Which Workers Are Overtime Eligible?
As in many industries, employers in the self-storage business are being caught up in the wave of wage and hour lawsuits sweeping the country. From 2000 to 2015, the number of these costly cases across all industries increased 358 percent!
Many self-storage companies are learning the hard way that misclassifying employees as exempt, and failing to pay them overtime, can result in staggering liability. This expensive error commonly occurs with self-storage facility managers. Under federal law, these employees may be entitled to overtime pay for hours worked over 40 in a week, even though they are called “managers” and receive a salary.
This article aims to shed light on overtime requirements; however, employers are strongly advised to consult with their attorneys and accountants when it comes to assessing potential pitfalls. When there is any question as to whether an employee is exempt or not, the safest course of action is to treat them as non-exempt and pay that employee the overtime premium.
The Big Picture
Employers must classify all employees as either exempt (ineligible for overtime) or non-exempt (eligible for overtime). Federal law requires employers to pay non-exempt employees “time and a half” for all hours they work in excess of 40 in a workweek. Certain state laws require employees to be paid at a premium rate for hours worked over a threshold (such as eight hours) in a day.
One of the challenges employers face is determining which employees should be classified as exempt and which should be considered non-exempt.
If an employer misclassifies an employee as exempt and that employee regularly works over 40 hours/week, significant liability can result. The misclassified employee is entitled to not only the unpaid overtime but potentially double or triple that amount, plus his attorney’s fees. Depending upon the wage and hour law at issue, the employee may be able to seek unpaid overtime going back many years. Employees and former employees frequently band together and sue, quickly multiplying the exposure.
Classified As Exempt
The law requires employers to start off with the presumption that all employees should be classified as non-exempt. Employers may only classify employees as exempt if the workers fall within certain limited exemptions. The overwhelming majority of positions in the self-storage industry do not fit within any exemption and must be classified as non-exempt.
Some of these exemptions are known as the “white collar”
exemptions. They require that an employee pass both the “salary basis test” and
the “duties test.”
The Salary Basis Test
In order for a worker to pass the salary basis test, federal law requires that he is paid a regular weekly salary of at least $455. This amount was set to increase to $913/week on Dec. 1, 2016; however, the increase was struck down by a federal judge. The increase could still go into effect in the future. Notably, many state laws already require employees to be paid a weekly amount higher than the current $455 federal threshold in order for them to be classified as exempt.
The salary basis test also requires that employees be paid a set weekly salary. They cannot be paid a day rate. With limited exceptions, if they work any part of a workweek, they must be paid for the whole week.
The Duties Test
Most of the exemptions require that a position involve particular types of duties and responsibilities. Importantly, a position’s job title is irrelevant. A self-storage facility could refer to a worker as a manager; however, unless that position has the requisite duties and authority, that manager cannot be classified as exempt.
The two white collar exemptions most likely to apply to employees in the self-storage industry are the executive and administrative exemptions.
The Executive Exemption
The executive exemption is typically reserved for only high-level managerial employees. Many self-storage businesses classify their site managers as exempt; however, this may be a mistake. Moreover, it could be a costly mistake for employees who live on site because they could claim that they spent many hours working, which would be challenging to dispute.
In order for an employee to fit within the executive exemption, both the salary basis test and the duties test must be met.
The salary basis test requires the worker to be paid at least $455/week under federal law (and significantly more under various state laws). If a self-storage company offers “free” on-site housing to managers, such housing cannot be applied as a credit toward the salary requirement.
In order to pass the duties test aspect of the exemption, the employee’s primary duty must be managing the entire self-storage company or at least a department, subdivision, or location of the company. The employee must also regularly supervise at least two or moreother full-time employees or their equivalent (such as four part-time employees). The worker must have the authority to hire or fire other employees. Alternatively, if the worker does not have that absolute authority, his recommendations as to the employment terms or status of other employees must be given particular weight.
Many self-storage “managers” fail to meet this duties test, as they are responsible primarily for providing an on-site presence and responding to customer inquiries and complaints. While these are important contributions, they rarely qualify as “managing the enterprise”. Such management typically includes tasks such as hiring and training employees; assigning and directing work; providing performance reviews and feedback; responding to employee complaints; disciplining, demoting, or firing employees; planning and controlling the budget; selecting and purchasing equipment, tools, or inventory; selecting techniques to be used on the job; and planning for the safety of employees or the property.
