The Delemmas of Misclassifying an Employee as Salaried Exempt

Written by Galen T. Shimoda and Kristin LaRoi

An employer can save a lot of money by classifying an employee as salaried, exempt.  An employer does not need to pay overtime wages to a salaried, exempt employee nor provide meal and rest breaks.  This means that an employer can require a salaried exempt employee to work 50, 60 or even 70 hours per week without overtime compensation.  This translates into huge financial savings for an employer.  Hourly employees must clock in and out for meal breaks; however, no such requirement exists for salaried employees.  In fact, a salaried, exempt employee is technically not even entitled to meal and rest breaks.  Therefore, it is legal to work a salaried, exempt employee like a “mule”.

There are a number of exemptions within the Labor Code and Wage Orders that employers can use to exempt employees from overtime and other benefits.  Such exemptions include: the commission exemption; administrative, professional and executive exemptions; outside salespersons, to name a few.  However, these exemptions are fraught with legal technicalities and can pose huge problems to an employer if not administered with counsel.  In my experience, many companies simply slap a label on employees as “exempt” without properly conducting a legal analysis of the employee’s position and duties.  Even inadvertently mislabeling an employee or deducting from an exempt employee’s salary can destroy the exemption and lead to huge liabilities for the employer. 

Let’s say, for example, an employee is misclassified as salaried, exempt.  How bad can it be?  Well, very bad.  In representing employees, I frequently see liability anywhere from a few thousand dollars upwards to several hundreds of THOUSANDS of dollars for a single employee.  For example, a misclassified employee who works an average of 60 hours per week (with 20 hours of overtime) is misclassified can sue for back wages in the form of all unpaid overtime for years prior.  In this example, assume the employee earns $60,000 per year, or $31.25 per hour.   If the employee worked an additional 20 hours of overtime per week for two years, the employer would owe up to $97,500 in unpaid overtime wages (calculated as follows, $31.25 x 1.5 (time and one half) x 20 hours per week x 104 weeks (two years)).  This figure does not include potential waiting time penalties, interest or attorney’s fees.  You can see how expensive it can be for a company to pay overtime wages for just a single employee who is misclassified.  Imagine this figure multiplied by 2 employees, 10 employees, or 20 employees. 

Now, let’s talk about attorney’s fees and the burden of proof.  Under California law, only the employee can recover attorney’s fees in an overtime action.  So, even if an employer fights an employee to the end of the litigation and wins, it cannot recover attorney’s fees against the employee, only costs.  However, in the alternative, the employee can collect hundreds of thousands of dollars in attorney’s fees.  It is important to note that the employer bears the burden of proof.  If the employer cannot meet this burden, the employee wins.  Remember, California law is very protective of the rights of employees in overtime and other wage cases. 

The point of this article is that an employer must be careful in how it classifies employees.  When I speak with employees, most have no idea whether or not they are correctly classified.  In my review of any potential case, I do a quick check to determine whether an employee may be misclassified.  In many instances, an employee may believe he or she has a wrongful termination case, when in fact there is an overtime claim. 

If you have any issues with your classification at work, please contact our office.

The Shimoda Law Corp. legal articles should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of these articles are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.

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