“Wage Theft”: Are You Stealing Overtime From Your Employees?

Misclassifying workers as exempt from overtime can lead to costly lawsuits and government investigations.

Published in Wages & Overtime (Saturday, February 7, 2015 12:00 pm)

Are your employees “exempt” or “non-exempt” from earning overtime pay?  The federal law governing this area is the Fair Labor Standards Act (“FLSA”), which is enforced by the Wage and Hour Division of the U.S. Department of Labor and, for Pennsylvania employers, the Pennsylvania Department of Labor and Industry.1  Many employers mistakenly assume that paying an employee an annual salary automatically removes the legal obligation to pay overtime – defined as one and a half times the regular rate of pay for all hours worked over 40 in a consecutive 7-day period.2  That assumption is costing employers around the country millions of dollars in back pay, additional damages, and, in some cases, attorneys’ fees and court costs as well.3 To attract more attention to this issue, plaintiffs’ lawyers and government agencies have labeled the misclassification of employees for overtime purposes a form of “wage theft” – an emotionally laden phrase that may incite employees to sue and should shock employers into compliance.

Employer Must Prove an Exemption Applies

So how do you determine whether an employee should be classified as “exempt” or “non-exempt” from the overtime rules? At the outset, note that (1) the burden is on the employer to make this determination for each position in the company; and (2) the presumption under the law is that an employee is entitled to overtime compensation unless the employer establishes that the position satisfies one of the exemptions under the rules. Three of the most common of these exemptions are so-called “white collar” exemptions that apply to 1) executive, 2) administrative, and 3) professional employees, discussed in more detail below.4 Note that “highly-compensated employees,” defined as those earning an annual salary of at least $100,000, may also be exempt from overtime if they “customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee.” 5

Exempt Employees Must Satisfy Three Tests

Three tests must be satisfied in order to classify an employee as exempt: 1) the employee must be paid no less than $455 per week (or $23,660 per year); this is the “salary level” test6 The amount of time the employee performs exempt work factors into this analysis – if 50% or more, the presumption is in favor of the exemption – but “time alone is not the sole test.”7

Executive Exemption

This exemption typically applies to the CEO and other top corporate officials. It may also apply if the employee is paid a salary of at least $455 per week ($23,660/year) and meets all of the following elements of the executive job duties test:

“The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

• “The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

• “The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.”8

Under the regulations, the phrase “two or more other full-time employees or their equivalent,” can include, for example, one full time and two half-time employees. Note that employees who merely “fill in” for a manager who is absent do not meet this exemption.9

Administrative Exemption

Managers who supervise fewer than two full-time employees, or who lack the authority to hire and fire other employees, may nevertheless be exempt from overtime under the administrative exemption. This exemption applies if the employee is paid a salary of at least $455 per week ($23,660/year) and meets all of the following elements of the administrative job duties test:

• “The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

• “The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”10

This is the most frequently misapplied of the overtime exemptions, largely because employers misunderstand the phrase “discretion and independent judgment.” There has been much litigation and controversy around its the meaning, especially in an increasingly service-sector economy where knowledge workers have replaced manual laborers. Under the current regulations, “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.”11 Job titles and position descriptions are irrelevant to the duties required for this exemption. Thus, “an employee who simply tabulates data is not exempt, even if labeled as a ‘statistician.'”12

Professional Exemption

This exemption applies to two types of “professional” employees: “learned professionals,” such as doctors, lawyers, and engineers; and “creative professionals,” such as actors, composers, and writers.

To meet the “learned professional” exemption, the employee must be paid a salary of at least $455 per week ($23,660/year) and meet the following job duties test:

• “The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• “The advanced knowledge must be in a field of science or learning; and

• “The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.”13

Note that what the employee actually does – rather than what degree or credentials the employee holds – determines whether the “learned professional” exemption applies. For example, a receptionist at a law firm who holds a Ph.D. in English does not satisfy this exemption because the degree is not required to perform the duties of the position. On the other hand, an advanced degree that does correlate with job duties can be determinative: Registered nurses with a bachelor’s degree typically satisfy this exemption, while licensed practical nurses with only a high school degree do not.14

To meet the “creative professional” exemption, the employee must be paid a salary of at least $455 per week and meet the following job duties test:

“The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.”15

This exemption has caused considerable confusion for media companies. Under the regulations, not all “journalists” satisfy the creative professional exemption: “Employees of newspapers, magazines, television and other media are not exempt creative professionals if they only collect, organize and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.”16 Thus, newspaper columnists or television pundits will likely satisfy this exemption, while local beat reporters may not.

