Managers paid a salary are considered exempt employees and are, therefore, not entitled to overtime pay. If you believe this to be true, you are not alone. Family Dollar Stores (“FDS”) hired managers at salaried positions for all of its locations, classified them as exempt employees and required them to work extended hours. The wage and hour class action brought by FDS managers which put this strategy to the test focused on two elements: (1) actual duties performed by store managers and (2) the authority the same managers had in making decisions.

Family Dollar adopted an exempt employee policy that was applied company-wide regardless of individual factors, and did not conduct an audit to identify exempt employees. In the end these factors were the focus of a landmark decision that yielded a $35.5 million award plus $19 million in attorney’s fees in Morgan v. Family Dollar Stores.

So how can you make sure your company doesn’t fall into this same trap? 

1. Have you ever studied the number of hours that salaried managers spend doing their jobs or their tasks? 

2. Have you ever studied the managerial duties or the amount of time spent on managerial duties?

3. Do you have a policy addressing Fair Labor Standards Act (FLSA) overtime requirements?

These questions are examples of those put to FDS executives during trial, where store managers alleged that although they were classified as salaried exempt employees, their actual job duties were those of a non-exempt hourly employee.

The lawsuit began with a complaint in 2001 by two managers who filed a complaint alleging that the company violated the FLSA by not compensating store managers for overtime, 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 case involved a nation-wide class of store managers who did everything from unloading trucks to scouring bathrooms. The case escalated to 1,424 plaintiffs. 

In Morgan, the company found itself paying employees a “salary” based upon a historical job title without looking at the primary duties of the position. Employers make decisions such as “everyone is salaried” or “we don’t pay overtime.”   Worse yet, some 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, and assigning an executive title isn’t enough. There are specific job duties aligned with exempt executives, such as the supervision of two or more employees. But mere supervision is not sufficient. During the Morgan trial, executives were questioned about 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 audits that will study employees’ specific duties and determine that the duties meet one of the exemptions defined in FLSA. An audit consists 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 millions in trial judgments.

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. The third test requires that an employee’s duties be evaluated.  Per FLSA Regulations, there are three primary categories of exempt employees as defined by duties – executive, professional and administrative. 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. 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. A college degree does not ensure a “professional” classification. 

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.

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. 

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? These are all questions to review with an 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,  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. 

One last question: would you rather know you might have a $35 million overtime liability now – or later?