Hotel Online  Special Report
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The Global Hospitality Advisor

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Time Bomb Waiting to Explode:
Wage & hour Claims Over
Exempt Employees


Six Ways to Protect Yourself with a “Payroll Practices Audit” 
October  2002
Hospitality industry targeted for wage & hour claims

Employers are increasingly targeted by class actions and government audits on wage and hour issues. Plaintiffs’ lawyers typically solicit former and current employees to form a “class” to challenge the “exempt” employee designations of employers with large numbers of exempt employees. Then they challenge that classification in court in order to impose overtime liability. Results? Often there are enormous monetary awards for the class members and their counsel—and devastating losses to the employer. 

As the hospitality industry slashes its workforce to cope with the current downturn, many managers will be asked to assume more hands-on responsibilities, spending more time on “nonexempt” work and less time managing. Similarly, in an effort to save on overtime, positions may be reclassified from an hourly nonexempt to a salaried exempt. In both cases, plaintiffs’ lawyers and government audits are increasingly finding potential misclassifications. Claims are rising at an alarming rate.

Why is the hospitality industry so vulnerable to claims? 

Under applicable law, employees who work more than 40 hours a week must be compensated at a rate of 1 1/ 2 times their regular rate. Unless an employee’s job description fits one of the specific exemptions in the law, the employer will be responsible for any unpaid overtime, plus monetary penalties. The employer is also responsible for maintaining accurate time records for all nonexempt employees. If an employer fails to maintain time records for employees in the mistaken belief that they are exempt, the law will apply a “presumption” favoring the employees’ statements of the overtime worked. 

Unfortunately, hospitality industry practices and this presumption make hospitality employers particularly vulnerable to wage and hour litigation. One of the most popular wage claims is the allegation that managers, assistant managers, and other management personnel are not spending at least half of their time on exempt work. Because managers almost never keep time records, and because there is generally no one supervising the manager (or assistant manager) on a day-to-day basis, the employer has a difficult job to show that the manager spent a majority of time on management-level tasks (especially when plaintiff-employees submit declarations stating that they always spent 60% to 80% of their time on the non-managerial tasks). In an industry which uses its assistant managers so extensively, there is a significant risk that managers are not spending the requisite percentage of their time on nonexempt tasks.

Two prong test for “Exempt” Employees. 

The exempt classifications apply only to executive, administrative and professional employees, as those are defined by the applicable wage and hour laws. To qualify for an exemption under any of these categories, the employee must satisfy two basic tests: (1) a “salary basis” test and, (2) a “duties test.”

Generally, an employee meets the salary basis test if, weekly or less frequently, he or she receives a predetermined salary, which is not subject to deductions regardless of the quality or quantity of work. 

The duties test—which is harder to meet—focuses on the primary duties of the employee in question to determine whether the duties are sufficiently complex to justify an exemption. Generally, the determination of whether a duty is a “primary” one depends on whether the duty occupies more than 50% of an employee’s time.

Each of the three exemptions has a different duties test. For example, the executive exemption applies when the employee’s primary duty consists of “managing the enterprise in which the person is employed, or managing a customary recognized department or subdivision of the enterprise.” “Managing” includes duties such as hiring, firing, directing and evaluating employees, setting rates of pay, determining work techniques, and determining appropriate levels of supplies and merchandise. To be properly classified as an exempt employee under the executive exemption, an employee must also customarily and regularly direct the work of two or more full-time employees or their equivalent. In the hospitality industry, most of the exemptions will fall in this category for executives or managers, or under the administrative exemption described below.

The administrative exemption applies when the employee’s primary duty consists of office or non-manual work which (1) is directly related to the employer’s management policies or general business operations, and (2) requires the exercise of discretion and independent judgment. Thus, the administrative work must be of substantial importance to the management or operation of a business and not of a routine or clerical nature. Bookkeepers, secretaries, receptionists, operators and desk clerks do not fall within the administrative exemption, whereas tax experts, credit managers, account executives, sales research experts and personnel/human resource directors are typical examples of employees who may be considered exempt. Because the administrative exemption is so broadly defined, employers will often attempt to fit a number of job classifications under this exemption, making it one of the most common areas of misclassifications.

