January 2013

Correctly Classifying Employees

A primer on the ins and outs of paying overtime wages.

By Sharon Sheridan, Contributing Writer

It sounds simple enough. An hourly employee who puts in extra hours earns time-and-a-half pay in overtime compensation.

But the reality is a bit more complicated. Whether workers are employees or independent contractors, whether they qualify for “exempt” status and even how much they use e-mail and Blackberries outside regular hours all factor into determining whether those workers should be paid overtime. And the price of misclassifying or underpaying employees can be high, with companies facing potential fines, back payments and damages.

The good news is that complying with wage and hour laws concerning overtime in New Jersey has become easier, thanks to efforts to align state and federal laws.

The federal law was New Deal legislation during the Depression in the 1930s and was intended to help cut the 25 percent unemployment rate at that time, says Patrick McCarthy, partner in the Parsippany office of Day Pitney LLP. “In the ’30s, people were made to work 60 – and sometimes more - hours a week. The idea was that when an employer got to 40 hours a week with a worker, he would say, ‘I’ll just bring in another guy … and things will be cheaper for me [instead of paying the first employee time-and-a-half in overtime compensation].’”

But economic changes in future decades complicated things.

“Society moved away from a manufacturing- production society, in which timekeeping was easy to capture,” McCarthy says. “People were at a machine or an assembly line. You knew how much they were working, and nobody was going to be working at home. There was much less creative mental effort and much more physical effort.”

Today, so-called production workers form a small part of New Jersey’s workforce and knowledge workers are dominant. “Plus the onset of electronic devices and the ability if not the desirability of having people work remotely has turned these laws kind of on their heads,” McCarthy says.

Complicating things further, the US Department of Labor modernized its rules in 2004, adopting new, simpler tests for determining which employees are exempt from receiving overtime. The problem was the new federal standard was completely different from the only one New Jersey recognized, says Ian Meklinsky, a partner at Fox Rothschild LLP in Princeton and Philadelphia. “A number of New Jersey-based employers ended up paying a lot of back-money to employees because they would apply the federal test, which was not the same as the New Jersey state test.”

State law also prohibited rounding employees’ work time unless it was in the workers’ favor, while federal law allowed for rounding up or down, he says.

Things have improved. “In December 2010, the State Department of Labor adopted the federal rounding rule, which was its first big step in decades in terms of meeting what the federal rules were,” Meklinsky says. “And as of Sept. 6, 2011, New Jersey employers can apply the federal rules for determining overtime exemptions.”

So who, exactly, is exempt?

The first step is to determine whether someone is an employee or an independent contractor.

“More employers are looking to use independent contractors because it gives them elasticity,” says Michael Riordan, partner at McElroy, Deutsch, Mulvany & Carpenter, whose main office is in Morristown. Particularly in an uncertain economy, employers benefit from being able to hire temporary workers and not have to withhold taxes or pay benefits, he explains.

But, just working short-term or part-time doesn’t make you an independent contractor, says Lou Chodoff , partner in the Cherry Hill office of the multi-state Ballard Spahr LLP. “Independent contractors will typically have their own, independently established business or trade. … Independent contractors work for a variety of different companies throughout the course of a year and should be getting multiple 1099s from people, not just one.”

Independent contractors also typically are paid on a per-job basis and make their services available to the public, he says. Independent contractors have discretion over the time, means and manner of their work and their work equipment, summarizes Galit Kierkut, partner at Sills Cummis & Gross P.C., Newark. “If someone is on site and is directed to be there from nine to five and is using the employer’s equipment, it’s going to be harder to prove that person is an independent contractor.”

Often, someone begins as an independent contractor, but as that contractor moves into having “a permanent and exclusive relationship with their client, that may morph from an independent-contractor relationship into an employer-employee relationship, even if not intended,” Riordan says.

Once someone is an employee, he or she only is considered an exempt worker, not receiving overtime, if the job meets certain legal requirements. The main exemptions are for executive, administrative and professional workers. There also are certain computer and outside-sales employees exempt from overtime, Kierkut says.

