Do I have to pay overtime?

Many employers believe that simply by paying their employees a salary they are relieved from overtime obligations. To the contrary, there are several factors that determine whether an employee is exempt from overtime pay.

Under the Fair Labor Standards Act, an exempt employee must meet the salary basis test and the primary job duties test.

Salary basis requirement

To qualify as an exempt employee, that employee must be paid at least $455 per week ($23,600 yearly). An employee is paid on a salary basis if the employee regularly receives a pre-determined amount constituting all or part of the employee’s compensation each pay period on a weekly, or less frequent basis and that amount is not subject to reduction because of variations in the quality or quantity of the work performed.

An exempt employee should receive the full salary for any week in which the employee performs any work, without regard to the number of hours worked. Similarly, an exempt employee need not be paid for any week in which they perform no work.

 Sick time and paid time off

The salary test focuses on the form of an employee’s compensation as well as the amount. The technicalities of the salary basis rules under federal law are complicated. Many employers make the mistake of docking an employee’s salary for time missed from work. The salary basis test reflects the concept that salaried employees are paid for the general value of their services rather than the precise amount of time spent on the job. Thus, employers may not dock a salaried employee’s pay for partial days missed. However, if that employee has accrued vacation or sick days, the employee may be docked from the banked time. For example, if the employee has 12 sick hours and misses two days of work, the employer can deduct the full 12 hours from the employee’s sick bank but must not deduct the remaining 4 hours of pay from the employee’s salary. If an exempt employee misses an entire day of work for personal reasons, the employer may dock that day’s pay regardless of any banked time.

Primary job duties

Under the duties test, an employee will not be considered exempt unless his or her duties are primarily “administrative,” “professional” or “executive” in nature.

Factors to consider when determining the primary duty of an employee include the relative importance of the exempt duties as compared with other types of duties, the amount of time spent performing exempt work, the employee’s relative freedom from direct supervision and the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.

The regulations specifically address amount of time spent performing exempt work as a factor used to determine if an employee is exempt. If an employee spends more than 50% of his time doing exempt work, that employee “will generally satisfy the primary duty requirement.” Time is not the only test, and someone who spends less than 50% of his time performing exempt work may still be an exempt employee.

As a general rule, an exempt employee should have a fair amount of freedom to exercise independent judgment and discretion regarding matters of significance and for the manner in which they perform their duties. The exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.

Overtime pay

If an employee does not meet the salary and job duties criteria, they are deemed to be non-exempt and the employer will be required to pay overtime according to Federal Law, at a minimum. Under Federal Law, an employee is eligible for 1.5 times his or her hourly wage for any time worked in excess of 40 hours in one week. That overtime liability, however, will be higher according to each individual state’s laws. California, for example, provides that overtime is to be paid at 1.5 times hourly rate for any time in excess of 40 hours per week, or in excess of 8 hours per day, and at 2 times the hourly rate for any time in excess of 12 hours daily.

Meal and rest periods

In addition, some states—like California—mandate an unpaid 30-minute meal period and two paid 10-minute rest periods for all non-exempt employees. Employees working more than 10 hours in one day are eligible for a second unpaid 30-minute meal period and a third paid 10-minute rest period. Employees are entitled to one additional hour of pay for each work day that a meal or rest period is not permitted. Employees working beyond ten hours and not permitted a second meal break and third rest period would be eligible for two additional hours of pay and overtime pay.

Thus, if an employer has misclassified an employee, the employer will be liable for overtime pay as well as pay for any meal or rest period violations that may have occurred. Furthermore, the employer faces an uphill battle in court since they are unlikely to have time records for the misclassified employees.

Classification of employees is just one area of law where misinformation, or lack of knowledge, can harm a remodeler’s bottom line or even put a small to medium-sized operation out of business. Employment laws are complex and constantly changing. A legal professional can help you stay compliant, and stay in business.—Roger Mason

Resources

Department of Labor Home

Overtime pay – general information

Exemption regulations

 

Roger M. Mason is a shareholder with Sweeney, Mason, Wilson & Bosomworth, A Professional Law Corporation in Los Gatos, Calif. He has published numerous articles and has reported cases on various labor matters. For more information, visit www.smwb.com or call (408) 356-3000.