Valuable lessons gleaned from a landmark case
True or False: Managers paid a salary are considered exempt employees and are, therefore, not entitled to overtime pay.
If you answered true, you have company. Family Dollar Stores hired managers for all of its locations and paid all of them salaries, classifying them as exempt employees required to work extended hours – whatever it took to get the job done. What the national chain failed to take into account were the actual duties performed by store managers and how much authority they had in making decisions.
Family Dollar's biggest mistakes regarding exempt employees were adopting a policy that was applied company-wide regardless of individual factors and not conducting an audit to identify exempt employees. These mistakes cost them more than $35.5 million in damages to employees, employees' attorney fees, and their own attorney fees.
So, where did Family Dollar go wrong? And, more importantly, how can you make sure your company doesn't fall into this trap?
Answer questions now or later
Q. "And the employer never did any study of the hours that the store managers were spending in the stores?"
A. "No."
Q. "And the employer never studied the tasks that the store managers were doing working in the stores?"
A. "No."
Q. "And the employer never studied or looked into the managerial duties or the amount of time spent on managerial duties?"
A. "No."
Q. "In fact, the employer doesn't even have a policy addressing Fair Labor Standards Act overtime requirements, does it?"
A. "Not that I am aware of."
This series of questions is only a small sample of those put to Family Dollar Store executives during a 2006 jury trial,1 where store managers alleged that although Family Dollar classified them as salaried exempt employees, their actual job duties were those of a non-exempt hourly employee.
The 2006 trial was merely a stop along the path of a lawsuit that started with a complaint in 2001 and ended with an order from the United States Court of Appeal for the Eleventh Judicial Circuit in 2008. The case had such a circuitous route that the court provided a table of contents for the 63-page opinion. The path included a nation-wide class of Family Dollar store managers who did everything from unloading trucks to stocking shelves, sweeping floors, running cash registers, cleaning the parking lot, pulling weeds and scouring bathrooms.
Family Dollar Stores operates more than 6,000 retail stores selling a wide variety of merchandise. In 2001, two of its managers filed a complaint alleging the company violated the Fair Labor Standards Act (FLSA) by not compensating store managers for overtime. The case eventually included 1424 plaintiffs.
The company found itself in the position that many employers face or, hopefully, used to face: paying employees a "salary" based on a historical job title or other equally unimportant reasons without looking at the primary duties of the position. Employers make decisions such as "everyone is salaried" or "we don't pay overtime" or "I don't want to hurt Johnny's feelings by making him clock in or out." Worse yet, some employers praise employees who take work home, come in early or stay late, and work through lunch without paying them overtime in accordance with the FLSA.
Determining if an employee or group of employees is exempt can be complicated. But just assigning an executive title to an employee doesn't do the job. There are specific job duties aligned with exempt executives, such as the supervision of two or more employees. And mere supervision is not sufficient. During the Family Dollar trial, executives faced questioning regarding a company email that told store managers that if they tried to hire their own assistants on their own, they would be subject to being terminated. Management must be the primary duty of an exempt manager. They must be involved in determining the job status of other employees, planning work, budgeting, and monitoring sales and records.
Companies should regularly conduct an audit that will study employees' specific duties and determine that the duties meet one of the exemptions defined in FLSA. An audit will consist of surveys, employee and management interviews, and a review of company FLSA policies. Hiring an attorney or consultant to conduct an audit could save the company untold millions in trial judgments.
Classifying employees as exempt or nonexempt
There are three steps to determining if an employee is exempt. The first two, which guarantee a minimum salary that is consistently paid, are fairly simple to assess. Sometimes employers will even cause problems in this area by making improper deductions from pay. The third test requires that an employee's duties be evaluated. There are three primary categories of exempt employees as defined by duties – executive, professional and administrative2. Certain thresholds will determine if an employee's tasks are managerial in nature. In addition to supervising other employees, a variety of managerial tasks must regularly be performed. Choosing vendors and assigning work are just a couple of task items an audit takes into consideration. If only 10 percent of tasks are managerial in nature, the position is probably not exempt.
Some professions are automatically considered exempt – learned professionals such as doctors, lawyers and some creative professionals. But careful evaluation is the order of the day. A college degree does not ensure that a person can be classified as a professional. Outside sales professionals are generally exempt, but inside sales professionals may not fall into that category.
There are also some administrative positions that qualify as exempt but are difficult to assess. These positions must be related to management. The employee must regularly exercise judgment and discretion about matters of considerable importance to the operation of the business. The work cannot be manual in nature, and must take place in an office and relate to matters of significance. Keep in mind that the Department of Labor and the courts narrowly construe the exemptions in favor of the employee.
Know what to expect from an audit
Companies may consider conducting a self-audit, but should do so with care. The process should be carefully documented, including the completion of job questionnaires, evaluation of the questionnaire, and the payment of back pay if a formerly exempt position is determined to be non-exempt. While a self-audit will not prevent a lawsuit, a court would likely find that any violations are not willful because an employer made a good faith effort to comply with FLSA standards.
Post-audit – making changes with minimal risk
Once the audit is complete, you may find that certain employees should be reclassified as nonexempt. This is a good first step, but companies must also decide how to make the transition without risking a lawsuit.
Consider how to handle back pay for newly nonexempt employees. How far back should you go? Do you have accurate records of time worked over 40 hours per week? How will former employees be compensated? These are all questions you'll need to ask yourself and your attorney. Even though these changes are made voluntarily and you will likely have employees acknowledge their participation in the audit and receipt of back pay, in Lynn's Food Stores, Inc. v. U. S. Dept. of Labor,3 the 11th Circuit Court of Appeals held that such releases are not binding unless reviewed and approved by the court or by the Department of Labor. Even with this restriction, you have a record that includes employee input of how many hours employees worked and how much back pay they have received, thereby leaving very little for even the most aggressive plaintiff's attorney to bring forth.
The final question: would you rather know you might have a $35 million overtime liability now – or later?
Footnotes
1. Morgan v. Family Dollar Stores, 551 F.3d 1233 (11th Cir. 2008)
2. The regulations also contain exemptions for other categories such as computer professionals, outside sales and highly compensated individuals.
3. 679 F.2d 1350 (11th Cir. 1982)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.