February 1, 2003
Avoiding Lawsuits is a service of the employment law training and consulting firm of Counsel Consulting Group LLC and the law firm of Powell, Trachtman, Logan, Carrle & Lombardo, P.C.
EVEN EINSTEIN CAN'T FIGURE OUT
WHEN TO PAY OVERTIME
Within the last year, RadioShack agreed to pay almost $30 million to approximately 1,300 current and former store managers who claimed that they had been mis-classified as "exempt" from overtime requirements, and should have been paid time and one-half.
Within the last year, Starbucks agreed to pay an $18 million settlement to its managers and assistant managers in a virtually identical case.
Within the last year, Farmers Insurance, faced with a similar overtime claim, decided to eschew a settlement and go to trial - and ended up with a $90 million jury verdict against it.
And within the last year, even Einstein got smacked - Einstein Brothers Bagels recently paid almost $500,000 as the result of a Department of Labor investigation into its failure to pay overtime to its managers.
Anyone see a pattern?
The U.S. Department Of Labor estimates that as few as 20% to 40% of employers are in compliance with the Fair Labor Standards Act ("FLSA") - the federal legislation that defines which employees are "non-exempt" and have to be paid overtime, and which employees are "exempt" and only have to be paid their salary, no matter how many hours a week they work. As a result, employers were assessed more than $10 million in civil penalties by the DOL in fiscal 2001, and that tide is rising.
But that's not even close to being the worst of it. The DOL's multi-million dollar enforcement proceedings against the RadioShacks and Starbucks of the world have been widely reported in the media, and the trickle down effect has been undeniable. As a result of the publicity, both lawyers (always looking for new cases) and disgruntled employees (always looking for new ways to exert leverage against employers) have put overtime claims on their radar screens. The upshot is an increasing volume of not only DOL enforcement proceedings, but private claims, many reaching way into the six-figure range.
All of this makes it mandatory that businesses place their overtime policies under the compliance microscope. We first wrote about this problem in the December 1, 2000 issue of Avoiding Lawsuits, things have gotten even worse, and it is time to re-visit the topic.
The FLSA and the regulations that have been promulgated to interpret and apply it can make the Internal Revenue Code seem like Dr. Seuss. It is a convoluted and arcane body of law. There is no simple way to explain it - it is comprised of esoteric rules, double-speak definitions and exceptions on exceptions. The only effective solution we have found for our clients who want to do their best to assure compliance is what we call a "legal audit" - we study whether the jobs that a company classifies as "exempt" or "non-exempt" meet the legal criteria, and help the company assess its risks while at the same time applying some preventive measures (for instance, where possible, tweaking job descriptions to get to the desired result).
Generalization is dangerous, but in our experience, there are two overtime mistakes business executives make more often than any other. We know there is trouble around the corner when we hear the following:
- "He's one of my managers. Since when do you have to pay overtime to managers?" There is no "manager" exception to the overtime provisions of the FLSA. Merely classifying someone as a manager, and having them manage some aspects of the business, does not take you outside the overtime requirements of the FLSA.
- "He's a salaried employee. You only have to pay overtime to employees that you pay by the hour, right?" There is no "salary" exception to the FLSA. Even if an employee is paid a salary, you may still have to pay the employee overtime.
As for "managers," the FLSA presumes that all employees - managers and underlings alike - must be paid on an hourly basis, including overtime, unless they fall into one or more strictly-interpreted and rigid exceptions. One of those exceptions covers employees who spend more than 50% of their time performing what the FLSA deems "executive" or "administrative" tasks. That sounds like a "manager," but the way the FLSA defines "executive" or "administrative" tasks, and the way most business people define them, are worlds apart.
By way of vast oversimplification, to qualify within the "executive" exception, the employee must have real control over key business functions - hiring, firing, training, evaluating and determining pay rates for other employees, for instance. To qualify under the "administrative" exception, the employee's primary duty must involve work which is directly related to management policies or general business operations, and the employee's duties must require the exercise of independent judgment and discretion. An employee who is second in command to another person who generally calls the shots, or an employee whose primary duty the implementation of the policies made by others, will generally not qualify for the overtime exemption - a concept that sunk RadioShack, Starbucks and many others.
As for salaried employees, the mere fact that you provide a salary, as opposed to paying by the hour, is anything but an assurance that an employee is exempt. On the contrary, once an employee is salaried, the FLSA requires that the employee's duties be scrutinized in order to determine whether they fit within the overtime exceptions. However, once that hurdle is crossed and it is determined that, for instance, the employee passes the "executive" or "administrator" test, an employer can still blow the exemption without knowing it, based on the way the employer treats the employee. This most frequently occurs when an employee misses a few hours of work without an excuse, and the employer docks his pay. In those circumstances, the law basically provides that if the employer is going to treat the employee like an hourly worker (i.e., by subtracting money from the employee's salary for hours missed, as opposed to disciplining the employee in some other way), then the government (or your local plaintiff's lawyer) will be entitled to do the same. Again, it's a lot more complex than that - there are other conditions and stipulations, to be sure - but you get the general idea.
Only an analysis geared to a specific company's particular characteristics can meaningfully reduce many of the pitfalls in the FLSA jungle, but consider some additional, general tips:
- Be certain that you keep proper time records, for salaried as well as hourly employees, so that you can document the time that was spent (and not spent) when the overtime claim hits the fan. Failure to keep appropriate time records can subject you to substantial fines and penalties;
- Consider re-classifying certain employees who are salaried and on the borderline of the exempt/non-exempt distinction as non-exempt, and pay them by the hour, but adjust their hourly rate in order to factor in some presumed overtime. Your out-of-pocket dollars won't change, but your exposure to substantial risks will;
- Do not grant compensatory time in lieu of overtime pay. Many employers believe that they can avoid overtime requirements by giving employees time off in lieu of overtime. The practice is illegal;
- Often, it may be advisable to develop a job description to help you prove later on that, in fact, your "manager" held more than a vacant title.
There are a myriad of other approaches, and in view of the huge dollar exposure overtime proceedings can involve, they are all worth considering. You don't have to be Einstein (or an Einstein Brother) to get through the overtime maze, but like so much else in the effort to avoid lawsuits, you need to recognize where the red flags are, and get the right people to coach you through the right precautions, before it's too late.
Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.
