Episode 313: What Can Happen if You Classify Your Employees Incorrectly?

Paying $400k in back wages…sound like something you’d want to have to do? Classifying employees incorrectly is extremely common in several fields of business. Having employees who are incorrectly classified, either as exempt or non-exempt, has caused problems for thousands of companies throughout the years. In this week’s episode of What The Hell Just Happened?! Listen to Paul Edwards and Michelle Richard discuss what happened to two businesses, one smaller and one large, after they were discovered by the Department of Labor to be incorrectly classifying some employees.


Voice Over: You’re about to listen to another episode of What The Hell Just Happened?! Join Paul Edwards and his guests as they discuss and sometimes even solve some interesting HR problems. 

Paul: Hey, Michelle, who is an absolute, amazing expert in HR who’s about to discuss a What The Hell Just Happened in HR?! topic.

Michelle: Wow. 

Paul: Wow.

Michelle: That was quite the tee up. [laughing]

Paul: This is all the information we have to get out there so new listeners know what’s going on.

Michelle: Well, thank you for that.

Paul: Okay, so for new listeners, both of them, plus our one listener…

Michelle: [laughing]

Paul: Who comes in, so for all three –

Michelle: Three total.

Paul: Total, so for the two…

Michelle: Maybe four?

Paul: Maybe four. 

Michelle: You never know.

Paul: Well, there’s your family, but they’re tired…

Michelle: [laughing] This is true!

Paul: Tired of your voice already. [laughing]

Michelle: They like to listen to me.

Paul: I bet they don’t. [laughing]

Michelle: Not on recording. Not in real life. Just when I’m professionally edited. [laughing]

Paul: Yeah. Okay.

Michelle: Okay. 

Paul: What’s the topic?

Michelle: Let’s get down to business. All right. So the Department of Labor, they like to release these, I don’t know if they like it, but they do, they release these news releases, which talks about different cases they’ve pursued, investigations that they’ve done. 

Paul: Uh huh.

Michelle: Gives us the outcome so we can kind of see what’s out there.

Paul: So I want to say one thing. The two examples that I know that we’re going to give are big companies that got themselves in trouble. I want everyone to be clear here that just because you’re a small employer doesn’t mean that the Department of Labor is going to overlook you and not in any form, shape or whatever. You’re still quite vulnerable to these kinds of complaints.

Michelle: Exactly. So the first one that we’re going to talk about probably in a bit more depth than the second. The first one is a family owned supermarket so we’re gonna talk about that first. And then the second one is a larger nationwide slash state owned joint employer messy situation. 

Paul: Okay. 

Michelle: So let’s talk first about the supermarket.

Voice Over: You’re about to listen to another episode of What The Hell Just Happened?! Join Paul Edwards and his guests as they discuss and sometimes even solve some interesting HR problems. 

Paul: And… I’m gonna go off the rails sometimes and talk about whatever I want. 

Michelle: So this is a supermarket based out of Illinois. 

Paul: Okay. 

Michelle: Family owned, small business, rather small, you know, in comparison. 

Paul: Yeah. 

Michelle: The DOL, Department of Labor, they recently investigated and just published in January of this year that they found that about $400,000 were owed in back wages –

Paul: Right.

Michelle: To 49 employees over the span of two years, because remember, there’s a statute of limitations – 

Paul: Yeah.

Michelle: So there’s a look back period.

Paul: That could only go back that far.

Michelle: The two years was where they found discrepancy. They found issue. And let’s just talk about the number: $400,000.

Paul: It’s brutal. I mean for this, by the way everybody, this is a small business still. They’ve grown to 50 employees over time. Do you know if they have more than one location?

Michelle: From what I read here, it looks like one location.

Paul: Looks like one giant location with 49 employees. Lots of part, I imagine lots of part time employees, which is kind of how the… it’s a supermarket.

Michelle: Coming from a retail background, you can easily have a large roster of employees, but not really have that big of a need every day. It depends.

Paul: Well, you’re open seven days a week, 365 days a year so…

Michelle: Don’t give me flashbacks for scheduling for retail. That was crazy but…

Paul: So 400 grand.

Michelle: So what led to this? And the reason why I think this is so important is these were very basic level mistakes.

Paul: Avoidable.

Michelle: Very avoidable. If this employer, and we don’t know, we don’t know where they came from. We don’t know if this was purposely done, accidentally overlooked. 

Paul: Yeah.

Michelle: We can make assumptions based on some of the facts here, but that’s not what we’re here to do. We’re here to look at: where did they go wrong?

Paul: Uh huh.

Michelle: And help whoever’s listening. The four people listening, I mean, we want you guys to not make the same mistake. [laughing]

Paul: [laughing] Yeah.

