An obscure rule works overtime - Department of Labor rule on overtime compensation - includes related article

Nation's Business, March, 1993 by David Warner

If you dock salaried workers for partial-day absences, you could find yourself in court.

Many employers are unwittingly violating a U.S. Department of Labor pay rule, and they could pay a high price as a result. To be precise: U.S. companies could owe $39 billion in back pay, according to the Labor Policy Association, a business research organization in Washington, D.C.

The rule--on overtime compensation--has been in effect since 1954, but it has come to the fore, mostly in economically painful ways, because of a handful of recent court decisions and increased Labor Department enforcement actions against companies.

William Pierce says the costs of fighting the Labor Department's charge that he had violated the rule contributed to the demise of his 32-employee engineering consulting firm in Cincinnati. He says it cost him nearly $30,000 in back pay and legal fees and resulted in a 2 1/2-year legal battle that diverted his attention from the business.

Pierce says he had "no idea, no concept of what [the Labor Department] was looking for" when it examined his payroll records in June 1988.

The rule says employers must pay hourly employees at one-and-a-half times their hourly rate for each hour over 40 they work in a week. Employers are not required to pay overtime, however, to employees who are paid "on a salary basis" and who also meet certain requirements related to "duties."

Generally, employees performing in a professional, executive, or administrative capacity meet the "duties" test. The current controversy involves the "salary" test. The Labor Department regulation says employees are paid "on a salary basis" if they receive a minimum guaranteed salary on a weekly or less-frequent basis regardless of the hours they work or the "quality or quantity of the work performed." The standard minimum pay requirement for meeting the "salary" test currently is $170 per week.

The department says employers may deduct pay from salaried employees for full-day absences but not for partial-day absences. If workers are docked for partial-day absences, says the department, they are "hourly" employees and should receive overtime pay for hours worked over 40 in a week.

The rule "is proving to be a huge trap for the unwary," says labor-and-employment attorney Samuel D. Walker. "Many companies are not in compliance with it." A member of the Washington, D.C., law firm of Wiley, Rein & Fielding, he has served in the Labor Department as acting assistant secretary and as acting wage and hour administrator.

Pierce's engineering firm, Pierce Processing Inc., did consulting for companies changing their physical plants and industrial processes. He says he thought he was a progressive employer with a flexible leave policy; he allowed employees to take time off when necessary as long as they worked 80 hours in a two-week period. "Our system was set up to be more than fair and more than equitable," he says. His industrial engineers earned about $55,000 a year.

The firm was cited by the Labor Department for improperly handling 105 hours out of 69,000 hours worked by its employees over two years. The department said Pierce owed $22,000 in overtime pay to the 11 workers who had put in those 105 hours. The department reached that conclusion after determining that six employees (not necessarily among the 11) had been docked a total of $3,400 for partial days off during those two years.

The Labor Department argued in court that because Pierce had docked some workers, all of his salaried employees were considered hourly employees and were owed overtime for hours worked over 40 in a week.

Pierce says between 80 and 90 of the 105 hours for which the Labor Department sought overtime pay were the result of employees working, for example, 37 hours in the first week of a two-week pay cycle and 43 in the next. Having worked 80 hours in the pay cycle, the salaried employees were paid their guaranteed compensation.

But the Labor Department said those workers should have been paid for 37 hours of regular time in Week 1 and 40 hours of regular time and three hours of overtime in Week 2, because they were actually hourly employees. They were hourly workers, the department said, because some of them had been docked at one time or other for working less than 80 hours in a pay period.

Although Pierce eventually prevailed in the Labor Department's case against him, the fight cost him $26,000 in legal fees. In addition, he still had to pay $3,400 in wages he had docked the six employees who took leave without pay for partial-day absences.

"All [the rule] has done is strip away the flexibility that my employees had," says Pierce, who adds that his workers voluntarily took leave without pay rather than deductions from their leave accounts.

Says labor attorney Walker: "A lot of companies have chosen for personnel-management reasons... to have a system in which employees can choose--in some instances employees have demanded--that their employers reduce the pay of workers who are absent for partial workdays. The feeling in some companies is that such a practice promotes accountability, that it promotes a sense of equity across class lines .... but the rules, as they're written, just don't countenance that."