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Wages and Hours: Paying Overtime Correctly

With the downturn in the economy, companies are often finding themselves laying off workers in order to save money and meet expenses. As I discussed in a previous article it is often necessary to let a portion of a company’s workforce go in order to cut overhead. With a reduction in force often overtime is necessary. In order to stay within federal as well as state employment guidelines, proper accounting has to be kept to ensure that overtime rates are properly paid. Failure to do so can result in litigation as well as penalties and interest on the unpaid back wages.

In California, nonexempt employees over the age of 18 and any minor employees not prohibited from working in the subject employment shall not be employed for more than eight hours in a workday or for more than forty hours in any workweek unless they are paid the appropriate overtime wages. For nonexempt employees any time beyond eight hours but less than twelve hours in any typical workday, that employee shall be paid at a rate one and one-half times their normal rate of pay. For any work performed in excess of twelve hours in a day that employee shall be paid at a rate equal to double the regular rate of pay. These rules are also typically true for all states within the United States.

There numerous exceptions to the overtime rule though. The main exception is for executive employees. Executive employees are defined as;

  • Whose duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof; and
  • Who customarily and regularly directs the work of two or more other employees therein; and
  • Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and
  • Who customarily and regularly exercises discretion and independent judgment; and
  • Who is primarily engaged in duties, which meet the test of the exemption;
  • An executive employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.

As an executive employee, that particular employee is not entitled to overtime wages. However, in order to meet the criteria of a managerial employee, one must be more than merely a supervisor of two or more employees. The managerial exempt employee must be in charge of the unit, not simply participate in the management of the unit.

There are other exceptions that may apply to your business, however, many are state specific and it is highly recommended that you speak with an attorney familiar with the employment laws of your particular state to stay informed of other exemptions to overtime laws.

One of the most misunderstood areas of payment of overtime laws by employers is whether overtime must be paid to salaried employees. The short answer is yes, depending on whether that employee is exempt or not. Obviously, executive employees that meet the above mentioned requirements are exempt from overtime laws whether they are paid hourly, commissions or salary or some combination thereof. Professional employees are usually exempt as well, i.e., in house attorneys and accountants. All employees, whether hourly or salary, must be paid overtime wages if they are not exempt and work over eight hours a day or forty hours per week.

This is usually where I see the most litigation as an attorney. Most companies realize that hourly employees that work in the warehouse should be paid overtime. Where most companies do not even realize that overtime needs to be paid is in regards to the salaried employees in the company’s offices. Usually what occurs is that a salaried employee is terminated and seeks legal counsel in regards to the termination. As part of the intake process the terminated employee learns that he/she should have been paid overtime but was not. This usually results in a complaint being filed with the labor board administrative court or with a civil court of law.

If a salaried employee needs to be paid overtime the most difficult question for most employers is how to calculate those overtime hours. If you are paid a salary, the regular rate is determined as follows:

  1. Multiply the monthly remuneration by 12 (months) to get the annual salary.
  2. Divide the annual salary by 52 (weeks) to get the weekly salary.
  3. Divide the weekly salary by the number of legal maximum regular hours (40) to get the regular hourly rate.

In California, if the employee was not paid overtime correctly, according to Labor Code section 203, “the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefore is commenced; but the wages shall not continue for more than 30 days.” Thus, not only would the employer be liable for the back wages, but also an additional month of salary after the employee is no longer employed as a penalty against the employer. Obviously, this can be quite costly for the employer.

What if an employee decides that he or she should not be paid overtime wages? Perhaps, the employer is a small family run company and one of the employees decides that as a matter of sacrifice to keep their job and to help the employer during tough economic times, they will waive their rights to overtime wages. In California, even if they do so in writing, that does not mean that later that same employee, when terminated, cannot come back and make an overtime claim against the employer. An employee cannot waive their rights to overtime or even minimum wage.

It is imperative that employers understand wage and overtime laws so that they may protect themselves from post termination or lay off claims. Ignorance of the law or a lack of intent is not a defense to wage claims nor is it a defense that the employee volunteered and agreed to waive their rights to overtime. Improperly paying your employees is a ticking time bomb waiting to explode in regards to your employment issues. There have been numerous class action lawsuits filed against large institutional employers for failing to classify employee correctly. In tough economic times the instances of employment litigation usually increases as employees are laid off or terminated. Again, it is recommended that before an employee is terminated or laid off that all employers seek the advice and counsel of an experienced attorney in employment law.

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