How FLSA Overtime Rules Apply to Contract Staffing

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
  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.

Many recruiters and clients have a misunderstanding as to what qualifies an employee as exempt from FLSA overtime rules.

Generally, under the FLSA overtime rules, 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 work week. 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.

Exempt Employee Requirements

Most employers assume because someone is working in what they consider a professional job, that employee is exempt from FLSA overtime rules. 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, or 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, the 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 at least $27.63* per hour can still be paid on an hourly basis and remain exempt from overtime under the FLSA (except for in the state of California). 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.

Clients May Be at Risk

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

Obviously, the scope and breadth of overtime laws is more detailed than this brief summary. However, it is imperative clients and recruiters are aware of the FLSA overtime pay requirements before sitting down to negotiate contract staffing arrangements because penalties for overtime violations can devastate a staffing firm.