The proposed changes to the Department of Labor rules in late 2016 regarding the minimum salary one must make before being exempt from overtime led to a hullaballoo of concern. The PGA went as far as to hire lobbyists to block this proposed overtime rule because they believed it would have a dramatic negative effect on the golf industry. With court decisions and a Republican administration, the rule is safely dead until at least 2020. This does not mean club managers can rest easy. To the contrary – the “salary floor” concern addressed by the 2016 proposed rules probably is nowhere near as important as the issue of “misclassification.” You probably have employees that are entitled to all of their back overtime pay and penalties who could sue you at any moment for “misclassifying” them as exempt, and the only thing stopping them is their ignorance as to what they are entitled to under the law.
This article evaluates the law from a litigation exposure potential, helping you to appreciate the risk of decisions you make regarding classification of such professionals. The new rules create a lot of changes, but the biggest and most striking one is that the salary threshold for qualifying as exempt from the requirement to pay overtime is changing from $23,660 to $47,746 a year. In other words, an employee who was formerly exempt under the old rules that made $40,000 a year would be entitled to sue you if you did not pay him an additional 1.5 times his normal hourly rate, or, increase his pay to at least $47,746 annually to meet the new salary threshold. As noted above, you may have heard that a federal court has blocked the implementation of this rule.Nevada v. United States Dep’t of Labor, 4:16-CV-00731, 2016 WL 6879615 (E.D. Tex. Nov. 22, 2016). If you think that means that you are safe from overtime claims from your salaried golf and tennis professionals, you are absolutely mistaken. Only certain jobs can qualify to be exempt from overtime, and these jobs are not out on the golf course or the tennis courts. Put another way, if you do not pay your golf and tennis professionals overtime for the hours they work over 40 in a week, even if you pay them a salary over the threshold, you are breaking the law and can be subject to extraordinarily costly lawsuits. If you gain anything from this article, let it be two very important points:
- It is extremely unlikely that your golf and tennis professional employees qualify as being exempt from the overtime law, under either the proposed rules orthe current rules.
- The reason that your salaried golf and tennis professionals haven’t sued you already is because you have been lucky enough that your disgruntled employees happen to know as little about overtime law as you do.
There are many very intelligent and competent professionals, in both the legal community and the club community, that have come to us and proclaimed with confidence that golf and tennis professionals can be paid a salary as long as the salary reaches the threshold. These well intentioned comments ignore the practical realities of overtime litigation and its many extremely relevant and important nuances. Most importantly, the “duties test” is nearly universally applied incorrectly. Employees in the United States are entitled to overtime pay of 1.5x their normal hourly pay if they work for over 40 hours in any given week. The exception, is if the employee is given a yearly salary at a certain rate and the job that the employee does is in one of the categories of exempt jobs. If the job is not “exempt” then the employee is entitled to overtime for his hours he works over 40 even if you pay him a million dollars a year.
Generally, there are four main categories of exemption, “administrative,” “professional,” “executive” and “computer professional.” At first blush, it really sounds like one of these exemptions might apply to cover all golf and tennis professionals. Each of these terms are terms of art in the sense that they have very precise meanings to lawyers that is a little different than the common meaning. With a more nuanced understanding of what these terms mean and are applied, it should be clear that none of these exemptions apply with the typical job duties given to golf and tennis professionals (excepting perhaps Directors of Tennis or Golf, assuming that they meet specific requirements; but it’s certainly not automatic). You will need to review your particular employment practices and actual job duties with an experienced labor and employment lawyer in order to have a more definitive answer can be provided here, but for the sake of this brief article, ask yourself these questions:
- Is your tennis or golf professional’s primary duty the administration of a business that involves independent discretion? If yes, you may have accidentally designated your human resources professional as a tennis or golf professional. If your tennis or golf professional teaches tennis or golf most of the time, then the “administrative” exemption really does not apply.
- Is your tennis or golf professional’s primary duty the management of an enterprise, which includes the power and authority to hire and fires other employees? If so, you should probably change their job title to “general manager”; if not, then the “executive” exemption probably doesn’t apply.
- Is the job done by your tennis or golf professional almost impossible without a formal degree (as in a doctor, lawyer, or engineer)? They might feel as if they are “professionals” (and they would be right) but unless they absolutely need a degree for the job, then he or she probably doesn’t qualify as a “professional” under United States overtime laws.
- Does your tennis and golf professional spend most of their time programming a computer or otherwise managing your computer network? If yes, then you need to send your tennis or golf professional outside to get back to work. If no, you have a very normal tennis and golf professional that is not covered by the “computer professional” exemption.
If your tennis and golf professional, like most tennis and golf professionals: sometimes works more than forty hours a week, only gets paid a salary, and does not qualify under any of the above job duties, then you have yourself a potential lawsuit on your hands.
“Wait,” you might say, “my club professionals are independent contractors!” It might be easy to click that on a form, but it is very unlikely that your golf and tennis professionals are independent contractors. There are a lot of factors in determining what an independent contractor is; but, the bottom line is, if you tell a golf or tennis professional that he needs to be at work at a certain time or you pay him a salary, then it is really unlikely that he will qualify as an independent contractor. The “independent contractor” designation is really for things like plumbers and taxi drivers.
