It was a long time coming, but last summer people on both sides
of the political aisle agreed to overhaul the federal overtime
regulations. A law was enacted and new rules took effect on
August 24, 2004.
Some people believe the changes will cause many employees to
lose overtime pay benefits, but it remains to be seen whether
this is true. One thing is clear: Federal overtime laws have
changed, and employers across the nation must familiarize
themselves with the new provisions and conduct internal
evaluations to ensure they comply.
Companies that fail to follow this law can be investigated by
the U.S. Department of Labor (DOL) and may be subject to large
back-pay orders, double damage awards, and orders to reimburse
employee legal fees. The DOL is serious about this. In fiscal
year 2003, it collected more than $182 million in back wages
arising from overtime and minimum-wage payment violations
alone, and assessed more than $3 million in penalties.
If you are an employer, you need to be aware that the DOL has
the power to take a single employee's complaint and convert it
into an investigation of your entire work force. The department
can force you to open your wage records for a general review
that could find overtime, minimum-wage, recordkeeping, or other
alleged violations. If it finds an overtime pay violation, the
DOL can require back pay for the two prior years, or three
years if it decides the transgression was intentional.
Hourly vs. Salaried Workers
While hourly employees are entitled to overtime, paying workers
a weekly salary does not in and of itself exempt them from
overtime eligibility. As of August 2004, any employee earning
less than $455 weekly is entitled to overtime pay, regardless
of the type of work he performs. For any time worked beyond 40
hours in a given week (defined as a consecutive pay period of
seven 24-hour days), employees must receive 11/2 times their
regular pay rates. (For the purposes of calculating overtime,
the hourly pay for salaried employees is determined by dividing
their weekly salary by 40 hours.)
White-collar categories. Compliance is more complex when you
have white-collar employees who make more than $455 per week.
When it comes to these employees, the DOL focuses on three
categories of workers: executive, administrative, and
professional. One rule that applies to all three groups is that
employees who receive a salary of more than $100,000 per year
are automatically exempt from overtime. Beyond that, however,
the three categories have different guidelines.
To qualify as an executive who is exempt from overtime pay, an
employee must meet the following general criteria:
- The salaried employee must be paid no less than $455
- The employee's primary work must relate to managing all
of a business or a recognized, established division of the
- The employee must regularly direct the work of at least
two full-time workers or their equivalent.
The executive employee must have the authority to hire and
fire the employees he supervises or must play an important role
in personnel matters.
The DOL defines management of a business as work that includes
such tasks as interviewing and training new employees; setting
pay rates and work schedules; disciplining workers; reviewing
employee performance; and exercising control over the purchase
of materials, equipment, supplies, and the like.
In sum, executives are employees who make key decisions about
a business's direction. They are generally top-level workers
who exercise broad independent judgment in important areas of
business operation, though they need not be in sole control of
Titles don't matter. Calling
someone an executive or giving him an executive title does not
make him one for purposes of overtime pay. To be an executive,
the employee has to perform the kind of executive functions
listed above. An employee who performs trade work or answers to
a supervisor who is not at the very top of the company would
not normally be considered an executive.
Administrators are also exempt from overtime pay requirements,
and their duties can be said to complement those of the
executives and other managers they commonly serve. To qualify
for this exemption, the following must be true of an
- Like an executive, an administrator must receive a
salary of at least $455 weekly.
- The worker's primary duty must be office or nonmanual
work that relates to management of the business operations
of an employer or its customers.
The employee must exercise discretion and independent
judgment on significant matters.
Of the three major white-collar exceptions to overtime rules,
the ones concerning administrative workers may be the trickiest
to apply. That's because it's not always easy to determine if
the employee exercises sufficient discretion on matters that
"relate to" operations management.
According to the DOL, the administrator's work must be
"directly related to assisting with the running or servicing"
of the business. The areas of responsibility that fall under
this phrase might include taxation, budgeting, quality control,
and health and safety issues. The employee who deals with these
issues exercises the requisite independent judgment if he
compares or evaluates potential courses of conduct and makes
decisions about the direction the business takes.
In the event of a dispute, the inquiry would focus on whether
the employee has the authority to make decisions that
significantly affect the business. To qualify for exemption
from overtime pay, the administrator would have to formulate
policy, carry out major assignments, or have the authority to
make serious financial decisions. Workers will not fall into
this category if their primary job is to follow orders from
Management jobs. As with
other exempt white-collar workers, the analysis for managers
focuses on the primary duties performed by the employee. The
standard examples of exempt administrators are executive
assistants and human-resource managers. In the construction
world, this category of exemption might apply to production
managers, project managers, and site supers. It could also
apply to a bookkeeper, provided he had discretion on matters of
budgeting, financing, and accounting.
Manual work. The
administrative exemption probably would not apply to lead
carpenters, even though they perform some supervisory duties.
Trade work is a primary part of the lead carpenter's job and
people who regularly do manual work are not exempt from
It's worth noting that the occasional performance of manual
work would not necessarily cost someone his exempt status. For
example, on smaller job sites, it's not unusual for a manager
to sweep the floor or help the crew unload a truck. Doing this
does not entitle him to overtime if his primary responsibility
is to supervise the employees who normally do the work.
Like executives and administrators, professionals must earn a
weekly salary of $455 or higher to be exempt from overtime pay
rules. In addition, the employee must meet the following
- The worker must work primarily in areas that require
- The advanced knowledge must be in a field of science or
- To qualify for the professional exemption, the employee
must have undergone a prolonged course of specialized
Professionals are now relatively easy to identify. They
generally work as accountants, engineers, and the like, and
possess a recognized professional status. Though those
performing creative work may be exempt under this category of
workers, tradespeople and others who might previously have been
considered professionals based on their high skill levels now
clearly fail the exemption test because they do not meet the
formal educational requirement.Jack K. Merrillcounsels small businesses on employment
matters and dispute resolution for Kushner & Sanders LLP in