Wage and hour dilemmas: how nice guys finish last

In my employment practice, it is not usual to hear employers say, in good faith and with great (and understandable) emotion: “But I treated them like family!” Yes, and you know, some parts of your family you would sooner do without. This “family” is now suing you. And they have the Department of Labor (DOL) knocking on your door.

Your grievous act? Not paying overtime because you believed the employee was “exempt.”

“I paid them a salary,” you explain. Unfortunately, the misconception is that putting an employee “on salary” defeats the overtime claim. It does not. Or you may argue that you offered employees lots of leeway on hours and personal time, and essentially gave them paid hours off whenever they needed it. Doesn’t that personal “comp” time count? In some respects, it is sad that while you have tried to be nice, work with people, and treat them “like family,” you still have not complied with the Fair Labor Standards Act (FLSA) and could be subject to litigation. Or you may say you paid “straight time” for hours in excess of 40 in a week. Doesn’t that eliminate the overtime issue? Though it would reduce the amount of ultimate recovery, it does not end the overtime investigation, as time—and—a—half is always the rule.

Bottom line, all those good deeds will not count toward assessing if your company is in FLSA compliance. And when that litigation comes, you may cynically recall that somewhat humorous adage: No good deed goes unpunished. Being a “nice” employer may not stop a disgruntled employee bent on finding a way to retaliate.

It is important to keep in mind that salary compensation is only one—half of the equation; correctly classifying the employee in a recognized “exempt” category is the critical second half. This article explores the important issue of employee classification, offering some practice pointers to prevent these overtime issues from occurring.

It’s not really a big deal, is it? Consider that not only is the employee entitled to recover the back wages for at least two years or possibly three, but in “willful” situations (jury determined), the recovery can also be doubled — automatically — and attorneys’ fees are recoverable.

Still manageable, you say? Consider further that this unhappy employee may be only the tip of the iceberg. There could be 5, 10, 30, or many more in the same category, as well as others that might be related — each with potential claims, each with the possible ability to recover two to three years of overtime, with liquidated damages and attorneys’ fees. That spells class—action trouble or the government mucking around in your books through a DOL audit.

Obviously, the expense and risk involved in potential wage and hour disputes is enormous and can affect companies both large and small. The FLSA applies across the board, as long as “interstate commerce” — a low standard — is involved. Since the DOL revamped its regulations in August 2004, there has been renewed enthusiasm among plaintiffs’ counsel for litigation under this act. That has resulted in, for example, an $11 million settlement in a Longs Drugs case and settlements involving Radio Shack ($30 million), Bank of America ($22 million), UBS AG ($89 million), and Allstate ($120 million) — and they are just part of a longer list. These are big national companies, but the overtime litigation amounts, though smaller, can be equally devastating for smaller businesses. Only the scale is different. To illustrate the overall impact, in 2005 the DOL won more than $119 million for 189,000 employees. In short, it is a huge issue.

Avoiding overtime nightmares begins with the concept of a salary paid weekly. Generally speaking, for most exemptions a person must be paid at least $455 a week in salary (that amount used to be $155 a week, so now more people qualify for overtime pay just by the change in the salary qualification). There are limited instances of exempt employees who are paid hourly, but the hourly rate must be guaranteed and must be based on an accurate estimate of the honestly expected guaranteed hourly time, week in and week out. Effectively, no matter how you term it, the compensation must have all the earmarks of a consistent salary paid every week.

Once the salary requirement is met, the next issue is determining if the employee meets one of the exempt classifications. If he/she does not, then the employee is not exempt, and overtime payments apply (that is, time—and—a—half for all hours over 40 in a week). There are several other exemptions, but the three principal ones are the executive, administrative, and professional exemptions.

The Executive Exemption

This exemption requires management duties of the enterprise or a subdivision of it, directing the work of others, and the authority to hire/fire (or make recommendations that are given particular weight). Typically, the employee must spend 50% of his/her time in these executive functions, though less time might be acceptable if other factors demonstrate that the exemption really does apply — such as the critical importance of the person’s leadership and his/her relative autonomy at the workplace. [See Mims v. Starbucks Corp., 2007 WL 10369, at *8 (S.D. Tex. Jan. 2, 2007) (store manager).]

