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Compensation: Do You Know the Rules?

Mon December 30, 2013 Publications

Federal Overtime Laws

Florida businesses face the highest number of unpaid overtime wage claims in the nation under the federal Fair Labor Standards Act (FLSA).

Lawsuits claiming unpaid overtime against businesses have increased dramatically nationwide, nearly doubling in the past five years. Florida businesses, in particular, received the brunt of this increase. More than 30 percent of all new claims filed in our federal courts were filed in Florida in 2010 – for Florida, nearly one-third of all filings nationwide.

Business owners and managers increasingly are being named personally as defendants, along with their companies, because under certain circumstances they can be held personally liable for unpaid overtime. Today, unpaid overtime litigation is a high-volume, organized practice area for law firms with resources that engage in aggressive multi-media advertising campaigns.

There are several reasons for these increases. Conservative rulings and changes to the law in other types of employment law cases and competition in other practice areas have spurred law firms to seek new areas of revenue. Law firms have focused on unpaid overtime claims, both small and collective, in the hope of seeking attorney’s fee awards that far exceed the wages claimed. Also, the definition of “compensable work” has changed with the increased accessibility of off-duty employees, through improved technology.

The overtime laws are mechanical and counterintuitive, but they apply to nearly every business. Technical violations are not uncommon. Even a minor violation, like the docking of a final paycheck, can subject a business to back pay, liquidated damages, and attorney’s fees. Where there is a violation as to one employee, there is often a violation as to others. And, owners or managers in charge of day-to-day operations can be personally liable.

Businesses must thoroughly understand and comply with the laws to avoid liability. They should review the U.S. Department of Labor Wage and Hour Division website and conduct an internal audit to determine that employees are properly classified as exempt or nonexempt and that nonexempt employees’ hours of work are properly recorded and paid.

Common Exemptions for Salaried Employees

Certain employees, under the federal Fair Labor Standards Act (FLSA), are exempt from minimum wage and/or overtime requirements. The most common exemptions apply to executive, administrative, professional and outside sales employees who meet certain salary, duties and responsibilities requirements. These are commonly referred to as the “white collar” exemptions.

With the exception of certain employees, including outside sales employees, most employees must be paid a minimum salary of $455 per week to be exempt. Salaried employees must generally be paid their full salary regardless of the hours they work. And, these employees’ salaries must not be subject to reduction based on the quantity or quality of work.

Although it is a common misconception that employees are exempt from overtime if they are paid a salary, placing an employee on a fixed salary is not enough. In addition to the salary test, employees must meet the duties test to qualify for one of the common white collar exemptions.

The executive exemption applies to management level employees with the primary duty of managing the enterprise, its department or subdivision. These employees customarily and regularly direct the work of two or more other employees. And, they must either have the actual authority to hire or fire, or their recommendations as to hiring, firing or other types of significant employment actions must be given “particular weight.”

The administrative exemption applies to employees whose primary duty consists of performing office or non-manual work directly related to management policies or general operations of the business or the business’s customers. Administrative employees must exercise discretion and independent judgment with respect to matters of significance. Insurance claims adjusters, financial analysts, administrative assistants to business owners and human resources managers will generally qualify for this exemption under the duties test.

The most common type of professional exemption applies to employees who primarily perform work requiring advanced knowledge of science or learning – referred to as “learned professionals.” These employees are registered or certified medical technologists, registered nurses, dental hygienists, physician assistants, and certified public accountants to name a few – in addition to lawyers, doctors or teachers who do not need to meet the salary test. There is also an exemption for creative professionals and computer professionals.

For the outside sales exemption, employees must have the primary duty of making sales or obtaining orders or contracts for services or for the use of facilities. These employees customarily and regularly perform their duties away from the employer’s places of business.

Finally, there is a special category of exemption for highly compensated employees – those whose annual compensation is at least $100,000. These employees are deemed exempt provided they customarily and regularly perform any one or more of the exempt duties and perform office or non-manual work.

Tipped Employees

Businesses may use tips received by tipped employees to take a tip credit against the minimum wage obligations if certain criteria are met under the federal Fair Labor Standards Act (FLSA). Employees must be given a minimum “cash wage” of $2.13 per hour. If the employee’s tips combined with this cash wage do not equal the minimum hourly wage (the current minimum wage in Florida is $7.67 – higher than the Federal minimum wage of $7.25) then the business must make up the difference.

Prior to taking the tip credit, businesses must notify the tipped employees of certain required information, such as:

  • the amount of cash wage they will be paid
  • the amount of tips to be credited as wages toward the minimum wage
  • the right to retain all tips received by the employees unless the employees participate in a valid tip pooling arrangement limited to employees who customarily and regularly receive tips

Although notice can be provided verbally, the best way to defend against challenges to the notice requirement is to do this in writing and have each employee sign and date the notice, acknowledging that they have received and understand the notice.

Businesses can require tipped employees to split or pool tips among employees who customarily and regularly receive tips. To be valid, tip pooling arrangements must not be required to contribute a greater percentage of their tips to the pool than is “customary or reasonable.” In the past, contribution not exceeding 15% of the employee’s tips was considered reasonable, but there is no longer such a presumption. Where the tip pool includes ineligible employees, such as management or kitchen staff, the business must reimburse the tipped employees for the tips turned over to the ineligible employees.

If the tipped employees work overtime, it is important to be sure that their overtime pay amounts to one and a half times their regular rate of pay, which includes the amount of tip credit taken.

Finally, the U.S. Department of Labor has recently established that tipped employees must be allowed to retain their tips, even if the business does not take a tip credit or use tips to meet its minimum wage obligations.

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