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Overtime is no simple matter

June 13, 2012

The federal rules governing overtime seem to grow more complicated every year. To know who is entitled to overtime pay and who is exempt from it under federal wage and hour laws requires close examination.

Here are answers to questions you might have about how the current rules apply to your business.

Note: These answers discuss applications of the federal overtime rules. Some states have rules that differ from federal rules. Federal rules that are less favorable than state rules do not apply in the state. Find out how your state law treats employee overtime.

Can You “Round Up” – or Down?

There’s no doubt about it. Overtime pay is a tricky issue. One recent case illustrates how employers can get into trouble calculating hours.

The FLSA allows an employer to round off hours worked, usually to the nearest 15 minutes, but such practices must be equally fair to both employer and employee. They cannot always result in less pay for employees.

In 2004, a Michigan hospital paid nearly $910,000 in back wages resulting from FLSA violations involving rounding and other issues.

Employees of Mt. Clemens General Hospital who started work early or worked late were only paid if they stayed a full 15 minutes. Otherwise, the time was rounded to the nearest quarter hour.

After being notified by the Labor Department of possible violations, the hospital performed a voluntary two-year audit. It was also cited for other technical overtime violations when employees received on-call and incentive payments for working extra shifts.

Salaried Employees

Q: All of our office employees are paid salaries. They usually work 40 hours a week. However, sometimes they put in about 35 hours weekly and occasionally, they work up to 46 hours in a week. Do we have to pay them overtime when they go over 40 hours?
A: Just because they’re paid a salary instead of an hourly rate doesn’t make salaried employees exempt from overtime pay. Salaried employees, who earn $455 weekly or more ($23,660 annually), and perform executive, administrative, or professional duties (as defined in the federal rules) are exempt from overtime pay. Salaried office employees who earn less than $455 weekly (or less than $23,660 annually) and those who do not primarily perform executive, administrative or professional duties are not exempt from overtime pay.

Defining Exempt Duties

Q:  We understand that employees who are executives, administrators and certain professionals are exempt from overtime. However, in our business, these exempt employees sometimes do tasks that really aren’t typical of an executive, administrator or professional. How can we make sure that we’re treating these employees correctly?

A:  First, click here for an overview from the Labor Department about overtime. If you’re still uncertain about applying these rules, contact the Wage and Hour Division office of the U.S. Department of Labor in your state or consult with your payroll or human resources professional.

Regarding exempt employees who sometimes do work that really isn’t typical of a manager, executive, administrator, or professional, the federal rules state that, to be exempt, employees’ primary duties must be executive, managing, administrative, or professional in nature. According to the federal rules, “Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.”

Computer-Related Jobs

Q:  Our company has computer employees on salary. Is this still appropriate under the current rules?

A:  Yes, if the type of computer work they do qualifies for exempt status and if you pay them enough. Here’s a summary of computer-related duties that qualify an employee for exempt status:

    1. The application of systems analysis techniques and procedures to determine hardware, software or system functional specifications. This includes consulting with users.

    2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, based on and related to design specifications.

    3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems.

    4.  A combination of the above duties, which require the same level of skills to perform.

If you pay an employee doing these types of computer tasks at least $455 per week, or you pay at least $27.63 hourly, the employee is exempt from overtime pay.

Sales Personnel

Q:  Our sales people spend most of their time calling on customer accounts outside of our office. They’ve always been paid a base salary, plus commission. Can we keep on paying them this way under the current rules?
A:  Outside sales people are exempt from overtime and can be paid on a salary-plus-commission basis, if:

     Their primary duties are making sales, or obtaining orders or contracts.
     They customarily and regularly do this work away from your place of business.

Note: The minimum salary requirement for an exempt employee does not apply to outside sales reps.

Salaried and Nonexempt

Q:  Many of our company’s employees who have always been exempt from overtime are now nonexempt because they are paid less than the stipulated amount – even though they perform exempt-type duties. Some of them feel they’ve been demoted. They seem to equate being exempt with management. Any suggestions on how to handle this?

A:  For some people, being salaried is prestigious and more important than earning a little more occasionally in overtime. For these employees, the answer is simple: Continue to pay them a minimum guaranteed salary just as you have been. But also pay them overtime pay for any overtime hours worked (based on their hourly rate, their salary divided by 40 hours). Of course, you can only use this strategy if you are willing to guarantee a weekly salary, even when the employees work less than 40 hours in a week.

If their annual salaries were close to $23,660 a year ($455 a week) in the past, you could raise their salaries above this amount. Then, as long as their duties continue to be those of an exempt employee, they will continue to be salaried and exempt.

Deductions from Exempt Salaries

Q:  In the past, if our business made deductions from an exempt employee’s salary for almost any reason (except paid vacation and paid time off), we ran the risk of the employee losing exempt status. If, for example, we wanted to discipline salaried employees by making deductions from their paychecks, we could get into serious trouble. Now that the rules have changed, can we make disciplinary deductions from an exempt person’s salary without getting penalized?
A:  The general rule hasn’t changed. If an employer makes deductions from an exempt person’s salary, similar to the kind made in nonexempt employees’ pay, the employee is being treated as a nonexempt employee and the exempt status is lost. In other words, an exempt employee is entitled to his or her full salary for any week that work is performed, regardless of the number of hours.

Since the rules changed, an employer can suspend an exempt employee without pay for serious conduct violations (such as sexual harassment or workplace violence). Your company can discipline with partial-week suspensions, without pay, for misconduct.  These type of suspensions and discipline actions do not put the exempt status in danger.

Remember: By making unauthorized deductions from an exempt employee’s salary, an employer risks losing not just the individual’s status but also the status of the entire class of exempt employees at the company.

For protection from liability for possible improper deductions from exempt salaries, employers must:

    1. Clearly communicate a policy prohibiting improper salary deductions.
    2. Include in the policy a complaint mechanism.
    3. Reimburse employees for improper deductions.
    4. Make a good-faith commitment to comply in the future.

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