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Contra Costa Lawyer, May, 2002
By Harvey Sohnen, Esq. and Patricia M. Kelly, Esq.

Recently, there has been new vigor in employees’ assertion of longstanding rights to overtime compensation in California. Last July’s Alameda County jury verdict of $90 million in Bell v. Farmers Insurance Exchange, an overtime class action brought by insurance adjusters who claimed that they were misclassified as exempt from overtime pay, reflects this trend, as do hundreds of pending overtime pay class actions throughout California. Law firms can also be subject to overtime claims. This article touches on some of the major issues.

Both state and federal law regulate employee compensation. The Fair Labor Standards Act , 29 U.S.C. § 200 et seq. and corresponding CFR provisions set forth the federal minimum wage and overtime requirements. Applicable California statutes are set forth in the Labor Code. The Industrial Welfare Commission (“IWC”) is a state commission with the authority to establish minimum wage rates and regulate working conditions. It exercises this authority through Wage Orders regulating wage and hour requirements and working conditions in various industries and occupations. Wage Order 4 applies to law firms. (Wage Orders are available atwww.dir.ca.gov/IWC/iwc.html, and are set forth in Title 8 of the California Code of Regulations §§ 11000-11150.)

Employers must comply with both federal and state law, but since California law is generally more strict in protecting employees, compliance with state law is usually the question. This article discusses state law.

OVERTIME REQUIREMENTS

An employee must be paid a premium wage rate for all work performed in excess of eight hours per day and/or forty hours per week unless the employee is exempt from the overtime laws. Thus, the following issues must be considered:

1. Which employees are exempt from overtime laws?

2. What is the appropriate overtime rate?

3. What hours are subject to overtime compensation?

Determining “employee” status

The threshold issue in many employment matters is whether the individual performing services is an independent contractor or an employee. Whether a given relationship is properly classified as “independent contractor” as distinguished from “employer-employee” is beyond the scope of this article. There is no duty to pay an independent contractor overtime pay, as that obligation arises only in connection with employment. However, if a worker is paid as an independent contractor, but later is determined to have been an employee, overtime pay liability may result.

If the individual is an employee, the next question is whether he or she is exempt from the overtime laws. Unless the employee is exempt, overtime rules apply. To be exempt, an employee must pass a duties test and a salary requirement.

Duties Test

To be exempt, an employee must spend at least 50% of his or her actual time worked on exempt work. For private law firms, there are three types of exempt work: executive, administrative and professional.

Executive work is supervisory. Under this exemption, over one half of the employee’s work time must consist of the management of the enterprise or of a customarily recognized subdivision thereof, including the customary and regular direction of the work of two or more subordinates. In other words, an exempt executive is someone who spends over one-half of his or her work time supervising at least two full time employees (or equivalent number of part-time employees). Exempt supervisory work includes hiring, firing, or disciplining (or effectively recommending such action); interviewing, selecting and training employees; setting or adjusting pay rates or work hours; evaluating productivity of others; responding to complaints or grievances; distributing work amongst employees; determining materials or supplies. Although the job title is not determinative, whether the individual is considered by others to have supervisory authority is a relevant factor.

The executive exemption is frequently used improperly. Often there is an employee who is a supervisor of others, but who also performs non-supervisory work. For example, there might be one secretary who supervises other secretaries or clerical staff, but who also performs secretarial work. Usually such an employee is not exempt. The error usually is that although the individual does perform supervisory work, it does not account for more than half his or her hours.

The administrative exemption applies principally to employees who are executive or administrative assistants. The general test for exemption as an administrator is that over one half of the employee’s work time must be spent on performance of office or other non-manual work directly related to management policies or general business operations, and include the exercise of discretion and independent judgment. As with the executive exemption, employees often fail to qualify as exempt administrators because discretionary administrative tasks accounts for less than half the hours.

Different types of exempt work can be combined to meet the requirement that at least 50% of the employee’s time be spent on exempt work. For example, an employee who spends 20% of his or her time on exempt executive work and 40% on exempt administrative work is exempt.

The professional exemption applies in general to persons licensed to practice law, and eight other listed professions. Few persons in the legal field other than members of the bar qualify for this exemption. Paralegals, law students and law school graduates without a current license to practice law are not “exempt professionals.”

Salary Test

In order to be exempt, the employee must also be paid on a salary basis. Generally, an employee will be considered to be paid on a salary basis if he or she regularly is paid a predetermined amount which is not subject to reduction because of variations in the quality or quantity of work performed, or the actual number of hours worked. A further requirement for the employee to be exempt is that the salary must be at least $2,340.00 per month as of 2002.

Overtime Rates

Overtime premiums are generally due for work performed in excess of either eight hours in a day or forty hours in a week. In general, the following premium rates apply:

1 ½ times the regular hourly rate for:

  • Hours over 8 and up to 12 in a day
  • the first 8 hours on the 7th day in a workweek
  • all hours over forty in a workweek

2 times the regular hourly rate for:

  • all hours over 12 in a day
  • all hours over 8 on the 7th day in a week

Hours Worked

“Hours worked” includes all time during which the employee is subject to the control of the employer. Thus, an employee who is subject to the employer’s control but performs slowly or poorly must be paid for the time spent. “Hours worked” also includes all time that the employee is permitted to work, whether or not required to do so. For example, an individual who stays late on his or her own accord in order to catch up must be paid the appropriate overtime rate. In order to avoid unforeseen and unnecessary overtime obligations, employers often have a policy that all overtime must be approved in advance. However, if an employee violates the policy, and the employer is not diligent in stopping the violation, the employee will still be entitled to any earned overtime pay. Appropriate disciplinary action may be taken for violation of the policy.

A meal period does not count as hours worked if the period is for at least thirty minutes, during which the employee is relieved of all responsibilities. Employees must also be provided with a ten minute break period during every four hour work period. Such break periods are included in the calculation of hours worked. Also, an employee must be provided a one half hour unpaid meal period if he or she works for five consecutive hours. Labor Code Section 226.7 provides a penalty of an hour’s wages for any day when the meal or rest period rules are violated.

“Training time” is counted as hours worked if the training is required for the job, regardless of where the training occurs. Similarly, for an employee regularly working at one work site, travel time between work locations (other than the initial arrival and end of the day departure from the regular site) must be included in hours worked.

There is no legal requirement that premium pay be provided for work done on legal holidays, but an employer could become obligated for premium pay for holidays by agreement or by practice. If an employee is compensated for holidays (or vacation days or sick leave days) on which he or she does not work, the holiday (or vacation or sick leave) hours do not count in determining overtime entitlement as overtime premiums are based upon hours worked, not upon hours paid.

Overtime pay is due even for overtime work done with a promise by the non-exempt employee not to seek overtime pay. Similarly, informal “comp time” arrangements which involve more than eight hours work one day to cover missed hours on another day, will generally not permit the employer to avoid overtime pay. Labor Code § 1194 prevents any waiver of an employee’s right to overtime pay.

Conclusion

Law firms are not exempt from worries about overtime pay. Overtime claims can add up quickly, so the stakes may be higher than many would expect. This article is not intended to offer legal advice for particular situations, but rather to identify issues for consideration so that law firms can comply with the law.