As a Dunkin’ Donuts franchisee, you and your labor lawyer should immediately audit your franchise’s compensation practices. Lawsuits for unpaid minimum and overtime wages are on the rise, and several Dunkin’ Donuts franchisees in the northeast have been the targets of lawsuits and Department of Labor investigations.

In September 2014, a Dunkin’ Donuts franchisee near Pittsburgh was sued by his assistant managers, who alleged that the franchisee misclassified them as exempt from overtime pay, and violated the Fair Labor Standards Act (FLSA) and Pennsylvania’s Minimum Wage Act (PMWA). In that case, the assistant managers alleged that they performed the same duties as hourly paid employees and did not otherwise meet the FLSA’s or PWMA’s overtime exemption for executive or administrative employees. The assistant managers claimed that they were required to work 50 or more hours per week without overtime pay. The assistant managers also accused the franchisee of inaccurately recording the number of overtime hours each assistant manager worked, by recording each assistant manager’s hours worked as 50 per week, regardless of the actual number of hours worked.

Another case involving a Dunkin’ Donuts franchisee demonstrates the impact that minimum wage and overtime violations can have on your franchise. In 2013, a two year investigation conducted by the U.S. Department of Labor resulted in a Dunkin’ Donuts franchisee, who operated 55 stores in New Jersey and New York, paying nearly $200,000 in overtime violations. The Department of Labor found that the franchisee incorrectly classified its store managers as exempt employees. Although the store managers did perform management duties that satisfied the FLSA’s duties test, the managers did not meet the salary basis test for exempt status. Specifically, the franchisee docked its store managers’ weekly salaries whenever they worked fewer than 60 hours per week. This violated the FLSA’s salary basis requirement and converted the store managers into non-exempt employees. The Department of Labor also determined that management at two of the franchisee’s locations violated the FLSA’s minimum wage requirements by taking employees’ tips to make up for register shortages.

These cases highlight just some of the common compensation and payroll mistakes that plaintiff’s attorneys can use to initiate a court action. In some cases, employers have been held liable for millions of dollars in unpaid minimum and overtime wages. These common mistakes can be particularly problematic for franchisees who own multiple locations. If the Department of Labor determines a franchisee has committed a violation at one location, it will naturally assume that the same franchisee is committing the same violations at his other locations and launch investigations of those stores.

Both of the cases mentioned above highlight a common overtime exemption mistake. Many employers believe that managers and assistant managers are not entitled to overtime pay simply because they have “manager” in their title. However, under the FLSA and similar state wage and hour laws, an employee’s actual job duties – and the manner in which they are compensated – determine whether the employee is exempt from overtime pay. Accordingly, you should evaluate whether your employees are entitled to overtime pay on an employee-by-employee basis. An employer that determines that an employee is exempt from overtime pay simply because the employee shares the same job title as other exempt employees runs a serious risk of litigation or a state or federal department of labor investigation.

In order for an employer to claim that an employee qualifies for one or more of the FLSA’s “white collar” overtime exemptions, the employer must be able to demonstrate that the employee satisfies both the “duties test” and the “salary basis test.”

The FLSA’s duties test varies among the various overtime exemptions, but each duties test is defined in detail by federal regulations. The FLSA’s salary basis test is also controlled extensively by federal regulations. These regulations provide in part that, in order to meet the salary basis test, an employee must receive a guaranteed salary of at least $455 per week which cannot be reduced because of variations in the quantity or quality of the employee’s work.

In fact, federal and state regulations have effectively eliminated an employer’s ability to take what some might consider a common sense approach to classifying employees as exempt and non-exempt from overtime pay. Employers that incorrectly classify their employees as exempt can be liable for unpaid minimum and overtime wages going back three years under the FLSA–six years under certain state laws, liquidated damages equal to the amount of unpaid wages, and their employees’ attorney’s fees.

These examples underscore the importance of periodic self-audits to ensure compliance with the FLSA and state wage and hour laws. Every Dunkin’ Donuts franchisee should consult with his or her labor law attorney to evaluate whether you are compensating your store managers, assistant managers, and other employees as required by the FLSA and applicable state wage and hour laws—before a government audit starts or notice of a lawsuit arrives.

John R. Vreeland is a partner in the Newark, New Jersey office of Genova Burns Giantomasi Webster LLC. John directs the Wage and Hour Compliance Practice Group and is a member of the Labor Law Practice Group.