The Administrative Exemption
In order for an employee to fit within the administrative exemption, both the salary basis test and the duties test must be met.
In order to meet the duties test, employees must be authorized to make important decisions for the company. To qualify, the employee must regularly exercise significant discretion and independent judgment on important matters. Also, the worker must be primarily engaged in the performance of office or non-manual work directly related to the management or general operations of the company.
These employees may not be doing work that is necessary to produce or sell the company’s product. Instead, they must do work that would traditionally be categorized as back-office work, or work necessary to keep the business running. Examples of the types of work that could satisfy the requirements of the administrative exemption are accounting, insurance, billing, marketing, Internet and database administration, safety and health compliance, human resource functions, legal compliance, and similar activities. Importantly, while multiple employees may work in these categories, such as on a human resources team, only the person with decision-making authority on important matters within the department is likely to fit the exemption.
Commissioned Sales Employees
While narrow exemptions exist for commissioned sales employees who primarily work off site, on-site sales employees are typically non-exempt. If a commissioned employee does not fit into the exemption, they must earn wages that are equivalent to at least minimum wage for every hour worked. In addition, commissions earned by employees should be included when determining the employee’s regular hourly rate in order to calculate the overtime premium for any hours worked beyond 40.
Many self-storage companies employ drivers. These employees may be eligible for an exemption pursuant to the Motor Carrier Act. However, they must drive interstate and satisfy certain other requirements (such as driving a vehicle weighing in excess of 10,000 pounds).
Employee Pay Guidelines And Recommendations
Employers are legally required to maintain contemporaneous time records of the hours worked by all non-exempt employees. The most accurate way to do this is to have employees “clock in” at the start of every shift and “clock out” when they stop working. They should also clock out for any unpaid breaks, including meal breaks.
It is crucial that employees are not permitted to perform any work “off the clock.” Many businesses require employees to acknowledge the accuracy of their hours in writing each week to minimize exposure to off-the-clock claims. In addition, it is advisable to circulate policies and procedures for employees to follow if they believe they are not being paid for all time worked.
Federal law requires that employers calculate overtime on a weekly basis. This means that employers cannot avoid the obligation to pay overtime for hours worked in one week by reducing the employee’s hours for another week.
Only time actually spent working counts toward the 40 hours needed for overtime pay under federal law. Employers may choose to exclude paid or unpaid time off (i.e., sick leave, vacation, or holidays) from the 40-hour threshold.
Employers can control obligations for overtime pay by requiring employees to obtain approval before working any overtime. Notably, if employees work unauthorized overtime, they must be paid; however, they can be disciplined for violating the rule. In other words, they can be fired but still must be paid.
Internal Audits Of Pay Practices
Employers should review their classifications of employees and their pay practices to minimize potential exposure in a wage and hour case or government investigation.
Ensure that any employees who are not being paid overtime for hours worked over 40 are accurately classified as exempt. For employees considered exempt under a white-collar exemption, review their pay to ensure that they pass the salary basis test. Evaluate their written job descriptions and actual duties (which often differ from written descriptions) to ensure that they pass the duties test.
If the audit suggests that reclassification is appropriate, begin treating the worker as a non-exempt employee. Convert their salary to an hourly rate. Track their hours and pay them overtime for all hours worked over 40 in a week (and for any other premiums required by state law). Notify the employees of their new pay structure. Consult a labor and employment lawyer for advice about communicating with employees regarding their new classification.
Many states have their own overtime and other pay requirements. For example, New York requires that non-exempt employees who work days spanning more than 10 hours be paid an extra hour of pay at minimum wage.
An experienced employment attorney can help you conduct the audit and implement any necessary changes while minimizing potential pitfalls during the transition. While this can be an imposing undertaking, it can have an enormous payoff in heading off potential liability and future legal costs.
Ellen Storch, partner at Kaufman Dolowich & Voluck, LLP, represents management in all areas of labor and employment law. She defends international, national, and local employers, as well as public employers and not-for-profit organizations, in various types of employment litigation. Her litigation practice includes discrimination and harassment cases, restrictive covenant disputes, wage and hour claims, and NLRB matters. In addition to litigating on behalf of clients, Storch provides day-to-day advice and counsel to employers regarding the panoply of laws that govern and affect the employment relationship, with special emphasis on litigation avoidance strategies. Contact Ellen Storch at email@example.com.