The Administrative Exemption

Less easy to determine are those folks within this exemption. These employees must have office or non—manual work related to the management or business operations of the company. Further, and a fundamental dividing line, their jobs must include the exercise of judgment and discretion. [29 C.F.R. § 541.200 (2004).] To draw a distinction, as an example, a human resource manager would likely be exempt under this classification, but his/her assistants or reporting employees may likely not be exempt. Or, an employee would be exempt if his/her job entailed judgment and discretion in running the company’s business operations and in acting as a principal client contact for numerous purposes. [See Howell v. Ferguson Enter., Inc. 93 Fed. Appx. 12 (5th Cir. 2004).] In contrast, challenges in the financial area have led to enormous overtime settlements involving stockbrokers, “account executives,” and financial advisors, who the courts say are non—exempt and thus fall outside of the administrative exemption.

The Professional Exemption

This applies to employees “whose primary duty is the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” [29 C.F.R. § 541.300 (2004).] Typically, we are talking about teachers, computer programmers, lawyers, doctors, engineers, and the like — folks who have received, usually, at least a four—year college degree in a specialized field and who exercise discretion and judgment in their intellectual work.

There are other exemptions, such as those applied to “outside sales” or to certain maritime workers, and if the employee does not fit within any exempt category, then overtime would apply. So it is critical for employers to audit internally their job classifications and employees to ensure all regulatory requirements are met. Having outside counsel assist in this review may be important to try to keep data and discussion privileged (not subject to discovery or disclosure). As can be seen, titles may be good — but it really comes down to actual job duties, discretion, and judgment.

“Obviously, the expense and risk involved in potential wage and hour disputes is enormous and can affect companies both large and small…. To illustrate the overall impact, in 2005 the DOL won more than $119 million for 189,000 employees. In short, it is a huge issue.”

Aside from an audit of employee classifications, several other areas may have impact in overtime control or reduction. Consider these questions:

1. Do I have appropriate record—keeping in place? Under the law, employers — not employees — have the responsibility to keep accurate time records, to record start and end times of work, to record lunch periods, etc. Personal time away from work (more than 30 minutes), such as to take lunch, need not be included in time accrual; however, short breaks must. But that accrual or non—accrual must be supported by accurate records. Without such records, an employer is subject to challenge by the employee, who will be able to testify based on his/her personal diaries/logs, recollection, and embellishment.
2. Do I have a policy about overtime? A good policy is that employees must obtain permission to work overtime. But keep in mind that you still must, in almost all cases, pay overtime, even if a person works the time without explicit permission. The policy can be used, nonetheless, to discipline employees who fail to get that permission, and it will help keep a check on overtime expense.
3. Does the availability of Blackberries and at—home computer use mean that I have to pay overtime for that work too? The line of where “work” exists has blurred, and the FLSA, promulgated in the 1930s with factory workers in mind, seems to be behind the times for the modern—day workplace. Yet until the law is changed, it is what we have to work with, and it will be applied even if we call it antiquated for today’s “flexible” workplace. So the answer will depend, as above, upon proper classification of the employees. Exempt employees are not paid overtime, no matter where or how many hours they work. As to non—exempt employees, the question will be, what were they doing with the computer or electronic gadget? In other words, were they truly on the clock, devoted to company—demanded work, at the time? If so, the time will be counted.
4. Do I have a fluctuating work week compensation scheme? The fluctuating work week permits the employer to pay the employee essentially a flat rate for all hours in a week, no matter how many. Overtime is still paid but only at the half time rate of the regular rate determined for that week’s hours. An employee’s regular rate is determined by dividing the total number of hours by the rate of pay for the week. If there is an agreement between the employee and the employer to pay the flat rate, then overtime may be calculated in this way. One advantage to this system is that it tends to discourage employees from working large amounts of overtime, as their effective, actual overtime rate reduces the more overtime hours they work. [See, e.g., Dufrene v. Browning—Ferris, Inc. 207 F.3d 264 (5th Cir. 2000) (day rate under §778.112).]

The subject of overtime and compliance under the FLSA is large and complicated. Other issues that may confuse the determination include a) travel and training time; b) donning and doffing of uniforms and equipment; and c) having employees “on call,” and the illegal practice of working employees “off the clock.” Employers are usually best served by periodic review and audit and by an outside confirmation of their practices and policies. In short, setting up processes for overtime reduction and understanding your employees’ classification with the DOL regulations are the best assurances against painful wage and hour litigation or interfering governmental audit.

About the author

Andrea M. Johnson is a partner at Burleson Cooke LLP, a Houston—based law firm. She is head of the employment and labor law practice group. She earned her undergraduate degree at UCLA and her law degree at Loyola Marymount.