January 5, 2004

 

Do You Know...

 

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Friday, January 2, 2004 was National Director Michael Maciekowich's 50th birthday! Congratulations, Mike, on hitting this milestone.


 

Should Exempt Employees Receive Overtime Payments?

 

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While employers are under no obligation to pay overtime to employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA), a growing number have taken an interest in the practice. In this Astronology, we explore the potentials and pitfalls of exempt overtime.

Some employers interested in retaining star performers in particularly competitive industries have expressed an interest in rewarding them financially for working more than 40 hours per week. This is a thorny path, however, and one that can lead to feelings of entitlement - and even permanent non-exempt status.

The cardinal rule for exempt overtime is that any related bonuses must not be tied to hours worked. As the FLSA includes in its definitions of exemption that such employees are "paid on a salary basis," it is essential that a court does not perceive them as hourly employees.

To pass the salary-basis test and be considered exempt, an employee must receive a predetermined amount of compensation at regular intervals. Accordingly, any method of rewarding exempt employees for overtime that involves tracking their hours can put their exempt status in jeopardy, as counting hours implies compensating on an hourly basis.

Legal interpretations have varied. In Brock v. Claridge Hotel & Casino, employees were guaranteed a minimum weekly salary, and then awarded additional compensation on an hourly basis for hours worked above the minimum. The court decided that the employees were not paid on a salary basis, and underlined in its decision the incompatibility between hourly compensation and the intention of the FLSA's salary requirement. In Elwell v. University Hospital, a similar decision was reached.

On the other hand, in Boykin v. Boeing Co. and Spradling v. City of Tulsa, courts ruled that the receipt of overtime compensation did not, in and of itself, change exempt status.

While courts appear to be more concerned with the reduction of pay based on hours worked by exempt employees than with the receipt of overtime pay, any method of compensating based on hours tracked may result in said employees losing exempt status. In order to ensure that exempt status is maintained and still compensate for extra hours, employers must be creative in structuring their bonuses.

For instance, a bonus that rewards employees for the completion of a project that required overtime might be a safer bet than rewarding employees for the specific hours worked. The more that such incentives are tied to performance above and beyond the call of duty, and the less they pertain to the particular number of hours worked, the safer they are in this respect.

The frequency of payouts may also impact the legality of such compensation. For instance, quarterly payouts would be preferable to those that coincide with regular pay periods, as the latter method will lead to fluctuating amounts of pay incompatible with the salary basis test.

With a general idea of the average "extra" hours worked, an employer can estimate the amount of overtime that would have accrued, and pay employees performance-based bonuses on a quarterly or other basis without fear of legal repercussions.

Again, any bonus or incentive paid to exempt employees and calculated on a per-hour basis may endanger their exempt status. If you are considering rewarding your exempt employees for overtime, we recommend that you discuss your policy with appropriate legal counsel.  

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