Articles Posted in Overtime

In California, whether a computer/software professional is properly exempt from overtime compensation or whether he should be entitled to overtime is governed in large part by California Labor Code 515.5:

According to California Labor Code section 515.5, employees in the computer software field are not entitled to an overtime rate of compensation only if all four requirements are met:

(1) The employee is primarily engaged in work that is intellectual or creative and that requires the exercise of discretion and independent judgment.

The Department of Labor has recently issued an opinion holding that mortgage loan officers performing typical job duties, regardless of the title affixed to them (i.e. loan originator, loan consultant, etc…) and who spend the majority of their time working in the employer’s place of business of the employee’s own office, would not qualifiy as bona fide exempt employees.

One of the three requirements for being exempt from overtime under administrative exemption is that an employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. The Department of Labor pointed out that mortgate loan officers’ duties are contacting potential customers based on the information generated by the employer or databses to discuss or sell loan products. These are not administrative duties because the qualify as “making sales” and not running the business.

Although this determination is not limited to just mortgate loan officers, it may be applicable to other professionals selling products out of their employer’s office.

For a while I could not understand why so many employers violate basic overtime laws. After all, these laws are not rocket science, and plenty of resources are available for employer to understand and make sure that they comply with the rules of the Department of Labor Standards Enforcement when it comes to overtime compensation.

Recently, I represented an employer at a hearing in front of the labor commissioner. The employer was clearly liable for some overtime to several of his employees, and my job was mostly mitigating that liability rather than denying it. I was also curious to find out why the employer did not bother to contact me or another employer attorney before hiring workers to make sure that he pays out compensation correctly. The answer was very simple: the employer was not aware of who the overtime laws apply, didn’t really care to find out, and honestly thought that the likelihood that he was going to have to deal with the issue in court was very low.

All of the above assumptions were mistakes on the part of the employer, especially the last part about the “likelihood.” Having hired over 10 workers for a project of 3-month duration and having had to unexpectedly terminate the project due to some cash-flow issues, he was guaranteed to turn his hard-working employee to disgruntled workers, left without the expected earnings from the project, who will do whatever they can to obtain additional compensation after being unexpectedly terminated. Naturally, they turned to the labor board to find out if they can “squeeze” some overtime from their employer.

Like with many other employment laws in general and wage laws specifically, there is no bright line rule that defines which employees are exempt from overtime, and which workers are entitled to overtime compensation. Below, I will try to make the job of both employers and employee who try to apply professional exemption to their situation easier and more certain.

For the purposes of determining professional exemption, the term “professional” means any employee who: (1) is compensated on a salary or fee basis at a rate of no less than $455 per week (periodically adjusted); (2) whose primary duty is the performance of work (a) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or (b) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 29 C.F.R. 541.300(a).

The phrase “work requiring advanced knowledge” is the key part which is the most commonly litigated and disputed element of the rule. According to regulations, this includes work requiring consistent (although not necessarily constant) exercise of discretion and judgment, as distinguished from routine mental, manual, mechanical or physical work. An employee who performs work requiring the advanced knowledge generally uses the advanced knowledge to analyze, interpret or make deductions from a set of facts. The advanced knowledge required to be exempt as a professional cannot be attained at a high school level.

To qualify for the administrative exemption from overtime compensation requirement an employee must be primarily engaged in a work of a type that is “directly related to management polices or general business operations.” This requirement of course must be interpreted as it is inherently vague. In one sense, every type of work directly relates to management policy because every employee does work that carries out, or is governed by, management policy. But for obvious reasons, such an interpretation wouldn’t make sense, as it would make virtually all employee exempt from overtime.

In Harris v. Liberty Mutual Insurance Co. (2007), the court clarified that the work is “directly related to management policies or general business operations” for the purposes of determining whether administrative exemption applies only if it “relates to the administrative operations of a business as distinguished from ‘production’ or in a retail or service establishment ‘sales” work.” This means, the court continued, that only work performed at the level of policy or general operations can qualify as “directly related to management policies or general business operations.” On the other hand, work that merely carries out the particular, day-to-day operations of the business is production and not administrative work, and thus doesn’t qualify for administrative overtime exemption.

California overtime law, administrative exemptionThe Harris court, applying this analysis, found that insurance adjusters, who sued the defendant for unpaid overtime, were primarily engaged in “production” – adjusting individual claims for their employer. They investigate claims, make coverage determination, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and so forth. Noe of that work was found to be carried out at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of defendants’ business.

