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Employee classifications: Getting the C-Suite’s ear

Avoid the dangers of wage and hour class-actions.

Worker misclassification analysis is boring, but the fact is plaintiffs’ class-action attorneys remain endlessly fascinated — or at least economically motivated — by worker misclassification cases.

Plaintiffs’ lawyers love these cases. They are bet-the-company actions, with the employer bearing the burden of proof regarding proper classification. If the C-Suite isn’t listening, they should be.

In the past three years, more than 20,000 wage and hour class-actions have been filed in the U. S. — many of them related to alleged misclassification of workers as exempt from federal and state overtime and other labor laws.

What makes these cases so dangerous?

  1. The law presumes that employees are non-exempt and thus entitled to minimum wage, overtime and other requirements set forth in federal and state wage and hour laws.
  2. They are expensive. Damages for one misclassified worker in California making an annual salary of $100,000 are approximately $250,000—that’s if you credit only two hours of overtime per day and assess one hour penalties for missed meal and rest breaks. Multiply that figure by 100 cohorts and the liability is staggering.
  3. There are defense costs.
  4. And, oh yes, the tail that wags the dog: Plaintiffs’ attorneys’ fees. This last item can be worth millions of dollars.

Few employers knowingly misclassify workers. Oftentimes, they simply equate “white collar” work or particular job titles (e.g., “Manager”) with exempt status. Many companies also assume that persons working in highly technical positions, or those that require significant expertise, are exempt. For this reason, IT workers and engineers are often misclassified. Corporations have paid mightily for their alleged misapplication of the law in this particular area, even where no liability was actually shown. One technology company settled such an action for more than $60 million and a gaming company paid out nearly $15 million, fearing an even worse result if litigation persisted. Now is the C-Suite listening?

Other departments where misclassifications and class-action litigation are abundant include Operations, Accounting/Finance, Human Resources, Payroll, Administration, Engineering, Legal and Sales. Again, settlements in the tens of millions have resulted from these “boring” claims.

How, as in-house counsel, do you broach this subject?

The best approach,depending on your company’s dynamics,is to get a sense of the potential exposure in a private and privileged manner. This is especially important if your company is an attractive litigation target, i.e., profitable and sensitive about damage to its brand if accusations of worker abuse are made.

The person taking a first look at classification issues in your company must have comprehensive knowledge of the relevant law. Take, for instance, the administrative exemption. That exemption generally requires, among other things, that the worker perform office or non-manual work, that such work be of significance to the company, that he or she be consistently exercising discretion and independent judgment, and that he or she be primarily engaged in such exempt activities. Seems easy enough, right?

But in Bell v. Farmer’s Ins. Exchange, 87 Cal. App. 4th 805 (2001), the court held that the company’s claims adjusters, who had such independence and discretion that they were authorized to cut checks for the insured,were not exempt administrative employees.  Rather, they were deemed non-exempt “production workers.” The result? Liability to the tune of $210 million.  Other exemptions — for executives, computer professionals, “learned” professionals and other workers — are equally difficult to apply.

If there is exposure on the misclassification front, “bottom-line it” for the C-Suite. Tell them what the dollar value is of a potential claim and what it will cost to fix it. Better to be the bearer of bad news with a fix, than the bearer of bad news in the form of a class-action lawsuit with no clue what it will cost to defend or settle.

Worker misclassification is boring, but if armed with the necessary information, businesses can modify work assignments, reporting hierarchy, job descriptions, managerial expectations, etc., to bolster any positions treated as exempt and reclassify personnel as necessary. Such preventative diligence will lessen the likelihood of protracted litigation and protect the company’s bottom line. The C-Suite will be glad they listened.

Chair of the Employment Law Department

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Mary Dollarhide

Ms. Dollarhide is Chair of the Employment Law Department in the San Diego office of Paul Hastings LLP where she concentrates on employment law...

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Employment Law Associate

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Haley Morrison

Ms. Morrison is an Employment Law Associate at Paul Hastings LLP and has a particular expertise in the area of worker misclassification.

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