Most employers understand their basic obligation to pay overtime compensation. They know there are "exempt" employees to whom overtime requirements do not apply (commonly, albeit erroneously, understood to encompass only professionals and executives); and they know there are "non-exempt" employees to whom overtime requirements do apply (commonly, albeit erroneously, understood to encompass only hourly workers). But like so many other things in the law, a little knowledge can be exceedingly dangerous. The overtime requirements of the Fair Labor Standards Act are convoluted -- and in some instances unimaginable -- and over the last several months we have seen various companies slammed by FLSA audits, often brought forth by a telephone call from a disgruntled employee to a governmental authority. FLSA violations can result in huge back pay awards and penalties.
As is usually the case, prevention is the key. Consequently, many clients retain us to do FLSA "audits," which involve a preventive analysis of the company's overtime payment policies in the effort to forestall costly mistakes. Do you need such an audit? Consider the following three "disasters waiting to happen" scenarios, each of which is becoming more commonplace. If any of these gives you pause, perhaps its time to consider a more aggressive and proactive review of your company's payroll practices.
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.
Nightmare #2: The "On-Call" Employee
In a recent federal case, a non-exempt employee sued his employer for overtime payments. That, in itself, is not so unusual, but this employee claimed that he was entitled to overtime for the hours he was not working, but was only "on-call." The employer immediately moved to dismiss the case. The court disagreed with the employer, and instead ruled that the employee may well be entitled to the monies sought. The case is now heading for a jury trial (and you can bet that there will be more employees than employers on the jury).
Basically, the law in this area requires employers to pay overtime to non-exempt employees who are "on-call," depending upon how "burdensome" the employer's "on-call" procedures are. Some of the issues that are considered include:
- Does the employee carry a beeper or similar device?
- How frequent are the employer's calls, and what is the nature of the employer's demands?
- Does the employee have the ability to maintain a flexible "on-call" schedule?
- Does the employee actually engage in personal activities during "on-call" time?
If a court finds that the employer's "on-call" policies significantly interfere with an employee's personal life, then time spent by the employee while "on-call" will be adjudged to be compensable, legitimate overtime, even if the employee is not actually performing the employer's work. At least one court has ruled that there is a significant interference with an employee's personal life when a frequency of duty-related calls approaches between 3 to 5 calls or pages per day.
Nightmare #3: The Telecommuter
The increasing popularity of working at home is creating a variety of overtime problems and liabilities.
The FLSA does not contain any exemptions for telecommuting employees - the rules apply no matter the location at which the employee performs his or her work. This has led to scenarios in which non-exempt employees claim (usually after they leave your company) that during the last year they actually spent an average of 65 hours per week working - 40 in the office, and another 25 at home. Having received no overtime pay for their efforts, they now seek retroactive compensation, at time and one-half plus fines and penalties, for their efforts.
Every company that allows telecommuting or other work at home arrangements must establish and enforce policies that require non-exempt employees to keep detailed, daily time logs, and to turn them in weekly. The policy should also provide that employees are not to work more than 40 hours per week unless authorized in advance and in writing. Otherwise, your employees, not you, control and define your payroll budget.
SUMMARY: Most of our clients find these results to be a slap in the face, and the disheartening truth is that there is a vast array of additional and equally unforeseeable and confusing pitfalls in the overtime area.
For instance, do you really know who is exempt and who is non-exempt? Chances are that not all of the employees you consider to be professionals or executives are exempt from overtime requirements. There are detailed criteria that appear in the FLSA regulations and cases, and the decisions smacking employers for failure to pay overtime to a salaried professional or executive are legion.
Do you really understand how to calculate overtime payments? What if an employee works 30 hours one week, 30 hours the next week, and 45 hours the next week? Is the employee entitled to 5 hours of overtime, even though he worked less than 40 hours in the previous weeks?
Do you really know what kinds of records you are supposed to keep? If you are subjected to an FLSA audit, will your records explain and support what you did as required by the law?
The message to be taken from all of this is clear and simple: this is an extremely hyper-technical area, the potential liabilities are substantial, and it should not be trifled with or handled based on "common sense." A "preventive law" approach to these issues is mandatory.
Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Our affiliated preventive law training firm, Powell Trachtman Training and Consulting, LLC, trains business executives throughout the United States in techniques designed to avoid and minimize litigation. Inquiries regarding our liability-avoidance training for business executives may be directed to training@powelltrachtman.com. For further information on our preventive law and related business services, please visit our website at www.powelltrachtman.com or contact mtrachtman@powelltrachtman.com.