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Beware the Double Whammy of New Overtime Rule

By the end of the year, employers could get hit with a double-whammy from new overtime pay rules. You may have heard about the new minimum pay rule, but another aspect of the overtime rules could sneak up on you.

The big, publicized change, announced in May, is that executives, administrators, outside sales people and professionals (and some others) are exempt from overtime under the Fair Labor Standards Act (FLSA) only if they perform duties that are considered exempt (the “duties test”) and are paid a minimum of $47,476 annually, or $913 a week (the new “salary test”). The current threshold, unchanged since 1975, is only $23,660.

Read our previous post on this change in overtime rules here.

What makes it a double whammy is that the attention given to the new salary test likely will prompt many employees to ask if they are correctly being classified as exempt based on the “duties test,” which is separate from the salary test. Regardless of how much someone is paid, they must be paid overtime for hours worked over 40 per week if they don’t fall into an exempt category based on their actual job duties.

Employers won a major victory when the U.S. Department of Labor left the existing definitions for exempt classifications unchanged when it increased the pay threshold. We would caution employers not to breathe a sigh of relief, however. This unchanged part of the overtime rules may prove to be quite troublesome in the months ahead.

Misclassification of even one employee can cost thousands of dollars

Here’s the hidden danger. With so much attention now focused on overtime eligibility, many employees – even those already paid at least $47,476 annually – likely will consider, perhaps for the first time, whether their position is eligible for overtime pay based on their job duties. This is especially likely for managers and administrative employees who routinely work more than 40 hours in a work week. Newly enlightened employees could come forward and present you with a demand for thousands of dollars in back wages for overtime.

For example, an employee who earned $50,000 last year and worked an average of 10 hours of overtime a week could claim $18,000 of unpaid overtime.

A lot has changed since these exemptions were written. There are whole industries that would have seemed like science fiction just a decade or so ago, and technology has transformed every business. More importantly, our workplace culture has undergone a significant shift with just about everybody expected to multitask. There are few jobs in our knowledge economy that can be defined by just one responsibility.

There is a long list of exempted occupations – seasonal workers at theme parks, for example – but for most businesses, there are three occupation classifications that should be of concern:

  • outside sales employees,
  • certain computer professionals, and
  • those who work in executive, administrative or professional jobs.

What to look for

For outside sales, the test is clear. The employee must spend most of his or her time away from the employer’s place of business.

The computer exemption is more difficult to define, both because nontechnical people may not fully grasp the nature of these jobs, and in small businesses, a go-to computer employee may do everything from code writing to laptop repairs. If the words analyst, programmer or engineer are in the job description (and the employee actually performs such tasks), the position likely is exempt. However, if your computer employee’s primary role is to keep your system up and running, that may seem like a highly skilled, professional position – but it likely is not exempt.

If you want to classify someone as an executive, he or she must be managing employees and either have the actual authority to hire and fire or at least have significant influence in such decisions. Administrative employees must perform work that supports management and business operations and exercise independent judgment on significant matters. As for professionals, they must do work that requires advanced knowledge in a field of science, learning or creativity – work that most often requires an advanced college degree.

Does this sound subjective? It is, and many jobs are so specific in their functions that it’s impossible to offer general advice on whether they qualify for exemptions.

The best way to protect your business against the penalties that come from misclassifying employees is to have accurate, up-to-date job descriptions that accurately reflect the job’s actual functions and require employees to sign off on them. When writing or revising a job description, ask employees for their input. What do they do? How much time is involved in each job duty? What knowledge, skills and training are required?

Take a close look at all your positions and be realistic. In some cases, you may need an outside opinion. If you have to think for more than five minutes about whether a position qualifies as exempt, it probably does not.

Reginald W. Belcher is a shareholder at Turner Padget in Columbia, S.C., and represents businesses and employers throughout South Carolina. The South Carolina Supreme Court has certified him as a specialist in Employment and Labor Law. He may be reached at rbelcher@turnerpadget.com or by phone at (803) 227-4314.

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