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Overtime Abuse You Could Be Guilty

February 1, 1999
Related Topics: Wages and Hours, Telecommuting, Featured Article
We take it for granted-the eight-hour day. We clock in. We clock out. Seldom do we reflect upon labor's untold story. When you're racing against the competition, it's easy to forget the Haymarket Massacre of 1886. It was a bloody chapter in U.S. history. Hundreds of workers in Chicago were shot at while rallying for the eight-hour day.

Even then, years would pass before Congress established the Fair Labor Standards Act (FLSA) in 1938. Its intent was restrictive: to keep employers from abusing the American worker. Six decades later, however, employers increasingly are violating the FLSA-most times, unknowingly. In fact, Department of Labor investigations reveal that in 1998 alone, businesses paid $120 million in back wages and penalties for overtime violations involving more than 173,000 employees. Confusion over the FLSA is one factor. Pressure to control business costs is another.

There's nothing wrong in adopting new ways to save time and money. To find cheaper labor, today's employers increasingly are hiring subcontractors, such as janitorial services firms. To make workers more efficient, they're capitalizing on the wizardry of computers. And to make work styles more flexible, they're granting more employees the privilege of telecommuting.

All these options are positive innovations for employers-especially as we head into the 21st century. Indeed, HR's job is to constantly refine its workforce, work tools and work styles. The problem arises when the 'good things' are shoved to the extreme-at the expense of the worker.

Consider these scenarios: Are you monitoring subcontractors to ensure they're not violating wage and hour regulations? Have you classified your computer specialists correctly? Are you instituting ways to measure the productivity of your telecommuters?

According to the U.S. Department of Labor, two-thirds of the nation's workforce-70 million-are eligible for overtime pay. If firms incorrectly categorize employees as exempt, they're liable for back pay, overtime pay, and in some cases, punitive damages. For each one percent of the white-collar workforce found to be incorrectly classified as exempt, rather than nonexempt, the liability for back pay would be $1.9 billion, says Ken Deavers of the Washington, D.C.-based Economic Policy Foundation. The most egregious violations are in industries, such as mining, manufacturing and service, particularly among women.

With employee lawsuits on the rise, HR needs to make sure your company is in compliance with the FLSA. Although parts of it may read vague, its original message still applies: Time worked must be time paid.

Why is the FLSA still confusing HR?
Max Wagoner, HR director at Perinatal Practice Management in Pasadena, California belongs to an online HR discussion group. "Monitor the HRNET [newsgroup] for a month. You'll find experienced HR professionals confusing the terminology [exempt and nonexempt]. They ask questions regarding overtime, which should be a 'no brainer.' But that just isn't the case."

So why the confusion? Overtime issues require an understanding of the definitions of workweek, time worked, compensatory time, and covered and noncovered employees under the provisions of the FLSA. FLSA establishes minimum wage, overtime pay, record-keeping and child-labor standards that affect more than 80 million full- and part-time workers in the private sector and in federal, state and local governments.

The law says the employer "shall not permit" employees to work overtime (more than 40 hours per workweek) without the payment of an overtime premium. The intent in 1938 was to discourage overtime and promote full employment as a Depression era recovery mechanism. "It was designed to cure abuse," says Michael M. Herrick, a labor attorney in San Francisco.

Much of the confusion, he says, is due to the changing workplace-and the wording of the FLSA. There are thousands of different jobs that change every day. Workers often are asked to complete different duties, day in and day out. "Because exemptions benefit employers, they've tried to get certain exemptions for various positions. But these exemptions aren't always clear," he says.

Under the FLSA, there are three types of positions that are eligible for exempt treatment-that is, exempt from overtime pay. They're known as "white-collar exemptions." Under these classifications, employers are allowed to exempt executives, professionals and administrative employees. Executives are those who manage the work of two or more employees, and whose primary duty involves management functions. The professional exemption includes anyone whose position requires the possession of an advanced educational degree in a field of specialized study, such as a CPA, physician or engineer.

The broadest exemption-and the hardest to define and quantify-is the administrative exemption, according to Patrick J. McHale, a partner in the labor and employment law department of Shipman & Goodwin's Hartford, Connecticut, office. "This applies to individuals who perform functions that are internal to the organization, as opposed to customer-based or production-based functions." These employees exercise significant discretion and independent judgment. Examples of administrative employees are internal auditors, a controller or an executive secretary.

One of the most common HR misconceptions, however, is that 'salaried' employees are exempt. "This isn't so," says Wagoner. Exemptions aren't based on salary alone. There are two FLSA requirements to be considered exempt. Salary is just one test. In this case, the employee must receive each week the same pre-determined amount, regardless of hours worked. The second test is job duties. "The job description means absolutely nothing. It's the actual job tasks that determine whether someone is exempt or nonexempt," says Herrick.

