Because My Employee is Paid Salary, I Do Not Have to Pay Overtime, Correct? … Wrong!

I cannot count the number of times I have heard the statement from a prospective or new client that “the employee is paid salary, so we do not have to pay overtime.” This misconception can easily cost employers tens of thousands of dollars or more. Whether an employee is entitled to overtime is a complicated analysis of federal law, the Fair Labor Standards Act (“FLSA”), and state law.

Federal:

When conducting an analysis of whether overtime is required, employers should always start from the perspective that unless an employer can establish either that the employer is not covered by the FLSA or that an exemption from the FLSA applies, employees are presumed to be eligible for overtime at 1 ½ times their regular hourly rate for all hours worked in excess of 40. In order to determine whether an exemption applies, meaning that an employer does not have to pay overtime, an employer needs to review not only the income/salary received, but also the job description of each individual employee.

Some of the most common exemptions from federal overtime rules are the executive exemption, administrative exemption, professional exemption, computer employee exemption, and the outside sales exemption. The first four exemptions listed above all require employees to be compensated on a salary basis at a rate not less than $455 per week (although this value may change shortly). This is, unfortunately, where some employers assume that the analysis ends. However, in addition to the salary requirements, employees must meet job duty tests, a few of which are outlined below:

  • In order to fall under the administrative exemption, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customer and the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

  • In order to fall under the professional exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge. This is defined as work that is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment, the advanced knowledge must be in a field of science or learning, and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Many of the terms in the duties described above are further defined through administrative bodies and case law. This article is not meant to describe all exemptions or go into any exemptions in detail, but to simply point out that the analysis of whether an employee falls under a certain exemption can be very difficult.

State:

What makes the analysis even more complicated is that an employer must comply with both Federal AND State law. There are instances where an employer does not have to pay overtime pursuant to federal law but is required to pay overtime pursuant to state law. For instance, there is a federal exemption from overtime for employees at retail establishments paid on commission. However, there is not a similar exemption under Minnesota law. Thus, while no overtime will be required on a federal level, for all hours worked in excess of 48 (which is Minnesota’s threshold) the employer will be required to pay overtime pursuant to Minnesota law. This is only one of many instances where the FLSA diverges from state law and is not unique to Minnesota. The FLSA and Wisconsin overtime laws diverge at times as well.

The penalties for misclassification of exempt/nonexempt employees can be extremely severe and expensive. Damages can easily be tens of thousands of dollars, if not hundreds when dealing with large numbers of employees. On top of a potential damage reward to employees, the expense of litigating an overtime claim is extremely expensive as well.

As Benjamin Franklin once indicated “an ounce of prevention is worth a pound of cure.” If you have any questions about whether your Minnesota or Wisconsin employees are properly classified, I urge you to contact an experienced labor and employment attorney to help you with the analysis.


Questions about this topic?

If you have any questions about the content of this article or are looking for assistance in properly classifying your employees, please contact Labor & Employment attorney Lida Bannink at 651-351-2116, or email at lbannink@eckberglammers.com.


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