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Do Your Employees Qualify for Overtime?

The answer may surprise you.
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She's well compensated. He's a manager. They're all on salary. These are some of the common reasons employers give to explain why they do not pay their employees overtime. But in many cases these reasons are not legally valid.

That's something business owners have been learning the hard way. Indeed, the number of overtime lawsuits has exploded over the past couple of years. In 2005, class-action suits involving wages surpassed discrimination cases as the most widespread work force class action, according to a recent study by Chicago law firm Seyfarth Shaw. During the same year, the Department of Labor collected $166 million in back wages, mostly overtime pay--a 26 percent increase from 2001. Large companies, such as Cingular Wireless, have doled out millions in back overtime wages recently. Smaller companies are being forced to pay up as well.

The litigation has been fueled, in large part, by changes to the Fair Labor Standards Act in 2004. The Department of Labor updated the antiquated act, which first came into effect in 1938, in order to eliminate references to outdated jobs (think straw bosses and keypunch operators) and establish guidelines for contemporary workers. Among other changes, the agency determined that employees must make at least $455 a week to be ineligible for overtime pay, a sharp increase over the previous benchmark of $250 a week. As a result, 1.3 million workers suddenly qualified for extra pay, according to the DOL.

But the effects of those changes are really being felt now. Not only are more workers aware of the changes, but employment lawyers are increasingly on the lookout for potential overtime suits. "What we're seeing now are claims that are driven by an increase in awareness," says Paul DeCamp, administrator of the Wage and Hour Division at the Department of Labor. "All of a sudden, people are realizing that they have rights to overtime that they didn't know about." Paul Lukas, partner at Minneapolis law firm Nichols Kaster & Anderson, says that most clients come to his office complaining about wrongful termination or discrimination. But he ends each initial interview with questions about overtime pay, with an eye toward building a class-action case. And he's not alone. The revised overtime laws, Lukas says, have created a cottage industry. "Nothing wakes up lawyers faster than someone else making money on a certain kind of case," he says. "The word is that FLSA cases are lucrative cases."

Employers have been caught off guard by the rise in overtime disputes. "Employers frequently don't appreciate the value of spending time on these issues until it's too late," DeCamp says. Case in point: Eloy Torrez, president of SEI Group, an engineering firm in Huntsville, Alabama. Torrez thought he was being a good boss when he devised a pay plan that allowed him to avoid layoffs by adjusting his employees' salaries along with the ups and downs of government contracting. When business was flush, he paid staffers a salary, plus the equivalent of one hour of pay for each hour worked in excess of 40 hours a week. In a good year, he doled out as much as $30,000 extra per employee. But when contracts from clients like the U.S. Army and the Department of Homeland Security slowed down, Torrez scaled back some salaries, treating his staff of engineers, architects, accountants, and program managers as part-timers--paying them only for the hours they worked--but with full health benefits.

Torrez figured the system was great because it eliminated temporary layoffs and gaps in health coverage. But unbeknownst to him, it was also illegal. Because SEI's professional staffers were not receiving consistent salaries, they qualified for overtime pay--at least one and a half times their regular hourly wages--for every week they worked more than 40 hours. Last October, after an audit that lasted months, the Department of Labor ordered SEI to pay two years of back overtime wages totaling $464,342 to 103 of its 126 employees. "That's about half of this year's earnings," Torrez says. "This has been a huge burden for us."

Like many business owners, Torrez assumed that his staffers were ineligible for time and a half because they received salaries. But the updated overtime rules make it clear that salaried workers such as computer programmers and account executives may be eligible for overtime if their jobs meet certain exemption criteria. Those criteria are numerous and detailed, but the philosophy behind them is simple: Workers who do not spend most of their days performing tasks that require them to exercise "discretion and independent judgment" probably qualify for overtime pay. That could include anyone from a secretary who answers phones all day to a loan officer who relies on computer algorithms to determine an applicant's eligibility. Even managers and job site foremen who do not have strong input into hiring and firing decisions may be eligible to collect overtime.

Many employers realize they're in violation of the revised overtime laws only after they've been contacted by the Department of Labor. Most audits are the result of a complaint from a single worker that blows up into a companywide investigation. "If the DOL visits you, it will rarely be to look at the one employee complaint," says Steve Trent, chairman of the labor and employment practice at Baker, Donelson, Bearman, Caldwell & Berkowitz in Johnson City, Tennessee. Audit results are rarely good news for companies. Those found to be in violation must pony up two years of back overtime wages, in addition to fines for repeat offenders. Lawsuits tend to be even more damaging: Lukas, for example, typically sues employers for two years of back overtime pay. If he can demonstrate that a business knowingly broke overtime laws--which he frequently does--his clients may be entitled to a third year of back wages.

To stay out of trouble, consider paying a labor attorney a few thousand dollars to vet your pay policies. And take a hard look at what your employees do all day, regardless of their job descriptions. If they don't make many independent decisions, there's a good chance they qualify for overtime pay. Also, think twice about offering flextime to hourly workers. If an employee with a flexible schedule works more than 40 hours in a given week, regardless of how much he or she worked the previous or following weeks, that person may qualify for overtime.

Of course, you might not like what you discover. And correcting overtime mistakes isn't easy. Workers will probably ask about back wages when they find out they are eligible for overtime. To avoid a pricey lawsuit and bad press, some companies bite the bullet and hand over two years of back wages and pay overtime going forward.

Torrez, for his part, isn't sure how the Department of Labor found out about SEI's pay system. He recently switched his work force to guaranteed salaries with no overtime pay. When business slows down, Torrez says, he'll be forced to lay off workers. He's gotten plenty of complaints from staffers about the new system. "No one is happy about it," he says.

Resources

To learn more about the rules governing overtime pay, visit the website of the Department of Labor's Wage and Hour Division (wagehour.dol.gov) or call the DOL hotline (1-866-4-USWAGE).
Last updated: Jan 1, 2007




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