The problem, he says, is that HR often has no idea of what's going on in the field. They create the job descriptions, hand them to an outside lawyer and proceed to assign all kinds of duties that bear no relationship to the job title.

Adding to the confusion is that state laws can be much more restrictive than federal laws. Employers are required to be in compliance with the more restrictive of the state or federal laws, says Mae Lon Ding, president of Anaheim Hills, California-based Personnel Systems Associates. "For example, California doesn't have a specific exemption for computer professionals, which is available under the federal law. [So] California employers should treat any programmers who spend more than 50 percent of their time writing code as nonexempt."

With so many regulations to keep in mind, it's no wonder violations abound. At the very least, HR needs to become aware of the most common mistakes to avoid future liability. "The law says that a job is nonexempt unless [employers] can prove it's exempt. The burden of proof is on the employer," says Ding.

There are three common violations.
Driven by competition and impacted by downsizings, companies have virtually buried the legacy of the eight-hour day. "Employers today regularly require working more than 40 hours a week," says Herrick. "It's a disgrace. Employees have not caught on yet what their rights are, and employers haven't caught on to the extent of their liability."

Robert A. Dye, a partner with Epstein Becker & Green in Los Angeles, says most violations occur in three areas:

  • Failure to pay overtime due to misclassification of employees as exempt
  • Failure to properly calculate the overtime premium payments due to not understanding or improperly deriving the regular rate of pay
  • Failure to pay for "unauthorized" overtime or allowing time worked "off the clock."

In the misclassification situation, HR may not understand what "exercising discretion and independent judgment" means for the administrative category. "It's a great phrase, but what does it mean?" Dye asks. If an employer promotes an employee to "manager" or "supervisor," HR often assumes he or she is exempt. But while the duties typically associated with the title are exempt, the question isn't what the title or job description says, but what the employee is actually doing on a daily basis. If a manager of a hotel is spending a regular portion of his or her job bellhopping, that's grounds for losing one's exempt status.

Failure to pay for "unauthorized" overtime or allowing time worked "off the clock" is less common, Dye says. These violations result from the mistaken belief that a policy against unauthorized overtime allows an employer to not pay for that time worked. Wrong again. Not paying is seen as the corrective disciplinary action, but if the employer knew and allowed the work to proceed, the employer is obligated to pay for the time worked. The same rule applies if the employer learns of work that's done overtime, after the fact. "Of course, the employer can then take the other disciplinary action, such as suspension without pay or termination," says Dye.

One reason for no payment or underpayment of overtime is simply poor record keeping, says Amy Reiss, a human resources analyst at Pittsburgh-based Reed, Smith, Shaw & McClay LLP. Her law firm has 1,000 employees, two-thirds of whom are nonexempt. Most of her employees, she believes, don't understand the FLSA. In their haste, employees can miscalculate timecards. Payroll staff compounds such errors by also miscalculating the records. These violations can occur when employees work in more than one department-doing nonexempt and exempt tasks-and are still being paid straight time for all hours, she says.

Employers must also remember to pay nonexempt employees for the following periods: training, travel during normal workdays, meetings, uniform changing, cleanup and some types of on-call situations. And specific instructions to employees not to incur overtime won't protect the employer from liability for overtime pay. If you know it's going on, you're obligated to pay.

And don't even think about swapping overtime pay with comp time. Under the FLSA, only public nonexempt employees are entitled to such arrangements. Although there have been several legislative attempts to amend the FLSA in favor of offering compensation time instead of overtime pay (http://www.thomas., the old rules still apply: There's no comp time for private, nonexempt employees-nor pizzas, for that matter. Indeed, employers search for all kinds of ways to cut corners, but that's no excuse for violating human rights.

In fact, one of the most egregious areas in which violations are occurring is right under HR's nose. Think about it. Nearly every employer-whether you occupy an office building or own one-relies on nightly janitorial services. Just because you seldom see these evening workers doesn't mean you should ignore their wage and hour entitlements.

Who's minding your subcontractors?
Within the last 20 years, the building-services industry has turned entirely toward subcontracted services. Typically, an employer relies on a building management firm to subcontract janitorial services. Most of these workers-more than 1 million of them-toil between 6 p.m. and 2 a.m., often in isolation.

According to the U.S. Bureau of Labor Statistics, the building-services industry is the fastest growing industry in the United States. And the competition between subcontractors is fierce. Building-management firms (the usual contractors), have thus responded by subcontracting firms that hire a predominantly immigrant and non-English speaking workforce. "That's driving wages down and benefits off the map," says Andrew Gross-Gaitan, senior organizer for Justice for Janitors, a national campaign of the Service Employees International Union (SEIU). (He works for SEIU Local 1877 in Sacramento, California.) "Many contractors count on the fact that workers don't know the law. And immigrants are often too afraid to get the law enforced."

