The potential risk of misclassifying employees under FLSAAs we discussed in a previous article, determining whether or not your employees are considered exempt or nonexempt under the Fair Labor Standards Act (FLSA) can be very difficult. Misclassifying employees can devastate your business. On one hand, you could be paying overtime to employees who are not eligible—the cost here is easy to calculate. On the other (potentially much worse) hand are the penalties, interest, and back wages you could owe if you misclassify employees over a significant period of time. 

Some business owners don’t pay close attention to this issue and take the “it won’t happen to me” approach, especially if they haven’t seen any real-life examples of the impact. But beware: All it takes is an audit or an employee filing a complaint to put your business under the microscope.

A Real Example of Misclassifying Employees

As one California-based employer recently found out, the penalties can quickly get out of hand. The San Leandro-based company was ordered to pay $1 million in back overtime wages, and it was also hit with $58,000 in civil penalties. This company thought it was doing the right thing. It increased the wages of its employees in order to make them exempt from minimum wage. The Wage and Hour Division of the Department of Labor did not view these employees as experts and therefore the employer was on the hook for the back wages and penalties owed.

This is a very large employer with an HR staff, and the company still made an extremely costly mistake. It’s easy to see how small businesses and those without considerable HR support could be putting themselves at risk.

So, what’s a small business owner to do? First, familiarize yourself with FLSA, and take a look at your current employees. Are you paying anyone a salary who should actually be paid hourly and eligible for overtime? Then, seek a second opinion. There are many third party providers who can assist you in determining FLSA eligibility. Don’t try to do it alone and risk a similar fate to the above example.