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| Getting and Staying in Compliance with the Fair Labor Standards Act's Overtime Pay Requirements It is critically important to ensure that every company is in compliance with the federal Fair Labor Standards Act (the "FLSA"), which mandates that non-exempt employees receive overtime pay for hours beyond forty (or thirty-five, at the employer's election) per week. In addition, most states have laws that parallel the FLSA, and sometimes impose stricter requirements than the federal law. For instance, in California, nonexempt employees are entitled to overtime for each hour that they work beyond eight on any workday, as opposed to the federal "workweek" standard. More and more, employees are feeling overworked and underpaid, and are questioning their exempt status under the law, a determination of which often involves close judgment calls. Indeed, as workforces shrink and the remaining employees take on new responsibilities, an employee's exemption status may change. Employers also need to be aware that some common workplace policies could inadvertently cause an employee, who might otherwise be exempt, to become eligible for overtime. For these reasons, now is an opportune time to review your workforce and your company's practices to ensure that employees who are entitled to overtime pay are getting it. This article outlines the basic criteria for determiningwhether or not an employee is exempt or not under the FLSA's three main exemption categories - professional, administrative, and executive employees - and will highlight some common practices that may violate the FLSA, and that risk turning an otherwise exempt employee into a non-exempt one. Salary Basis: One key criterion for most of the so-called "white collar" exemptions is that the employee be paid on a salary basis. Generally speaking, an employee is not salaried for FLSA purposes if his or her pay is "subject to reduction based on the quality or quantity of work." First, any employee who is paid on an hourly basis is entitled to overtime regardless of the level or kind of work he or she performs. This includes freelancers, temporary employees, day workers, etc. Second, many companies pay workers on a "daily rate" - a flat rate for each calendar day of work. But, unless this employee is eligible for overtime pay, the company has violated the FLSA, no matter what the employee's duties are. Because the "daily rate" employee is not paid for days that he or she does not work, his or her pay is "subject to reduction based on the quality or quantity of work." Even if the employee has agreed to forego overtime, the company risks significant liability, since the employee who agrees to the arrangement today may decide tomorrow that it is unsatisfactory. The "salary basis" requirement also means that employers cannot reduce an exempt employee's salary for disciplinary reasons, because of tardiness, etc., except where explicitly permitted by law. Thus, even when an employee is paid an annual salary and in all other respects meets the exemption criteria, the exemption will be lost if his or her salary is reduced due to the quality or quantity of his or her work. In fact, simply having a policy that provides for deductions may be sufficient to lose the exemption, even if the policy has not been invoked, if there is a "significant likelihood" that the employee's salary will be reduced. Permissible Reductions: Exempt employee salaries may be reduced without loss of exempt status only when (1) the employee is absent from work for a day or more for personal reasons, other than sickness or accident;Duties Test: Meeting the salary basis test does not necessarily mean that an employee is exempt from the FLSA's overtime provision. In addition, an employee's job duties must meet the criteria for a specific exemption. If they do not, the employee is not exempt, no matter how he or she is paid. The actual duties and responsibilities of each individual's employment are determinative, not merely his or her title or job description. A detailed analysis of the FLSA duties tests is beyond the scope of this article, but some general criteria are set out below. It is critical that you analyze your workforce to understand which employees are exempt and which are nonexempt, and periodically re-evaluate your classifications, particularly when positions are eliminated and the remaining employees' duties change. There are three "white collar" exemptions: (1) executive employees,The administrative tests require that an employee's primary duties are "non-manual or office work directly related to management policies or general business operations...." The employee must also regularly exercise "discretion and independent judgment." Professional employees are those whose duties require "advanced learning, or original or creative work depending primarily on invention, imagination or talent." We cannot emphasize enough how important it is to consider each individual's particular duties and responsibilities when examining your employees' exempt status. All too often, two employees with the same job title are in reality performing entirely or partly different duties, which might make one employee exempt but not the other. Titles and job descriptions simply cannot be relied upon. For further details concerning FLSA exemptions, the Department of Labor has a web site devoted to the "wage and hour" laws, which includes the FLSA, at http://www.dol.gov/dol/esa/ public/whd_org.htm. Nonexempt employees must generally be paid overtime at a rate of one and one half times the employee's regular rate of pay for all hours worked beyond thirty-five or forty in a single workweek, depending on which the company has set as its regular workweek. Currently, employers must pay overtime based on hours in a "workweek," and are not allowed to use a "payroll period" system, whereby an employee would not be entitled to overtime if she worked 50 hours one week but only 30 the next, or an average of 40 per week. However, Congress is considering bills that would amend the FLSA to permit such a scheme. Under some circumstances, salaried nonexempt employees who are paid a fixed salary for a fluctuating workweek need only be given an additional amount equivalent to 50% of their pay for overtime hours, since their salary covers the straight pay for their overtime hours. The actual "half time" amount will vary with the number of hours actually worked. Congress is also considering amendments regarding "compensatory time" arrangements under the FLSA. While many employers would prefer to give "comp time" instead of cash for overtime, and many employees would be happy with this arrangement, the current law sharply curtails the availability of comp time in lieu of cash wages for nonexempt employees. Currently, comp time can only be substituted for cash payment if the comp time is used in the payroll period in which it is earned. Thus, if your payroll period is biweekly, and a nonexempt employee works 50 hours (i.e. 10 hours of overtime) in the first week, the employer may require the employee to use 15 hours of comp time in the second week, in lieu of a cash payment. But, if the overtime is worked in the second week, the employee must be paid in cash, since it would be impossible for him or her to use the comp time in the samepayroll period. A bill before Congress would allow nonexempt employees to "bank" comp time for future use, but for now, use of comp time is limited. Of course, any comp time must be granted at a rate of one and one half for each overtime hour worked. Employers should be sure to check their state laws, several of which provide for greater overtime benefits than the FLSA. In addition, not all state laws provide for identical or similar exemptions. © 2001 Davis & Gilbert LLP |
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