Overtime: What should employers know?

Up until last August 2004, employers had a hard time understanding the rules and regulations of overtime pay. Who was exempt from overtime was not always clear, and class-action lawsuits on the Fair Labor Standards Act, the law regulating who receives overtime pay, had reached as high as $90 million dollars.

For example, one appeals court found that assistant managers at fast-food restaurants were white-collar workers and exempt from overtime, even though they spent half their time preparing food. On the other hand, a federal court in Texas found that engineers and scientists working for the space program did not qualify as white-collar employees and were entitled to overtime pay. These inconsistencies compelled the U.S. Department of Labor to change the federal overtime requirements last year. The changes marked the first major overhaul of the federal overtime law in more than 50 years.

The rules now simplify and continue exemptions from overtime for "white collar" employees who are considered executive, administrative, professional and outside sales employees. The rules also add exemptions for computer and highly compensated employees. The federal rules have no impact on the current exemptions for salespeople, parts department workers, technicians or commissioned employees.

So, what do employers need to know about overtime? Basically, unless an exemption exists, an employee must be paid at least minimum wage and overtime at 150% of normal rate for hours worked in excess of 40 per week.

There are three tests for determining who is eligible for overtime ("non-exempt") and who is not ("exempt"):

1. The "salary-basis" test. To be exempt from overtime, workers must be paid a set salary, not an hourly wage. This test existed under the old federal overtime law, and does not change with the new stipulations.

2. The "salary-level" test. This test has been amended under the new rules. In order to be exempt from overtime, employees must earn a minimum salary of $455 a week, or $23,660 a year. That is triple the prior minimum salary of $155 a week, or $8,060 a year. A new stipulation to this test is that white-collar employees who earn more than $100,000 a year are automatically exempt from overtime pay.

3. The "duties" test. This test establishes eligibility based on the type of work an employee performs every day. Under the federal law, an employee whose job duties are deemed "administrative,""professional," or "executive" in nature does not qualify for overtime. These include "learned" professionals such as lawyers, doctors, registered nurses and engineers. However, technicians, beauticians, licensed practical nurses, and other "skilled trades people" are owed overtime, as well as firefighters, police sergeants and other emergency personnel deemed to be "first responders."

The following duties are deemed exempt from overtime:

Administrative Employee Exemption:

The administrative employee exemption applies to:

• Those who engage in office or non-manual labor directly related to the management or general business operations of the company or its customers; and
• use discretion and independent judgment regarding matters of significance.

The positions that fall under this category are:

• assistant departmental managers
• office managers
• human resource personnel

This exemption typically does not apply to:

• clerks
• cashiers
• secretaries
• those whose main duties involve bookkeeping, payroll preparation, sending out monthly statements of account or routine clerical duties.

An employee who simply applies protocols or provisions from a manual on a case-by-case basis is not exempt.

Executive Employee Exemption:

The executive employee exemption applies to:

• Those who manage an enterprise or a recognized department of an enterprise;
• regularly direct the work of two or more employees; and
• have the authority to hire or fire employees (or their recommendations as to hiring or firing employees are given great weight).

This exemption often covers business owners and managers.

Learned Professional Employee Exemption:

This applies to those who perform work requiring advanced knowledge in a field of science or learning, which is acquired by specialized instruction. This typically applies to attorneys and accountants, but not accounting clerks or bookkeepers.

Outside Sales Employee Exemption

The outside sales employee exemption covers:

• Those who make sales or obtain orders/contracts for services purchased by a customer; and
• are regularly away from their employer's place of business.

Outside sales employees do not need to be paid a minimum salary to be exempt from overtime.

Highly Compensated Employee Exemption

This exemption refers to:

• Those who perform office or non-manual work and are paid a total annual compensation of $100,000 or more, (which must include at least $455 per week);and
• regularly perform at least one of the duties of an exempt executive, administrative or professional employee.

This applies to most "white collar" employees earning over $100,000.

Computer Employee Exemption

This new rule exempts those who are compensated $455 a week salary or at a rate no less than $27.63 per hour for each hour worked, and are engaged in at least one of the following:

1. the application of systems analysis techniques and procedures; or
2. the design, development, documentation, analysis, creation, testing or modification of computer systems or programs; or
3. the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
4. a combination of 1 through 3.

Recordkeeping Requirements for Employers

Employers must maintain the following for all exempt employees:

• Full name and any employee symbol or number identifier used on any records.
• Social security number.
• Home address, including zip code.
• Date of birth if under 19 years of age.
• Sex and occupation.
• Dates, amounts and nature of additions and deductions to wages.
• Total wages paid each pay period.
• Date of payment and the pay period covered by the payment.

Employers should periodically review the job duties, written job descriptions and pay structures of their employees to ensure they are properly classified as exempt or nonexempt.

State Overtime Rules May Differ from Federal Rules

Employers are reminded that some states also have overtime laws that may differ from the federal requirements. Therefore, if an employee is subject to both state and federal overtime laws, the employee is entitled to the overtime rule that will provide the higher rate of pay. For example, Pennsylvania law does not allow an employer to restrict overtime if an employee earns a certain salary. However, federal regulations exempt highly compensated employees earning over $100,000 annually from overtime, if they perform at least one job duty of an exempt executive, administrative or professional employee. In this instance, employers in Pennsylvania must adhere to Pennsylvania law since it is more favorable to the employee.

For information on a particular state's overtime requirements, and how they contrast with the federal requirements, visit http://www.dol.gov/esa/programs/whd/state/state.htm