Overtime Rules

The Fair Labor Standards Act includes overtime rules that define overtime pay at wages not less than one and half times regular pay rates after 40 hours of work in a workweek. Any use of overtime means more work for some that could go for more jobs to others. Requiring higher overtime pay for employers gives financial incentive to avoid the added expense of overtime and hire more employees at regular pay, which helps spread available work to more people. The incentives will be more effective if overtime rules apply to all employment. Instead the Fair Labor Standards Act as amended provides exemptions from overtime requirements for broad categories of employees employed in a bona fide executive, administrative, or professional capacity, selected computer employees, outside sales employees, motion picture employees, and other more narrowly defined categories. (1)

Exemptions from overtime rules go back to the 1940’s but changes drafted during the Bush administration and adopted in August 2004 revised Fair Labor Standards Act rules with new language referred to as white collar rules. The new regulations in Title 29 Code of Federal Regulations Part 541 define an employee’s salary and duties to determine exempt work that qualifies for an exemption from overtime pay.

Executive Employees

The general rules for executive employees that qualifies for an overtime pay exemption under white collar rules means an employee “compensated on a salary basis not less than $455 a week, exclusive of board, lodging or other facilities, whose primary duty is the management of the enterprise or a customarily recognized department or subdivision, who customarily and regularly directs the work of at least 2 or more full time employees, who has authority to hire and fire other employees, or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.” (2)

The definition of management and primary duty in the regulations that establishes exempt work incorporates the traditional managerial prerogatives like hiring, firing, paying, promoting and disciplining as primary duties if they are the principal, main, major or most important duties. (3) Nevertheless, executive employees can be exempt from overtime if they have other non-exempt duties because the regulations allow an employer to exempt an employee who does some exempt work and other activities directly and closely related to exempt work.

The phrase ‘directly and closely related’ means tasks that are related to exempt duties and that contributes to or facilitate performance of exempt work. “Thus, ‘directly and closely related’ work may include physical tasks and menial tasks that arise out of exempt duties, and the routine work without which the exempt employee's exempt work cannot be performed properly.” (4)

The 40-hour work week continues to be the standard full time workweek as it has been for more than eighty years, but exempting executive managers from overtime pay converts three managers working 40 hour weeks into two managers working 60 hour weeks. Using overtime rules to turn three jobs into two makes it easier for employers to economize on wage costs, especially in high wage occupations like executive managers. A lower wage cost with exempt overtime hours also assures fewer jobs in exempted occupations like management.

Occupational Employment Survey data reported by the Bureau of Labor Statistics shows managerial jobs in decline from 1999 to 2009. Managerial occupations were 6 percent of America’s jobs in 1999 with employment just over 8 million. By 2009 managerial occupations were down to 6.1 million jobs and 4.7 percent of the total of occupational employment. The job totals in managerial occupations are for establishment employment, meaning they are jobs at firms, non-profit associations or government.

Undoubtedly the decline in managerial jobs resulted from a combination of factors. It is common now for business to issue laptop computers, cell phones, and Blackberry’s to employees, which makes them available to work overtime in the evening, weekends, or the middle of the night. There are few reports business treats these additional hours of work as time and a half for overtime, but using new technology helps reduce jobs in management anyway.

Administrative Employees

Second on the list of overtime exemptions are the general rules for administrative employees. Any employee employed in a bona fide administrative capacity must be “compensated on a salary or fee basis at a rate of not less than $455 per week, exclusive of board, lodging or other facilities, whose primary duty is 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, and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.” (5)

“In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The term ‘matters of significance’ refers to the level of importance or consequence of the work performed. The phrase ‘discretion and independent judgment’ must be applied in the light of all the facts involved in the particular employment situation in which the question arises.” (6)

The regulations include a list of example decisions that an employee might make to satisfy the requirement to exercise discretion and independent judgment and also summary wrap up. “The exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision. However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level. Thus, the term ‘discretion and independent judgment’ does not require that the decisions made by an employee have a finality that goes with unlimited authority and a complete absence of review.” (7)

Section 541.203 of the regulations explains specific example occupations that generally meet the requirements for the administrative exemption: insurance claims adjusters, employees in the financial services industry, executive assistant or administrative assistant, human resources managers, and purchasing agents. A description of the usual duties and decisions for these occupations provides the nature of decision making that will allow exemption from overtime status. For example, “An executive assistant or administrative assistant to a business owner or senior executive of a large business generally meets the duties requirements for the administrative exemption if such employee, without specific instructions or prescribed procedures, has been delegated authority regarding matters of significance.” (8)

Educational establishments also come under rules for administrative employees. Employees qualify as exempt from overtime at educational establishments when “compensated for services on a salary or fee basis at a rate of not less than $455 per week exclusive of board, lodging or other facilities, or on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment by which employed; and whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision thereof.” (9)

These educational employees are cited as generally meeting the requirements for overtime exemption: superintendent, assistants with educational duties, principals and vice principals, department heads, academic counselors and other employees with similar responsibilities.