Michelle: So I’m going to give you just a couple of the basics, Paul.

Paul: Okay.

Michelle: Where they went wrong: Number one, overtime. Oh, boy. They weren’t paying overtime. They were paying a straight, like rate of pay. 

Paul: Yep. 

Michelle: The regular hourly wage, instead of paying the overtime rate of pay –

Paul: In their state.

Michelle: Once they exceeded 40 hours. 

Paul: Yeah. 

Michelle In Illinois, I believe it’s only the 40 hours. If they work over 40 hours in a work week – 

Paul: Okay.

Michelle: Having to pay that and they misclassified. So what I mean by that… we can go down, we can have a whole other podcast about that subject. 

Paul: Uh huh.

Michelle: But what they did was they decided at some level that certain employees were exempt from overtime so that they didn’t have to pay them overtime.

Paul: Right.

Michelle: And there’s a whole analysis that goes behind that but if you tell, if you classify someone and you do it wrong, and you don’t pay them overtime, that’s actually due to them… This is what can really happen.

Paul: It piles up and there’s no hiding it. You can’t, you can’t hide it. Once you get the audit, there’s no hiding it and there’s no justification for what you did. There can be some slight arguments around the classification for paying someone an exempt salary, which means they are exempt from the overtime requirements of the Federal Labor Standard Act. And a lot of folks think that just because you pay someone a salary, that that means that they’re also exempt. You can pay someone a fixed salary, but you still have, okay, you can pay a nonexempt employee.

Michelle: Uh huh.

Paul: So which just, you know, a nonexempt employee, you can pay them a fixed amount, a salary that’s agreed upon for 40 hours but you still have to track their hours and then you have to pay them the overtime. Correct?

Michelle: Correct.

Paul: Okay. Then there’s the exempt salary employee who gets there through a kind of a 40 point test that both the IRS and the Department of Labor have. And you can have an employee, for those of you who are listening, it’s going to be an upper level manager who spends most of their time managing other people, not doing the work that those people do alongside of them, who makes a certain amount of money per year subject to all kinds of other rules. 

Michelle: Yeah.

Paul: And most of the businesses who are listening to this, you only have one or two, maybe three positions. That supermarket probably had maybe, maybe there was managers…

Michelle: Uh huh. And that’s probably about it.

Paul: That’s probably about it and there could have been a manager of produce and they might have fed into it. It could be a manager of the front people, you know, the service people who run the registers and they’d have some other duties. But the manager of the people who restock who also does the restocking alongside of them, he or she is not going to qualify for that exemption. 

Michelle: Yep. 

Paul: So you just, everybody really be clear about it because paying someone a fixed salary does not make them an exempt employee. There’s more that you have to qualify them on.

Michelle: Exactly.

Paul: You can’t hide from this. These rules are known. The time records are there. We all know what everybody worked. We all know what the rules are. So you really can’t. There’s not much you can do here. So you just need to know the rules and comply.

Michelle: Exactly. And you said something right now, and it was like a, raised a flag for me. You said “the time records.”

Paul: Yup. Oh no!

Michelle: A common mistake we see is that employers are not keeping actual records. If, if somebody is misclassified as an exempt employee – 

Paul: Yes!

Michelle: And is not keeping their records and then you get an audit…

Paul: It’s a double whammy. 

Michelle: Boom. Now, you don’t have anything to protect yourself to say ‘oh, this is how many hours they worked. This is how many overtime hours they worked.’

Paul: So they can claim whatever they want.

Michelle: Exactly. 

Paul: Yeah. 

Michelle: And, you know, more than likely the DOL is going to side with the employee because it’s the employer’s responsibility to make sure that this is being done properly.

Paul: They’ll pick the worst week and just multiply it times two years.

Michelle: Yeah. And you know what’s important to understand about an audit and one of our previous, one of my previous coworkers here at CEDR, brought this to my attention. She had a lot of experience with dealing with audits and all it takes is one employee to bring a complaint to the DOL. The DOL’s not just going to look at that one employee’s file, are they, Paul? [laughing]

Paul: [laughing] No, they ask for all the records.

Michelle: They’re going to look at everybody’s and they’re going to look back as far as they legally can look back. 

Paul: Yeah.

Michelle: And that’s, you know, I don’t want to scare you guys, but this is a scary thing: If you get a basic element of employment wrong, later on, it can really hurt you.

Paul: It can really pile up. 

Michelle: Yeah. And we see that here.

Paul: We see it with our dental, we see it with hygienists all the time.

Michelle: Right.

Paul: Where they’re misclassified as an exempt employee and they’re not tracking their time or they’re paying them a daily commission or something like that and they’re still not tracking the time. The problem with that is, if you’re not tracking the time and they’re not working and they’re working less than 40 hours in a week, you’re technically out of compliance and you could get in trouble for not tracking the time, but you have no way to prove it.

