Brewery Misclassification

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Opening a brewery is often the culmination of a life long dream and years of hard work and dedication. It should be a euphoric moment for any brewery. However, the ever-changing rules of operating a business in the twenty-first century can dampen that euphoria. They can be overwhelming and confusing to understand, apply, and keep updated on. Despite the overwhelming nature of countless government regulations that you must comply with, as a business owner you understand that it is absolutely essential that you get them right the first time. This article will address a very small area of brewery labor operations, particularly the requirement of overtime pay which may or may not be required for an employee, a growing area of frustration for employers and employees alike. It should be noted in advance that the FLSA is extremely action specific. One worker may qualify when another who holds the same job title may not. As such, this guide should not be used as legal guidance in making your determination of your employees exempt status.

CURRENT EXEMPTION LAW

Employee overtime and the exemption of employees from overtime is governed by the federal Fair Labor Standards Act (FLSA). Current FLSA regulations require that no employer shall employ any employees who are engaged in commerce or the production of goods for commerce, for a work week longer than forty hours, unless the employee receives compensation for any hours worked in excess of the forty-hour maximum. The required rate of pay for each additional hour over forty is 1.5 times the base pay[1], or as it is commonly called, time and a half. Within the FLSA there are provided a number of exemptions to the requirement of overtime pay. These exemptions fall into the primary categories of Executive, Administrative, and Professional employees.

A common mistake in many brewery’s occurs when employers begin to classify their employees to comply with the often-confusing regulations and exemptions that each position may be subject to. What an employee is hired to do, and what they ultimately end up doing, can often be two very different things. Oftentimes an employee’s job title, description, and duties will change to meet the ever-evolving needs of the business in a competitive marketplace. Change in business is essential, but oftentimes when change occurs there is little thought on the FLSA exemption status of the employee in their new role. While this error is often easily overlooked, improper classification of an employee as exempt can result in severe monetary penalties against the employer as we shall see below. As a general rule on the scope of FLSA exemptions, the employer should remember that FLSA regulations state that the “exemptions and the regulations in this part do not apply to manual laborers or other ‘blue collar’ workers who perform work involving repetitive operations with their hands, physical skill[,] and energy.”[2]

EXECUTIVE EXEMPTION

To qualify for the executive exemption under the FLSA an employee must meet four requirements.[3] The employee must (1) be compensated on a salary basis[4] at a rate of not less than $455 per week, (2) whose primary duty[5] is management of the enterprise in which the employee is employed, (3) who customarily and regularly directs the work of two or more other full-time employees, or their part time equivalent, and (4) who has the authority to hire or fire other employees, or their recommendation to hire and fire other employees is given particular weight.

Each element must be met for this exemption to apply and each element must be in action, not title or job description alone. For instance, managing the enterprise or managing a recognized department of the enterprise has an employee focus, which is why the regulation further requires that two or more other full-time employees must be supervised. For purposes of being considered to manage employees for the enterprise or department, generally management includes, but is not limited to:

“activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employee’s productivity and efficiency for the purposes of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employee or the property; planning and controlling the budget; and monitoring and implementing legal compliance measures.”[6]

Further, when considering whether for the purposes of hiring, firing, or promoting employees, the individuals opinion is given any form of considerable weight, factors which should be looked at include, but are not limited to ”whether it is part of the employee’s job duties to make such suggestions and recommendations; the frequency with which such suggestions and recommendations are made or requested; and the frequency with which the employee’s suggestions and recommendations are relied upon.”[7] Further, “[g]enerally, an executive’s suggestions and recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include an occasional suggestion with regard to the change in status of a co-worker.”[8]

Most employees in a brewery will not fit the executive exemption requirements. The employee must be a salaried employee who will receive a set amount for the year, regardless of whether they work forty hours a week. For the purposes of executive exemptions, the primary duty of management is the focus of the exemption. FLSA regulations state that job titles, such as brewery manager or cellar manager, alone are not sufficient to establish an individual as an executive in management of the company.[9] Management includes activities such as interviewing, setting hours and rates of pay, disciplining employees, and planning the work and techniques to be used.[10]  A manager may have separate duties apart from the management of the company, such as working in the cellar or assisting with the canning process, but the principal and primary duty of the employee must be a managerial duty.

ADMINISTRATIVE EXEMPTION

To qualify for the administrative exemption under the FLSA an employee must meet three requirements.[11] The employee must be (1) compensated on a salary or fee basis at a rate of not less than $455 per week, (2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer, and (3) whose primary duty includes the exercise of discretion and independent judgment[12] with respect to matters of significance.

Most employees in a brewery will not qualify under the administrative exemption. Work in many areas of a brewery is laborious and an employee is typically expected to expend their labor by moving ingredients, moving hoses, keeping production areas clean, and organizing equipment and ingredients. Just as the executive exemption requires the primary duty to be in the area of management of the business, the administrative exemption requires that the principal duty of the employee be in an administrative area.  The FLSA regulations have identified the type of work areas that would qualify as primary duty under the administrative exemption as those in tax, finance, accounting, budgeting, auditing, insurance, quality control, procurement, advertising, or public relations, with other administrative areas to be considered on a case-by-case basis.[13]

The employee must also exercise their discretion and independent judgment in an administrative area. Simply working in these administrative areas is not conclusive of an employee having discretion and independent judgment. Regulations note that “the exercise of discretion and independent judgment […] does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work”.[14] Rather it applies to whether the employee has authority to formulate, affect, interpret or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; and whether the employee performs work that affects business operations to a substantial degree.[15]

Even to the extent that an employee is primarily responsible for the inspection of the products and processes utilized in the brewery, FLSA regulations note that “ordinary inspection work generally does not meet the duties requirements for the administrative exemption.”[16] An employee who performs the job of quality assurance exclusively will need the ability to change policies or issue directives as to the processes currently in place. Simply testing the product for a desired quality is not sufficient.

