There are many difficult challenges and questions that constantly come up in the human resource function of any company in any industry. However, one of the most challenging and sometimes frustrating ones is that of employee misclassification. As you may know, the U.S. labor system, for purposes of determining who receives overtime payment, classifies employees either as exempt or non-exempt. The exempt worker is paid to “perform a job” and is generally not paid overtime and the non-exempt worker is paid exclusively by the hour which includes receiving overtime pay.
The difficult challenge comes into play when you have misclassified an exempt worker who should really be a non-exempt or hourly worker. After you’ve gone through the testing procedure (both California & Federal have separate exemption tests) and have determined that you have a misclassified employee, what are the options that you have before you. In theory, there’s only one option to totally reduce the risk from misclassifying an exempt employee who really should be non-exempt and that is reclassifying the employee as non-exempt and paying the back wages. However, in reality we’ve seen other solutions as well. Although these solutions are not perfect, they may work to some extent depending on various factors. Here are three different approaches to consider. In all the situations listed below, there is a misclassified employee or employees who are exempt and need to be reclassified as non-exempt.
- You reclassify the exempt employee to non-exempt and make the back pay.
The most direct and correct approach from a legal perspective is to reclassify the employee as non-exempt and pay the employee for back overtime. In this situation, you might typically interview the employee – both to confirm the correct classification for the job and to determine the estimated overtime owed. This may be difficult especially if you, the employer, don’t have any records of hours worked by the employee. Your only means of resolution may be to get the employee’s idea of how much overtime was worked. To get resolution, you will need to obtain the employee’s written agreement that the estimated overtime hours are correct to their best understanding. This is important because if the employee later comes back and sues for additional overtime, they will have a hard time in any court or mediation setting to later come back and give a reasonable explanation why their amount changed.
- You decide to do nothing.
Another option, believe it or not in these days of lawsuits over anything, is to do nothing. Although this isn’t a recommended approach, an employer can simply take a risk that the employee won’t say anything or challenge the misclassification. There are many real-life situations where employers know their employees are misclassified and they make a determination that there is a low risk of the employee speaking up or even knowing they are misclassified.
- You reclassify the employee with no back pay.
You could reclassify the exempt employee to non-exempt but not compensate the employee for back pay. This option, however, requires a calculated risk as much as the previous option. With the reclassification and the employee now available to receive overtime, it may be just a matter of time before the employee starts raising questions about why the reclassification occurred and why you’re not paying the back overtime wages.