Company Pays $3.2M to Settle Exempt Worker Misclassification Case

The U.S. Department of Labor (DOL) announced on October 27 that a company in Massachusetts paid $3.2 million to settle an exempt worker misclassification case that affected over 700 sales representatives. The DOL found that the employer had misclassified the employees as exempt from overtime pay under the Fair Labor Standards Act’s (FLSA’s) administrative exemption rule. In July 2023, the DOL sought claimants in a similar case in which an employer had to pay $5.6 million to settle its own illegal employee misclassification case.

Background of the Exempt Worker Misclassification Case

The DOL alleged that the employer illegally exempted employees from federal overtime protections under the FLSA’s administrative exemption rule. In addition to the exempt worker misclassification, the employer retaliated against employees participating in the investigation. Reportedly, the company’s senior management sent instructions to employees during the investigation to discourage them from speaking freely to investigators.

FLSA Administrative Exemption Rule

The FLSA is the nation’s primary wage law and one of the major employment laws employers must follow. It establishes minimum wage and overtime pay for non-exempt part-time and full-time employees. Generally, administrative employees are exempt from overtime provisions under the FLSA. Section 13(a)(1) of the FLSA provides specific tests to determine whether an employee qualifies under the FLSA administrative exemption. For the exemption to apply, the following qualifications must be met:

1. The employee must be compensated on a salary or fee basis at a rate not less than $684 per week;
2. An employee’s primary duty must entail performing office or non-manual work directly related to management or general business operations under the employer or for the employer’s customers; and
3. Their primary duty must include exercising discretion and independent judgment in matters of significance.

However, some employers illegally and inaccurately misclassify workers as exempt under the administrative exemption rule to avoid paying required overtime. What’s more, exempt worker misclassification denies employees benefits and protections to which they are legally entitled. It’s worth noting that misclassifying employees is illegal even if the employee agrees to the erroneous classification.

Settlement in the Misclassification Case

Subsequently, the DOL filed suit against the company in the U.S. District Court for the District of Massachusetts (the Court). The Court concluded in the exempt worker misclassification case that the sales representatives were not administratively exempt under the FLSA. In brief, the employees performed the very work that was the company’s business purpose. Namely, this included producing wholesale sales. Additionally, the Court found that the employer failed to pay proper overtime wages and violated recordkeeping requirements under the FLSA. Under the Court’s consent judgment and order, in addition to paying the $3.2 million in overtime back wages, the employer is forbidden from violating the FLSA’s overtime, recordkeeping, and anti-retaliation provisions in the future. To ensure compliance and fair treatment of employees, organizations should focus on preventing worker misclassification through consistent training and internal audits. HR and management teams should stay informed about FLSA exemption criteria, review job descriptions regularly, and document classification decisions thoroughly. Establishing clear policies and communication around employee status not only reduces legal risks but also promotes transparency and trust in the workplace.