Overtime is tricky…To prove that an employee is exempt from overtime, companies must prove several thresholds.
In an article released in the Wall Street Journal on December 28 titled “More Workers Eligible for Overtime Pay in 2020”, Sarah Chaney and Eric Morath correctly point out that one of the tests that apply to overtime eligibility is pay. Anyone falling below the federal pay cap is automatically eligible for overtime, no matter what they are doing. As the article points out, the Labor Department just increased that limit by roughly 50%. That may seem exorbitant, but it hasn’t been adjusted since 2004, so it’s a very modest 2-3% annual cost of living increase over that time. The knock-on impact of this is that several states have higher thresholds, which will likely follow suit. At the end of the day, this means that companies need to be aware that millions of workers will now be overtime eligible… But the danger lies in thinking that simply meeting the salary threshold is enough to avoid overtime.
The world changed in 1999. In the landmark case Ramirez v. Yosemite Water Co., the California Supreme Court created a new cottage industry for class actions lawyers by ruling that employees were only exempt from overtime pay if employers could prove that more than 50% of their time was spent performing exempt tasks. While this specific case was pertaining to outside sales people, it was quickly applied to retail and hospitality settings where “managers” often switched frequently between exempt tasks and non-exempt tasks. It was no longer enough to say someone was in a management role, but companies now had to prove it. The lawsuits have been flowing since then, beginning in California but quickly spreading across the nation. It is now critically important that employers know not only how many hours a person is working and how much they are being paid, but also that the nature of those hours is also understood.
The introduction of Obamacare on March 23, 2010 further compounds the importance of knowing how many hours a person is working. The IRS defines a full-time employee as:
For purposes of the employer shared responsibility provisions, a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month.
The measurement period for this is at least 3 months but not longer than 12 months. Employees identified as full-time are then “locked in” to full-time status for at least 6 months after testing, or a time period equivalent to the measurement period chosen, whichever is longer. Most companies choose an annual measurement to facilitate administration. It is deceptively easy for someone who is considered part-time to exceed the threshold for full-time eligibility.
So, what should employers do to guard against paying unintended premiums?
- Most employers, especially large retailers, have already moved most management positions below store manager to an hourly rate and have proactively made the positions non-exempt. If your company still has positions in stores below the store manager who are considered exempt, it is critical to be vigilant on the number and type of hours they are working.
- Diligent scheduling practices are a key preventative measure. This means that employers should be aware of the workload in the stores and ensure that it is allocated appropriately to employees depending on their status (exempt/non-exempt, full-time/part-time). Best-in-class practices also provide a buffer against the thresholds. For instance, if the exempt threshold is 50% of hours performing exempt duties, schedule 75%. If the threshold for part-time is 30 hours, schedule 24. In the real-world things go wrong, and scheduling with a buffer allows managers the flexibility to respond without worrying about unintentionally exceeding limits. The use of an automated scheduling tool like Kronos or Reflexis can help facilitate this chore. As these systems become more sophisticated and integrate AI and machine learning principles, the task becomes even easier, but they do not replace the need for accurate inputs and deliberate decision-making.
- Regular reporting on variances and outliers is vital. Make no mistake, sometimes overtime is the best option. However, regular use of overtime may indicate an underlying condition. If a location, like a store, is regularly using overtime, it is likely that the store manager is working more than 40 hours and is likely “chipping in” with non-exempt tasks. This can quickly add up to exceed the 50% threshold. Similarly, monitoring the number of hours worked by part-time employees is important, especially in highly seasonal or variable environments. Moving a part-time retail employee to a 40 hours schedule during the holiday crush is often the best answer for the employer, the employee and the customer. However, it is important that post-holiday the hours revert so that the average during the measurement period is below the 30 hours threshold.
- An engineered labor model can be the foundation for good decisions. Detailed understanding of the nature of the work required facilitates good scheduling and reporting. It is important that companies balance the level of detail engineered into the model with the maintenance and applicability of that detail. To borrow an adage, “80% accuracy with 100% applicability trumps 95% accuracy with only 90% applicability.” Engineering a labor model with the proper balance of detail, application, communication and training can help employers ensure that they do not inadvertently expose themselves to legal risk.
Overtime is a complicated subject that goes well beyond the increasing salary threshold. There are armies of class action law firms who would love nothing more than to find a large employer who does not have tools and systems in place to apply overtime eligibility rules. The penalty for not accurately applying full-time status is $2500 per employee. For large employers, this can quickly push into the millions. The issues are complex and require sophisticated solutions. It is highly recommended that large employers consult experts in order to avoid risk.