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Do I have to pay overtime?

In these challenging economic times, many businesses are asking more from all of their employees, including their salaried employees.  As a result, many businesses are requiring their salaried employees to work more hours and complete tasks that were previously performed by hourly or temporary employees.  For example, a salaried employee may now be doing both the management work that he or she has always done, as well as additional work that was previously performed by lower level employees who have been laid off. Anytime a company’s salaried employees are working more than 40 hours in a week, there is the potential for unpaid overtime compensation liability if these salaried employees are not exempt employees under federal and state overtime laws.  The answer to whether such salaried employees are exempt from the overtime laws requires an examination of what the employee’s actual day-to-day duties and responsibilities are—not merely a look at his or her job title and how they are paid.  Accordingly, when an employee’s duties and responsibilities change, his or her classification as exempt or not exempt may also change.

In general, the Federal Fair Labor Standards Act (“FLSA”) requires that most employees be paid at least the federal minimum wage for all hours worked and be paid overtime at time-and-a-half for all hours worked in excess of 40 hours in a week.  The FLSA provides an exemption from the overtime laws for employees who are considered “executive,” “administrative,” “professional.” or “outside sales employees.”  See generally 29 CFR Part 54.  Likewise, under Minnesota law, similar exemptions apply to bar the application of state minimum wage and state overtime laws from applying to employees who are considered “executive,” “administrative,” “professional,” or “outside sales employees.”

To determine whether an employee is exempt from overtime laws because he or she is an “executive” employee (often referred to as a manager), the Court will apply a four-part test.  This test includes an examination of: (1) whether the employee’s salary is at least $455 per week; (2) whether the employee’s primary duties include managing the business or a department or division of the business; (3) whether the employee directs the work of two or more other full-time employees;  and (4) whether the employee has the authority to hire or fire other employees or, if not, whether the employee’s suggestions and recommendations as to such hiring and firing or other change of status of an employee is given particular weight by the ultimate decision maker.  For an employee to be considered an “executive employee” who is exempt from the overtime laws, all four parts of this test must be met.  Application of this test focuses on what an employee’s actual day-to-day job duties, not simply what may be written in a job description or what the employee’s duties were when he or she began employment months or years before.  As a result, an employee who is initially exempt from the overtime laws because his or her work duties and responsibilities satisfied this four-part test may later become a non-exempt employee entitled to overtime pay because of changes in his or her work duties and authority.

Similarly, to determine whether an employee is exempt from overtime laws because he or she is an “administrative” employee, the Court will examine three factors: (1) whether the employee’s salary is at least $455 per week; (2) whether the employee’s primary duty is the performance of non-manual work directly related to the management or general business operations of the company or the company’s customers; and (3) whether the employee’s primary duty includes the exercise of discretion and independent judgment regarding significant matters.   For an employee to be considered an “administrative employee” exempt from the overtime laws, all three factors must be satisfied.  Application of this test, like the test for an executive employee, focuses on what an employee is actually doing in his or her day-to-day job duties.

Likewise, for an employee to be exempt from overtime laws because he or she is a “learned professional” employee, the employer must show that: (1) the employee’s salary is at least $455 per week; (2) the employee’s primary duty is the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; (3) the advanced knowledge must be in a field of science or learning; and (4) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.  There is a separate test for a “creative professional” employee.  This test requires that: (1) the employee’s salary is at least $455 per week; and (2) the employee’s primary duty is the performance of work requiring invention, imagination, originality or talent.  For an employee to be considered a “professional employee” who is exempt from the overtime laws, one of these tests must be satisfied.  Once again, the Court will examine on what an employee is actually doing in his or her day-to-day job duties to determine whether either test has been met.

Finally, an employee is exempt from the overtime laws as an “outside salesperson” if the employee’s (1) primary duty is making sales and (2) the employee is customarily and regularly engaged in his or her duties away from the employer’s place or business.  Again, the Court will examine the actual, day-to-day duties of the employee and where he or she performs such duties in applying this test.

If an employer treats an employee as exempt from the overtime laws, but the employee is actually not exempt from the overtime laws, then the employee will likely have a claim against the employer for unpaid overtime compensation if the employee has worked more than 40 hours in a week.  In addition, such an employee would likely have claims for “liquidated damages” under the overtime laws, which essentially are civil penalties that double the amount of overtime compensation owed to the employee.  Such an employee can also recover his or her reasonable attorneys’ fees and other costs incurred in bringing such a claim.  As a result, it can be a costly mistake for a business to misclassify an employee as being exempt from overtime laws if, in reality, the employee is not exempt.

So, what is the best way for a business to seek to protect itself from such potential costs and liability that could result from the misclassification of an employee?  The answer is to consult with an attorney and obtain sound legal advice on the proper classification of the company’s employees.