Bar News - April 13, 2012
Labor & Employment Law: Do You Owe Your Exempt Employees Overtime?
By: Beth A. Deragon
Jobs are classified in one of two ways – exempt or non-exempt – pursuant to the Fair Labor Standards Act which applies to most employers via the $500,000 enterprise coverage and/or individual coverage. 29 USC. § 203. NH law integrates the FLSA into its overtime provisions and adds an exception for employees employed by an amusement, seasonal, or recreational establishment if the business: (1) does not operate for more than seven months in any calendar year; or (2) during the preceding calendar year, the business’s average receipts for any six months of such year were not more than 33 1/3 percent of its average receipts for the other six months of such year. RSA 279:21, VIII. Exempt employees are paid on a salary basis and ineligible for overtime pay and non-exempt employees are paid on an hourly basis and eligible for overtime pay for time worked over 40 hours in a week. If it is straightforward, then why are companies fined millions of dollars for unpaid overtime? The simple answer is that companies often classify employees as "salaried" without reviewing actual job duties and without consulting the FLSA.
The repercussions of misclassification can be costly: the aggrieved employee can look back two years for unpaid overtime and three years if the violation was willful (liquidated damages and criminal penalties are also possible remedies for willful violations); it could involve a class of employees who would each have damages; and attorneys fees and costs are awardable. The FLSA has a retaliation provision that protects employees who complain about FLSA-related issues and suffer an adverse job action. The NH Department of Labor can assess fines if the company has not accurately recorded an employee’s actual time worked. RSA 279:27. This is likely to happen when an employee has been misclassified as exempt, worked over 40 hours some weeks, but the company did not track the "salaried" employee’s time. It is very difficult to mitigate overtime damages when there are no time cards to show the employee’s actual time worked.
There six main FLSA exemptions. In order to correctly apply the test for the exemption, the first step is to understand the employee’s actual job duties (which may differ from the job description). For some exemptions, the employee must earn at least $455 per week (the salary basis test) in order to qualify. Like "salary basis test," there are many other terms of art embedded in the FLSA exemption language – "perform customarily," "primary duty," "selling," and "management related" are just a few which require careful analysis by an employment lawyer since the US DOL and courts interpret these terms regularly. Read on for an overview of the exemptions and their criteria!
Computer Employee Exemption
The employee must meet the salary basis test or fee basis or, if paid hourly, at a rate of not less than $27.63 per hour. The employee’s primary duty must include one of the following or a combination:
- Application of system analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- Design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
- Design, testing, documentation, creation or modification of computer programs related to machine operating systems.
Note: Typically, IT employees are not exempt from the FLSA because they do not have the required degree or experience or the required exercise of discretion or judgment to qualify them as exempt. Systems analysts, programmers, and software engineers are exempt, generally.
Learned Professional Exemption
The employee’s primary duty must be to perform work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. The advanced knowledge must be obtained by completing an academic course of study resulting in a four-year college degree or leading to certification. The salary basis test applies.
Note: US DOL regulation gives examples of professions that "generally meet" the exemption: registered or certified medical technologist; registered nurses (but not licensed practical nurses); dental hygienists; physician assistants; accountants (but not accounting clerks or bookkeepers); chefs (including sous chefs) with four-year culinary arts degrees; certified athletic trainers; and licensed funeral directors and embalmers with specialized college degrees. WH Admin. Op. FLSA2005-54 (Dec. 16, 2005). Paralegals generally do not qualify for this exemption unless they have an advanced degree; therefore they must be paid on an hourly basis or pursuant to the fluctuating work week method, consult infra. Id.
The employee must supervise two or more employees and have as a primary duty management-related functions, including input into hiring or firing decisions or reliance upon his or her suggestions or recommendations in that regard. The salary basis test applies.
Note: If the employee has at least a 20 percent equity interest in the business and is actively engaged in its management, then he or she does not have to meet the salary basis test.
The employee’s primary duty must be performing office or non-manual work directly related to the company’s management or general business operations and must be exercising discretion and independent judgment to matters of significance. The salary basis test applies.
