Federal and State law require nonexempt employees to be paid time and one half their regular hourly wage for hours worked in excess of 40 hours in any given workweek. Overtime is calculated based on an employee’s regular hourly wage.[1] Assuming there is no contract or other obligation imposed by Federal or State law, there is no requirement that a nonexempt employee be paid premium overtime compensation for hours worked in excess of eight hours per day, nor for work on Saturdays, Sundays, or holidays, other than the requirement of overtime for over 40 hours per week.
Who Qualifies as a Nonexempt Employee Eligible for Overtime Pay?
Not all employees qualify for overtime pay. Generally, individuals employed in bona fide executive, administrative, or professional capacities are exempt from Federal and State overtime requirements under the so-called “white collar” exemptions. Qualification for exemption is not determined solely by an employee’s title, job description or the fact that the employee is paid on a salary as opposed to hourly basis. Rather, to qualify for this exemption, the employer must show that the employee satisfies both a “salary basis” test and a “duties” test. Because the burden is on the employer to demonstrate that the exemption applies, it is critical that employers conduct a thoughtful and careful analysis when classifying an employee as exempt.
Satisfying the Salary Basis Test.
The salary basis test requires that employees qualifying under the white collar exemptions be paid a minimum level of compensation. Effective January 1, 2020, the Department of Labor issued a final rule increasing the salary-level threshold for white-collar exemptions from $455 a week to $684 a week. In other words, workers who do not earn at least $35,568 a year would be eligible for overtime, even if performing managerial or professional duties. Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level.
Satisfying the Duties Test.
Once an employer determines that the employee meets the minimum salary threshold, the employer should then engage in a far more difficult analysis – whether the employee’s job duties fall within the applicable exemption. Each of the “white collar” exemptions have different criteria as set forth below:
- Executive exemption. The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. Additionally, the employee must customarily and regularly direct the work of two or more employees and have the authority to hire or fire workers (or the employee’s suggestions and recommendations as to hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight).
- Administrative exemption. The employee’s primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Additionally, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption. The employee’s primary duty must be to perform work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction or requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Computer professionals are limited to computer system analysts, computer programmers, software engineers, or other similarly skilled workers in the computer field.
The “Highly-Compensated Employee” Exemption.
In addition to the white-collar exemptions, there exists a special “highly compensated employee” exemption which allows high earners with a total annual compensation of at least $107,432 to be exempt from overtime pay requirements even if they do not meet all of the duties of the white-collar exemptions. Instead, a reduced duties test is applied requiring that 1) the employee’s primary duty be office or nonmanual work, and 2) the employee customarily and regularly performs at least one of the bona fide exempt duties of an executive, administrative or professional employee.
*Note – In 2023 The United States Supreme Court held in Helix Energy Solutions Group, Inc. v. Hewitt that a highly compensated executive employee paid a guaranteed daily rate is not paid on a ‘salary basis’ and therefore, is a nonexempt employee entitled to overtime pay under the Fair Labor Standards Act (FLSA). Read our update on this decision here.
Liability for Violations.
Employers who fail to pay overtime to an employee misclassified as an exempt executive, administrative or professional employee face significant consequences. Employers are liable for all overtime wages due as well as administrative penalties of up to $1,100 per violation. The look-back period for unpaid overtime is generally two years, increased to three years for willful violations. Moreover, the Department of Labor and the courts may award “liquidated damages” of two-times the amount of wages due. Finally, successful employees are entitled to attorney fees. To avoid significant financial forfeiture, businesses should carefully analyze existing job descriptions to ensure they accurately reflect the position’s duties and responsibilities and will justify the classification of an employee as exempt from overtime.
Please do not hesitate to contact the Labor & Employment Attorneys at Lindabury, McCormick, Estabrook & Cooper, P.C. with any questions regarding the proper classification of your employees for overtime purposes.
[1] If an employee is not paid based on a single hourly rate, an employee’s regular hourly wage is determined by dividing the total remuneration by the total number of paid hours worked in that week.