Mr. Schmidt

Hospitality Law

The Employment Classification Trilogy - Part I of III: The Overtime Exemption Dilemma

By Michael C. Schmidt, Partner, Cozen O'Connor

As we rapidly reach the end of 2009, it is clear that wage and hour lawsuits continue to make up a large portion of all new cases filed in federal court. In these challenging economic times, hotel employers also recognize the importance of reducing costs, while determining, where possible, how to avoid the more drastic remedy of individual and mass layoffs. But there are pitfalls that employers should try to avoid when reducing perceived costs.

One potential danger is misclassifying employees as "non-exempt," and therefore ineligible for overtime compensation if they work 40-plus hours per week While companies may reap short benefits by cutting costs from not paying premium overtime compensation, the resulting liability and defense costs, if it is determined that employees were misclassified, far outweigh any immediate gains. Indeed, these cases are often prosecuted through class action lawsuits, where the existence of multiple plaintiffs increases the potential for significant exposure to the hotel employer.

In 2009, the ever-changing nature of the workplace and the workforce has also contributed to the wide spectrum of issues facing hotel employers, and the increasing number of overtime lawsuits being filed generally. In the past, an employer had an easier time controlling employees hours worked when the work performed was generally confined to the nine-to-five work day and within the hotel office walls.

However, technology has torn down the office walls, making anywhere and everywhere in the world a virtual cubicle. Employees not only have greater access to company documents and e-mail from home computers, but Blackberries and similar devices allow workers to remain connected to the office and clients anytime day or night. Coupled with the increasing number of employees allowed to telecommute, it is practically impossible for your company to control, let alone know about, all hours in which employees are performing work.

The problem is two-fold. The first is determining how a hotel employer can minimize the liability risk for misclassifying employees as "exempt" from overtime compensation. The United States Department of Labor (DOL) issued new regulations more than five years ago to alter tests used to determine which employees qualify. Yet, many employers still do not understand, or are incorrectly interpreting, the law.

Both the federal Fair Labor Standards Act (FLSA) and most state laws require that non-exempt employees receive overtime pay for all hours worked over 40 in a workweek. The law contains certain primary exemptions from overtime pay (i.e., where the employers are not required to pay overtime) for "any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman[.]" Congress has never defined the terms "executive," "administrative," "professional," or "outside salesman," leaving those terms to be defined through DOL issued regulations.

Assuming the hotel and employee meet the FLSA's coverage requirements, it is imperative that the hotel determine whether the employee is exempt from overtime pay. In short, and subject to certain carve-outs, the DOL's regulations provide that all employees who earn less than $455 per week ($23,660 annually) are now guaranteed overtime pay, regardless of the nature of the employee's job duties. Employees who earn between $23,660 and $100,000 will be entitled to overtime if their actual job duties meet the tests established for each exemption. Employees who earn $100,000 or more must meet a new "highly compensated test" to be entitled to overtime pay.

Hotel employers should separate fact from fiction. For example, a worker cannot be treated as exempt by meeting the salary test without also meeting the corresponding job duties test for that exemption, and vice-versa. Companies should not assume that an employee is exempt simply because he or she is paid a particular salary. Furthermore, determining whether an employee is exempt doesn't rely solely on job title, or whether other similar positions in an industry may be exempt. Rather, the employee's actual job duties must be looked at in conjunction with the tests set forth in the DOL's regulations.

To be classified as an exempt employee, he or she must meet the salary test and the job duties test for a particular exemption. According to the DOL's regulations, a "salary basis" means the employee "regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis." The predetermined amount "cannot be reduced because of variations in the quality or quantity of the employee's work." For example, an employee may lose exempt status if the hotel has a practice of making improper deductions from employee salaries, such as deductions for partial day absences.

So what should a hotel employer do?

Understand the Exemption Tests

The appropriate human resources professionals or other company representatives dealing with compensation issues should develop some familiarity with the DOL's regulations. While a hotel can never completely eliminate the possibility of a lawsuit, a basic understanding of wage and hour obligations will minimize the number of mistakes made (even in good faith) and ultimately the hotel's potential exposure.

Conduct an Appropriate Internal Audit

Hotel employers should sit down with counsel to review each employee's actual job duties (or each category of employees) to ensure that workers are properly classified under the DOL's regulations. Once again, job titles and outdated written job descriptions are useless if they do not comport with actual day-to-day responsibilities.

Maintain the Appropriate Documentations

Hotel employers should ensure that appropriate records are maintained, so that documentation identifying and supporting the proper wage classifications for the employees can be produced if necessary in defense of a lawsuit or when requested during an administrative audit.

Create and Communicate an Effective Policy

An appropriate overtime policy should be created (or existing policies revised where necessary), distributed and communicated to all employees. Other issues such as meal breaks, travel time and "on call" time are also issues that hotel employers need to address to ensure that the correct wage rates are used for each employee, and that the correct amount of working time is compensated.

The second problem a hotel employer can face when dealing with overtime issues involves avoiding exposure for unauthorized overtime. Many jurisdictions, including recently in the Second Circuit Court of Appeals in New York, have held that even unauthorized overtime constitutes "work" that must be compensated by an employer. Thus, as a New York court recently ruled, an employer who has actual or imputed knowledge that an employee is "working" must compensate the employee at a rate of time and one-half for overtime hours worked, even if the employer acquires such knowledge at some point after the work is performed. The result is that an employer cannot turn a blind eye to after-hours and off-premises work that it knows - even constructively - is being performed for the employer's benefit.

Here too, a hotel employer can take proactive steps to minimize potential liability. Initially, as noted above, an employer should have a well-defined overtime policy that is communicated effectively. While an employer may be required to pay overtime premiums, even if the overtime work is not authorized, it can discipline and even terminate an employee for performing unauthorized overtime.

The second step a hotel should take is to say what it means and mean what it says. If an employer maintains a policy that employees should not work after hours, then the employer should not create a culture where employees feel as if they are expected to "check in" at all hours through home computers or Blackberries. A good indication that an employee may be working off hours is if a supervisor receives a return e-mail message late at night or on the weekend. Employers also should be aware of the production of its employees, since certain high levels of productivity may be indicative of extra work being performed outside the hotel's office. Companies must also ensure that any overtime policies maintained are enforced consistently and indiscriminately.

Finally, a hotel should consider instituting a documentation procedure for non-exempt employees, so that it can better track (and better defend itself against) the number of hours an employee later claims he or she worked. Employers often walk the fine line between the hope of avoiding the lost morale associated with "big brother" watching, and the need to protect against employee claims. However, in light of today's changing workforce from the standpoint of increased technology use and more time spent outside the traditional office, hotels should consider a requirement that employees provide written certification, for example, at the end of each pay period attesting to: (i) the number of hours worked during that period, and (ii) the fact that the employee did not work more than 40 hours during that period. Such a certification will not eliminate the potential for an employee to claim in a subsequent lawsuit that hours were worked in addition to those identified on the certification, however, a contemporaneous certification completed regularly by the employee may bolster the hotel employer's defense of that claim.

Michael C. Schmidt is a member of Cozen O'Connor in the Labor & Employment Practice Group. A portion of his practice is devoted to advising large and small businesses how to avoid litigation and minimize exposure to claims. He has represented clients in the hospitality and restaurant industry in matters involving wage and hour, discrimination and employment contract disputes. Mr. Schmidt is an Adjunct Professor of Law at Touro Law School in Central Islip, N.Y., he teaches employment law. He lectures and conducts seminars for human resources professionals, corporate executives, and lawyers. Mr. Schmidt can be contacted at 212-453-3937 or Extended Bio... retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by

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