Overtime Violations: It’s Not Like It Used To Be

Overtime Violations: It’s Not Like It Used To Be
The Metropolitan Corporate Counsel

The federal Fair Labor Standards Act ("FLSA"), which governs the payment of wages, permits employers to avoid paying overtime to professional, executive, administrative and outside sales employees, who are considered "exempt." In a spate of recent lawsuits, employees have been challenging their employers on those classifications and demanding overtime pay. And they are winning significant awards. To identify a few examples, last year Farmer's Insurance paid $90 million to claims adjusters in California it had classified as exempt, who sued for back overtime pay. In April 2002, Starbucks Coffee paid $18 million to settle overtime claims by its managers in California. Shoney's paid $19 million to settle overtime claims, and one major retailer is defending dozens of overtime suits all over the country.

Overtime collective actions - the FLSA equivalent of "class actions" -- actually outnumbered more "traditional" employment discrimination class action suits last year. Plaintiffs' attorneys have become more experienced at bringing such suits under the FLSA and comparable state laws, and they are encouraged by each new decision in favor of employees. It is also often the case that a single employee's claim can easily be turned into a collective action.

Overtime and Exempt Employees: a Primer

The FLSA regulates wage payments to employees and in particular, overtime.1 Unless an employee is exempt for a specific reason, the FLSA requires employers to pay all employees by the hour for all hours worked, and to pay one-and-a-half times the base wage rate (i.e., "overtime") for any hours worked in excess of forty hours in a week.

In addition to the general exempt categories, FLSA also sets criteria within those categories, which must be satisfied for an employee to be exempt, e.g., salary levels, job responsibilities, etc. However, many of these criteria are outdated and vague. The federal salary requirement is just $250 a week - the same level it was at in 1975. The state criteria may be more current but they are also often outdated.

The Administrative Exemption Has Been A Focus Of Attention

Of the four exempt categories, the administrative category historically has been the most difficult to interpret and apply. Not surprisingly, it has generated many of the recent lawsuits.

For many years, employers commonly believed that if the employee's salary was high enough, and the employee exercised some discretion or judgment at work, any employee whose work was remotely connected to administration could be classified under the 'administrative' exemption. Recent court decisions make clear that this analysis is no longer sufficient.

FLSA regulations require that an administratively exempt employee perform work "directly related to management policies or general business operations." Her primary duty must involve servicing the business itself; for example, developing the company's policies, overseeing the budget, or performing the human resources function.

The administrative functions must be distinguished from the production function. A production employee, who is not exempt from overtime, contributes to the production or creation of the product (or service) of the company. It was long thought that a "production employee" was someone who worked on a factory floor or performed manual labor; however, as recent court decisions have shown, this is not true. The following positions have been found to be non-exempt production jobs:

If other courts follow this trend, many persons formerly thought to be exempt, will be treated as "production" employees and as eligible for overtime. The Managerial Exemption Can Cause Problems Another area that has caused confusion and led to litigation is the classification of "executives," or managers. To be exempt as a manager, the worker must:

The limit on the percentage of time that can be spent on non-managerial tasks is a frequent fall-down point. For example, a 'working foreman,' who works alongside the crew he supervises, cannot be classified as exempt. In many retail establishments - particularly food service - managers spend more than 40% of their time performing the same work done by those they supposedly supervise. These managers are also becoming aware that this is a violation of the FLSA for which they can sue. 6

Collective Actions

The FLSA permits a collective action, rather than a class action, to be brought on behalf of a group of aggrieved employees. The collective action is an "option" class which means that persons join the class only by affirmatively choosing to do so. This tends to result in smaller classes than for class actions under Fed.R.Civ.P. 23 in which persons can become class members without any affirmative steps, and instead must affirmatively opt out if they do not want to be in the class. Some plaintiffs' attorneys have brought class actions under state overtime laws or the common law to avoid the limitations of collective actions.

On the other hand, a collective action can be more easily "certified" than a class. The fairly lenient standard for initial certification of collective actions requires only that members be similarly situated.

Other Potential Traps

Pitfalls await employers in many areas of the FLSA, and given the current trend to increased litigation, employers are well advised to tighten their payroll practices. For example, employers should beware of tracking partial-day absences of exempt personnel, and making hourly or half-day deductions (or require the use of vacation time or sick time in hourly or half-day increments) for these employees. The reason is that under the FLSA, an exempt person is paid by the week, not by the hour. When the employer takes steps that seem to demonstrate the employee is being treated as an hourly worker, this can jeopardize the exempt status of the employee and sets the stage for a determination that the employee is non-exempt. In fact, even if no actual applications of such a policy occur, merely having the policy of taking partial-day deductions from an exempt person constitutes a violation of the FLSA.

Employers should be cautious using "comp time." Compensatory, or "comp" time is time off which is given to an hourly employee, in exchange for having worked over forty hours in a week. Many employers use this practice to eliminate or control overtime costs, and many give the same number of ‘comp time' hours as the employee worked overtime. However, under the FLSA, comp time is only permissible if the employee receives one and a half times as much time off as that person worked overtime: in other words, the employer has to pay time-and-a-half, but pays in hours, not in dollars. Also, the FLSA requires that the comp time be given in the same pay period in which the overtime was worked. Unless both these conditions are met, the comp time policy violates the FLSA.

Employers should not pay a flat sum as an overtime premium; instead, overtime pay should always be calculated at the required rate of one and a half times the regular base rate. Finally, employers should be aware of any state laws that create even stricter requirements on overtime and payment of wages than FLSA. These requirements are not preempted by the FLSA7.

Self Audit of FLSA Classifications

By observing the following points, an employer should reduce the risk of misclassifying employees:

*************************************************** 1. Most states have a Wage and Hour law patterned on the FLSA with similar provisions. For example, in New Jersey, employees in a bona fide executive, administrative or professional capacity and outside sales persons shall be exempt from the overtime requirements. N.J.A.C. 12:56-6.1. 2. Dalheim v. KDFW-TV, 918 F.2d 1220 (5th Cir. 1990). 3. Bell v. Farmers Inc. Exchange, 87 Cal. App. 4th 805, 105 Cal. Rptr. 2d 59 (2001). 4. Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990). 5. Reich v. American Intern. Adjustment Co., Inc., 902 F.Supp. 321 (D.Conn 1994). 6. Berg v. United States, 49 Fed. Cl. 459 (2001). 7. The California equivalent of the FLSA requires 50% of the manager's time be spent solely on managing. The FLSA allows the manager to simultaneously perform the duties of an hourly worker while managing, up to 40% of the time. 8. Shoney's settled three suits in 1998, after the district court found for the plaintiffs in one of the cases. Belchers v Shoney's 30 F.Supp.2d 1010, MD Tenn 1998. Grayson v. K-Mart Corp., 79 F.3d 1086 (11th Cir.), cert. den., __ U.S. __, 117 S.Ct. 435 (1996). 29 U.S.C. § 218(a).