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California Overtime and Exemption: asks an Expert

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Washington, DCLawyer Harvey Shulman has represented employers in several Department of Labor overtime investigations and class action litigations. In this interview with LawyersandSettlements, he explains California overtime versus overtime in other states, and whether or not an IT employee is exempt from overtime.

"Let me start by mentioning my background. From the beginning I have represented employers in the IT industry and it has been satisfying: most employers are delighted to negotiate wages and do the right thing. But not all employers end up doing the right thing because some of the laws are unclear -- particularly when it comes to overtime.

Harvey ShulmanWe first started dealing with this overtime problem in the mid 1980s when the need for IT workers was mushrooming. At that time, the US Department of Labor rules that regulated overtime were based on standards that came into play even before there were computers and what was said about the computer industry, even in the late 1980s, was outdated. For example, computer sciences were not even recognized by the Department of Labor regulations as a standard course of study in college.

However, IT workers were well paid in those early years -- a salary of $50,000 or $25 per hour wasn't uncommon 20 years ago (the minimum wage was only $3.35 per hour). Around this same time the Department of Labor started investigations that raised the overtime issue and it often said: 'If an IT employee works overtime, he should get paid time and a half in many instances, especially if he is paid only by the hour -- even if it's $100 per hour.'

The Department of Labor investigations also came at a time when many employers were hiring IT workers to do consulting assignments for clients. For instance, a computer programmer would be paid $30 per hour by the employer and the client was paying the employer $50 per hour for the consulting service. Understandably, employers said 'I can't pay my employees time and a half; paying $45 per hour means that, by the time I pay taxes and workers comp, I would be losing money' .

Typically, before the Department of Labor investigations, if a computer programmer made $30 per hour back in the 1980's (the equivalent of $60,000 per year), any overtime would also be paid at the 'straight time' of $30 per hour -- so they would get $150 more per week for another five hours worked. Then the government said employers had to pay overtime time and a half -- but most of them couldn't afford it. As a result, the workers weren't happy -- they didn't mind working another five hours a week to bring home an extra $150 at their 'straight time' rate of $30 per hour (amounting to an extra $7,500 per year).

Why should I be told by the government to work 40 hours a week and no more?

The Overtime Exemption Law
So in the late 1980s a number of employers' and workers' groups supported the US Congress when it passed an overtime exemption law for IT workers, an amendment to the Federal Fair Labor Standards Act.

Understandably, many workers and employers were in favor of the exemption law. The law was passed in 1990 and passed again by US Congress in 1996 in a slightly different form -- it expanded the exemption. So now we had an industry where IT workers who got a straight hourly rate of at least $27.63 per hour (the federal requirement) or who got paid a salary could be exempt under the federal overtime law, which in many cases meant they could work overtime -- and many did so and then got paid 'straight time' or bonuses, but not time and a half.

California Overtime
Then the states got involved. Most states followed the federal law or they had no overtime law requirements. In many states, if a computer employee is exempt from special overtime pay under federal law, that person is exempt under state law.

Pay Rates
But California adopted a more narrow overtime exemption: Some employees who are exempt from federal law could be eligible for overtime under California law. Today, many overtime cases are being brought in California because their law isn't the same as federal law. One of the California differences is about pay rates.

Whether or not an IT worker is exempt is based in part on the amount earned. For instance, a computer programmer at mid or senior level being paid $40 per hour ($80,000 per year) would not be exempt under the computer employee exemption under California law (if paid a salary, she might be exempt under the administrative or other state exemption, but not the computer employee exemption). But the federal hourly rate exempts these same employees as long as they are paid at least $27.63 per hour, and most states follow the federal law at $27.63 or they have no special overtime pay requirements.

So the programmer being paid $40 per hour working in California wouldn't be exempt as a computer employee. But if that person worked in most other states, she would be exempt from overtime under state overtime law (as well as the federal law).

Job Duties
There is also a gray area when it comes to job duties that a computer employee must perform in order to be exempt from overtime, and these areas are dark gray in California. Let's say someone is a network systems specialist. Under federal law, the computer employee exemption for overtime applies for computer programmers, systems analysts, software engineers and another category called 'similarly skilled workers', as long as any of those workers is primarily performing certain computer duties listed in the federal law.

