Which Employees must be paid overtime?
Most employers' pay practices are governed by The Fair Labor Standards Act (FLSA), which was enacted in 1938. The purpose of the FLSA is to ensure that: 1) all employees receive a minimum wage, 2) men and women are paid equally when performing substantially the same job, 3) the use of child labor meets strict requirements, and 4) unless an employee is "exempt" from the requirements, he/she receives extra compensation for hours worked in excess of forty (40) in a workweek.

Regarding the fourth requirement, there is a common misconception amongst recruiters and their clients regarding the payment of overtime to contract employees. Many recruiters and clients have a misunderstanding as to what constitutes an "exemption" from overtime under the FLSA. Hopefully this article will shed some light on this confusion.

Generally, under the FLSA, all employees must be paid a rate of time and one half of their regular rate of pay for all hours worked in excess of forty (40) in a workweek. However, particular employees may be exempt from this overtime requirement if they meet certain criteria. As applied to contract staffing, the most common exemptions apply to those white-collar employees who are employed in a bona fide executive, administrative, or professional position.

When is an employee exempt?
Most employers assume that because someone is working in what they consider a professional job, that employee is exempt from the overtime requirement of the FLSA. However, the test for exempt status is a two-pronged test. Not only must the employee’s duties meet the exempt requirements, that employee must also be paid on a salary or fee basis as opposed to an "hourly" basis. Both the salary test and duties test must be met for the exemption to apply. An employee is not considered exempt if only one of the two tests is met. Therefore, although an employee has a professional title and professional duties, that employee must also be paid on a salary or fee basis to qualify as exempt from overtime under the FLSA. A professional, executive, or administrative employee will not meet the FLSA exemption requirements if he/she is paid on an hourly basis (with one exception discussed below).

Similarly, the payment of a salary does not, in and of itself, create an exemption. The individual who is paid a salary must still meet the duties test to qualify for exemption. Generally once it is determined that a particular employee is exempt, such an employee must receive his/her entire salary for any week in which work is performed without regard to the number of days or hours worked. When deductions are permitted, they should only be made in full-day increments.

Are there any exceptions?
Although numerous "miscellaneous" exceptions exist, there is really only one exception to these general principles which is extremely relevant to recruiters offering contract staffing. Professionals working in a "computer related occupation" who earn more than $27.63 per hour can still be paid on an hourly basis and remain exempt from overtime under the FLSA. Originally, the FLSA stated that the computer related employee must be paid at a rate of six and one half times the minimum wage to qualify. However, the FLSA was modified by the Small Business Job Protection Act of 1996. This modification set a firm dollar amount of $27.63 to replace the six and one half calculation.

Your clients may be at risk
By not agreeing to pay overtime for hourly contractors, your clients are at risk. Many staffing firms may be tempted to ignore the proper classification of their contract employees because their clients refuse to pay for overtime hours worked. If a staffing firm fails to meet obligations imposed by the FLSA, the Department of Labor may hold both the client and the staffing firm jointly liable for these violations as co-employers of the contractors.

Trend
The trend with many clients today is that they expect premium resources at discounted prices. Clients expect staffing firms to continue to recruit exceptional candidates and pay professional employees a salary (hoping to meet exemption standards), yet these clients only want to pay for the actual hours the contractor works. This is unacceptable without increased margins. The reason is simple. If a contractor only works four hours one day, the staffing firm must pay the employee for eight hours of work, but can only bill the client for four hours. Neither staffing firms nor recruiters should accept these unreasonable client demands. Only when the client agrees to pay overtime in accordance with the FLSA (e.g., time and one half) or if you greatly increase your straight-time margins will you be financially protected from this situation.

Oftentimes, clients expect staffing firms to provide quality resources and comply with the FLSA without increased margins for overtime hours worked. This expectation is unrealistic. Recruiters should be on guard when they see their clients making any of the following faulty assumptions: 1) The "regular" straight-time bill rate allows enough margin for the staffing firm to pay the contractor time and one half overtime pay, 2) The contract staffing firm can pay a contractor as a "professional" exempt employee, yet only bill the client for the actual hours worked, or 3) There is no liability for the client when a staffing firm erroneously classifies an employee as exempt. Again, these assumptions are faulty.

Obviously, the scope and breadth of the FLSA is well beyond the allotted space for this article. However, it is imperative that clients and recruiters are aware of the FLSA requirements before sitting down to negotiate contract staffing arrangements because penalties for overtime violations can devastate a staffing firm.

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