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A Better Partnership


Feb 2006
February 15, 2006

What Businesses Should Know About -- Overtime Pay

One of the most confusing areas of the law for employers concerns the payment of overtime. Terms like "salary" and "hourly" are bandied about with terms like "exempt" and "nonexempt." Despite the fact that the wage and hour laws have been in place for decades, confusion continues.

The Basic Rule

To understand the wage and hour laws, it is best to start with this basic rule: Every employee who works more than forty hours in a pay week is entitled to pay at time and one-half for each hour worked over forty. An employee who is entitled to overtime pay under the law is referred to as "nonexempt."

To avoid payment of overtime compensation, an employer must show that the employee falls within an exemption under the law. There are four basic exemptions: the executive exemption, the administrative exemption, the professional exemption and the outside sales exemption. An employee who is exempt from overtime pay is referred to as "exempt."

To be eligible for an exemption, the employer must pay the employee on a salary basis and the employee's job duties must meet the requirements of the particular exemption under the law.

Salary Basis

An employee is paid on a salary basis when the employee receives a predetermined amount each pay period and the amount is not subject to variation based on the quality or quantity of work performed. Thus, an employer may not make deductions from the salary for tardiness or leaving early. Similarly, the employer may not make deductions if the employee is absent due to sickness or disability unless the employer has a policy or plan that provides compensation for the loss of salary caused by the sickness or disability. (Under the Family and Medical Leave Act, however, an employer does not have to pay for the time the employee is off work if the employee claims the lost time to be covered under the FMLA.) It is important to note that an employer may pay a base salary, plus incentives.

Executive Exemption

The executive exemption is limited to those who are paid a salary, directly supervise two or more full-time employees and have the discretion to hire and fire or can effectively recommend to hire or fire.

Administrative Exemption

The administrative exemption is limited to those who are paid a salary and regularly exercise independent judgment and discretion concerning management of the business. Examples of such individuals may include tax experts, safety directors, personnel managers, and purchasing agents. Employees who typically do not meet this exemption include secretaries, receptionists and accounting clerks.

Professional Exemption

The professional exemption is generally limited to individuals who have acquired professional knowledge through prolonged study. Employees who typically meet this exemption include accountants, lawyers, degreed engineers and physicians.

Outside Sales Exemption

The outside sales exemption is limited to those employees who spend a significant amount of the working time making sales calls away from the employer's place of business (typically at the customer's place of business).

Making the Decision Whether an Employee is Exempt or Nonexempt

Determining whether an employee qualifies for an exemption from overtime pay must be done on a case-by-case basis. Job titles are not controlling. What is controlling are the employee's actual duties and whether the employee is compensated on a salary basis. In addition, there are some obscure exemptions available and exceptions to the exemptions in the law. Accordingly, this is an area in which employers should tread carefully and often with professional advice.

If you have questions about overtime pay, feel free to contact Lou Rabaut at 616.752.2147 or your WN&J attorney.

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