Fiscal Fitness
Determining which employees qualify for overtime pay
California lawmakers have been tackling the issue of overtime through a series of laws and court rulings during the past few years. But there still is confusion regarding which employees qualify for overtime pay and which are “exempt.”
Many California companies— including those in the apparel community—are due to reexamine their payrolls to see which employees fall under the categories of “exempt” and “nonexempt” for overtime pay.
Finding the right fit
Apparel manufacturers work hard to find the right fit for their clothes, which can make or break a sale.
But the notion of “fit” can also be applied in another context: determining whether employees fit into a category that entitles them to be exempt from federal and state wage and hour requirements, including overtime pay.
This issue has become increasingly important in California because of the restoration on Jan. 1, 2000, of the eight-hour day and the passage of Assembly Bill 633, which made garment manufacturers guarantors of the wages owed to their contractors’ employees.
There is also the “hot goods” issue. This is not a reference to designer warm-ups and studded belts. Goods manufactured in violation of the federal Fair Labor Standards Act (FLSA) may be considered “hot goods.” If wages are unpaid, whether minimum or overtime, goods manufactured during the period of underpayment are “hot” and cannot be sold or shipped.
“Mis-fit,” or in employment terms “misclassification,” can result in employer liability for thousands of dollars in back wages for unpaid overtime. Specifically, employers must pay 11/2 times an employee’s hourly wage for every hour worked in excess of eight hours in one day or 40 hours in one week and double the hourly rate for hours worked in excess of 12 hours per day.
Unpaid overtime wages can add up rapidly. Claims can extend back for three-year periods, and penalties and interest may also be applied.
Looking for fit
The key question, therefore, is “fit”: Who fits into an exempt category, and who doesn’t?
In order for employees to qualify as “exempt,” with the exception of certain high-paid computer professionals and sales people, they must fall within one of three general categories:
bull; Executive (director, manager or supervisor)
bull; Administrative (advising manager, planner or goods buyer)
bull; Professional (licensed or certified in a recognized profession or working in a learned or artistic profession) Employees falling within one of the above categories must also meet two basic tests: the duties test and the salary test.
The salary test
The salary test is fairly simple. In California, in order to be exempt, a full-time employee must earn a salary at least twice that of minimum wage ($540 per week, $2,340 per month and $28,080 annually, as of Jan. 1, 2002). Federally, the new FLSA regulations that will go into effect on Aug. 23, 2004, establish a lower cut-off: $455 per week or $23,660 per year under the new Standard Test.
The duties test
The duties test is the difficult part. It’s like designing a Lycra bodysuit to fit a slippery hippopotamus. It may prove to be a little dicey.
Giving an employee an impressive title or paying a generous salary may not “cut it.”
Federally, under the new FLSA regulations, the employee must be engaged primarily in exempt duties. Employees who make more than $100,000 per year will be automatically exempt if they:
bull; customarily or regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee or
bull; perform office or nonmanual work.
In California, regardless of compensation received, in order to fit into the exempt category, employees must spend at least 50 percent of their time performing what are considered exempt duties. Both quantity and quality apply. An employee may be in sole charge of a department but still must meet the duties test in order to qualify as an exempt manager.
The most reliable way to determine whether an employee qualifies is to analyze that individual’s duties.
(See the accompanying chart for examples of exempt and nonexempt duties for each of the major categories.)
Problem fits
There are certain employees who may be difficult to fit into exempt and nonexempt categories.
Fashion designers may fit neatly into the professional- artistic category because their work “is of a type that is original and creative in character in a recognized field of artistic endeavor.”
Assistant designers and patternmakers require more careful analysis to determine whether their primary duties require the application of special knowledge or the exercise of independent discretion and judgment. Purely mechanical routine work usually does not fall within the professional exemption.
Quality control staff is also difficult to categorize. These employees often perform only under general supervision and do work along detailed technical lines requiring special training, experience or knowledge.
Yet, they may frequently exercise a good deal of independent discretion and authority.
They commonly possess expertise with respect to specifications, intolerance in materials, development criteria, textile fiber production, labeling requirements and federal flammability standards.
New ruling
The issue is whether these individuals exercise sufficient discretion and independent judgment to qualify as exempt administrative employees. Recently, the California courts expounded on a third requirement needed to qualify an exempt administrative employee: whether or not the employee is actually performing in an administrative role.
Under this criterion, many employees performing services that their employer is in the business to provide may be considered nonexempt production workers, even if the employee is highly compensated and exercises a high degree of independent judgment and discretion. The bottom line issue is whether a worker is performing tasks directly related to management policies or is merely producing the goods or services the enterprise exists to produce.
There is good argument, however, that in the garment industry, the job of a quality-control manager requires such broad knowledge of materials, processes and numerous standards that a person acting in this position should be categorized as a bona fide administrator. Each staff member should be evaluated individually.
Sales people
A special category of exemption applies to sales people. Outside sales people who regularly work outside the workplace are exempt from overtime requirements if they are 18 years old or older and spend more than 50 percent of their time working away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products.
Certain inside sales people working for a retail establishment may also be exempt if their earnings exceed 11/2 times the minimum wage and more than half of their compensation represents commissions. If there is a guaranteed draw against commissions, the California Labor Commissioner may consider the earnings not an actual commission but rather a salary, and the exemption may not apply. As a result, many inside sales employees are nonexempt.
Blue-collar workers
Under both California law and less-stringent federal law, manual or other blue-collar workers who perform work involving repetitive operations with their hands, physical skill and energy are always entitled to overtime pay, no matter how highly paid they may be. Examples include non-management production-line workers and nonmanagement maintenance or construction employees, such as carpenters, electricians, mechanics, plumbers and crafts people.
The best insurance against misclassification is to have an independent analysis of each employee considered “exempt” performed by legal counsel familiar with the garment industry. An employer who undertakes this audit will significantly minimize the risk of noncompliance. As with garments, getting the “fit” right with respect to employee classification can save hundreds of thousands of dollars as well as untold aggravation.
EXECUTIVE *
Exempt DutiesInterviewing, selecting and training employees Setting and adjusting pay rates and work hours or recommending sameDirecting the work of or supervising two or more employeesKeeping production records Evaluating and disciplining employeesPlanning, determining and distributing work
Non-Exempt DutiesPerforming same kind of work as subordinates Performing any kind of production workPerforming routine clerical duties, such as bookkeeping, cashiering, billing, filing or operating business machinesPerforming maintenance work
*The new federal FSLA regulations require that to qualify as an exempt executive, the employee must have actual authority to hire, fire or make recommendations that are given “particular weight.”
ADMINISTRATIVE
Exempt DutiesAdvising managementPlanning, negotiating and representing the companyPurchasing and promoting salesDoing business research, analyzing data and determining policies
Non-Exempt Duties Routine clerical dutiesOperating equipmentInspecting productsTabulating data
PROFESSIONAL
Exempt Duties Licensed lawyer or accountant doing legal or financial workDesigner performing creative work requiring independent judgment and discretion
Non-Exempt DutiesUnlicensed person doing bookkeeping or financial planningAssistant duplicating or re-drawing designs or patterns
Jeff Kapor is a partner and Laura Worsinger is senior counsel in the Los Angeles office of Buchalter, Nemer, Fields & Younger. For more information, contact Worsinger at (213) 891-5021 or lworsinger@buchalter.com.