“Determining who is exempt versus nonexempt can be tricky,” she says. For all but the outside-sales employees, exempt workers must be paid a salary of at least $455 a week.

“This is another area where employers tend to get into trouble. You cannot kind of chip away at that salary,” says Randi Kochman of Cole, Schotz, Meisel, Forman & Leonard, PA, which is based in Hackensack. “For example, if you’re treating someone as exempt and you pay them a salary of $30,000, you can’t start docking them for an hour here or an hour there, because if you do, you’re really treating them as an hourly employee.”

“If the employee works any time in the work, they must be paid that full salary,” she says. “On the flip side … if they work 70 hours, they get the same salary.”

Salary is not the sole criteria, Kierkut says. “That’s probably the most important thing to get across to people: Not hourly doesn’t mean not exempt. They have to fall into the exemption based upon what they’re actually doing – not based upon the job description you’ve written for them, but based upon what they’re actually doing every day.

“It is wise to consult with counsel when you’re initially doing your job descriptions and you’re deciding which posts are going to be exempt or nonexempt,” she says.

Notes Meklinsky, “You can’t do this in broad brush strokes. You have to do this on an individual employee-byemployee analysis.”

And conducting regular wage-and-hour audits is a good idea to ensure that jobs and job descriptions match, says James Boyan III, an associate attorney in the Day Pitney labor and employment group.

An exempt executive’s primary duty is managing a business unit, where he or she supervises two or more employees and has the authority to hire and fire workers or make suggestions and recommendations about hiring and firing and the conditions of employment, Riordan says. An exempt administrative employee’s primary duty is performing “office or non-manual work directly related to the management or general business operations,” and the employee’s primary duty “involves exercise of discretion and independent judgment,” he says.

“The professional exemption,” Chodoff says, “is for anybody with advanced schooling – accountant, lawyer, doctor, things like that.”

Exempt computer employees are skilled workers such as analysts and programmers, Kierkut says. “You could say those people should qualify for professional exemptions, but a lot of them don’t tend to have advanced degrees.”

Again, it’s the actual job, not the job title or description, that counts. Someone called a manager at a fast-food restaurant who doesn’t actually have any authority in hiring and firing, for example, would not be exempt, says Dominick Bratti, partner and shareholder of Wilentz, Goldman & Spitzer at its main office in Woodbridge.

Misclassifying someone can have implications beyond that one job. “God forbid you have 50 people in that same position and you’re wrong,” Kochman says. “You have a big problem.”

Under federal law, she says, employers can be required to pay two years’ worth of back overtime for workers misclassified as exempt – three if it’s found to be a willful violation, and that total can be doubled for damages. There also are attorney fees and some penalties. “It can be very pricey if you get it wrong, especially if you have a group of employees.”

Good record-keeping is critical, notes McCarthy. Federal and state law require keeping records of time worked by employees eligible for overtime. Not doing so not only carries the risk of fines or penalties, but it also “completely undermines the employer’s ability to defend any claim,” he says. “The inference goes that the employee’s version is correct” concerning the number of overtime hours worked.

Beyond job misclassifications, one common error occurs when employees work on a two-week cycle, Bratti says. Employees working more than 40 hours in any week must be paid overtime for that week, even if they don’t work more than 80 hours total for the two weeks.

With non-exempt workers, employers must be careful about their use of Blackberries or other PDAs. “Let’s say somebody works nine to five,” Chodoff says, and they begin receiving and responding to e-mails during evenings or weekends. “Let’s say timekeeping records every six minutes. … It doesn’t take long to accumulate six minutes of e-mails. That’s compensable work time, and I think a lot of employers do not take that into consideration.”

Overall, overtime rules can be tricky. When in doubt, labor attorneys say, get help.

“Many times it’s clear cut, but there’s a lot of little pits and traps that employers can fall into,” Bratti says. “If they’re unsure, or if they’re just starting a business or if they have a business going and they just want to figure out what the lay of the land is, they should consult an attorney.”

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