and responsibilities are. Destroying his
exemption can make you liable for two years’ overtime pay for any hours worked
beyond 40 per week.


Some workers will be entitled to overtime no matter how highly compensated they are. Under the regulations, workers who “perform work involving repetitive operations with their hands, physical skill and energy” can’t be classified as exempt. If you have workers who gain the skills and knowledge required for their jobs through apprenticeships and on-the-job training, they’re probably entitled to overtime.

The regulations list examples of such blue-collar jobs:

  • Carpenters
  • Electricians
  • Mechanics
  • Plumbers
  • Iron Workers
  • Crafts People
  • Longshoremen
  • Construction workers and laborers

In addition, most people involved in law enforcement will continue to be eligible for overtime pay, including police officers, detectives, deputy sheriffs, state troopers, investigators, correctional officers, parole and probation officers, park rangers, firefighters, paramedics, emergency technicians, ambulance personnel and rescue workers.

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The duties tests

Workers who earn at least $455 per week or $23,660 per year ($684 per week or $35,568 annually under new rules to take effect January 1, 2020) may be exempt from overtime pay if they meet the appropriate tests for their classification: executive, administrative or professional. The last category is subdivided into learned professional and creative professional. In addition, special tests control the classification of certain computer employees and outside sales employees.

‘Highly Compensated Worker’ Exemption

The DOL rules also feature an exemption category for “highly compensated employees.” Essentially, any employee earning more than $100,000 per year ($107,432 under new rules to take effect January 1, 2020) and who regularly performs even one of the exempt duties of an executive, administrative or professional employee is precluded from earning overtime. To qualify as a highly compensated exempt employee, the person must meet the following tests:

  • Earns total annual compensation of $100,000 per year
  • Primary duty includes performing office work or non-manual duties.
  • Customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

Thus, for example, an employee may qualify as an exempt highly compensated
executive if she customarily and regularly directs the work of two or more other
employees, even though the employee doesn’t meet all the other requirements in
the standard test for exemption as an executive.


To be considered exempt from overtime, an employee must generally be paid on a salary basis and his or her job duties must meet the DOL’s standards for one of the six exemption categories discussed below. Answer the following questions to determine whether you’ve misclassified a worker as exempt:

Executive Employee

  1. Is the employee’s primary duty managing the enterprise or a department or subdivision of the enterprise?
  2. Does the employee customarily direct the work of two or more other employees or their equivalent?
  3. Does the employee have the authority to hire or fire, and do her recommendations carry significant weight if unauthorized to make the final decision?
  4. Is the employee paid the equivalent of at least $455 per week or $23,660 per year ($684 per week or $35,568 annually under new rules to take effect January 1, 2020) on a salary basis?

If you answered “No” to any of these questions, you may have misclassified the worker as an exempt executive.

Note: If the employee is at least a 20% owner of the business and meets requirements #1 and #2 above, he or she need not meet the salary requirement in #4 or the authority requirement in #3.

 Administrative Employee

  1. Is the employee’s primary duty performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers?
  2. Does the employee exercise discretion and independent judgment with respect to matters of significance? That is, does he or she evaluate and compare possible courses of action and then make a decision or recommendation after considering the various possibilities?
  3. Is the employee paid the equivalent of at least $455 per week or $23,660 per
    year ($684 per week or $35,568 annually under new rules to take effect
    January 1, 2020)on a salary basis?

If you answered “No” to any of these questions, the employee may be misclassified as exempt administrative.

Learned Professional Employee

  1. Is the employee’s primary duty to perform work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction?
  2. Is the advanced knowledge obtained by completing an academic course of study resulting in a four-year college degree or leading to certification?
  3. Is the employee paid the equivalent of at least $455 per week or $23,660 per
    year ($684 per week or $35,568 annually under new rules to take effect
    January 1, 2020)on a salary basis?

If you answered “No” to any of these questions, the employee may be misclassified as an exempt learned professional. Exception: Those who have completed the educational requirements for a law or medical degree need not meet the minimum salary requirement. Also, teachers need not be certified or meet the minimum salary requirement to qualify as learned professionals.

Creative Professional Employee

  1. Is the employee’s primary duty to perform work requiring invention, originality or talent in a recognized field of artistic endeavor such as music, writing, acting and the graphic arts?
  2. Does the work require more than intelligence, diligence and accuracy (i.e., does it require “talent”)?
  3. Is the employee paid the equivalent of at least $455 per week or $23,660 per
    year ($684 per week or $35,568 annually under new rules to take effect
    January 1, 2020)on a salary basis?