Tips to Minimize Wage and Hour Problems

Avoid Red Flags

Your hotel, restaurant or lodging facility raises red flags for plaintiff’s lawyers and regulators when you have: (1) a large number of exempt employees, (2) many employees in the same exempt job category, (3) aggressive use of the administrative exemption, (4) exempt managers with responsibilities similar to the employees they manage, (5) an increase in exempt worker characterization for a large number of employees, and (6) frequent (and perhaps improper) deductions from salary-based compensation. 

The 3 Most Common Employer Mistakes 

The three most common mistakes that employers make when classifying employees as exempt are:

  1. All salaried employees are exempt. Payment of a “salary” does not mean an employee is exempt if that employee’s duties and responsibilities do not correspond with the tests described in the accompanying article. 
  2. Job titles make positions exempt. A job title does not determine whether an employee is exempt. The job duties govern this determination. 
  3. Written job descriptions govern employees’ duties. Actual duties control over job descriptions. What employees actually do on a day-to-day basis may be quite different from their job descriptions. 
Working “Off the Clock” Issues

Class actions are also spawned by employers requiring hourly employees to work off the clock. These cases tend to arise when: (1) an employer has a policy of requiring employees to obtain a supervisor’s pre-approval before working overtime; (2) a senior supervisor requires employees not to report some or all of their overtime in order to reduce labor expense; or (3) an employer treats certain compensable activities, such as morning meetings, as not part of the work day. In California, there is an additional area of potential liability - the claim that employees have been working an alternative work week (e.g., four days, ten hours or three days, twelve hours) where the employer has failed to conduct a proper election. This type of claim applies only to businesses that are required to pay daily overtime.
 

Six Ways to Protect Yourself with a
“Payroll Practices Audit” 

The best way to minimize the risk of litigation on wage & hour issues is to regularly conduct an audit of your payroll practices. At a minimum, an audit should include the following:

1.  Review all positions classified as exempt. Focus on positions where multi-tasking is routine. In smaller properties particularly, managers may perform many tasks. The night manager, for example, might regularly spend most of his or her time handling the front desk, overseeing laundry and answering the phone lines, with little involvement in actual management duties. 

2.  Interview all exempt employees (or a significant statistical sampling within the classification) to determine actual job tasks performed and percentage of time spent on job tasks.

3.  Reclassify positions with the assistance of legal counsel. The reclassification plan should be implemented in a manner designed to reduce the existing potential liability for past practices. In this process, you will need to formulate a procedure for handling employee demands for past overtime liability.

4.  Revise job descriptions to conform with the actual tasks and duties performed by the employees in the exempt classifications.

5.  Redistribute revised job descriptions with acknowledgment forms to employees (if necessary) for them to agree that they are engaged in certain specified job tasks and are spending no more than certain specified percentages of their time on nonexempt job duties. 

6.  Review nonexempt personnel timekeeping requirements to ensure that nonexempt employees are appropriately documenting starting and ending times, as well as lunch and break times. If necessary, reissue policies reminding employees of the appropriate practices. Remember that even unauthorized overtime must be paid by an employer if the employer “knew or should have known” that the overtime was being worked.

Staggering costs for mistakes!

Why all the concern about innocent or inadvertent wage & hour violations? Mischaracterization of an employee ’s exempt status may not seem important, but it can cause big financial trouble for an employer down the line. A few recent settlements undertaken by employers to avoid devastating costs and potential jury verdicts on these issues illustrate the point.

• Starbucks paid $18 million for improperly classifying store managers and assistant store managers as exempt employees under California wage and hour laws.

• Pizza Hut settled two class action lawsuits for a total of $10 million based on alleged misclassification of managers.

