Founders, Are Your Salaried Employees Really Exempt from Overtime?

Be wary of imposing those long startup hours on your team

A common belief among founders is that if an employee is paid a salary, then the employee is not entitled to additional pay for overtime. The salary is intended to compensate for all hours worked in any given week, no matter the true number of hours clocked. Unfortunately, this is not necessarily true.

And it doesn’t make any difference if the position is labeled “exempt.” There are specific requirements that must be met before a position can be legally exempt from overtime.

Furthermore, even if an employee signs an agreement acknowledging that he or she will not be paid overtime, if the law says it is owed, then it must be paid.

The Fair Labor Standards Act (FLSA) establishes which positions are properly exempt from overtime under federal law. There are two types of coverage under the FLSA -

• “enterprise coverage”
• “individual coverage”

Enterprise coverage applies to businesses with annual sales or business of at least $500,000.

It’s important to remember that even if a business is not covered by enterprise coverage, its employees may still be covered as individuals.

Individual coverage applies to employees who are engaged in interstate commerce or in the production of goods for interstate commerce. Examples include employees who regularly (not just on isolated occasions):

• Make or receive interstate telephone calls
• Produce goods that will be sent out of state
• Handle records of interstate transactions
• Travel to other states for their jobs
• Perform janitorial work in buildings where goods are produced for shipment outside the state

This includes most employees who work for any company that does business across state lines.

Once an employee is covered under the FLSA, the general rule is that he or she is entitled to overtime unless their actual duties and responsibilities qualify for a recognized exemption under the FLSA.

Although there are a number of exemptions, the most common are what are known as the “White Collar” exemptions. These are available for employees in Executive, Administrative, Professional, Computer and Outside Sales positions. Each of these exemptions require that employees have specific “duties”, and all but the Outside Sales exemption also require that an employee be compensated at a specified minimum rate of pay.

My next posts will explore the requirements of each of these White Collar exemptions.

Should the Department of Labor come knocking, a founder/owner should rest easy knowing all positions are properly classified for purposes of overtime. Stay tuned and be safe, not sorry!

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