If you answered “No” to these questions, you may have misclassified a worker as an
exempt creative professional.

 Computer Professional

  • Is the employee paid the equivalent of at least $455 per week or $23,660 per
    year ($684 per week or $35,568 annually under new rules to take effect
    January 1, 2020)on a salary basis?

Is the employee's primary duty:

  1. Application of system analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; or
  2. Design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
  3. Design, testing, documentation, creation or modification of computer programs related to machine operating systems; or
  4. A combination of the aforementioned duties requiring the same level of skills?

If you answered “No” to #1 or were unable to answer “Yes” to any parts under #2, you may have misclassified the worker as an exempt computer professional.

Outside Sales Employee

  • Is the worker’s primary duty making outside sales?
  • Does he or she regularly work away from the company’s place of business?
  • Does the worker sell tangible or intangible items, such as goods, insurance, stocks, bonds or real estate, or obtain orders or contracts for services or the use of facilities?

If you answered “No” to any of these questions, you may have misclassified the worker as an exempt outside sales employee.


Administrative, professional and computer employees may be paid on a “fee basis” rather than on a salary basis. If an employee is paid an agreed sum for a single job, regardless of the time required to complete it, the person will be deemed paid on a “fee basis.”

A fee payment is generally paid for a unique job rather than for a series of jobs repeated a number of times and for which identical payments are repeatedly made. To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and whether the payment is at a rate that would amount to at least $455 per week or $23,660 per year ($684 per week or $35,568 annually under new rules to take effect January 1, 2020) if the employee worked 40 hours.


Computing overtime

You must pay overtime to every nonexempt employee who works more than 40 hours in a single workweek. The overtime rate is one and a half times an employee’s hourly rate. If an employee earns a fixed hourly rate with no other compensation, computing her base rate is easy. But in many cases, it’s not so simple:

  • Fixed hourly rate plus other pay: Divide the employee’s total earnings for the week (hourly wages plus bonus, for example) by his total hours of work.
  • Different rates in the same week: Divide total earnings for the week by the employee’s total number of hours worked.
  • Pieceworkers: Add the total earnings for the workweek (including bonuses) and any sums paid for waiting time or other hours worked. Then divide the sum by the number of hours worked in that week.
  • Workers on day rates or job rates: When you pay an employee a flat sum for a day’s work or for doing a particular job (regardless of the number of hours) and he receives no other form of compensation, total all sums received at such day rates or job rates in the workweek. Then divide by the total hours worked.
  • Salaried workers whose pay covers more than a workweek: You can convert a monthly salary to its equivalent weekly wage by multiplying the salary by 12 months and dividing it by 52 weeks.
  • Fixed salary for fluctuating hours by agreement with employee: Divide the salary by the number of hours worked in that week. Because you already paid straight time, the employee must receive additional pay for each overtime hour worked that week, at not less than one-half the regular rate.
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Other pay considerations

Travel Time

Many nonexempt (hourly) employees are entitled to pay for time spent traveling. Some general guidelines:

  • Travel between home and work. Regular commuting back and forth to work doesn’t count as paid time unless the employee performs work en route. Travel time does count, though, when an employee must travel a substantial distance for an emergency job at a customer’s premises.
  • Travel as a regular part of the job. When an employee’s duties regularly involve travel, you must count that as paid time.
  • One-day travel assignments. You must count all such time as work, except meal periods and the ordinary commute.
  • Extended trips. Travel during normal working hours, no matter the day of week, counts as work time.

In addition, the time an employee spends waiting for work counts as paid time: for example, when an administrative assistant waits for her boss to give her an assignment or a mechanic stands around while a machine’s being repaired. Both have been “engaged to wait”: Their employers require them to be present even though they may not have tasks available for the entire shift.

Thanks to a recent decision in a class action case, it’s now clear that if you have employees report to their regular workplace location in response to a call, they aren’t entitled to extra pay for their trip time. That’s counted as regular commuting time, which is always unpaid. Your organization can take advantage of this rule only if the employees report directly to their regular workplace first. If you send them to another location (such as a customer’s property), you must pay for their travel time.

Sleeping Time

In certain circumstances, you must pay for the time an employee working an extended shift spends sleeping. If she’s on duty fewer than 24 hours, the entire period counts as work time even though she may sleep or engage in other personal activities during her shift. If the shift extends beyond 24 hours, you and the employee may agree to exclude meal periods and sleeping periods of not more than eight hours from her hours worked.