• Taco Bell paid a $9 million settlement to 3,000 managers and assistant managers.

• Shoney ’s Inc. paid $18 million to settle overtime violation cases.

Verdicts and settlements in this area tend to be big because misclassified employees can go back for four years to recover unpaid overtime plus penalties and interest.Imagine if you had a class of employees nationwide —potentially hundreds or thousands —and they all sued for four years of unpaid overtime,interest and penalties!

Employers are also anxious to settle these cases —even at a high cost —in order to avoid other burdens such as loss of substantial senior executive time,unsettling concerns for investors, disruption of normal business operations,adverse impact on employee morale, big attorneys fees and costs (possibly even for the victorious plaintiff), and triggering an audit by the applicable regulatory agencies.


Marta M. Fernandez is a senior member of JMBM's Global Hospitality Group and Labor Department. As a management labor lawyer, Marta specializes in representing hospitality industry clients in all aspects of labor and employment, including implementation of preventative management strategies, such as executive training, arbitration enforcement and policies and procedures; defense of administrative and litigation claims, such as employee claims of sexual harassment and discrimination; and labor-management relations including union prevention, collective bargaining for single as well as multi-employer bargaining units, neutrality agreements and defense of unfair labor practice charges before the NLRB.

For more information, please contact Marta at 310 201-3534 or [email protected]

The Global Hospitality Group® is a registered trademark of Jeffer, Mangels, Butler & Marmaro LLP

©2002 Jeffer, Mangels, Butler & Marmaro LLP

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For more information:
Jeffer, Mangels, Butler & Marmaro LLP
web site: http://www.jmbm.com
Email Jim Butler at [email protected]
Or contact 
Jim Butler at the Firm
 Jeffer, Mangels, Butler & Marmaro LLP
  1900 Avenue of the Stars
 Los Angeles, CA 90067
     Phone: 310-201-3526 
The premier hospitality practice
in a full-service law firm
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Also See: I'm Mad as Hell, and I'm Not Going to Take it Anymore! / The Global Hospitality Advisor / JMBM / Oct 2002
Settlement Procedure Available to California Hotels Plagued by Prop 65 Cases - The Global Hospitality Advisor / April  2002 
Top Ten Investment Challenges Facing the Lodging Industry / Lodging Industry Investment Council / April 2002 
Decertifying a Union? The Employer’s Bill of Rights / The Global Hospitality Advisor / JMBM / April 2002 
Outlook 2002: A Roundtable Discussion /  Bruce Baltin, Bjorn Hanson, Randy Smith, Jack Westergom - The Global Hospitality Advisor / January 2002 
New Rules for Hotel Workouts: REMICs for Dummies / The Global Hospitality Advisor / JMBM / December 2001 
Living in the Wake: Predictions & Practical Implications / The Global Hospitality Advisor / JMBM / December 2001 
Avoiding Liability for Lay-Offs / The Global Hospitality Advisor / December 2001
The Worker Adustment and Retraining Notification Act: Impact on the Hotel Industry / JMBM 
When is an Apartment a Hotel ... and Who Cares? / The Global Hospitality Advisor / JMBM / September 2001 
The 'Perfect Storm' / The Global Hospitality Advisor / JMBM / September 2001 
Richard Kessler's Grand Theme Hotels - Interview with GHG Chairman  Jim Butler / March 2001
Stephen Rushmore's  Industry Trends / Top Markets, Predictions & Opportunities  / Jan 2001
Outlook 2001: A Roundtable Discussion The Global Hospitality Advisor / Jan 2001
Perspectives on Hotel Financing in 2001; Jim Butler, JMBM's Global Hospitality Group Chairman, Interviews Two Active Players in Hotel Finance / Jan 2001 
Robert J. Morse: Millennium’s New President / Interview with GHG Chairman Jim Butler / Nov 2000 
Special Reports / Jeffer, Mangels, Butler & Marmaro LLP

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