Overtime Pay Requirements for Salaried Employees

By Meade, Janet A. | The CPA Journal, July 2009 | Go to article overview

Overtime Pay Requirements for Salaried Employees


Meade, Janet A., The CPA Journal


Business owners might be surprised to learn that their biggest liability could be their workforce. About 115 million employees, or 86% of me workforce, are covered by federal overtime rules, according to the U.S. Department of Labor (DOL). Increasingly, diese workers are bringing suit against their current or former employers for violations of the wageand-hour rules of the Fair Labor Standards Act (FLSA). Targets of the lawsuits aren't just employers of hourly workers. Classaction complaints are currently pending against BDO Seidman, PricewaterhouseCoopers, Sun Microsystems, Intel, Disney, J.P. Morgan Chase, and scores of other employers of skilled, salaried employees. Given this litigious landscape, it is imperative for CPAs to understand the overtime rules so that they can avoid potentially devastating damages.

Discerning which employees are exempt from overtime pay requires more effort than just figuring out who is salaried An employer must also consider an employee's education, responsibility, and decision-making authority. Classifying an employee incorrectly can be costly. Under the FLSA liquidated damages provision, court awards can be as much as twice the overtime pay adjustment. These awards, when combined with attorney fees and litigation expenses, can make the total cost of an FLSA violation staggering. According to the DOL's Wage and Hour Division, more tiian $185 million in back wages and almost $10 million in civil penalties were recovered from 28,242 compliance actions in 2008 alone. Even settling out of court can be costly, as evidenced by KPMG's recent $10 million settlement for unpaid overtime involving its unlicensed Canadian employees.

Which Employees Are Exempt?

The FLSA requires overtime to be paid to most employees at the rate of one and one-half times their regular rate of pay when working more than 40 hours in a week. Simple as that may sound, the Wage and Hour Division estimates that up to 70% of employers may be in violation of this rule. The most common violation concerns incorrect classification of an employee as being exempt from overtime pay. The FLSA provides an exemption from overtime pay for those working as executive, administrative, professional, and computer employees when they are paid a salary not less than $455 per week, or for computer employees compensated on an hourly basis, at a rate not less than $27.63 an hour. Other exemptions apply to outside sales employees and highly compensated employees. In order for an exemption to apply, however, an employee's specific job duties and compensation must meet all the requirements of the FLSA regulations (detailed in the Sidebar).

The rapid rise in class actions against employers for violations of the wage-andhour rules dates back to 2004, when the DOL revised the FLSA regulations to clarify which employees were exempt from overtime laws. The revised exemptions, however, continue to cling to the act's Depression-era mentality rather than recognizing the realities of today's 24/7 business environment. Many employees working in this environment now fall into what might be described as a gray zone in that their jobs don't fit neatly into one of the exempt categories.

Consider, for example, the learned professional exemption. This exemption requires an employee's primary duties to be the performance of work requiring advanced knowledge in a field of science or learning and customarily acquired by a prolonged course of specialized intellectual instruction. Traditionally, this exemption has covered professionals working in the fields of law, medicine, accounting, actuarial computation, engineering, architecture, and similar occupations. Class actions currently pending in California against BIX) Seidman and PricewaterhouseCoopers, however, claim that instand second-year accountants working as associates as they train to take the CPA exam are rank-and-file employees eligible for overtime pay. The lawsuits argue that most of the work performed by associates during the first two years of employment is menial and does not require independent discretion or judgment as stipulated by law. …

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