You may also exclude sleeping periods of not more than eight hours per day if you provide adequate sleeping facilities and allow for uninterrupted rest. But when the job interrupts an employee’s sleep, you must count each interruption as paid time. If an employee can’t get at least five hours’ sleep, you must pay for the entire period as time worked.

Training Programs and Lectures

You must pay an employee for time spent attending training programs and lectures unless the following apply:

  • Attendance is outside regular working hours.
  • Employees don’t perform any productive work during the sessions.
  • The program doesn’t directly relate to their jobs.
  • Attendance is voluntary.

If you give employees the impression that they must attend or risk losing their jobs, their attendance isn’t considered voluntary. If the training is intended to help an employee perform her job better, it’s directly related to her job. But if the purpose is to upgrade an employee’s skills in hopes of advancement—and you haven’t required her to attend—you don’t have to pay her for training time

What about any hours spent in an apprenticeship program? Usually, you can exclude this period from paid time if the apprenticeship meets the standards of the DOL’s Bureau of Apprenticeship and Training and the instruction doesn’t involve productive work or performing regular duties. You must count instruction time, however, if the written agreement specifically provides for it

Civic and Charitable Work

The DOL regulation defines civic and charitable work as “hours of service for a public agency for civic, charitable or humanitarian reasons.” Examples include volunteering for nonprofit organizations such as food banks, churches and religious organizations, and fund-raising events designed to raise money for disease research and the like.

Essentially, you must pay for hours spent on civic or charitable work if:

  • The activity takes place during normal business hours or
  • If outside normal work time, it’s the same type of work the employee would do as part of her job or
  • You require employees to participate.

You needn’t pay for civic or charitable work if:

  • You don’t require participation or penalize those who don’t.
  • The work doesn’t occur during normal work hours.
  • The duties performed are outside their normal work duties.


Tracking exempt employees' hours

You also may want to track the number of hours exempt employees work just in case you didn’t correctly classify someone. Why? Because if the employee is reclassified as hourly, you must be able to show how many hours he worked. If you can’t, a court may force you to accept the employee’s inflated estimates.

Nothing in the law prevents you from requiring all employees (exempt and nonexempt) to record their hours by punching a time clock or filling out a time sheet. That way, you’ll have the records in case you need them. Just make sure you don’t base exempt employees’ compensation on those hours, or you will jeopardize their exempt status.

Tracking actual hours worked may turn out to be useful if you end up converting employees who are currently exempt into hourly workers when the new regulations take effect. You will have to estimate how many hours the exempt employees are putting in to determine what their new base hourly rate will be. For example, if exempt managers are now working on average 60 hours per week, and you expect them to continue at that pace, you will have to calculate what the hourly rate should be for the first 40 hours and the anticipated extra 20 hours at the 1.5 times base hourly pay rate to end up paying the newly hourly employees approximately the same.


What to do in case of a DOL audit

Suppose an employee has complained to the DOL about possible wage-and-hour or overtime violations in your workplace. Once you’ve been notified that an auditor is coming, get prepared by conducting your own audit.

DOL auditors have plenty of latitude to inspect records and interview employees, so make sure you’ve done everything possible to discover and correct any compliance problems as well as gather documents to defend your decisions.

If faced with an audit, you should:

  • Review the differences between federal and state overtime labor laws to ensure you’re complying with the stricter of the two.
  • Reread the job descriptions of any positions that might be in question. Interview people in those jobs and their supervisors to ensure their job descriptions are accurate. Find out what the workers actually do, and check timekeeping records. Promptly correct any errors.
  • Interview exempt employees to find out how much time they spend on duties typically done by hourly employees. If it’s more than 20% (or in retail, 40%), consider reclassifying the employee as nonexempt. (There’s no liability in classifying too many people as nonexempt; it’s the opposite that plunges employers into hot water.)
  • Check to see that employees are performing their jobs as assigned and working the hours designated by management. If they’re not, insist they start doing so.
  • Train supervisors and managers on how to determine who’s an exempt employee and who’s not.
  • Check your overtime records. If you discover unpaid overtime, pay it immediately—even if the overtime wasn’t approved.
  • Review your policy manual with an experienced employment attorney to make sure it’s complete and in line with the law.
  • Enlist help with all of this from a consultant or attorney. Many of the regulations are difficult to interpret, and the wrong call could cost you plenty
How to Fire an Employee the Legal Way: 6 Termination Guidelines

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