In-house lawyers must make sure their companies conduct a comprehensive audit of their job descriptions, classifications and pay policies in anticipation of the Aug. 23 effective date of sweeping new overtime regulations, experts tell New England In-House.

Equally important as conducting the audit is documenting every step in the review process, according to Norman Davis of Miami-based Steel, Hector & Davis.

"You can avoid a lot of grief with the Department of Labor in documenting your steps," said Davis. "Establish what you’ve done and why you’ve done it. Some companies see this as a nuisance and bother until they get burned. My take-home message to in-house counsel is review the exempt classifications very carefully and document your activities. You do these two things, and you’ll be well down the road to being safe and secure."

The DOL will "vigorously" enforce the new rules, according to Joseph Ambash, an employment law partner in the Boston office of Seyfarth Shaw.

"This is a window of opportunity. An employer that fails to pay attention to this does so at its own peril," Ambash said. "Companies that become involved in overtime litigation after Aug. 23 and who have not conducted an internal review may find it awkward to explain their failure to look at job classifications when they’ve been ‘invited’ to do so by Department of Labor."

Michael A. Alaimo of Miller Canfield in Detroit noted that the DOL anticipates that all companies will assess pay policies under the new regs.

"The cost of conducting an audit is built into the regulations. It’s part and parcel of compliance. That’s what the Department believes," Alaimo said.

The DOL has set up an enforcement task force and has announced that it will be conducting "spot" investigations throughout the country. It also has created an "amicus program" pursuant to which it will file briefs in select cases that are challenging job classifications by employers explaining its position on various aspects of the new regs.

Experts suggest that in-house attorneys play more of a supervisory role in the initial stages of an audit, with human resources personnel reviewing job classifications to determine which workers are clearly eligible for overtime pay under the new regulations – so-called non-exempt employees.

"You don’t need to have lawyers involved at every stage. Initially, it’s more of a ‘triage system,’" Alaimo said. "HR can make the first cut on who is clearly exempt [i.e., not eligible for overtime pay] or non-exempt."

But in-house counsel will need to assess the tougher cases, and seek assistance from outside counsel to not only ensure the job classifications comply with the new regs, but also to help establish a "good faith" defense to challenges to exempt classifications.

Ambash suggested focusing attention at minimum on middle manager jobs in the various exempt categories, which he characterized as the most "vulnerable" to change under the new regs.

He said outside attorneys should provide opinion letters on whether particular job classifications are exempt to further establish the good faith defense in the event of a legal challenge.

"You won’t be liable for liquidated damages [armed with a opinion letter]," Ambash said. "It will cut down enormously on exposure."

Audit Procedure

An audit boils down to matching up job duties with the exempt categories.

"Look at what your business does and what the workers do," said Chris Vrountas of Nelson, Kinder, Mosseau and Saturley in New Hampshire. "You need to understand what each person does, and what their real duties are."

Miami employment law expert Davis added: "The job title makes no difference. You have to assess the job duties position by position. That’s the heart of the new regulations, which modified a large number of exempt classifications."

Employers should rewrite the job descriptions in their employee handbooks to make sure they comport with how people are compensated and what their duties are, noted William E. Hannum III, a management lawyer in Andover, Mass.

And Ambash suggested that in-house counsel "interview key supervisors to gain a better understanding what people are actually doing" to make sure job descriptions accurately reflect what employees are actually doing in the workplace.

The new regulations provide clarity in many cases, which should help in-house counsel make the right call on job classifications and help reduce the number of overtime lawsuits, according to David E. Dubberly of Nexsen Pruett in South Carolina.

"The Department of Labor has clarified the underlying terms in the main categories of exemptions and given examples of positions they consider exempt. It’s easier for in-house counsel to figure out because less people fall into a gray area," said Dubberly.

He said companies should decide whether it makes sense to increase an employee’s salary to get over the $23,500 minimum threshold

Litigation Trouble Spots

Experts are divided over how much impact the new regulations will have on the level of litigation.

Washington, D.C., attorney David Fortney observed: "With anything new, there’s a shake-out period, but in the long run, I think [the regs] will significantly reduce litigation."

Others predicted a host of litigation trouble spots on the horizon.

The exempt category for administrative workers was not altered in any meaningful way and will be heavily litigated, according to Mark Pomfret of Testa Hurwitz and Thibeault in Boston.

"The new regulations didn’t clarify the administrative exemption and adhere to what was used in the past," Pomfret said. "There are a host of jobs subject to interpretation."

(Click here for a summary of the various exemption categories, including the administrative exemption.)

Davis said, "This is the most complicated area of the new regulations. It poses the hardest questions and is a little more fluid than some other areas. It will have to be parsed out."

Under the final regs, an employee who makes more than $23,660 but less than $100,000 per year must have as his or her primary duty "the performance of office or non-manual work directly related to the management of the general business operations of the employer or [its] customers." The employee’s primary duty must also "include work" that involves the "exercise of discretion and independent judgment with respect to matters of significance."