PROFESSIONAL EXEMPTION

To qualify for the professional exemption under the FLSA an employee must meet two requirements.[17] The employee must be (1) compensated on a salary or fee basis at a rate of not less than $455 per week and (2) the employees primary duty either; (i) requires knowledge of an advanced field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or (ii) requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

The professional exemption is the FLSA exemption that is most likely to be used incorrectly. Most employees in a brewery will not qualify under the FLSA professional exemption. Many employers may consider their employees to be ‘Learned Professionals’ in that they require their employees to have “knowledge of an advanced field of science”[18] by holding a college degree or completing a formal brewing education from an accredited brewing program, however, many duties will fail to meet the requirements of the advanced knowledge component.

To qualify as a ‘learned professional’ under the professional exemption, the primary duty of the employee must meet a three-part test. The primary duty test requires that (1) the employee must perform work requiring advanced knowledge; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.[19]

Many brewery’s may think that by requiring a degree in a relatively obscure area such as fermentation science or commercial production and technology that this would be enough to qualify their employees as learned professionals. However, FLSA regulations state that “the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship, or with training in the performance of routine mental, manual, mechanical, or physical processes. The learned professional exemption also does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.”[20]

Professions identified by the FLSA regulations as meeting the professional exemption include registered or certified medical technologists, nurses, dental hygienists, physician assistants, accountants, lawyers, paralegals, athletic trainers, embalmers, executive chefs, and sous chefs.[21] The inclusion of executive chefs and sous chefs in the regulations is further expanded to explain that “the learned professional exemption is not available to cooks who perform predominantly routine mental, manual, mechanical or physical work[22]”, making a subtle distinction between advanced educated professionals and general education professionals. This distinction applies to the brewery in the distinction between a cellarman who would not qualify, a brewer who would likely not qualify, and a master brewer who may qualify on a case-by-case basis if they can meet the educational requirements outlined above.

EFFECTS OF IMPROPER CLASSIFICATION

The effects of an improper classification under the FLSA in the eyes of the employer can seem extreme. However, it must be remembered that the reason the FLSA exists is to prevent, deter, and ultimately remedy the abuse of employees by employers. When a claim is brought against an employer for a violation of FLSA exemption classification and unpaid overtime then an employee, if found to be misclassified, will be entitled to the qualified wage they should have been paid, backdated two years if shown to be done in good faith, or three years from the date the claim is brought if shown to be in bad faith. The employer will have to produce records of hours worked for their employee for the previous three years so that a court may determine the proper amount of overtime that should have been paid.

If a court finds that the employer acted willfully and wantonly or simply in bad faith, then the court may issue a fine of $10,000[23] and award liquidated damages[24]. Liquidated damages under the FLSA are calculated at double the back pay owed to the employee. If an employee is owed back wages in the amount of $20,000.00 then the liquidated damages owed to that employee would be $40,000.00. Other fees may also apply such as employer matching contribution to employee retirement accounts that were shorted as a result of the lack of overtime pay per paycheck, and other salary-based incentives such as bonuses and stock plans. Further, under FLSA regulations, if the plaintiff can prove that they are owed as little as one dollar in back wages then they can recover their attorney’s fees from the defendant as a result of being required to bring the claim.[25]

HOW DO I FIX THIS MISTAKE?

Before a mistake needs to be fixed, it must first be determined that a mistake has been made. Each situation will be very fact specific and so each employee will need to be reviewed on a case-by-case basis. As these classifications can be difficult to interpret and costly if misinterpreted, it is always recommended for employers to consult their legal counsel. Legal counsel should be able to advise the employer and put in place a comprehensive plan that will correct the mistaken classifications, make the required accounting corrections, determine the back-wage disbursement schedule, and draft new employment contracts with the proper classifications. Consulting counsel and making the required changes may also be used as evidence to show that the employer made a good faith effort to fix the mistaken classification and recompense their employees in the event that a claim is ever filed. A showing of good faith is one factor that a court may consider when determining whether to award liquidated damages for a claim of a violation of the FLSA overtime requirements[26], or to wave the liquidated damages entirely.

[1] see 29 USC § 207(a)(1)
[2] see 29 CFR § 541.3(a)
[3] see 29 CFR § 541.100(a)
[4] An employee is on a salary basis if the employee regularly receives each pay period a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of the quality of quantity of work performed. see 29 CFR § 541.602(a)
[5] The term “Primary Duty” means the principal, main, major, or most important duty that the employee performs. see 29 CFR § 541.700(a)
[6] see 29 CFR § 541.102
[7] 29 C.F.R. § 541.105
[8] Id.
[9] see 29 CFR § 541.2(a)
[10] see 29 CFR § 541.102(a)
[11] see 29 CFR § 541.200(a)
[12] The exercise of discretion and independent judgment must be more than the use of skill in applying well established techniques, procedures, or specific standards described in manuals or other sources. see 29 CFR § 541.202(e)
[13] see 29 CFR § 541.201(b)
[14] see 29 CFR § 541.202(e)
[15] see 29 CFR § 541.202(b)
[16] see 29 CFR § 541.203(g)
[17] see 29 CFR § 541.300(a)
[18] see 29 CFR § 541.300(a)
[19] see 29 CFR § 541.301(a)
[20] see 29 CFR § 541.301(d)
[21] see 29 CFR § 541.301(e)
[22] see 29 CFR § 541.301(e)(6)
[23] see 29 USC § 216(a)
[24] see 29 USC § 216(b)
[25] see 29 USC § 216(b)
[26] see 29 USC § 260