The IRS isn't the only uninvited guest that could show up on your company's doorstep. The Department of Labor does investigations, too. Its Wage and Hour Division conducts some 60,000 investigations each year, looking for minimum wage, overtime, immigration, and child-labor violations.

One of the easiest places to err is in how you classify employees regarding their eligibility for overtime pay. "Many smaller employers have the misconception that if you pay employees a salary, you don't have to pay them overtime," says Janet E. Goldberg, a partner in the labor and employment law group at Sachnoff & Weaver, in Chicago.

The key is knowing which employees are exempt from overtime pay. The federal government and most state governments set a limit of 40 hours a week. Some states require overtime pay after 8 hours a day. While most of the exemption tests, or criteria, are clear enough, others are less so. Below are the three classifications of exempt employees that are fuzziest. In each case, employees in these categories must make more than $250 a week. Those making less -- but more than $155 a week -- must qualify for the more exacting "long form" exemption.

* Professionals. Their primary duty is the performance of work that requires advanced knowledge, including the consistent exercise of discretion. An accountant, for example, uses judgment in deciding whether to expense or capitalize a cost, whereas a bookkeeper may merely adhere to established practices.

* Administrative employees. Their primary duty is office or nonmanual work directly related to management policies or to general business operations, and it must include the regular exercise of judgment. Take the tricky case of executive secretaries. Some exercise discretion in ordering furniture, setting up conferences, choosing vendors, and other activities, and are thereby exempt. But other executive secretaries are trusted confidantes who type and are privy to highly confidential information. They would not be exempt because they do not use judgment in their jobs.

* Executives. Their primary duty is the management of the enterprise or a portion of the enterprise requiring the regular exercise of discretion and supervision of the work of two or more other employees.

If you have misclassified an employee, the penalties are not as severe as those levied by the IRS, but they can add up. The Department of Labor may ask you to start paying overtime to the employee and ante up with the back pay that you owe him or her. It pays to do as the department asks. Though less than 10% of violations go to litigation, the Department of Labor wins almost all that do. -- Ellyn E. Spragins

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