Finance News & Insights

Adding this simple sentence to your pay policy can save you in court

Granted, no employer wants to wind up on the wrong end of a misclassification lawsuit.
But with today’s constantly evolving job descriptions, even the most meticulous and careful employers could wind up in court by accidentally misclassifying certain workers.And when that happens, the financial costs can be

staggering. However, according to employment attorney Michael D. Yim, there is a very simple step employers can take to limit their exposure to a misclassification lawsuit.

‘Express understanding’ key

That step involves adding some version of the following sentence to all employment contracts, handbooks and company policies:

“For exempt employees, your salary is intended to pay for all hours worked during each pay period, regardless of your scheduled or tracked hours.”

For legal purposes, this sentences shows employees have an “express understanding” of their payment.

Seems redundant, doesn’t it? After all, simply paying an employee on a salary basis eliminates the need for a time-based pay structure.

But that’s the type of thinking that gets many employers in legal trouble, according to Yim.

Reason: The DOL’s own regs on how to calculate damages for misclassification are vague.So, without a sentence like the one Yim suggests embedding in key employment documents, courts will assume that an employee’s salary only applies to the first 40 hours of their workweek.

Fluctuating workweek factor

And that subtle difference in pay-rate calculations can wind up costing employees a lot if they’re found to owe employees OT pay in a lawsuit.

Here’s why, using an example of an employee who earns $900 per week and works five hours of overtime.

Without the “express understanding” sentence, the regular rate of pay would be calculated by dividing $900 by 40, which would come out to $22.50 per hour. This means the employee would make 1.5 times that rate for five hours of OT.

With an “express understanding” sentence added, the regular rate of pay would be calculated via the “fluctuating workweek” method by dividing $900 by 45 (regular hours plus the five hours of overtime).

That would make the regular rate $20/hr. And the fluctuating workweek method would allow you to pay just 0.5 times the $20/hr regular rate – not the 1.5 – for the OT. So, the OT owed is significantly less than the previous example. When you consider many misclassification suits include a class of workers, the savings really add up.

For a more detailed example of how Yim’s calculation, visit.

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