Two recent decisions from the highest federal court in New York serve as useful reminders of the high costs to employers of failing to pay overtime to those employees who are entitled to it.

In one case, the Second Circuit Court of Appeals held that an employee whose primary duty was to sell advertising, and who was paid a base salary plus commissions, should have been considered “nonexempt” (from the wage and hour laws), and should have received overtime for all hours worked over 40 in a workweek. In the other case, the same court held that a JP Morgan Chase underwriter, whose job was to evaluate whether to issue loans, was also a “nonexempt” employee, and should have received overtime.

Many employers mistakenly believe that if they pay an employee a salary (rather than on an hourly basis), they do not have to pay the employee overtime. Other employers are under the false notion that any employee who is paid on a commission basis is not entitled to overtime. However, the relevant inquiry is whether or not an employee falls into one of the narrow exceptions to the default rule that all employees are entitled to overtime. The determination is based in part on compensation, but is also based on the employee’s job duties.

If an employer misclassifies an employee as exempt (i.e. not entitled to overtime), the penalties can be severe. Employees can file a complaint with the Department of Labor or bring a private civil suit. The Department of Labor can also initiate an audit—either randomly or as the result of a tip. Employers may be liable for a combination of fines, penalties and unpaid wages, together with the legal fees incurred by an employee who brings suit. Willful misclassification can result in criminal prosecution.

Employers can take proactive steps to avoid wage and hour disputes by auditing their employment practices. If an employer is not clear on whether employees are properly classified, they should consult counsel.