It is also important to not rely on technical exemptions to overtime law that you find which you believe will protect you. While there are some defenses that you might able to bring up to claim that the “Fair Labor Standards Act” does not apply to country clubs, those defenses are risky, unreliable, and can be costlier to defend even if they are successful.
Let’s take one example of attempts to avoid the application of overtime law to understand the potential risk on relying on “technicalities.” It is possible that some seasonal country clubs will be able to avail themselves of the exemption to overtime law because it is a “seasonal recreation establishment”5 and thus exempt from the FLSA under 29 U.S.C. §213:
“any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center, if (A) it does not operate for more than seven months in any calendar year, or (B) during the preceding calendar year, its average receipts for any six months of such year were not more than 33 ⅓ per centum of its average receipts for the other six months of such year…”
While this exemption might sound great to a country club with highly seasonal income, it is very dangerous to rely on it, or another FLSA exemption, because of very practical reasons that can only be seen once a lawsuit begins. If you do not prevail on that exemption, then prepare to lose big.
Not apparent is the risk that you incur if you rely on an exemption – even if you know with 100% certainty that you would win. There are major risks and costs associated with employment practices that don’t pass the “smell test.” A plaintiff’s lawyer is not going to be deterred by technicalities. To a plaintiff’s lawyer, a “close call” is just a hurdle to leap over in the process of suing you. There is no way for a plaintiff’s lawyer to know if your country club is an exempt “seasonal recreational establishment” until she has forced you to produce all of your receipts and financial documents – which is already a very expensive process. A savvy plaintiff’s lawyer would likely be able to secure extensive financial, electronic and other document production relating to all the Club’s revenues and expenditures, as well as securing extensive sworn depositions of a number of every person who had knowledge of such decision or processing, along with inquiring into policies, decision-making and other intrusively justified inquiries.
Victory after spending exorbitant amounts in litigation is a very hollow and pyrrhic victory. It seems far more prudent to avoid relying on technicalities and instead invest in legal compliance. In sum, you better be absolutely sure of your decision and appreciate the exposure whenever you seek to avoid the wage claim laws.
Understanding the Danger of “Misclassification”
What happens when a formally good employee that knows that they have a potential overtime claim ends up doing something that gets them fired? They call lawyers. Experienced lawyers like us represent employee-plaintiffs and manager-defendants so we fully understand all aspects of this kind of litigation. Lawyers representing disgruntled workers or their employers call this type of case a “misclassification” case. To explain why this type of case makes plaintiff’s lawyers drool, we present this example. All a lawyer has to do is show a court that you were wrong when you classified a person as a salaried employee, and then suddenly every hour that was ever worked over 40 is at issue.
Imagine a golf professional is paid $30,000.00 annually, and makes $30,000.00 in commissions. For the past two years, this hypothetical golf professional worked 50 hours a week on average. That hypothetical golf professional would be entitled to receive 1.5 times his regular hourly rate of pay for every hour he worked overtime during these two years. There is more than one way to calculate damages in these types of cases, but we will pick just one for our example.
To find what that amount would be, we first take the total amount of compensation for a year and divide that up until you have come down to an hourly rate. For the sake of our example, we are going to base this off of a 50-hour work week. For the yearly compensation, we don’t take the $30,000 annual salary, but instead, the combined salary plus commissions, $60,000 in our example.So we would find our hourly rate – $60,000 divided by 52, for $1,153.85 a week. We then divide that by the number of hours worked, 50, and come to $23.08 an hour. We multiply that by 1.5 to get the overtime rate of $34.62 per hour. We then take that overtime rate, and multiply it by all the hours that were worked which were overtime, which is 10 a week in this example. This comes out to $18,000.06 per year, for a total of $36,000.12.
That is not an end to the liability. Aggrieved overtime plaintiffs almost always get what is called “liquidated damages.” These double the amount owed, so this hypothetical golf professional is entitled to $72,000.24 for the two years. But wait, there is more! Aggrieved employees are also entitled to their “reasonable” attorneys’ fees that they expended to sue you. This can be as little as $10,000.00 if you settle quickly, but can end up costing many hundreds of thousands of dollars, depending on how long the case goes on. This does not even include the cost of your own attorneys who you will need to pay to defend the suit, which costs similar amounts. If you have been keeping score, this all adds up to be well over a hundred thousand dollars – and that is only if the case ends relatively quickly.
All of these proceedings are public record – it is generally illegal to privately settle overtime cases. That means there might not be anything stopping all of your employees from knowing that they might be entitled to tens of thousands of dollars in overtime, if they just add their signature to a list with the plaintiff’s law firm.
This is not some nightmare scenario that we imagined, but something that we see on a somewhat regular basis. We implore you to speak with a legal professional if you have any question as to the propriety of your exemptions. You just might be responsible for saving your club.