Michelle: Yeah. [laughing]

Paul: So it’s like, “well, they never work more than 32 hours.” Well, prove it. And that’s where the Department of Labor said, “you know, you could pay them a commission, but you still have to pay them overtime for the hour…” and I’m not going to go down the rabbit hole. 


Paul: What was the second?

Michelle: It’s easy, easy to go down these rabbit holes.

Paul: What was the second one? The part seller was a private company, correct?

Michelle: So yes, a private company. 

Paul: Okay.

Michelle: It’s a national auto parts distributor and also an Arizona based logistics company. 

Paul: Okay.

Michelle: So they work together. Joint employer situation, meaning singular employer. 

Paul: Okay.

Michelle: So there were about 1400 drivers classified as an independent contractor…

Paul: Yeah. 

Michelle: Instead of an employee and the DOL obtained judgment from a court that that was incorrect.

Paul: So they pulled their 40 point test, which by the way you can pass 39 of the 40 points, and by the way it might be 44 points. That’s not my… that’s not what I’m trying to get to here. You can pass 39 of the 40 points. If you fail the 40th point, that is the thing that reclassifies the employee. So it’s, it is not, it’s not complicated but it is complicated and there are certain points of failure where you fail them and it doesn’t matter what else is true and I can’t imagine how they got this wrong but I know why they tried it and I bet they’re emulating.

Michelle: Yeah. There’s always a benefit from the employer’s perspective. I mean it’s clear, I understand the logic behind it, but that’s not the law. 

Paul: Not the law. 

Michelle: Exactly. And they ended up owing $5.6 million in back wages. 

Paul: Ow!

Michelle: So that’s very different than $400,000 but you know, a large employer versus small employer. 

Paul: Oh, my goodness…

Michelle: That’s a lot of money. So that’s back wages and again, liquidated damages, also civil money penalties. I mean –

Paul: They hit them with the penalties and everything? 

Michelle: These things are piled on top of each other and…. 

Paul: Yeah.

Michelle: And it’s kind of wild. So I mean, that one – larger scale – but we get these questions all the time at the Solution Center about classification, how to pay my employee correctly because generally speaking, employers want to get this right. 

Paul: Oh, yeah. 

Michelle: They don’t want to have to deal with this.

Paul: Oh I wanna be clear.

Michelle: They have good intention.

Paul: Oh yeah. Every time I’ve ever been in like a customization or education on this and someone’s gotten it wrong, the first thing, you can just see them go white. They’re like, “I didn’t know… somebody was doing it like that. When I bought the practice, I just kept doing it,” or something along those lines. I rarely, almost never, in our 17 years of existence had someone who didn’t want to correct it immediately and you know, wasn’t upset that they got it wrong.

Michelle: Absolutely. So I think, you know, just talking through these examples, we can take away from this is if you don’t know, just work with somebody who does, you know? You’re not expected to be the expert on all of these things, all things business, but surround yourself with experts.

Paul: Yup.

Michelle: People that do know how to get this right, because when you do the right thing for your employee, it benefits you as well. So not only does it impact these 49, these 1400 individuals in each of these examples, directly, them and their families, it’s going to impact you as a business owner as we very clearly seen happen here.

Paul: Absolutely. Also for everybody who’s listening we put down in the notes for the podcast: we’ve written extensively about this. You can seriously, you can really educate yourself by just reading a couple of our blogs that are in depth that go through this whole analysis. We even give you a worksheet that you can go through. You do this in private, in the background, if you think you have a problem, you could reach out to someone like us. Of course, if you’re a CEDR member, you want to reach out to us, you can talk to your CPA about this as well, but you do it privately in the background and then you have to go through a process for cleaning it up. And there is a mechanism for self-reporting, which if you find it and fix it, then you can’t really be sued over it and you can avoid all the penalties. But you gotta get out in front of it, do it in a certain way, you’ll need guidance for that. So…

Michelle: Thank you, Paul.

Paul: That’s our…our scary, make sure that you classify…

Michelle: [laughing] That was pretty daunting but…

Paul: Make sure you classify and pay people properly everybody.

Voice Over: Thanks for joining us for this week’s episode of What The Hell Just Happened? do Paul a favor; share this with your network. If you have an HR issue or a question, and you’d like us to discuss it on this show, send it to podcast@WTHjusthappened.com. For more HR advice and insights from Paul and his team of experts, you can also join the private Facebook group, HR Base Camp, or visit HRbasecamp.com. Make sure you tune in next week. And remember: better workplaces make better lives. 

Apr 19, 2023

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