Professional Employees

The general rules for professional employees apply to the learned professions, creative professions, teaching, law and medicine. “To qualify for the learned professional exemption, an employee's primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” (10)

Having an academic degree is cited as prima facie evidence of meeting the requirement of learning customarily acquired by a prolonged course of specialized intellectual instruction. “However, the word ‘customarily’ means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction.” (11)

The regulations have a list of example professions and a selection of occupations that meet the requirements for the learned professions exemption. Exemptions apply to professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, and various types of physical, chemical and biological sciences and pharmacy. Some example jobs signal how far employers can push the definition of learned professions. Jobs that generally meet the requirements for exemption are listed in the regulations: certified medical technologists, registered nurses, dental hygienists, physician assistants, chefs, athletic trainers, funeral directors and embalmers.

Chefs?

“To qualify for the creative professional exemption, an employee's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.” (12)

Creative professionals that generally meet the requirements for overtime exemption are listed in the regulations: actors, musicians, composers, conductors, and soloists; painters, cartoonists, essayists, novelists, short-story writers and screen-play writers and journalists.

There are some stipulations for journalists. “Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent, as opposed to work which depends primarily on intelligence, diligence and accuracy.” (13)

Teacher exemptions apply to “Any employee with a primary duty of teaching, tutoring, instructing or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity as a teacher in an educational establishment by which the employee is employed.” (14)

Teachers at public or private schools who are permanent, conditional, standard, provisional, temporary, emergency, or unlimited, or certified or not certified, or doing extracurricular activities such as coaching athletic teams or acting as moderators or advisors in such areas as drama, speech, debate or journalism have exempt status for overtime. (15)

The exemption for law and medicine applies to “Any employee who is the holder of a valid license or certificate permitting the practice of law or medicine or any of their branches and is actually engaged in the practice thereof; and any employee who is the holder of the requisite academic degree for the general practice of medicine and is engaged in an internship or resident program pursuant to the practice of the profession.” (16)

Three additional exemptions close out the white collar rules. A computer industry exemption applies to any computer employee compensated on a salary or fee basis not less than $455 a week, and to any computer employee compensated on an hourly basis at a rate not less than $27.63 an hour. (17) Exemptions apply to outside sales employees who make sales or obtain orders or contracts for services and customarily and regularly work away from the employer’s place or places of business. (18) An employee in the motion picture producing industry who is compensated at a base rate of at least $695 a week is also exempt. (19)

Hourly pay and the State of Exemptions

Exempt status eliminates the financial incentive to spread work and hire more people.
Salary and fee basis requirements defining the white collar rules in Title 29 Code of Federal Regulations part 541 does not permit exempt status for most hourly paid jobs. There are exceptions but as a practical matter hourly pay will be preferred for some jobs, especially where work fluctuates, or work has intermittent weeks with less than forty hour schedules.

The Current Population Survey reports the number and percentage of wage and salary workers paid at hourly rates. (20) In 2006, hourly rated employees were 76.5 million and 59.7 percent of wage and salary workers. By 2009 the numbers were down to 72.6 million and 58.3 percent. Having 58.3 percent paid hourly rates leaves 41.7 percent paid on a salary, fee or other basis, which comes to 51.9 million jobs.

Since few hourly paid employees are eligible for white collar exemptions the 51.9 million wage and salary workers not on hourly pay gives a number that meets the first criteria for exempt status: pay on a salary or fee basis. Pay by the hour or by salary continues to be the sole discretion of the employer and as my summary of overtime rules suggests, the new language in the regulations allows more discretion to adjust primary duties to meet the duty tests for exemption from overtime pay.

No agency has a count of salary or fee based employees with exempt status, but the 51.9 million total is big enough to include all employment reported for management, business operations, financial administration, and professional occupations reported by the Bureau of Labor Statistics.

A little over 12 million work in managerial occupations, business operations and other financial administration and the broad wording in the regulations give reason to believe they all qualify, or could easily be adjusted to qualify, for exempt status. Since the regulations specifically include 1.4 million executive secretaries and administrative assistant as exempt administrative employees, financial administration occupations like accountant, loan officer and financial analyst could be expected to meet at least one of the requirements for executive, administrative or professional exemptions as well.

