One of the biggest differences between employees and independent contractors is that independent contractors never have the right to overtime pay while many employees do. The default assumption is that employees have a right to overtime pay, but there are several exceptions which are generally referred to as “exemptions.” Hourly employees are referred to as “non-exempt,” meaning not exempt from overtime, an awkward way of saying they are eligible for overtime pay.
Workers in California generally have the right to be paid a premium overtime rate for all hours worked over eight (8) hours in one day and for all hours worked over forty (40) in one week. It is illegal to pay a worker in California a flat salary unless the worker satisfies one of several tests to qualify to be an “exempt employee.”
For hours over eight (8) in one day or over forty (40) in one week, the overtime rate is one and one-half times (1.5x) the worker’s regular rate of pay.
A worker must be paid two times (2x) his or her regular rate of pay for all hours worked over twelve (12) hours in one day or over eight (8) hours if the employee is working a seventh consecutive day.
Damages for unpaid overtime can be significant. Claims fall into two basic categories: (1) overtime was not paid because the time spent working was not recorded and (2) the company has an express policy that it is not paying overtime such as when an employee is misclassified as overtime exempt.
The method to calculate the potential monetary recovery is simple with respect to the first category mentioned above; whatever hours were not recorded should be paid at the employee’s regular rate or at the applicable overtime rate if the addition of the recorded hours and the unrecorded hours equal more than eight hours in any day or forty hours in any workweek. In the first category, you simply multiply unpaid hours by the appropriate hourly rate, and you are done. The one remaining caveat is also relatively simple: if an employee was paid straight time for an hour instead of overtime for that hour, then he would be owed one hour multiplied by one-half his hourly rate because he was already paid straight time for that hour and just needs to be paid ½ his hourly rate to be paid appropriately.
The second category requires a bit more math. Parts of the calculation are the same. You still multiply an hourly rate by a number of hours worked. But what is the hourly rate for a salaried employee? The same could be asked regarding the number of unpaid hours. California’s approach to this issue is to adjust the calculations in the worker’s favor. More specifically, when calculating the hourly rate to be used, we take the total annual compensation and divide by 2,000 hours. This calculation would be non-controversial if an employee worked exactly 50 weeks and exactly 40 hours each week, totaling 2,000 hours. Generally, salaried employees are working more than 2,000 hours in a year. Thus, the legal calculation, which is referred to as the Skyline Homes approach after the case bearing that name, results in an hourly rate that is higher than the rate that would apply if we used the actual hours worked. This approach makes sense in terms of incentives; otherwise, a company could force employees to work an insane number of hours which would result in a very low hourly rate to calculate damages. For each additional hour the salaried employee worked, his hourly rate would decrease. The Skyline Homes approach avoids this improper incentive for companies to force workers to accrue an inordinate number of hours.
Now that we have the hourly rate for the calculation, we need to decide how many hours were “unpaid.” In an overtime misclassification case, the number of unpaid hours would be those hours over eight hours in a day and over forty in a week. Since we now have an hourly rate and a number of unpaid hours, we calculate unpaid wages by (unpaid hours)*(hourly rate)*(1.5).
The right to overtime is so strong that it cannot be waived in a contract. In other words, a worker and a company are not allowed to enter into a contract to take away the right to overtime. California Labor Code § 1194(a) in relevant part provides: “Notwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid...including interest thereon, reasonable attorney’s fees, and costs of suit.” Thus, if the worker qualifies to be paid overtime, he cannot waive that give up that right. As is often true with the law, this rule has some limited exceptions to this principle.
Some employees do not get the right to overtime pay because they qualify under one or more exemptions to the standard overtime rules. The most commonly known exemption is the “executive exemption” which is sometimes called the managerial exemption. In short, a high-level manager often does not have the right to overtime pay and, thus, can be paid a salary. The legal analysis involves several factors, but in essence the test revolves around whether the worker has discretion to make important decisions. If yes, then the company does not need to pay overtime, even when the individual works more than 40 hours in a week. A similar test applies for the administrative exemption. Just like a manager, a high level administrative employee may be exempt from overtime. For instance, if the Office Manager of a company has broad discretion to modify company policies or operations, he may be exempt from overtime pay.
Other exemptions: Several other exemptions may apply such as the outside salesperson exemption which requires that the employee is generally out of the office attempting to complete sales. The Industrial Welfare Commission’s Wage Orders define “Outside salesperson” to mean, “any person, 18 years of age or over, who customarily and regularly [i.e. > 50%] works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.”
Another exemption is referred to as the Inside Salesperson exemption, making it sound similar to the Outside Salesperson discussed immediately above, but the analysis is quite different. While the outside salesperson exemption depends in large part on where the worker spends his time, the inside salesperson exemption depends on how much of your income comes from commissions. The Wage Orders provide that the right to overtime “shall not apply to any employee whose earnings exceed one and one-half (1 1/2) times the minimum wage if more than half of that employee’s compensation represents commissions.”
Employers can combine multiple exemptions. For instance, if an employee spends 80% of his time performing a combination of exempt executive and exempt administrative tasks, he may be exempt from overtime. But employees must satisfy all other factors for both tests. For instance, if there is a salary requirement in one but not the other, then the requirement will still apply.