In it recent decision, filed in November 6, 2008, the 9th Circuit clarified an important point of California Overtime Law. In that case, the issue was whether Oracle employees, who are not residents of California, are entitled to the protections and privileges of California overtime compensation laws, if they work in California. In its well reasoned decision, the court summarized California Labor Code section 510(a). The court reminded that this law requires overtime pay of one and one-half regular pay beyond 8 hours worked in any single day, 40 hours in one week, and the first 8 hours of work on the seventh day worked of any one workweek. Additionally it requires double pay for hours worked beyond 12 in a day or 8 hours on the seventh day of any one workweek.

California Supreme Court has concluded that California’s employment laws govern all work performed within the state, regardless of the residence or domicile of the worker, citing Tidewater Marine Western Inc. v. Bradshaw 927 P.2d 296. That case held that California employment laws implicitly extend to employment occurring within California state law boundaries. Please feel free to read the full decision on California Overtime Law as it applies to non-residents of California.

Thus, this recent decision suggests that all employees who would otherwise qualify for overtime compensation, regardless of the state of their residence, are entitled to overtime compensation under California law, if they perform the work at issue within the territory of state of California.

One exemption from overtime compensation under Fair Labor Standards Act is known as the “Outside Salesperson Exemption.” This exemption permits an employer to not pay overtime as otherwise required under California law, but only if a particular worker (a) has the primary duty of (a) making “sales” or (b) obtaining orders or contracts for services or facilities usage, and

(b) is customarily and regularly engaged away from the employer’s place of business in performing such primary duty.

The information above can be found at 29 USC § 213(a)(1) and 29 C.F.R. § 541.500. In order to qualify for this exemption under California law, however, the employee must spend more than 50% of his/her working time performing truly-exempt sales functions away from the employer’s business establishment (or away from the employee’s home, if that is where the employee is normally based).

California Labor Code section 515.5 defines who qualifies for a computer/technology professional exemption from overtime compensation. There are three main requirements:

(1) the employee must be doing work that is “intellectual or creative” and it should require “discretion and independent judgment,” which requires more than just deciding which procedures to follow but must involve substantial decision making that have real effect on the operation of the employer’s business. Generally, programming, coding and creating databases qualifies as such work as it involves inquiry and innovation and it affects the quality and the usability of the software created.

(2) The employee’s responsibilities primarily consist of “systems analysis techniques and procedures, including consulting with users:” these professionals must work in the “design, development, documentation, analysis, creation, testing, or modification of computer systems or programs” or similar work with computer programs “related to the design of software or hardware for computer operating systems.

Under FLSA an employee will be considered to be paid on a “salary basis” and thus exempt for the purposes of overtime compensation, if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all of part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 C.F.R. section 541.602(b)(1)(2004). Employees must also be paid a specified minimum salary in order to qualify as exempt.

exempt salaried employee under FLSA

The effect and the reason behind those provisions is to prevent employers from docking the pay of an employee for an absence of less than a day (partial day absence). In other words, the employer should only deduct pay for one day absences or longer. Thus, if an exempt employee takes a few hours off, that should not be deducted from pay. If an employee takes one day and a half off, the employer, with a small number of exceptions, can only deduct one day from that pay period. If the employer makes partial day deductions, then the employees subject to those deductions do not meet the salary basis test, and are non-exempt for the purposes of overtime pay.

Thus, an employer should be very careful with partial day deductions against exempt employees’ pay, as classifying employees as “salaried exempt” while docking their pay for partial day absences will likely subject an employer to liability for failure to pay overtime compensation for at least the entire time that the policy of partial day deductions has been in place.

The Supreme Court has held that time spent waiting for work is compensable if the waiting time is spent “primarily for the benefit of the employer and his business.” Armour & Co. v. Wantock (1944). Whether the time spent predominantly for the employer’s benefit depends on the specific circumstances of each situation. Although there is no hard and fast rule, the cases dealing with the question of compensation and overtime for on-call duty consider two major factors: (1) the degree to which the employee is free to engage in personal activities; and (2) the agreement between the parties.

While the second factor – the existence or non existence of the agreement to waive on-call duty compensation – is usually easy to determine, the first factor includes sub-elements that determine whether the employee is free to engage in personal activities while on call: (a)whether there was an on-premises living requirement; (b) whether there were restrictions on employee’s travel during on-call duty; (c) whether the frequency of calls was so high that it prevented employee from engaging in typical off-duty activities of a person; (d) whether a fixed time limit for response was unduly restrictive; (e) whether the employee could easily trade on-call responsibilities; (f) whether employee actually engaged in personal activities during call-in time.

The above list is not exhaustive but merely illustrative.