Nightmare #1: The Hardworking Executive

Many companies pay their exempt employees extra for extra work, which only seems fair. But can an "extra pay for extra work" policy get you in trouble with the government?

Suppose you employ professionals (engineers, accountants, whatever) that charge clients by the hour. You treat them as exempt employees, and you pay them a salary based on the assumption that they will bill out 40 hours per week. You think it is only fair to pay them extra for each hour beyond 40 hours per week that they work and you bill out - you're getting extra money, and it is only right that they get extra money as well. What could be wrong with that?

The FLSA regulations and the cases that interpret them send this message: if you treat your exempt employees like non-exempt employees by compensating them by the hour, the government may treat them like non-exempt employees as well. Typically, say the regulations and the cases, exempt employees do not get extra money just because they put in extra time. Rather, they get extra money for extraordinary results or performance, unrelated to the time they put in. Therefore, when exempt employees are paid extra purely because they put in more time, they may become non-exempt in the eyes of the law. The result will be that all employees that you have paid in this fashion may be entitled to time and one-half for all overtime, retroactively, plus penalties.

If you had not instituted a well-intentioned policy of paying for extra work, you never would have faced this scenario. As the saying goes, "no good deed goes unpunished." What is the solution? You could have avoided these consequences through a preventive analysis and revision of your overtime policy: for instance, you might base the extra payments on receipts or profitability, not hours worked, and under that scheme you could not have been accused of treating exempt employees like hourly workers - a simple change, potentially worth tens, or even hundreds of thousands of dollars.

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.

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