Employee Misclassification Mistake Proves Costly for Employer

Just last week, the U.S. Department of Labor (DOL) announced that Halliburton, one of the world’s largest oil companies, had agreed to pay $18.3 million to over 1,000 employees. The reason why? Halliburton misclassified a number of jobs as exempt.

There are two very dangerous ways to misclassify individuals: (1) as independent contractors; and (2) as exempt employees. 

The Halliburton resolution is significant because it serves as a reminder for employers to double-check the factors that courts examine when determining whether an individual is correctly classified.

Recently, the DOL’s Wage and Hour division issued guidance on how to properly classify independent contractors. The guidance emphasizes the fact that the FLSA defines “employ” broadly as including “to suffer or permit to work.” 29 U.S.C. 203(g) and that application of the “economic realities” test in view of the expansive definition of “employ” results in most workers being considered employees. 

The “economic realities” test requires an examination of a number of factors and generally focuses on whether the worker is economically dependent on the employer or in business for him or herself.  The factors examined typically include: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer.  

No single factor is determinative and each factor is analyzed in relation to one another.  In sum, the totality of the circumstances will determine whether a worker is economically dependent upon the employer and as a result, an employee. 

Furthermore, while there are a number of exemptions available under the FLSA for employees, they are narrowly construed. The Halliburton settlement emphasizes the need to ensure that your company has not expanded the definition of an exemption and misclassified employees. There are six most common exemptions: (1) executive; (2) administrative; (3) learned professional; (4) computer professional; (5) highly compensated; and (6) outside sales.

As a preliminary matter, before classifying an employee as exempt (with the exception of an outside sales employee), you must ensure you they are paid at least $455 per week ($23,660 annually). If an employee does not meet this preliminary “salary basis test”, they are non-exempt.

Next, you have to carefully consider the duties of the position.  Each exemption has a “primary duty” that the employee must perform to fit within the applicable exemption. What does that mean? The “principal, main, major or most important duty that the employee performs.” The following breaks down the primary and other required duties of the six most common exemptions:

Executive

• The primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

• The employee also must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative

• The primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

• The primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Professional

• The primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• The advanced knowledge must be in a field of science or learning; and

• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Computer Professional

The primary duty must consist of:

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

• The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

• The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

• A combination of the aforementioned duties, the performance of which requires the same level of skills.

Highly Compensated

• The primary duty must include performing office or non-manual work; and

• The employee must customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.

Outside Sales

• The primary duty must be making sales (as defined by the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or the customer; and

• The employee must be customarily and regularly engaged away from the employer’s place or places of business. 

Again, when making important classifications between “independent contractor” and “employee” and “exempt” and “non-exempt,” take a very close look at the job duties of the position and the specific requirements listed above. Talk to your legal counsel and confirm that you are not expanding the definition beyond Congress’ intent. 

You don't want to realize your error $18.3 million later!

Share: Twitter Facebook LinkedIn Email

Add a comment

Type the following characters: sierra, whisky, mike, papa, six, three

* Indicates a required field.

Employment Law Guide

Topics

Recent Updates

Plunkett Cooney Blogs

Jump to Page