Privacy, Business and Law

It so much easier for a new company to simply pay everyone a weekly salary than to have employees account for each hour worked and pay by the hour. It may also be cheaper to pay everyone a salary, as hourly employees usually are entitled to overtime premiums. As a result, it is fairly common to find at emerging growth companies that all employees, with the possible exception of the receptionist, are paid a regular salary regardless of the number of hours worked in a week.

It is probably no surprise that federal and state labor laws are not based on what is convenient and cheap for emerging growth companies. The law starts with the presumption that everyone is entitled to be paid one and one-half times his or her normal hourly rate for all hours worked in excess of forty per week. There are exemptions from this overtime requirement, but they are limited. The most important exemptions under federal law are for “bona fide executive, administrative, or professional employees” and “outside sales[people].” “Executives” are defined as those individual engaged primarily in management activities, such as department heads who regularly supervise at least two employees. “Administrative” employees are defined as those who regularly exercise discretion and independent judgment, whose duties are directly related to management policies and who regularly assist a bona fide executive, with only general supervision, with work requiring specialized or technical knowledge. An executive assistant to a CFO who helps to prepare budgets probably would qualify for the administrative exemption. “Professionals” are defined as those who consistently exercise discretion and judgment, whose work is primarily intellectual and varied in character, and have knowledge of an advanced type that is customarily acquired through a prolonged course of specialized intellectual instruction and study. Software designers with engineering degrees ordinarily fall into the “professional” category.

More important for high-tech companies, the U.S. Department of Labor has issued regulations regarding overtime exemptions for employees in computer-related occupations. These regulations make it clear that while systems analysts and software designers will be considered administrative employees, many programmers will not. For example, programmers translating narrative into computer language or doing debugging work probably will not be exempt.

Failing to pay overtime premiums to employees who are not exempt is a very expensive mistake. If 10 employees, misclassified as exempt, make the equivalent of $18 per hour and work an average of 50 hours per week over a 3-year period, the liability in back wages and penalties could approach $300,000. This is partly because, if the Department of Labor finds the violation to be willful, actual damages are doubled.

To stave off this kind of liability, new companies should conduct periodic audits of job classifications to determine which positions can legitimately be considered exempt from overtime laws. These audits are likely to uncover several employees who had been paid a regular salary who should be paid overtime for all hours worked in excess of 40 per week. The long hours and frantic pace that are the norm at most emerging growth companies may make such an adjustment either expensive, or, if the employees are limited to 40 hours per week to avoid overtime payments, an administrative headache. On the other hand, these problems are far easier to face in the context of a self-audit than in litigation with a group of employees or the federal government.

by Dan Weisberg “10 Mistakes Technology Companies Make With Employees”