Calculating an Hourly Rate for Formally Salaried Employees
If you can’t rely on your golf and tennis professionals being exempt from overtime, then you might consider applying a less risky method of payment. One option is to pay your golf and tennis professionals hourly, and pay them “time and a half” for every hour they work over 40. If you are moving from a salary to hourly method, you may have an interest in creating an hourly rate which will result in essentially the same amount of money as the original yearly salary rate. This will take a little bit of algebra. We are trying to solve what the hourly rate should be. To answer that, we input as follows:
“Regular Hours” – The estimated average amount of hours that a person will work a week. Since this is an article about overtime, you are likely going to be expecting that your employee will be working more than 40 hours a week on average, so this number should be “40.”
“OT Hours” – The average hours in excess of 40 that the employee is expected to work. So, if in a given week an employee will likely work 45 hours, you should input “5.”
“Target Weekly Salary” – The yearly rate you desire to convert to an hourly rate. If an employee makes $60,000, this variable would be $1,153.85, because $60,000 divided by 52 is equal to $1,153.85.
Using this formula, we can come to a conclusion of what the hourly rate should be if we want to make sure that the employee receives close to the same rate of pay that he or she was originally receiving as a salary. The formula provided is relatively simple, and does not accommodate seasonal variations, or, if an employee is performing two different jobs at different rates.
In order to calculate a “seasonal rate,” which would decrease pay during busy periods and increase pay during less busy periods, simply run two different analyses on the different periods. If you are correct in estimating the hours, this will result in substantially the same pay as the yearly salary period.
As far as overtime law is concerned, there is nothing wrong with paying different rates depending on the different job being done by the employee. For example, you may find that a golf professional both teaches lessons and does other jobs. You could pay the golf professional $50 for every hour teaching lessons, and a lesser amount for non-lesson time (as long as it is over minimum wage).
To supplement this article, we have included a spreadsheet which can run the calculations for you. This spreadsheet will calculate the hourly rate(s) for an employee. Furthermore, it can calculate a base salary if you use the “fluctuating workweek method” to pay your employees. The fluctuating workweek method is a way to pay overtime that an employer may elect to do with the understanding of the employee. This method At the end of this article, we have enclosed a creative, fully adjustable Excel Spreadsheet that allows for computation of different formulaic options for pay.
An important consideration when changing your salaried employees to hourly is to keep track of time worked. There is very little that can be done to mitigate the hassle of calculating time, but it is necessary. Federal law requires that employers keep track of their employee’s time when that employee should be paid hourly – regardless if that employee is paid salary.
Time clocks are the simplest methods, but have their own risks. Our experience is that disgruntled employees often find that they remember that there were a whole bunch of times that they clocked in late, or, it turns out there was other off-the-clock work like answering e-mails in litigation. This creates a credibility dispute, which can be surprisingly difficult for employers to contest in trial. It is not uncommon for plaintiff’s lawyers, including us, successfully convince a jury that the timeclock records do not reflect the actual time worked.
Our preferred method of calculating time for educated and skilled employees is for the employees to record their time in a log themselves and then sign off on their own logs at a set time weekly or biweekly. It is significantly more difficult to challenge a timesheet that the employee himself agreed to. The drawback, of course, is that the natural inclination for employees with that time recording scheme is to err on their own benefit when recording time or to otherwise stretch the truth. Additionally, time sheets will require calculation of total hours. Modern timeclocks can do that sort of thing automatically, but this calculation will need to be done either by the employee or employer.
Structural and Personal Issues with Changing Salaried Employees to Hourly
Changing an employee’s pay structure can be very stressful for employees. While you, as the employer, understand and are aware of your intentions – employees affected by this change may not be as comfortable. Your employees likely base their life around the level of income they receive from their employer. Whatever you decide to do, we implore you to be as open and direct with your employees about this process for the purposes of maintaining employee morale.
Some employees take pride in being “salaried” because they believe that being paid a salary is an indicator of social status. These employees might be more enthusiastic about becoming hourly after being presented with some of the benefits. Overtime law exists to help align work with pay – an hourly employee entitled to overtime will not be in a situation where he feels like he is working late “for free.” Working longer hours can be more satisfying when a person knows they are to receive compensation for that time.
In the long run, paying employees hourly may affect some of your other decisions. Overtime pay creates incentives for employers to hire more workers and have each worker work less time. While there are greater costs to such an approach, in terms of hiring and managing new workers, there are benefits too. Having a greater number of workers can increase flexibility, because it is less devastating when a worker leaves their employment. Further, studies have shown that employers are dramatically more productive when they work less hours.
With the monetary exposure being higher, and the likelihood of many employers not fully understanding how to implement these rules with professionals in such areas as tennis, golf and other sports, you should well know that if you don’t comply with these overtime rules, you open yourself up to extraordinarily costly litigation in the event that a disgruntled employee gets wind of your violations. These costs are not just double what their overtime rate would have been, but the disgruntled employee’s own attorneys’ fees, not to mention your own costs and headache associated with defending such a lawsuit.
You are well served to make sure you fully evaluate your exposure when making decisions and you establish continued compliance. Ignorance is only bliss until a process server hands you a lawsuit with your name on it.