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Overtime Compensation Isn't as Simple as It Seems

December 1, 1995
Related Topics: Featured Article, Compensation
That employees are racking up major amounts of overtime will come as no surprise to most companies. What may come as a surprise, however, is that many human resources departments are shorting employees on their overtime pay.

How could this be? State laws and federal laws regarding overtime pay may conflict with each other. If you don't know or don't acknowledge the difference, or if you're incorrectly classifying employees, you may wind up in court paying substantial back wages—perhaps even penalties.

Mark Marshall, labor attorney and partner at Seattle-based Preston Gates & Ellis explains what you need to know about correctly reimbursing your employees.

What's the primary reason an employer can run aground in payment of overtime compensation?
Both federal and state laws require that virtually any employee paid on an hourly basis receives overtime compensation for working more than 40 hours a week. Exempt individuals are those in managerial, administrative or professional positions who are paid on a salary basis. That's the key word. So, even though engineers are considered professionals, if they're paid on an hourly basis, they're non-exempt. This means they must qualify for overtime compensation—regardless of their job description or how much they earn.

Many companies don't realize this. They think because they've classified an employee as a professional, they can continue hourly pay without having to pay overtime.

This is true even if the state law says otherwise?
Employees are entitled generally to take the better of the two laws in a particular matter—either the federal law or the state law. If there's a conflict between federal and state law in which the federal law is more favorable to employees—such as providing overtime pay—it will trump an exemption that the state law allows for overtime pay.

Are there any examples in which professionals paid hourly have kept their exempt status?
A few years ago, Congress passed a law establishing a special exemption from the overtime-compensation requirement for individuals employed in "computer-related occupations." The special statute excludes employees from overtime compensation if they're paid an hourly rate that is at least six and a half times greater than the applicable minimum wage. This exemption to the federal Fair Labor Standards Act (FLSA) recognized that the individuals were paid far in excess of the minimum wage and that the type of work they did was most realistically compensated on an hourly basis.

But if a state law demands that these employees be paid overtime, then it will overrule the federal law?
That's why it's so important to know both state and federal laws. For instance, the Washington State Department of Labor and Industries (DLI) very flatly said they don't recognize the federal exemption. Thus the federal law isn't in effect in Washington. The state law has trumped the federal law, saying that individuals who are paid hourly must be paid overtime, despite what they earn.

Are a lot of employers unaware of the difference between their state and federal laws?
There's a rise in lawsuits against employers for back payment of overtime. The employers we see, we make aware of the difference. They're often not too happy about it. Electronic sales companies have to pay their sales people overtime [because of the Washington law refusing exemption] even though the car dealer next door doesn't.

What happens to an employer that's been incorrectly administering overtime?
An overtime violation can be reported one of two ways. Either the employees find a lawyer and file a lawsuit, in which case the employer is liable for back pay and for attorneys' fees, and possibly for double the amount. That can become a jury question. In the other case, the employer is subject to an investigation by either the federal government or the state government.

Say, for instance, some computer employees in Washington aren't being paid overtime even though they'd be non-exempt under federal law. The state may get wind of a complaint and audit and determine that those individuals are entitled for back pay for all time over 40 hours. If it requires the employer to pay it and the employer doesn't pay it, then the state takes the employer to court.

What would be some other sources for complaints?
In my experience, administrative complaints have usually sprung from one of two sources. In one case, an employee has gone to the state or the federal agency and said, "Look, I don't think I'm being paid properly at work," and that triggers off the investigation.

In the other case—and I've seen this a lot in the construction industry—a competitor goes to the state or federal agency and complains about a particular company, trying to get that company in trouble to improve its own competitive position. I've seen situations in which the competitor that lodges the complaint is properly paying its employees, but that [firm] learns another company isn't paying its employees, so it triggers the investigation to make sure there's a level playing field competitively.

And in what case would an employer face a double penalty?
If it's a deliberate act by the employer. If the employer intentionally doesn't pay someone properly, under [many] state laws, the company can be liable for double damages, and under the Fair Labor Standards Act, they can be liable for double damages.

Besides being paid hourly, are there any other cases in which someone who's technically exempt should legally receive overtime?
With the professional exemption, you have to look at the individual and see if his or her duties meet the test for exemption as professional employees. Now there's at least two professions that are categorically exempt—lawyers and doctors—even if they're paid on an hourly basis.

What other occupations may be iffy?
You can get into some real questions of fact on other occupations. For instance, the recent graduate of an architectural school who goes to work for an architectural firm as a draftsman generally isn't exempt as a professional. Even if he or she has a license as an architect, the duties he or she is performing aren't considered of the type that would lead to the exemption.

In other words, the person isn't exercising independence in making decisions. [Exemption] is generally based on independence and discretion. At some point in the person's progress in the architectural firm, he or she will become exempt, because the person will start to use his or her creative talents independently.

What about a top officer whose pay just happens to be broken down into hourly units?
If a company pays its chief executive officer on an hourly basis, the Department of Labor would seemingly hold that the person is entitled to overtime, just because it says hourly pay is inconsistent with an exempt status. To be exempt, you should be getting a salary and not be paid on an hourly basis.

Any other tricky areas?
There are also problems with classifications. A classic example of that is the assistant store manager at a McDonald's or Burger King. I think Burger King generated most of the litigation.

The employers in those cases classified certain [employees] as assistant managers, and the employers lost a lot of those cases because an examination of an assistant manager's duties showed that he or she is still there flipping hamburgers. So the question is whether the person is exercising actual managerial duties, such as hiring and firing.

Is there a statute of limitations by which a claim must be filed?
Basically, under the FLSA, it's two years—unless it's an intentional violation, and then it's three years.

For employers who want to review their policies, where should they start?
Run an audit in the HR department and take a look at those job duties under the classifications the employer says are exempt. The federal government has short-form and long-form tests that are easily applied, and the HR office can use those tests and take a look at what the assistant store managers do to make sure they're exempt. And if they're not paid on a salary basis, they're probably not exempt. But remember, it's not enough to determine that the person is exempt under the federal law if they're not exempt under the state law and vice versa.

Anything else employers should do?
State audits. If I had clients operating in South Carolina, I'd want them to not only do the audit of employees under federal law, but to check to see if there were any nuances under South Carolina law that would cause the answer to be different. It's worth the small amount of money it will cost to get an answer from a lawyer in your state.

Personnel Journal, December 1995, Vol. 74, No. 12, pp. 104-109.

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