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Leader's Edge Time Delay

Failure to properly classify your employees as non-exempt from overtime pay could later cost you millions.

By  Scott Sinder and Stephanie Quincy

Your firm has worked hard to establish a compensation formula with rewards and incentives. But does it include overtime pay for those employees who are legally entitled to it?

Many in the insurance sector learn too late—through lawsuits against insurers and brokerages—that their overtime payment practices don’t comply with the law. Class-based wage claims filed under the federal Fair Labor Standards Act and its state law counterparts are becoming increasingly more common. Some have resulted in multimillion-dollar settlements or verdicts against the employer.

Employees may collect two years’ worth of unpaid wages as well as attorneys fees, which often exceed the value of the claim. In many cases, if the employer is large and should have known better, the employee is entitled to three years of back pay. Even if allegations are unfounded and your firm prevails, the expense of defending against these claims adds up.

It’s crucial that your firm classifies employees correctly as “exempt” or “non-exempt.” A critical issue is whether an employee is “administrative” and thus exempt from overtime requirements. Generally, an employee qualifies for the administrative exemption if their primary duties include the performance of office or non-manual work that directly relates to the management or general business operations of the company.

In addition, the employee must exercise discretion and independent judgment on significant matters. “Discretion and independent judgment” are determined in each case. The term implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Key factors to that determination include the significance of the employee’s assignments and the degree to which the employee’s work affects the employer’s business operations.

An alleged failure to properly classify employees can result in claims against almost every facet of your business. A class complaint filed in March 2011 alleges that an employer failed to properly pay former insurance agents by classifying the agents as independent contractors rather than employees. The complaint also accuses the employer of failing to pay the agents minimum wage and overtime compensation for mandatory training time as well as for travel time to and from the training sessions. The case is pending in a federal court in Montana.

Claims adjusters also have been the subject of extensive litigation regarding the administrative exemption. While courts occasionally have found claims adjusters to be administratively exempt employees, the analysis depends on the specific tasks and duties performed. In Bell v. Farmers Insurance Exchange, a class of 2,400 claims adjusters brought an action under state and federal law for unpaid overtime, claiming they had been improperly classified as administratively exempt employees. The jury agreed, awarding the class $90 million in back wages, fees and penalties. Farmers also had to pay nearly $80 million in attorneys fees and other costs.

More than 500 account specialists sued Aon Insurance Services in 2007, contending they were misclassified as administratively exempt. A California judge certified the class for trial in 2010, but in a settlement Aon agreed to pay $10.5 million in unpaid overtime. Similarly, last year United Healthcare agreed to pay more than $1 million in back wages and penalties to nearly 500 finance, actuarial, underwriting and IT employees who claimed that the carrier had improperly classified them as administratively exempt and failed to pay them overtime.

Industry agents, typically paid on a commission-only basis, have also filed wage claims to ensure they receive at least the legal minimum wage. Compensable time includes time spent performing any activity that is an integral and indispensable part of the employee’s principal duties.

The Labor Department recently conducted an investigation into the job duties of nearly 3,500 Farmers Insurance employees at call centers in six states. The department found that the employees regularly spent about 30 minutes a week performing pre-shift work for which Farmers did not compensate them—turning on computers, logging into the phone system and launching software. Those tasks were integral to the employees’ work, the department concluded, and therefore were compensable time. Following the investigation, Farmers agreed to pay a $1.5 million nationwide settlement.

Employers should not assume that certain workers qualify for overtime exemptions simply due to their titles or job descriptions. As discussed above, the requirement that an employee exercise independent judgment concerning significant business matters, as well as the nature and frequency of that judgment, are important factors in determining if an employee meets the exemption test. This has nothing to do with a job description or title.

Every firm is different, and no two claims adjusters, account specialists, or call center employees are alike. Employers should carefully consider the actual duties performed by each employee or class of employees to determine whether the individual performs the type of work that falls within the narrow categories of exempt employees. These types of routine audits are crucial to preventing legal action and saving the company from paying significant amounts of back wages in the future.

As with so many compliance issues, your firm can choose to pay now to ensure compliance or pay much more later because of your failure to do so. It’s your choice.

Sinder, a partner at Steptoe & Johnson, is CIAB general counsel. ssinder@steptoe.com.

Quincy is a Steptoe partner. squincy@steptoe.com


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