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Overtime Compensation — Myths and Realities

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If you keep up with legal news, you will almost certainly have noticed the proliferation of litigation concerning entitlement to overtime compensation, including collective actions where large numbers of employees sue their employers for unpaid overtime. Liability for unpaid overtime can be staggering, especially in cases involving collective actions, because employees can potentially reach back three years for unpaid overtime and may be able to recover liquidated (double) damages and attorney's fees.

Over the years, I have handled a large number of cases involving alleged unpaid overtime on behalf of both management and employees. While some cases are novel and may turn on an arcane exemption (i.e. a classification of jobs for which no overtime is required) or a unique position that does not fall neatly within any of the numerous exemptions recognized under the Fair Labor Standards Act (the federal law governing the payment of overtime) and/or Maryland law, I have seen employers stumble on many of the same issues time and time again.

Characterizing Employees as Independent Contractors. Characterizing workers as “independent contractors” has long been a favorite device used by employers to avoid overtime, provision of benefits and other privileges traditionally provided to employees (just ask Microsoft). Unfortunately, while true independent contractors are not entitled to overtime, based upon my experience, employers are usually on the wrong side of the law when they attempt to classify workers as independent contractors. One of the problems is that different agencies, like the IRS and Department of Labor apply different tests to determine whether a worker is truly an independent contractor. One of the keys is whether the worker is under the control of the employer and receives direction concerning how the work is to be performed. Other questions include whether the worker is performing a service that is part of the employer's core business, whether the worker works at the employer's site using tools provided by the employer and whether the worker works exclusively for the employer. If the answer to these questions is “yes,” then the worker is very likely an employee and is entitled to overtime and other benefits provided to employees.

Mischaracterizing Employees as Exempt. The Fair Labor Standards Act and Maryland law provide overtime exemptions for employees who are considered “executives,” “professionals,” “administrative employees,” computer professionals, outside sales professionals and a number of other exemptions for certain occupations — some quite arcane. The determination of whether an employee falls within any given exemption depends upon an employee's actual job duties — i.e. titles are virtually irrelevant. In my view, correctly classifying employees is one of the more difficult tasks confronting employers and one that has generated abundant litigation. For example, not every administrative employee falls within the “administrative” exemption (i.e. your receptionist and secretary are probably NOT exempt). Likewise, your inside telesales representative is not exempt (ask Dan Snyder, the owner of the Redskins) nor is your employee whose duties are limited to setting up computers for new employees. This is one area where it makes sense to obtain qualified legal advice in situations where proper classification is unclear.

Paying by Salary to Avoid Overtime. This is another very common misperception of the law. An employer CANNOT avoid overtime obligations simply by paying workers by salary rather than by an hourly wage. While paying a salary is a requirement to maintain a worker's “exempt” status, the provision of a salary does not create an exemption. Rather, as set forth above, it is the worker's actual job duties that govern whether he or she is entitled to overtime.

Paying “Straight-Time” for Overtime Hours. Over the years, I have seen countless employers pay their hourly, non-exempt workers their regular hourly wage, even when the worker works more than 40 hours per week — the threshold at which the obligation to pay overtime kicks in. In reality, employers are required to pay non-exempt employees “time and one-half” the worker's regular hourly rate of compensation for each hour over 40 worked in any given work week. This means that an employee earning $20 per hour would be entitled to $30 for each hour of overtime worked.

Refusing to Pay Overtime When it is Not “Approved.” Another myth. Any hours of overtime worked by an employee must be paid at the overtime premium, regardless of whether the worker complied with company policy requiring approval for overtime. That is not to say you cannot take appropriate remedial action against the employee with disciplinary measures or, in extreme cases, termination.

Agreements with Workers Not to Pay Overtime. While courts usually respect the concept of “freedom of contract” and provide parties wide latitude about the terms of their contractual arrangements, the courts afford no such freedom in the context of overtime. If a worker is exempt, the courts will strike down any attempt by an employer to contract out of the obligation to pay overtime.

There are many more examples to be sure. Understanding and applying the Fair Labor Standards Act can be a daunting task. This is one of those areas in which an ounce of prevention is most certainly worth a pound of cure.