Although the Fair Labor Standards Act's exemption rules are fairly straightforward, recent judicial rulings create an "overtime trap" that could affect many employers. The courts have ruled companies trigger an unintended aspect of law when they dock the pay or debit the accrued leave of an exempt employee for partial day absences. The exemption status of the employee's position thus changes when the docking occurs, making them non-exempt, and thereby eligible for overtime for all extra hours worked.

Because of these recent pronouncements, the employment Policy Foundation estimates that employers may be liable for as much as $20 billion a year in unpaid overtime. A recently introduced bill in the House of Representatives (H.R. 1309) is intended to correct this situation which became more apparent as companies attempted to comply with the Family and Medical Leave Act, which does permit the use of unpaid partial days of leave.

Under recent interpretations of the Fair Standards Labor Act, a loss of salaried exemption status is not limited to employees whose pay is actually docked. In the case of Martin vs. Malcolm Pirnie Inc., an appeals court ruled that language contained in the employee handbook effectively denied exempt status to a group of highly compensated engineers. The employer insisted that it did not have a policy that mandated partial-day deductions, and although the handbook applied to both exempt and nonexempt employees, the employer said that the particular language only related to nonexempt employees. However, the court held that the employee handbook irrefutably established a lack of salaried status for all employees, and all employees receive a right to overtime premiums when the loss of exempt status occurs.

Many companies choose to pay otherwise qualified exempt employees additional compensation (overtime) when they work extra hours. A significant question is, "Will this damage the exempt status?" It may, according to a recent ruling by the U.S. District Court for the District of Columbia. The employees in question were executives who were paid a weekly salary and who received extra compensation calculated on an hourly rate when they worked more than 40 hours. The question before the court was whether the employees were salaried for exemption purposes, and the court said:

"While some additional compensation beyond salary may still be permissible, where that compensation is measured by the number of hours worked and paid is at an hourly rate, there is a clear indication that employee is not working on an hourly basis." (Hilbert vs. District of Columbia)

This decision is contrary to a decision of another Federal District Court, and appears to be the only that has reached this conclusion. An area director of the Federal Wage and Hour Division said that the office does not take the position that such extra payment would affect the status of an otherwise exempt employee. However, employees can bypass the wage and hour division and proceed directly in federal court in seeking to enforce overtime pay claims, and it is possible that other courts will adopt the Hillbert decision. In addition, at least two other courts have ruled that employees receiving consideration of overtime in the form of bonus payments may jeopardize their exempt status.

As indicated previously, an employee may sue for unpaid overtime compensation plus an equal amount of damages. The latter will probably be awarded by a court unless the employer can show that the violation was in "good faith", and the company had reason to believe it was not in violation. The secretary of Labor can also bring suit if he or she believes that a violation has been committed.

The statute of limitations on overtime pay claims is normally two years; it is extended to three years where the violation is "willful". An employer's violation is willful when it knows the conduct is unlawful or exhibits a reckless disregard for its unlawfulness.

In light of the mixed opinions being issued by the courts on the subject and the potential magnitude of a mistake, employers may want to consider the following actions:

- Consider conducting a formal audit of each exempt position to ensure compliance with the applicable FLSA tests.

- Maintain written justification necessary to support the exemption status.

- Establish a clear-cut and consistent policy covering payments for "excess hours" for exempt employees.

- Prepare a written policy along with clear, unambiguous administrative guidelines covering related payroll practices.

- Communicate the new, revised policies and practices and practices to all employees.

- Carefully consider available options respecting accrued leave deductions and similar issues.

- Do not reduce a salaried employees pay for absence covering less than a full workday, until such time specifically permitted by law.

- Do not make any deductions for jury duty, witness appearances, temporary military leave, disciplinary infractions, or lack of available work unless the deduction extends through an entire pay period.

By taking action to review current employer policies and adhering to a systematic and prudent approach to handling excess hours and partial time off, you should be able to avoid potential FLSA violations. There are more than enough pitfalls in business without being trapped by the ones that can be easily anticipated and rectified.