To get a sense of public consciousness about an issue, Google is a good place to start. A Google search of "overtime" will reveal that the top "hits" are law firms that promise the prospect of a large recovery. It may be that the prospect of a large recovery for any one employee is small, but the prospect of a sizable recovery of attorneys' fees, regardless of the size of the recovery for the employee, is quite a motivator for some law firms.

Perhaps the most significant development in this area of the law has been the recent increase in collective actions by groups of workers seeking seven-figure awards. In the last several years, employers have been hit with huge damages awards, or have agreed to pay equally sobering amounts to settle overtime claims. In such cases, each individual's claim for unpaid overtime may be quite small—a few thousand or even a few hundred dollars—but when people join together in collective actions, the resulting damages (and attorneys' fees) can be enormous.

Many employers adopt a "head-in-the-sand" approach to overtime claims, gambling that questionable pay practices won't be discovered. Such employers mistakenly assume that if employees seem satisfied (or should be satisfied) with their compensation, they have nothing to worry about. However, all it takes is one disgruntled employee or former employee to visit a competent attorney, and it's off to the races. When that happens, all pay practices are open to dissection in court. And this is true even if all other employees are agreeable to a particular arrangement.

The federal Fair Labor Standards Act, as well as the Missouri Minimum Wage Statute, are intended to regulate minimum wages, overtime pay, equal pay and child labor. As a general rule, any employee who works more than 40 hours in a week must be paid premium pay of 1 1/z times their regular hourly rate for all hours worked over 40. These laws apply only to actual employees, and thus a preliminary inquiry may require an analysis of an individual's employment status. And even if a person is an employee, the laws do include exceptions—those positions that are "exempt" from this general rule—and thus the designation of "exempt" status.

Only Employees are Covered by these Laws

Not everyone who performs services for an employer will be considered an "employee." If an individual is not an "employee," he or she is not covered by these laws. However, some employers seek to avoid the obligations and potential liability presented by the overtime and other employment laws by classifying workers as "independent contractors," and paying them by means of the 1099 process, rather than through payroll. Sometimes these classifications are appropriate. However, how an employer chooses to label a worker is not controlling. Rather, to determine whether an individual is an employee under most employment laws, courts focus on the economic reality of the relationship. Courts look to whether the individual is economically dependent on the business to which he renders service, or is, as a matter of economic fact, in business for himself. If this test sounds familiar to many CPAs, there is a good reason: the tests borrow from traditional IRS analysis applied by accountants on a routine basis.

Who is Exempt?

Deciding how to classify an employee is a crucial decision, as mistaken classification can lead to enormous potential exposure. Yet, many employers put surprisingly little thought into these decisions. And, unfortunately, exemptions are commonly misunderstood and misapplied even by employers who are attempting to comply with the law. Here are some common mistakes and fallacies regarding exemptions:

If I put an employee on salary, she becomes exempt.

If an employee has a manager, supervisor, or administrator title, he is exempt.

If an employee is highly compensated, she is exempt.

If an employee is college-educated and performs office work, he is exempt.

If an employee has an advanced degree, she is exempt.

I have an employee who wants to be paid on salary, rather than hourly, and does not want to record his time. Based on his wishes, it's OK for me to treat him as exempt.

If an employee agrees to work some overtime at straight time pay, that should be fine.

Everyone else in my industry classifies this position as exempt.

The employee doesn't work overtime, so it doesn't really matter.

All of these assumptions are simply incorrect, and if an employer has classified employees as exempt on any of these bases, they need to look again. By way of example, under the law, employees cannot "agree" to a pay scheme other than what the law requires, can't "agree" to forgo overtime, and can't "agree" to be exempt if they are not.

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