Non-union janitors usually receive minimum wage with no benefits. It's an industry designed for abuse, he explains. Wage and hour, health and safety, and child labor laws are frequently ignored, and sexual harassment is not uncommon, according to the SEIU, the fourth largest and fastest growing union in the United States. SEIU was founded in 1921 by immigrant janitors. Today, it represents more than 1 million members working in health care, government and private industry.

What employers and HR need to ask themselves is: If the building-management company hires the subcontractor, then how would tenant employers become jointly liable?

In an employee lawsuit, the plaintiff would have to prove the joint employment of the building-management firm and the tenant employer, according to a former DOL investigator with the Wage and Hour Division. If the employer/tenant exercised some control over the janitors-made them sign in and sign out or told them when and how to clean-they've exercised joint control. "Companies should be more concerned because these people are on their premises," he says, speaking on anonymity.

Therefore, HR should double-check that subcontractors have been asked to sign an agreement stating their compliance with FLSA labor laws. Periodically, subcontractors also should be requested to share their payroll records with the building management company-and the employer/tenant.

Because janitorial services have developed an underground economy, unscrupulous practices have increased. Hence, SEIU organized building services, city by city. The Justice for Janitors campaign, explains Gross-Gaitan, combines community alliances and worker advocacy to break the cycle of low-wage, exploitative jobs. To date, SEIU represents more than 250,000 building service workers across the nation.

Employers, he advises, can best avoid liability by working with unionized firms. Many are regional-based. The two largest firms are Washington, D.C.-based American Building Maintenance (ABM) and International Service Systems (ISS), headquartered in Denmark, both union firms. Hiring firms that honor union contracts, he says, is the best defense against liability for the building management firm and the tenant employer.

Violations against janitors are particularly rampant in the computer industry, says Gross-Gaitan. The DOL has cited several cases in the Silicon Valley, in Northern California, for wage and hour violations. The citings were based on a "hot goods" provision of the FLSA, established in the early 1990s. The provision generally makes it illegal to ship goods in interstate commerce which have been made in violation of the wage and hour requirements of the FLSA. It would apply to janitors in Silicon Valley-and elsewhere-because their labor is considered integral to the production being done. "If there's dust in the silicon production room, the product can't be produced," says Gross-Gaitan. So janitors' work is directly tied to production in this industry. If a janitor isn't being paid in compliance with the FLSA, the produced goods (any type of silicon-manufactured product) can be seized by the DOL. Gross-Gaitan is unaware of any major seizures, but the DOL has issued a number of public warnings to the industry. "On a case-by-case basis, it's been effective in getting building managers (including single-tenant employers) to take responsibility for janitors' working conditions.

That's not all. In the computer industry, janitors are cleaning companies that often conduct interstate commerce. If janitors aren't being paid in compliance, the DOL will hold the building management firm or the single tenant occupant/owner liable. Anything crossing state lines, Gross-Gaitan explains, comes under the jurisdiction of the DOL, which has closely monitored the computer industry in recent years.

Misclassification of computer specialists is another area of DOL concern. Racing toward Year 2000 compliance is no excuse for employers to exempt unqualified employees.

Watch your classifications of computer specialists.
In one lawsuit, computer specialists were working 48-hour weeks, including five weekends in a row. None of them were paid overtime. They were paid a straight salary as exempt employees, says Steve Lebau, an attorney with Baltimore-based Lebau & Neuworth LLC.

Two questions arose: Were these computer specialists classified correctly? If not, how much overtime were they due?

Such gray areas are clarified in an amendment to the FLSA, established in November 1990. It required the DOL to issue regulations to permit individuals in certain computer-related occupations to qualify for the professional exemption, even though they aren't paid on a salary basis. The DOL's Wage and Hour Division issued rules to allow computer systems analysts, computer programmers, software engineers and other similarly skilled employees to qualify for the professional exemption, even if paid on an hourly basis, provided certain conditions are met.

Under the new rules, such employees must meet two requirements, according to Richard Simmons, an attorney and author of Wage and Hour Manual for California Employers (Castle Publications, 1998) and Wrongful Discharge & Employer Practice Manual (Castle Publications, 1994).

The first condition requires that an employee who is paid on an hourly basis must receive an hourly rate of pay that's not less than $27.63 an hour. Prior to September 1, 1996, the rate had to exceed six and one-half times the federal minimum wage.

The second condition involves a duty test. The test requires that an employee's primary duty consist of one or more of several specific duties such as the "design, documentation, testing, creation or modification of computer programs related to machine operating systems."

