Overtime Pay for Salaried Employees

“They’re on salary, so what is the problem?“ The problem is that many employers do not realize this: Just because an employee is put on a fixed salary does not necessarily mean that the employee is exempt under the law from payment for overtime.

To be exempt from overtime pay, an employee’s situation may need to meet both a “salary” test and a “duties” test under applicable law. Some of the requirements for these tests are discussed further below. The importance of the requirements can be seen from the consequences for misclassifying a worker.

Which Law Applies For Overtime Pay

For overtime requirements, either federal law or state law can apply to an employer or employee in Colorado. The regulations under the state law have similarities to those under federal law, but they are not identical. The law providing greater protection or setting the higher standard in a given situation will apply.

The federal law, known as the Fair Labor Standards Act, or “FLSA,” will apply to most employers who have annual sales or revenue over $500,000. However, both small and large employers can be required to comply with Colorado state law and regulations for overtime. The Colorado regulations are set forth in the Colorado Minimum Wage Order (the “Wage Order”) issued each year by the State.

Ordinarily, overtime is time worked in excess of 40 hours in a workweek. Under Colorado law, overtime also includes time worked more than 12 hours in a day or shift. Overtime must be paid at one and a half times the employee’s regular rate of pay.

Consequences for Mistakes

The consequences can be significant for assuming a worker is exempt from overtime pay if in reality a government agency or court would find that the worker is not exempt. Under the federal law, if an employer has not paid a nonexempt employee for overtime at one and a half times the employee’s regular rate of pay, the employer can be liable not only for the underpayment, but also for “liquidated damages” in an equal amount. The employer can also be liable for the employee’s attorney fees.

If the employer can establish that its conduct was both in good faith and based on a reasonable belief that its conduct was not in violation of the FLSA, the court may, in its discretion, award less or no liquidated damages. But, proof can be exacting. Ignorance of the exemption requirements is not an excuse.

The employer’s liability under federal law can cover two years of overtime incurred before the employee’s claim is filed. It can cover three years if the employer is found to have been in “willful” violation of the law’s requirements.

The liability problem is compounded further if a number of similarly situated employees were not paid overtime. Their claims against the employer under federal law may qualify to be joined together in a collective action.

Retaliation by an employer is unlawful. If an employer discriminates against an employee who claims overtime, or against another who may testify in support of a claim by a fellow employee, the employer can be held liable.

Smaller employers not subject to the federal law still may be liable under Colorado law for overtime pay to a nonexempt employee. An employee’s entitlement to wages generally cannot be waived. If the employee has quit or been discharged from employment, the employer is responsible for payment of any wages that were earned but not paid. A claim under Colorado law may be available to the employee two to three years after termination of employment.

Under the Colorado Wage Claim Act, if a former employee makes a proper written demand for unpaid wages within 60 days after separation from employment, the employer can be liable to the employee not only for the wages owed, but also for a penalty. To avoid any penalty, the employer must mail payment of the full amount due within 14 days after receipt of the demand. Attorney fees may also be awarded, depending on whether the employee recovers more than the amount tendered by the employer.

The amount of the penalty under Colorado law can be as much as 125% of the unpaid wage up to $7,500, and 50% of the wage over $7,500. The penalty will increase by 50% if the employer’s failure to pay the unpaid wage is found to have been willful.

Thus, if an employee was treated by an employer as exempt but is later found to have been not exempt, the employer can have significant liability if the employee had worked overtime. In addition to back payment of overtime, the employer may have potential liability for “liquidated damages,” penalties and/or attorney fees. To minimize the risk of liability, an employer should be careful from the outset to correctly classify each of its employees as exempt or not.

Criteria and Issues Abound

As previously indicated, various criteria in the regulations must be met for an employee to be exempt from overtime pay. Some occupations and industries are not covered by either the federal or the state law. Commonly, only certain “white collar” employees of a business who are paid in a certain way and whose duties are in an exempt category need not be paid for overtime.

The so-called “duties” test is an analysis of whether an employee’s duties fall in one of various exempt categories as defined in the applicable regulations. Some of the exempt categories are for administrative, executive/supervisor, professional, outside sales, or commissioned sales employees in certain businesses. Each of the categories has its own definitions and particular requirements.

An employer’s application of an exemption to an employee can be disputed. For example, application of the exemption for an “administrative” employee may come into question. It does not apply to just any clerk or secretary. “Administrative Employee” has been defined in the state Wage Order as:

    a salaried individual who directly serves the executive, and regularly performs duties important to the decision-making process of the executive. Said employee regularly exercises independent judgment and discretion in matters of significance and their primary duty is non-manual in nature and directly related to management policies or general business operations.

To the extent the federal regulations apply to an employer, they go into further detail regarding the FLSA’s definitions of administrative employees and of other categories of employees.

Even if an employee’s job description and actual duties otherwise seem to meet the “duties” test, other issues can arise. For example, an employee might not be found to have been paid on a “salaried” basis if the person’s pay varied based on the number of hours worked, or the employee was required to work a minimum number of hours per week, or if the employee’s pay was docked except as permitted by regulation.

Individuals whom the employer considers to be “independent contractors” may be found by a court to actually be “employees” for purposes of federal or state laws requiring overtime pay. Various factors may apply in determining whether an individual truly qualifies as an independent contractor, not subject to overtime pay.

It is up to the employer to show an individual is exempt from overtime pay. An employee’s right to wages, including overtime pay, cannot be waived. If an issue is raised at some point and the employee is not found exempt, the employer may need to disprove any claim that the employer knew or should have known the employee was incurring overtime without pay. The employer may need to show through accurate time records the time that the “salaried” employee actually worked.

Legal counsel can help to address questions about exemptions or about the potential for claims about overtime pay.

G. Roger Bock is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Litigation, Real Estate, and Employment . Contact Roger Bock.

Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

G. ROGER BOCK