Note: The following job categories have been found to meet this exemption, generally. Even if an employee’s position falls within one of the following job categories, he or she still may not be exempt because the analysis depends on the employee’s specific job duties: insurance claims adjusters, team leaders, executive assistants, human resources personnel, purchasing agents, buyers and financial services industry employees (mortgage loan officers no longer qualify. For detailed analysis read, FLSA Interpretation Requires Banks to Take Action Regarding Loan Officer Overtime Pay (June 2010).
Highly Compensated Employee Exemption
This exemption is only available to employees who customarily perform one or more of the exempt functions of an executive, administrative, or professional employee and earn at least $100,000 per year (can include commissions, nondiscretionary bonuses, and other nondiscretionary payments).
Outside Sales Exemption
The employee’s primary duty must be selling intangible or tangible items or obtaining orders for contracts for services and the employee must be regularly engaged away from the company’s place of business. The salary basis test does not apply.
Note: The US Supreme Court granted certiorari in Christopher v. Smithkline Beecham, Corp., 635 F.3d 383 (9th Cir. 2011), cert. granted (Nov. 28, 2011) to determine whether the outside-sales exemption applies to pharmaceutical sales representatives and whether deference must be given to the Secretary of Labor’s interpretation of the exemption. Oral argument is scheduled for April 16, 2012.
Misclassification – Now What Do You Do?
Hopefully you have discovered the error in a non-litigious setting and can make corrections to the misclassification after consulting employment counsel about how best to execute the change. Prompt reclassification might help to limit potential damages. You might have discovered the misclassification when you or your client is terminating an employee and realize that the terminating employee could be entitled to unpaid overtime. This is another appropriate juncture to consult with employment counsel who is likely to ask the company whether the employee ever complained to any supervisory personnel about his or her belief that he or she was misclassified and/or entitled to overtime. If you miss this issue, the employee may file an FLSA claim for unpaid overtime and retaliation, along with others.
If the company is now concerned about managing overtime costs, it could implement a written over time authorization policy, but must pay any overtime worked, even if unauthorized, or might consider paying certain personnel according to the fluctuating workweek method. The fluctuating workweek method requirements are: (1) the employee has to be paid a fixed salary; (2) the salary is large enough so that the employee’s wages during any week do not fall below minimum wage ($7.25); (3) the employer and employer have a "clear mutual understanding" that the salary covers all hours worked; and (4) the employee’s hours fluctuate from week to week – fixed base hours are coupled with fluctuating overtime. Overtime is still paid, but based on 50 percent of employee’s regular rate. Example: employee is paid a salary of $1,000 per week and works 50 hours one week. To calculate overtime owed find the regular hourly rate that week ($1,000 ÷ 50) or $20 per hour. Overtime for that week would be $200 and total compensation that week: $1,200. Compare that to the standard time and a half calculation: $1,375.
Resist any temptation to classify workers as independent contractors. This is a complex area due to the myriad of independent contract tests and is discussed more fully in: Determining Independent Contractor Status in NH (June 2012). If that is not disincentive enough, consider this: the FY 2012 US DOL budget includes a new multi-agency "Misclassification Initiative" to enforce labor violations that result from the misclassification of employees as independent contractors. USDOL Fiscal Year 2012 Budget in Brief. The number of US DOL Investigators will increase targeting industries that have higher rates of violations, such as construction, child care, home health care, grocery store, janitorial, business services, poultry and meat processing and landscaping. Id.
Do Not Assume "Salaried" Employees are Exempt Employees - Confirm
Each FLSA misclassification situation needs to be evaluated individually. While there are certainly guidelines and case law that provide information as to the merits of a particular classification, it is far from science. That is why it is important to seek the counsel of an experience wage and hour attorney who not only understands the FLSA, but also NH law.
|Beth A. Deragon
Beth A. Deragon is a Shareholder-Director at Gallagher, Callahan, & Gartrell, where she leads the Employment Law Group. Beth counsels NH businesses in employment practices and defends businesses in state and federal courts and administrative agencies. Beth authors NH Employment Law Blog for Business: www.nhemploymentlawblog.com.