When a Salary is a Bad Deal...and Illegal
For many professionals early in their career, the jump from being paid by the hour to a guaranteed salary feels like a milestone. Instead of each minute of work being logged and monitored, a salaried employee has the freedom to manage their own time and is recognized largely for their substantive contributions. Because more senior members of a company are typically salaried, having a salary often feels like a status symbol, making it a source of pride in corporate culture.
But a salary comes at a significant cost: no overtime pay.
The Legal Requirement to Pay Overtime
Under the law, the general rule is that employers must pay most employees at 1.5 times their regular pay rate, or “time and a half,” if they work more than 40 hours in a workweek. There are, however, some exceptions to that rule. If a position meets specific criteria described in state and federal regulations, then an employer may pay that position a fixed salary and avoid paying time-and-a-half, no matter how many hours the employee works. These employees are “exempt” from the overtime requirements, whereas employees who don’t meet one of the exemptions are classified as “non-exempt” and are legally required to be paid overtime.
Misclassification is Common
Employers oftentimes pay employees a fixed salary even though the employee doesn’t meet the legal exemption requirements. In some instances, this is because the employer is simply unaware of how rigid or peculiar the overtime exemption laws are; they do not realize a highly intelligent or highly motivated employee is actually entitled to overtime pay because of the nature of their role. In other instances, employers may pay employees a salary where it’s a “close call” because it saves them money and avoids the administrative burden of tracking time.
The Cost of Not Paying Overtime
Not paying overtime to employees who are legally entitled to it can be costly in the long run for both employers and employees.
For employees, the cost is obvious. Consider a misclassified employee who makes $80,000 per year and receives a salary of $1,540 per week. If that employee is working sixty hours per week, they are leaving $20,000 in overtime pay on the table each year.
For the employer, a failure to pay overtime due to misclassification can result in significant penalties. Employees in Massachusetts are entitled to treble damages (three times the amount of lost earnings), plus attorney’s fees, and can recover lost wages going back up to three years. The employee in the above example could arguably be entitled to $180,000 ($20,000 x 3 years x 3) if they are not paid in full before filing a lawsuit. If an employer has multiple misclassified employees in the same position, then the employer is vulnerable to a class action, and the exposure grows significantly.
What Should Employers and Employees Be Thinking About?
Employers should ensure their salaried positions fit within the legal criteria established by state and federal law. They may wish to consult an attorney who can perform this review under the protection of the attorney-client privilege, and who can advise the best way to remedy any current misclassifications.
Employees who receive a salary should consider whether they are classified correctly, or whether they may be entitled to unpaid overtime pay. An employment lawyer can help an employee understand whether they have been misclassified, provide advice as to how to recover unpaid wages, and commence legal action on the employee’s behalf if necessary.
Brandon Clippinger, Esq., is an experienced employment lawyer who advises on wage and hour issues and other legal aspects of the employment relationship. For a free consultation, contact Brandon at 781-636-5251 or by email.
This article has been prepared for informational purposes and is not legal advice.