Employers navigating the many risks associated with reopening workplaces must pay close attention to an under-the-radar litigation trap—changes to a worker’s pre-virus role that make them newly eligible for overtime pay, wage-hour attorneys said.
Businesses have long relied on statutory exemptions to overtime requirements to limit labor costs and the burdens of tracking employee hours. There are multiple forms, including an “outside sales” exemption for workers who routinely travel door-to-door, and an “executive” exemption for employees who direct the work of at least two others.
Most exemptions are based on a worker’s daily tasks and that creates a risk area for employers as job responsibilities evolve—sometimes by design, other times not—to meet the needs of a changing workplace.
In the pre-pandemic economy, ambiguities surrounding these exemptions were a common source of Fair Labor Standards Act class actions, regularly leading to multimillion-dollar settlements. But now, with businesses buffeted by recession and adjusting operational patterns under return-to-work plans, employers must proactively assess workers’ new routines to consider if the exemptions still apply, or face heightened risk of winding up in court, employment attorneys say.
At some companies, supervisors who previously qualified for the executive, administrative, or professional exemptions have been forced to take on non-managerial duties to fill in for laid-off colleagues, and at others, salespeople paid under the “outside sales” exemption have suspended in-person visits to customers as a safety precaution. These adaptations potentially strip employers of their legal basis for disqualifying workers from earning overtime for hours beyond 40 in a week.
“It depends on exactly where a business is along this line of opening back up. I’d say over the course of the summer, this is going to be the main risk,” said Caroline Brown, who is of counsel with management-side Fisher Phillips in Atlanta.
“The initial attack will be on the white-collar exemptions and, ‘What is the manager doing right now?’” she said. “And then, I think, it will go to outside sales from there, and then trickle into other exemptions,” such as those for retail and service workers, who are paid mostly on commission, or exemptions in the motor carrier industry for drivers, mechanics, and other workers.
With much of the return-to-work liability discussion focusing on occupational safety, retaliatory discrimination, and other virus-induced complexities, unpaid overtime is an overlooked area ripe for legal claims, Brown and other attorneys said.
Some companies are in the early stages of reviewing exemptions, if at all, but the plaintiffs’ bar will be ready to pounce, Brown said.
The need for employers to analyze workers’ duties in the new normal doesn’t necessarily mean the exempted worker whose routine has changed should automatically get converted to receive overtime pay. It’s a case-by-case, fact-specific inquiry that rarely offers a bright-line test, nor is the solution likely to be obvious.
For instance, whether a worker meets the outside-sales exemption turns on whether that employee is “customarily and regularly” engaged away from his or her place of work, under the language of the statute.
“People are working from home offices now; you can’t actually be ‘customarily and regularly’ away from the employer’s place of business, which can be the person’s home when it’s their home office,” said Reena Desai, who represents workers in wage-hour disputes as a partner at Nichols Kaster in Minneapolis. “Outside sales is one of the more vulnerable exemptions in this Covid world that we’re in right now.”
Brown said that some tasks, such as finishing paperwork from home on a sale that’s already in the pipeline, wouldn’t necessarily cause outside-sales workers to lose their exempt status—especially if it’s a short-term situation.
“Of course, the longer this goes on, the more potential risk there is that the nature of the job is changing,” she said.
The Labor Department last week issued a series of opinion letters on overtime exemptions, some of which focused on “outside sales” work, but the analysis wasn’t grounded in pandemic-related questions.
The more broadly applicable white-collar exemptions for executive, administrative, and professional employees also are subject to reconsideration in light of new workplace conditions caused by Covid-19, attorneys said.
The executive exemption lends itself to a clear-cut misclassification scenario because it requires the exempted supervisor to “customarily and regularly” direct the work of at least two full-time workers, Desai said. Some companies that laid off a significant percentage of their workforce may no longer have two or more employees who work at the same time as the supervisor who retained their job.
The administrative exemption is more ambiguous and involves assessing whether the worker’s primary duties are non-manual and relate to managing the business, while the professional exemption mandates that the employee focus on work requiring advanced knowledge.
Both of these exemptions may be nullified for managers who increasingly are performing the duties of the workers whom they used to supervise but are no longer able to work because of the virus.
“What we may end up seeing is companies are reacting to the pandemic and having people who were traditionally in a straight-up managerial role take up some of the production, nonexempt tasks, and if that becomes a majority of what they do every day, they may no longer be exempt under the duties,” said Peter Wozniak, who represents employers in wage-hour cases at Barnes & Thornburg in Chicago.
To Convert or Not to Convert?
Companies should consider a range of factors as they assess their risk on overtime exemptions, said Lee Schreter, who co-chairs the national wage-hour practice group at management-side firm Littler Mendelson.
“If I were sitting with a group of employers right now, what I would tell them is, ‘Go back to basics. Have the duties that an employee’s performing changed? And are those changes the type of things that are relevant to an exemption analysis?’” Schreter said.
If the answer is yes, then she said she would advise looking into whether those workers actually work more than 40 hours a week. “Employers can always control any potential exposure to a misclassification case by limiting the number of hours that somebody is working,” Schreter said.
Before an employer jumps to a conversion to non-exempt status, they should consider every possible exemption, she added.
Judges have applied inconsistent interpretations of whether a company has met the legal burden for certain overtime exemptions. For example, federal circuit courts are divided on whether mortgage underwriters qualify for the administrative exemptions based on their primary duties involving exercise of discretion and independent judgment.
The extent to which the coronavirus has altered this area of litigation will be revealed in coming months.
“With Covid happening and some people being out of work or more disgruntled, I think Covid can act as an accelerant,” Wozniak added, “so that maybe the lawsuit would be simmering anyways but now can rise to the surface.”