Washington, D.C. attorney William Kilberg, former solicitor of the Labor Department, noted this language leaves unanswered questions: "How much work? Who knows," he asked rhetorically.

Kilberg said the regs include some examples of specific cases where courts had the "right" interpretation and others where they didn’t, and it’s important for attorneys to take a closer look at those in assessing how much "independent" work will be sufficient to qualify for the exemption.

Little Rock, Ark. attorney Donna Galchus said the definition of "matters of significance" would have to be defined in litigation.

The regs indicate that some employees who are typically exempt under the administrative exemption include: insurance claims adjusters, financial services employees, human resources managers who formulate and implement employment policies, and employees who lead a team of other employees in completing major projects.

Another potential trouble spot is the executive exemption, according to Ambash.

The exemption adds a new criterion stating an executive must have the "authority to hire and fire," or make suggestions and recommendations as to hiring, firing, advancement, or promotion that is "given weight" by upper management.

Ambash said this "could be the most significant change to the new regulations."

Experts said determining whether an employee’s opinions on other employees’ status are given "particular weight" will be the cause of some confusion.

Kilberg illuminated this concern.

"Can [particular weight] vary by people with the same job title? Absolutely. Can it vary for an individual over time? Absolutely. Can you move backwards? Sure," he said. "Your views can be given particular weight by one supervisor and not another."

Hannum described a client where no one in the company can be fired without the CEO’s permission. "Basically every exempt executive in the company does not have the right to hire or fire on his own in a pure sense of the word. How do we decide whether these individuals’ recommendations are given ‘particular weight?’"

He said in some instances the manager likely gives details to the CEO on a particular employee’s status, but that others may not provide as much insight. "Does that mean one employee is exempt and the other is not? Is that going to become a fact-based question specific to the employee? That’s where I think these regs are creating more ground for litigation in the longer term."

Safe Harbor

The new regs provide a so-called "safe harbor" provision that will help companies avoid being penalized by making mistakes on overtime pay.

"This is an enormous benefit to employers," said Ambash.

Vrountas added: "The new regs are not meant to be trip wires. They are meant to encourage compliance, not punish good faith employers."

To take advantage of this "good faith" exception, employers must create a written policy inserted into employee handbooks, stating compliance with the FLSA is company policy, and setting forth a detailed complaint procedure for employees to follow should they believe they are entitled to overtime pay.

"It should look a lot like how you set up a sexual harassment procedure," said Vrountas. "Spell out the procedure, list contact persons with phone numbers, set up a hotline, and make sure investigations are undertaken right away."

And once a company determines a mistake has been made, it should pay the overtime owed right away, Vrountas said.

"If you have a policy of complying with the new regs, the Department of Labor will not remove the exempt status of employees of the same ilk. Now [under the current regulations], you get whacked. That’s why you have class actions of millions of dollars with all similarly situated employees [included in awards] going back two years," he observed.

Vrountas also advised putting in writing reasons for denying overtime pay as a way of helping to establish a reasonable and defensible position should a lawsuit result.

The safe harbor exception could diminish class action awards, experts predicted.

"The plaintiffs’ bar recognized that inadvertent failures to pay overtime to as few as one employee could invalidate the exempt status for thousands of other employees," Alaimo noted. "It was easy to create huge liability. This is what fueled major FLSA litigation. The regs speak to this in a very dramatic way. The safe harbor is a major defense to class-based litigation."

Another significant change beneficial to employers is allowing for unpaid suspensions of less than one week, noted David R. Deromedi of Dickinson Wright in Detroit. The old regs only permitted one-week or more suspensions.

"Employers now have more flexibility as to deductions permitted for salaried employees," Deromedi said. "But there’s a catch: A suspension must be pursuant to a written employment policy. In-house counsel should take a close look at the disciplinary procedures in their companies’ employment handbooks. This is a good opportunity to make changes in policies to allow for suspensions of salaried exempt employees."

Education

Aside from anticipating litigation trouble spots, another important role for in-house counsel is ensuring key personnel understand what the regulations require for assessing job duties, Alaimo said.

"You need to educate key personnel. Too often, the people who really know the regs are far removed from making the ultimate decisions," he said.

In-house legal departments should also give careful consideration on how new job classification policies are introduced to the work force, according to Dubberly.

"An important role for in-house lawyers is educating the work force," he noted. "You want to present it right to employees, because a lot of people rely on overtime to make ends meet. If you tell people they won’t be getting overtime when they are used to getting it, they might become upset and look for a way to get even. You might have morale problems and give people an incentive to put employer pay policies under a microscope to see if you’ve done everything by the book over the past couple of years."

(Reni Gertner contributed to this article.)

Questions or comments can be directed to the writer at: [email protected].