Conclusion

The determination of whether an employee is “exempt” or “non-exempt” depends on a fact-driven analysis of the employee’s job duties – not the employee’s title, position description, or resume. Paying an employee on a salary basis also does not alleviate an employer’s responsibility to conduct this analysis. Employers should take proactive measures to ensure they are in compliance with this area of law, before they are charged with “wage theft” and forced to do so by a court or government agency.

  1. Pennsylvania follows the federal law for purposes of classifying employees as “exempt” or “non-exempt” from overtime requirements.
  2. For an overview of the federal overtime pay requirement, see http://www.dol.gov/whd/overtime_pay.htm.
  3. FLSA lawsuits brought on behalf of large groups of employees – so-called “class actions” – are also increasing. Recently, the Pennsylvania Supreme Court upheld an award of $187 million in unpaid wages and damages to Wal-Mart employees who claimed they were forced to work “off the clock” or skip their breaks. Braun v. Wal-Mart Stores, Inc. (No. 32 EAP 2012) consolidated with Hummel v. Wal-Mart Stores (No. 33 EAP 2012 (Pa. S.Ct. Dec. 15, 2014).
  4. While not covered in this article, additional exemptions apply to two other categories of white collar employees – outside salespersons and computer employees – as well as employees in other industries, such as interstate commercial truck drivers. For more information about these exemptions, please contact Ms. Baulig.
  5. 29 Code of Federal Regulations (C.F.R.) §541.601(a) (2015).
  6. ; 2) the employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent (typically, annually) basis; this is the “salary basis” test; and 3) the employee must perform principally non-manual and other specific duties associated with one of the “white collar” exemptions; this is the “job duties test.” The “job duties” test is fact-intensive and requires a close examination of the duties actually performed by the employee. It is by far the least well understood of these three tests and is indeed often ignored by many employers.

    Listed below are the general requirements for the executive, administrative, and professional exemptions, with an emphasis on the “job duties” required for each. Whether the exemption actually applies to a particular employee often requires a more detailed analysis of the regulations – virtually every phrase used in the tests below is defined in a separate rule. Common to all of these tests, for example is the requirement that the employee’s “primary duty” involves exempt work. Under the regulations, “primary duty” means “the principal, main, major or most important duty that the employee performs.”[6. 29 C.F.R. §541.700(a) (2015).

  7. 29 C.F.R. §541.700(b) (2015).
  8.  29 C.F.R. §541.100 (2015).
  9. 29 C.F.R. §541.104 (2015).
  10. 29 C.F.R. §541.200 (2015).
  11. 29 C.F.R. §541.202 (2015).
  12. 29 C.F.R. §541.202(e) (2015).
  13. 29 C.F.R. §541.301 (2015).
  14. 29 C.F.R. §541.301(e)(2) (2015).
  15. 29 C.F.R. §541.302 (2015).
  16. 29 C.F.R. §541.302(d) (2015).

Disclaimer

The information contained in this website is provided solely for informational purposes. It should not be construed as legal advice, is not a substitute for legal counsel, and is not intended to create an attorney-client relationship. For legal advice or answers to specific questions, please contact Ms. Baulig.

Baulig Law focuses on employment issues

Problems with your employees? Problems with your employer? Frustrated with government regulations? Baulig Law provides experienced, cost-effective legal services for businesses and individuals in the areas of employment discrimination, wages and overtime, workplace safety and health, and health care compliance.

Laurie T. Baulig
Laurie T. Baulig

Attorney at Law

With a career spanning three decades, Laurie Baulig has been a litigator for the federal government, a private practitioner, in-house counsel for two business trade associations, and a teacher at a liberal arts college.  She founded Baulig Law with the idea that, at its best, law is a service profession that should be transparent, accessible and affordable.  The firm’s focus on employment law also reflects her philosophy that both businesses and their employees benefit when the workplace is free from discrimination, unfair wage practices, and unsafe or unhealthy conditions.

Laurie began her career as an antitrust litigator for the Federal Trade Commission in Washington, D.C.  She later shifted her focus to employment law as in-house counsel for the American Trucking Associations, one of the largest business trade groups in the nation’s capital.   While at ATA, she travelled across the country explaining the requirements of new laws passed by Congress – such as the Americans with Disabilities Act, Civil Rights Act of 1991, and Family and Medical Leave Act – and regulatory proposals that would have an impact on the trucking industry.   This experience not only confirmed her passion for employment law, but also awakened her interest in teaching.   So she left D.C. for Lancaster, PA in 2008 to serve as adjunct assistant professor at Franklin & Marshall College.  From 2008-13, she taught Human Resources Management, Gender and the Law, and other courses affecting legal rights and responsibilities in the workplace.

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