Avoiding overtime lawsuits: big companies are paying out big bucks for misclassifying non-exempt employees. Here are some basic steps to keep your company from being the next defendant

Workforce,  Oct, 2002  by Gillian Flynn

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There's a very clear message echoing through the American workplace: categorizing employees as exempt or non-exempt is no longer just a prickly payroll decision. Misclassifying employees as exempt from overtime pay when they are entitled to it is to risk being slapped with a huge lawsuit. In the past year, a number of class-action complaints have been filed by employees accusing companies of cheating them out of overtime pay.

In recent well-publicized cases, Rite Aid, U-Haul, and Taco Bell have been charged with overtime violations, settling for S25 million, S7.5 million, and $13 million, respectively. In July 2001, a jury ruled that Farmers Insurance Exchange owed $90 million for not correctly paying its 2,400 claims adjusters and examiners. The presiding judge in the case reasoned that the insurance adjusters were the equivalent of production workers.

Also last year, Starbucks Coffee Co. was accused of overtime violations. The company, which prides itself on its corporate citizenry, denies wrongdoing.

To avoid costly lawsuits, it is imperative that businesses understand what "exempt" truly means.

Section 13(a)(1) of the FLSA exempts executive, administrative, professional, and outside sales employees from the FLSA's overtime requirements--as long as they meet certain tests regarding job duties.

Here are the categories and their requirements, according to the Department of Labor:

Executive Exemption

* These employees have management as their primary duty.

* They direct the work of two or more full-time employees.

* They have the authority to hire and fire, or to make recommendations affecting the employment of others.

* They regularly exercise a high degree of independent judgment in their work.

* They receive a salary that meets the requirements of the exemption.

* They do not devote more than 20 percent of their time to non-management functions (or 40 percent in retail and service establishments).

Administrative Exemption

These employees perform office or non-manual work that is directly related to the management policies or general business operations of their employer or customers, or perform such functions in the administration of an educational establishment.

* They regularly exercise discretion and judgment in their work.

* They either assist a proprietor or executive, perform specialized or technical work, or execute special assignments.

* They receive a salary that meets the requirements of the exemption.

* They do not devote more than 20 percent of their time to work other than that described above (or 40 percent in retail and service establishments).

Professional Exemption

These employees perform work requiring advanced knowledge and education, work in an artistic field, work as a teacher, or work as a computer system analyst, programmer, software engineer, or similarly skilled person in the computer software field.

* They regularly exercise discretion and judgment.

* They perform work that is intellectual and varied in nature, and cannot be standardized as to time.

* They receive a salary that meets the requirements of the exemption (except doctors, lawyers, teachers, and certain computer occupations).

* They do not devote more than 20 percent of their time to work other than that described above.

Outside Sales Exemption

These employees engage in making sales or obtaining orders away from their employer's place of business. They don't devote more than 20 percent of the hours worked by non-exempt employees of the employer to work other than the making of such sales.

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Founded in 1926, the American Arbitration Association is a not-for-profit, public service organization dedicated to the resolution of disputes through negotiation, mediation, arbitration and other dispute resolution procedures. Currently, more than 500 companies and 5 million employees worldwide turn to the American Arbitration Association to resolve workplace conflicts.