Imagine this: You have just promoted an employee to a “manager” and based upon this title you have classified the employee as “exempt.” The Employee is paid a flat monthly salary, without deductions for time missed and no additional compensation is paid for overtime. At first, the manager is happy with his title and salary status, and likes the fact that he does not have to punch a clock or maintain time records. He does not mind that he sometimes works through his breaks and/or lunch, or that he works more than 8 hours in one day without overtime pay. But, some later time , the employee becomes aware that he may not be properly classified as a salaried exempt employee and may indeed be entitled to his meal and rest breaks, and to overtime pay and questions his status.

If you are lucky, an analysis of the position confirms that this “manager” is exempt under one of the classifications of exempt employees. However, if the analysis proves otherwise, the Company and possibly the owners, officers, directors and supervisors of the enterprise may be held liable to pay the employee previously unpaid overtime, statutory penalties for each missed meal or break, each paycheck which is in error, waiting time penalties, treble damages and liquidated damages. These statutory penalties, as contained in numerous provisions of the Labor Code, “stack” on top of each other and can add up into the thousands (and possibly millions) quickly.

The employee can pursue these claims through a wage claim with the Office of the Labor Commissioner or by hiring an attorney to bring a suit, where the statutory penalties will be sought plus attorney fees and court costs (which can reach the hundreds of thousands of dollars.)

As an example, if employees are improperly classified as exempt, and they do not take meals and breaks, and are not paid overtime, then they will be entitled to the immediate payment of one hour of additional pay at their regular hourly rate for each meal period missed, and for each break period missed and all previously unpaid overtime. In addition, the statutory penalties will accrue because now each paycheck is in error as the itemized pay stubs would have been not correct, and the payment of wages was untimely. Penalties of either $50 or $100 per pay period per employee will be assessed for the initial violations of the relevant code sections and then additional violations can be assessed up to $100 or $200 per violation, per employee, per pay period for a period of 4 years.

A misclassification can also result in a “mini class action” claim filed by one employee on behalf of all employees believed to be owed overtime wages, meal and rest breaks. The potential award would include back wages for every employee improperly classified as exempt along with fines and penalties dating back 4 years. Other problems which commonly arise concern the proper and timely payment of commissions and draws, and the propriety of “chargebacks” against unearned commissions. Are the commissions properly based upon a percentage of sales or some other pre determined calculations. All of these issues cause the commission wage structure to come under scrutiny.

To avoid these problems, employers should undertake a detailed analysis of the position, without regard to the position title, and determine if the duties meet the exempt duties test. So, the first step is understanding who is “exempt” and who is “non exempt”:

EXEMPT EMPLOYEES Exempt employees are not regulated by the Labor Code and/or the Industrial Welfare Commission Wage Orders and as such do not need to maintain time records, do not receive overtime compensation, do not have to be provided a 30 minimum meal period, do not have to take a 10 minute rest break for each four hours of work.

Employers are to be cautioned that the State of California favors employees to be classified as non exempt. The employer bears the burden of proving that the employee qualifies for exempt status and failing to meet the burden will result in a finding of misclassification and the imposition of penalties.

Generally an “exempt” employee is one who is “engaged in work which is primarily intellectual, managerial, or creative, and which requires the exercise of discretion and independent judgment, and for which the remuneration is not less than twice minimum wage for a 40 hour week which is currently $2,600.00 per month.” Exempt classifications are:

• “Professional” - Someone who is licensed or certified by the State of California and is engaged in the practice of nine specific professions (such as attorneys, physicians, accountants, etc).
• “Executive” - Must have duties that are directly and closely related to the daily operation of the business. Examples of executive duties are: interviewing and hiring, setting pay rates, directing work, disciplining and reviewing employee performance, etc. (Some would consider these duties to be that of a “manager.”) A executive or “manager” must supervise at least two other full time employees (or two full time equivalents)
• “Administrative” - One who performs office or non manual work directly related to management policies or general business operations of the employer or its customers; regularly exercises discretion and independent judgement; completes special assignments and tasks under general supervision or along specialized or technical lines; devotes more than 50% of his/her time to such “intellectual” duties.
• “Outside salespersons”- IF certain and very specific guidelines must be met, including that more than 50% of their time is spent in the act of selling goods or services.
• Other exempt employee classifications include artists and computer professionals, however, again very specific and strict requirements must be met to apply these exempt classifications.

Non exempt employees are those persons who do not fit into any of the above exempt classifications. Non exempt employees are generally those employed in office, administrative and clerical positions, including bookkeepers, customer service representatives, IT employees and other similar functions and manual labor positions. Such non exempt employees are to be paid for the actual hours worked, must record their time worked and must be provided meal and rest breaks.

• Undertake an analysis of every employee’s job duties to assess their proper classification.
• Compel non-exempt employees to take their uninterrupted meal breaks.
• Provide rest breaks for non-exempt employees.
• Require non-exempt employees to maintain daily time records.
• Post a meal period and break period notice, and include a specific meal and break period policy in your employee handbook.
• Train managers regarding the importance of compelling employees to take their meal breaks and ensure employees are provided their required breaks.
• Train managers to monitor hours worked. Specifically, if you have employees in any of the following job classifications, paid on a salary basis as an exempt employee, you should undertake an analysis to determine whether they are properly classified as an exempt salaried employees:
• • Outside Sales
  • Inside Sales
  • Retail Sales
  • Commissioned Sales
  • IT or MIS employees
  • Customer Service Representatives
  • Employees using computer software such as CAD or similar programs
  • Bookkeepers and In House Accountants and Credit managers

If you require assistance with an analysis of the proper classification of employees, the Law Offices of Cynthia Elkins is offering a Personnel Audit Program. The program is to will assist you with the audit of your personnel functions and employee classifications to assess whether the positions are properly classified as exempt or non exempt. The Audit Program is also designed to assist you with compliance issue to ensure that your wage statements are proper, and you have set up proper meal and rest breaks and documentation of time records. If you wish to participate in the Personnel Audit Program please complete and return the attached form to our office and we will contact you to schedule a meeting.