On the surface, it seems like a simple paperwork issue: Classify workers as exempt or non-exempt, cut the checks and move on. But when it comes to employee pay, one wrong label can cost an employer millions and trigger cascading liabilities, including unpaid wage claims, overtime disputes, government penalties and even class-action lawsuits.
Understanding the difference between exempt and non-exempt isn’t just about compliance — it’s about protecting the business from costly missteps. Employers who take a proactive approach can turn compliance into a competitive advantage by reducing legal risk, improving employee trust and workplace morale, and strengthening operational and reputational performance.
The Current Legal Landscape for Classifying Employees.
The Department of Labor and courts look closely at the duties performed, not just the pay structure; the duties test remains the core component of exemption classification. Salary does not automatically equate to exempt status.
In short, even highly paid workers can be misclassified if their job duties don’t meet the criteria set by the Fair Labor Standards Act. And if employees are misclassified, employers could be liable for years of backpay, liquidated damages and attorneys’ fees.
What to Watch Out for When Classifying Workers
Businesses often trip up in a few key areas when classifying workers, including:
- Inflated job titles: exaggerating job duties that the employee does not actually perform or calling someone a “manager” or other high-level position, regardless of actual job duties.
- Underpaid salaried workers: paying less than the applicable federal or state minimum salary threshold or making improper salary deductions for partial-day absences or work slowdowns.
- Failure to apply the duties test: assuming salary or a high-level job title alone means the employee is “exempt.”
- Failure to monitor and account for remote work and off-the-clock time: failing to account for time worked remotely or off-the-clock and failing to apply the proper state law for remote employees.
Legal and Financial Risks to Employers for Misclassifying Employees
FLSA violations can carry steep penalties for employers, such as:
- Back pay for unpaid overtime (up to three years if the violation was willful).
- Liquidated damages (often doubling the amount owed).
- Attorneys’ fees and costs (which can exceed the amount of unpaid wages in class or collective actions).
- Class/collective action exposure if multiple employees are misclassified.
- Civil money penalties for repeated violations or willful misclassification.
- Additional state penalties and reputational harm with employees and regulators.
Practical Steps to Ensure Compliance
Conduct internal classification audits. Employers should review and update employee classifications and job descriptions periodically based on the actual duties performed, including when responsibilities change. It’s important to not rely on pay structure or job titles alone but to confirm that both the salary threshold and the duties test are met for each exempt role. Employers should track where remote employees work to ensure the correct state law is applied.
Reclassify when necessary — but strategically. If an error is discovered, employers should fix it, document it, and seek legal advice before making retroactive pay adjustments. They should review pay structures periodically to ensure compliance with updated thresholds and consult legal counsel before classifying borderline roles such as “assistant managers,” which are often at the center of lawsuits.
Train management. It’s important to educate supervisors on the current exemption requirements and the importance of time tracking and maintaining accurate records of hours worked by non-exempt employees, as well as prohibiting “off-the-clock” work.
Monitor regulatory updates. Employers should designate HR, legal or compliance staff to monitor federal and state DOL updates. And they should work with legal counsel to identify changes, such as shifts in case law interpretations of the “primary duty.”
Potential as Major Legal Liability
Employee misclassification isn’t just a technical error — it’s a major legal liability that can damage a company’s finances and reputation. Businesses must treat classification as an ongoing compliance process and regularly reevaluate classifications, train managers and establish a defensible framework to handle exemption issues confidently.
Gallagher & Kennedy shareholder Haley Harrigan represents and counsels individuals, small businesses, franchised operations and large companies on a wide range of employment and business disputes, and litigates matters spanning labor and employment, commercial litigation and general liability. She serves as chair of the firm’s employment and labor law group.
