If So, Beware of the Misclassification Trap
By Patricia Mulligan, Esq.
Many employers, particularly of small businesses, make the mistake of automatically paying a salary to employees because they feel it’s easier, more manageable and requires less record-keeping. It’s also the way “things have always been done.”
Here’s the problem: If you are paying your secretary, receptionist, customer service representative or other support staff a salary, even if it is a generous salary, chances are you are treating her/him as an “exempt” employee and not keeping track of weekly hours worked and, more importantly, not paying the employee overtime wages.
Such “misclassifications” expose an employer to liability under federal and state labor laws that can reach back up to six years.
For example, let’s say your office receptionist has been with you for 20 years and you pay her handsomely – perhaps $50,000 to $60,000 because you “like” her or him and they’ve been with you a long time. The employee works between 50 and 60 hours a week and doesn’t take lunch, because they are loyal and appreciate the job security you have offered. You are like family.
That is, until you’re not.
Business slows and the unthinkable happens – you have to lay him or her off. You do it nicely, you pay a few months’ severance, and you wish her or him well.
The following month, you receive a letter from a lawyer, advising you that you misclassified the employee as exempt, meaning, among other things, you failed to pay overtime for all hours worked each week in excess of a 40-hour workweek.
In this case, the employee’s hourly rate, based on a $60,000 salary and a 40-hour workweek, would be $28.85. Federal and state laws require that overtime hours (hours over 40 in any workweek) be paid at a rate of time-and-a-half; in this case, $43.27. Multiply the overtime rate by 20 hours a week, and you have a weekly underpayment of $865. Multiply that by 52 weeks, and you have a potential yearly underpayment of over $45,000.
Now, the really bad news.
Under state law, an employee can reach back six years to recover the underpayment – in this case approximately $270,000.
Wait, it gets worse.
The law provides for the recovery of liquidated damages equivalent to 100 percent of the underpayment, or $270.000, for a total potential liability of over $540,000, and that is before interest and attorneys’ fees. You get the picture.
The laws also require that an employer keep accurate weekly time records for its non-exempt employees. In the absence of such records, the testimony of the employee may be credited, even if you contend that the hours claimed by the employee are inaccurate or exaggerated.
And, there are monetary penalties for failing to keep accurate weekly time records. There are also penalties for failing to provide employees with accurate weekly wage statements. These documents would be inaccurate if the “actual” hours worked, and the overtime hours, were not included in the weekly wage statement.
Final point: You can pay your employees a salary but be sure if they are non-exempt (most workers are non-exempt), they are paid overtime and you keep accurate weekly records.
If you pay any employee a salary and they are not part of your senior management or operations team, contact qualified labor counsel to conduct position audit/s and correct misclassifications now, to avoid exposure to liability later.
This article is written by a member of the Oxman Law Group, PLLC (www.oxmanlaw.com). Any comments or inquiries are welcome and can be directed to Marc Oxman at 914-422-3900 or moxman@oxmanlaw.com.