The Bureau of Labor Statistics defines seven major groups of occupations as professional employment with 27.5 million jobs in 2009. (21) Education has the most jobs in professions with 8.5 million in teaching or the exempt duties related to teaching. Health care has another 7.2 million practitioners, which includes 15 thousand athletic trainers specifically cited as an exempted occupation.

Given that embalmers and chefs are not defined in the Standard Occupational classifications as professional jobs but specifically included as learned professions in the overtime rules, we can expect the generous definition of learned professions includes more than the 27.5 million jobs.

Millions of business and professional jobs that support middle class and career minded Americans have no legal right to overtime. Truth is these are just the white collar rules; there are many more overtime exemptions in other parts of Title 29 of the Code of Federal Regulations. Airline employees, seasonal and recreational employees and firefighters working in small public fire departments with less than 5 firefighters are three of many more exemptions from overtime pay.

The Fair Labor Standards Act gives Americans the legal right to the minimum wage and overtime pay beyond 40 hours a week. That comes up at the beginning of the Fair Labor Standards as amended and its regulations. By the end of the regulations millions and millions of Americans have no legal right to overtime pay.

The rules that regulate exempt status for overtime pay are in addition to Fair Labor Standards rules for compensable work. (22) Employees are legally entitled to be compensated for hours worked. Exempt status means exemption from overtime pay at time and half, not exemption from pay for time worked.

Compensable time has a definition and a regulation because disputes can arise over compensable time as well as overtime. If an employee is asked to do an errand on the way to work reasonable people might disagree whether errands on the way to work are compensable time. When disputes occur new and amended definitions are drafted, adopted and published as they have been over the years for many different work disputes under the Fair Labor Standards Act. However, employers are still expected to pay wages and salary for compensable time worked up to and over forty hours if that occurs. Employers cannot legally expect employees to work for free or to work free overtime hours.

Still we have to expect free overtime hours happen anyway. In education, for example, phrasing in teacher contracts makes no allowance for over time: “Teacher shall perform such duties as deemed necessary, shall attend all assigned meetings, shall be present at school during school hours, shall be present at school or other location outside school hours as directed in connection with school events or activities.”

Teacher work days fill up with student contact hours, emails and calls from parents and assigned meetings that leave little time for grading or preparation. Grading and preparation occur in the evenings and weekends. Millions of America’s public school teachers work beyond 40 hours a week, but I am unaware they receive additional compensation for overtime hours. Their overtime appears to be free work; a donation or part of their dedication.

In office based occupations pressure to get the job done and be part of the team make it easy to ignore some extra hours. Salaried employees are not typically encouraged to clock their overtime hours and those who do might be reluctant to request additional pay. Just like unpaid interns, salaried employees may choose not to complain about free overtime as bad for career advancement. Legal rules mean nothing when employees choose to go along or feel good at being dedicated, even without pay.

Economizing on wage costs is a universal practice. Even though laptop computers and overtime rules help save labor costs and reduce jobs there is a difference between them. The former is applied technology; the latter applied politics. When the Bush administration expanded overtime exemptions by writing new overtime rules, they made it easier to economize on wage cost by eliminating the financial incentive to restrict overtime and spread work to more people. Exemption from overtime pay for millions of jobs and free overtime for others helps to build America’s surplus of labor.


Notes

(1) Title 29 Code of Federal Regulations, part 541, available at http://ecfr.gpoaccess.gov

(2) 29 CFR part 541.100

(3) 29 CFR part 541.102

(4) 29 CFR part 541.703

(5) 29 CFR part 541.200

(6) 29 CFR part 541.202

(7) 29 CFR part 541.202

(8) 29 CFR part 541.203

(9) 29 CFR part 541.204

(10) 29 CFR part 541.301

(11) 29 CFR part 541.301

(12) 29 CFR part 541.302

(13) 29 CFR part 541.302

(14) 29 CFR part 541.303-541.304

(15) 29 CFR part 541.303

(16) 29 CFR part 541.304

(17) 29 CFR part 541.400

(18) 29 CFR part 541.500

(19) 29 CFR part 541.709

(20) Bureau of Labor Statistics, U.S. Department of Labor, Characteristics of Minimum Wage Jobs

(21) Data here are from Bureau of Labor Statistics, U.S. Department of Labor, Occupational Employment Survey, May 2010.

(22) Title 29 Code of Federal Regulations part 785