By Andrea Paris, Esq.
One of the questions I ask business owners when I audit their employment practices is this: “Do you pay employees an overtime rate when they work overtime?
One of the most common responses I get is: “No. I pay them a salary.” This is when the alarms go off in any employment lawyer’s head.
It is a common myth that if you pay employees a salary you don’t have to pay them overtime. This is not true. Below are some basic rules that could save you from a wage and hour claim that could bankrupt your business.
1. Under both federal and California law, employees are entitled to certain protections such as minimum wage, overtime pay, and meals and rest breaks by default. These employees are classified as “non-exempt” employees. Most, if not all, of your employees fall under this default rule.
2. Employees may be “exempt” from this default rule, meaning that they don’t have to meet minimum wage requirements, get overtime pay, or meet meal and rest break requirements every day, only if they meet certain strict criteria.
One of the criteria for the most common types of exemptions is that the employee is paid a certain salary, commonly known as the “salary test.” This is where the myth originated and caused many people to believe that paying a salary is enough to make an employee exempt.
Since meeting the criteria of an “exempt employee” is the exception to the rule, only a few of your employees will meet this test and properly be classified as “exempt employees.” If the majority of your workforce is not entitled to overtime pay, you are probably misclassifying your employees.
The Criteria for Exemptions
Federal and California law have different specific criteria for exempt classifications. The most common exemptions under
California law are: Executive, Administrative, and Professional Exemptions. In order to be classified as exempt under any of these three categories, the employee must meet two tests: 1) the salary test; and 2) the duties test.
Salary Test
All three of the above categories have the same salary test in California:
The employee must be paid a salary that is at least twice the state minimum wage for full-time employment (40 hours). This means that as of January 1, 2017, the employee must make at least $43,680 per year.
Duties Test
The duties test varies under each type of exemption and is beyond the scope of this article. By way of example, in order to meet the Administrative Exemption, the employee’s duties and responsibilities must involve either:
· The performance of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer’s customers, or
· The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; AND
· Who customarily and regularly exercised discretion and independent judgment; AND
· Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
· Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience, or knowledge, or
· Who executes, under only general supervision, special assignments and tasks, AND
· Who is primarily engaged (spends more than 50% of the time) in duties which meet the test for the exemption.
Sorting through the duties test could get overwhelming or confusing for most people and business owners should seek help from their employment attorneys.
Why does this matter?
Misclassification lawsuits are very expensive. Here are some of the costs related to misclassification lawsuits:
1. Overtime payment that the employee should have received;
2. Penalties for each missed meal break and each missed rest break that the employee did not receive;
3. Penalties if the employee’s salary, divided by the number of hours they worked is less than the minimum wage;
4. Your attorney’s fees;
5. The employee’s attorney’s fees; and
6. Distraction and time away from your business.
These lawsuits usually cost businesses tens to hundreds of thousands of dollars. The good news is that you could easily and cost-effectively fix these mistakes. The return on investment in being in compliance is significant. In fact, it could save your business.
If you have questions about employee classification or any other employment law matters, please feel free to contact Andrea Paris, Esq. at (949) 529-0007 or ap@andreaparislaw.com.
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