Even with the amendment, some attorneys still believe the provision is inadequate. "The political language is very broad," says Lebau. The computer professionals' exemption suffers from the uncertainty of determining how much discretion and creativity is enough to move into the realm of learned professionals. The exemption is made worse, he adds, because of the nature of creative thinkers in this industry. "Many are self-taught," he says.

Certain computer employees also can be eligible for exemption under the administrative exemption. According to the DOL, the employee would have to exercise discretion and independent judgment and perform work directly related to the management policies or general business operations of the employer. That means HR should verify "planning, scheduling or coordinating activities that are required to develop systems for processing data to obtain solutions to complex business problems."

Remember, each exempt or nonexempt position must be judged on job duties before a decision can be made on an employee's status. This applies not only to those who operate the latest tools, such as computer specialists, but those who conduct their work in new ways. Telecommuters are the best example.

Telecommuters require trust-and rules.
Not only has the nature of work changed, but where our work is conducted has changed as well. The number of telecommuters in the United States has more than tripled from 3.6 million in 1990 to 11.1 million in 1997, according to New York City-based market research firm Cyber Dialogue.

As the number increases, so do the number of managers who are trying to supervise employees who work remotely. Although telecommuting is gaining acceptance as a practical option, HR managers still confront these questions: How should HR measure a telecommuter's time? And how should HR determine overtime for nonexempt telecommuters?

"Under the FLSA, there's no current definition or guidance about who is a telecommuter," says Lebau. What the law does provide is that if an individual is going to work, he or she is supposed to be paid-regardless of where the work is conducted.

Given the FLSA's established framework, telecommuters should be treated no differently than in-office workers, says Gil Gordon, a Monmouth Junction, New Jersey-based telecommuting consultant ( Managers, he says, can avoid misunderstandings about a telecommuter's responsibilities by drafting a generic agreement for those working outside the office. The agreement can elaborate job responsibilities, expected work habits, communication standards, goals and overtime policies. The employee and manager should sign the agreement before the employee starts to telecommute. IBM, for example, requires its telecommuters to draft a goal statement, which is revisited with the manager several times a year. Such mechanisms are important so HR can pin down if they're doing what they're supposed to be doing since they aren't in the office.

Depending on the level and type of job, managers may or may not track time by project, task or other factors. For exempt employees, the key to managing at a distance is to focus on results and deliverables-much less on hours worked and activity levels. "It's the results that count, not the activity," Gordon says.

Most importantly, telecommuters must understand that overtime must be approved in advance-just as in the office.

Lebau says employers can minimize liability by requiring HR and two immediate supervisors to approve overtime. In the event an employee 'forgets' to seek permission and claims overtime, employers should pay the first time because it's required under the law. After that, tighten up your approval mechanisms to avoid repeated employee claims.

While you're at it, review your FLSA compliance practices. Better to self-correct your violations than wait for a lawsuit or federal investigation. The process may save you millions of dollars.

Review your compliance. Avoid DOL investigation.
Shortchanged employees increasingly are filing lawsuits. But that's not the only way employers are being held accountable. The U.S. Department of Labor, regularly conducts major investigations in vulnerable industries such as garment, building-services, constructions, manufacturing and computer.

Although DOL investigations found 173,000 employees were owed $120 million in overtime pay, the penalties barely scratch the surface. The amount would be much more if the DOL hadn't been downsized in recent years. "There isn't sufficient staff for federal and state agencies to monitor overtime," says Kent Wong, director of Los Angeles-based University of California at Los Angeles (UCLA) Center for Labor Research and Education. According to a DOL spokesman, the agency has 950 investigators; a decade ago, there were approximately 1,600.

Nevertheless, don't assume you'll duck the Feds. The results could be costly. Successful FLSA plaintiffs are usually entitled to recover double the amount of improperly unpaid back wages. This is called "liquidated damages" and is essentially in lieu of interest. Liquidated damages are mandatory unless the employer proves that it made reasonable efforts to find out how the FLSA governed its employees, and also had an objectively reasonable basis to believe its wage practices were legal under the FLSA. To avoid such penalties, HR can implement the following steps:

  • Conduct an audit on all job duties, especially after reorganization and downsizing.
  • Review the FLSA regulations with your HR department and line managers.
  • Refine your timekeeping procedures.
  • Know your state laws and determine if they're stricter than federal laws.
  • Talk to attorneys who represent employers and employees to see how court cases are lining up.
  • Re-read your company's core values. If they don't say something about profit-and people-you may be tempting fate.

Says labor attorney Lebau: "As the employers' enemy, I tell companies that we're not claiming discrimination, nor claiming my clients are victims. They're just entitled to what they work for. Even to the most conservative judges and juries, people want people to be paid overtime."

Or better yet, honor the eight-hour day.

Workforce, February 1999, Vol. 78, No. 2, pp. 40-51.

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