This post was written by  Michael D. Yim and originally posted on Kelley Drye’s Labor Days Blog.

Employers, even with the most robust and well-intentioned human resources departments, can still face the dreaded misclassification lawsuit for their salaried employers. In many cases, exempt employees are properly classified as executive or administrative employees. A misclassification lawsuit, however, is difficult to dismiss early because plaintiffs are afforded great latitude in crafting factual disputes that can only be resolved at trial. On top of that, plaintiffs generally bring such claims as class or collective actions – making litigation costly as well. Further compounding the problem, settlement of wage and hour misclassification cases is the preferred mode of resolution – but only after a range of damages can be made with some degree of certainty.

What if I told you that if you included one simple sentence in your employment contracts, handbooks and policies for salaried employees, it would likely reduce your exposure by approximately two-thirds in FLSA cases? For starters, it would make it easier to settle at the right amount by avoiding unnecessarily inflated ceiling for damage calculations by plaintiffs. So what are the “magic words” in this simple sentence?

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

An employer’s first response is: well, isn’t that assumed for salaried employees since common sense dictates that a salaried employee means that an employee is not paid on a time basis and would be paid for all hours worked? No. This isn’t the case as more courts have presumed that, absent an express understanding, an employee’s salary only applies to the first 40 hours of a workweek as a default. This is because U.S. Department of Labor regulations are vague on how to calculate damages for misclassification cases, and courts have growingly interpreted guidance on what is called the Fluctuating Workweek (“FWW”) method of calculation for non-exempt employees – that is, counting a weekly salary to count as pay for all hours worked at a regular rate, even “overtime.”

Wait, what? In short, many courts would treat any overtime hours as unpaid as a default for calculations. Damages, therefore, would be 1.5 times the regular rate based on 40 hours (salary divided by 40 hours) for the overtime hours. See Ramos v. Telgian Corp., 176 F. Supp. 3d 181, 193, 2016 U.S. Dist. LEXIS 44321 (E.D.N.Y. 2016) (explaining that “[i]n the case of salaried, rather than hourly, employees, … the FLSA … ‘presum[es] that [] a weekly salary covers only the first forty hours, unless the parties intend and understand the weekly salary to include overtime hours at the premium rate’”).

Continue Reading Add One Line in Your Employment Contracts and Policies to Reduce Exposure to Misclassification Liability