Take the case of the network systems specialist or a network administrator: that person could be categorized as a 'similarly skilled worker' under the federal law. Then go down the list of duties: are their primary duties in the job description list? In many cases, the answer is 'yes'.

What exactly does a network systems specialist do? Now you get into a situation where you have to look at the employee's actual work and the list of exempt duties under both federal and California law. Many of the cases in California are now dealing with whether or not the job is exempt because they are disputing whether the actual job duties are exempt under California law.

Federal job descriptions (or duties) are broader than those in California. Under federal law it is possible that a network systems specialist might be exempt from time and a half overtime pay - if the primary duties are in the list of duties -- but he may not be exempt under California law because it uses a somewhat narrower definition of duties and adds some other elements not included in the current federal exemption for computer employees. Still, many computer employees are, in fact, exempt under California law, even if it seems gray at times.

What trumps -- federal or state law?
Many states follow the US Department of Labor standards but other states vary: some are stricter while others are more flexible. Employers must review their own state laws, as well as the federal requirements, because if either the state or federal law requires overtime pay, the employer must pay the overtime.

In other words, if the federal law says no special overtime has to be paid, but California law says that the employee is not exempt from state overtime laws, then California law will prevail and the employee must be paid the overtime rate required by California.

In this situation, is it any wonder that, increasingly, some California companies are moving jobs across the border to work in other states where employees don't have to be paid special overtime rates? Just like the ridiculously high workers' compensation rates hurt job creation in California several years ago, the overtime pay requirements are doing the same thing in the IT industry.

Keep in mind that, even though California is important and has a large IT industry, workers would be exempt from time and a half overtime in many other states even if they aren't exempt in California. There are other places in the US besides California where employers are doing the right thing, but in this state the employer might have to treat their employees differently to do the right thing, which means forbidding overtime work, even if the employee wants to work overtime at a 'straight time' rate.

The IT industry is still evolving. When you look at overtime exemption for IT workers and you try to use it in jobs that are evolving, there will always be some gray area -- but that doesn't mean the law is being violated. Many cases are being settled; they aren't going to trial because employers are saying it isn't worth their time and trouble to go through litigation. The overtime dispute about which duties are exempt vs. non-exempt may never get definitively resolved without a court ruling but in the meantime, settlement of these class action cases has been a way for some lawyers to get additional compensation for employees without resulting in a clarification by a judge on whether or not the employees were actually entitled to overtime pay under the law. If and when an employer goes to trial, it won't be a surprise to many of us if the employer actually wins.

The Future
Here is the bottom line: if technology employers can't pay 'straight time' overtime, a lot of workers will be told they can't work more than 40 hours a week even if they want to work at 'straight time'. This means a lot of them will take home less money -- and that isn't necessarily going to lead to more job creation for other workers because many of these jobs aren't fungible. In fact, tech jobs might migrate away from California. Right now, the pay rate required to exempt is about $50 per hour (adjusted yearly). That works out to $100,000 per year based on a 40-hour week. If employers have to pay time and a half overtime to employees who earn as much as $99,000 per year, they may not want to locate those jobs in California.

We need to remember that many IT workers these days can be working anywhere: at home, in other states, overseas. California law might be shooting itself in the foot because a growing number of companies are moving jobs to Utah, Arizona or Texas where they don't have to worry about such restrictive laws."

Harvey J. Shulman is the President of Expert Advice and Counsel ("EAC"), a Washington, D.C. law firm he founded in 2001 whose clients include information technology (I.T.) companies throughout the U.S. Before EAC, Harvey served as Executive Vice President and General Counsel of a national I.T. company, a law partner in two large Washington, D.C. law firms, and general counsel of a national trade association of I.T. companies.

Harvey has testified many times before Congressional committees, and he helped draft many laws and regulations passed by Congress or issued by federal agencies and affecting the I.T. industry (such as the overtime exemption for computer workers, provisions dealing with independent contractors, the definition of "leased employees", etc.). Harvey's firm handles a wide variety of issues for companies, including wage and hour overtime investigations and litigation and employment tax / worker classification audits.


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