Several cases in the last year highlight the importance of properly classifying employees as exempt or nonexempt from overtime.  Starbucks, the specialty coffee giant, recently agreed to pay up to $18 million to settle a case filed by 1,000 current and former managers and assistant managers the company classified as exempt from overtime.

This follows settlements for similar cases by Pacific Bell for $35 million, Rite Aid Corp. for $25 million and Bank of America for $22 million.  Another case last year, filed by employees of Farmers Insurance, went to trial and the jury awarded the employees $90 million in back pay for unpaid overtime as a result of being improperly classified as exempt.

While these cases were brought against large companies, the results significantly impact small companies because they involved employees who “managed” small offices and often ended up performing some of the regular operational duties of the office that do not fit the requirements to be exempt from overtime. 

Federal and state overtime laws require that employees must receive premium pay for all time worked beyond 40 hours in a workweek.  A few states, such as California, also require that overtime be paid according to the number of hours worked in a workday. 

Every employee should receive overtime unless the employee’s job duties and salary exempt them from the overtime requirement.  To determine if an employee is exempt, there are several tests under both federal and state law covering a variety of executive, administrative, professional, computer professional and outside salesperson positions.  In most cases, the federal law tests and equivalent state law tests are almost identical, so a position that passes one test will also pass the other.  However, that is not always the case.  California law requires exempt employees to receive significantly higher salaries than is required under federal law. 

The primary issue in most of the above cases was the amount of time spent performing exempt duties.  Federal and state law require that exempt employees spend at least half of their time performing exempt level work, in other words, work that satisfies the duties requirements for the exempt tests.  According to the Los Angeles Times, managers at Starbucks claimed they spent less than half of their time actually managing employees, an exempt level activity.  The majority of the time they said was spent cleaning the store, ringing up customers and other similar activities that did not qualify as exempt. 

So what should employers do as a result of these cases?  Below are a few recommendations to ensure you don’t find trouble brewing with your exempt employees: 

1.    Make sure every employee has a job description and that all of the job descriptions are up to date and accurately reflect each employee’s essential job functions.

2.    Make sure employees classified as exempt meet all of the requirements for exempt status under federal and state law.

3.    Regularly review the tasks exempt employees perform to ensure they continue to meet all of the elements of the exempt tests. 

There are numerous resources available to help with the above recommendations.  If you are a current client of HRCentral, call your HRCentral contact right away if you have concerns regarding the status of any of your employees.  If you are not a current client of HRCentral and are concerned about your exposure to this type of liability, call 425-462-6286 to learn more.