Here is a common question from a non-exempt / hourly employee: "I was told by my boss not to work overtime, but it's impossible for me to complete all my work in 8 hours, and I have to stay for at least 1-2 hours longer in order to keep up with my workload. However, I am not being compensated. How should I handle this situation?" 

This is not an easy question, and generally you have three choices, none of which are prefect but they are to be considered: 

1. You put your employer on formal notice of having to work overtime and then you file a claim with DLSE for unpaid overtime. The obvious risk is that the employer will retaliate and fire you for filing that claim. Even though this would be illegal, your employer can still choose to terminate you and then deal with the legal consequences of that termination later. 

2. You comply with your employer's instructions not to work overtime and leave after 8 hours of work, no matter how far behind you are on your work on that day. The risk here, of course, is being disciplined and fired for insufficient performance. Arguing that you weren't given an opportunity and enough time to finish work will not make this type of termination illegal, if you are an at will employee, because the employee is entitle to their subjective view and expectations of how they want their employees to perform.    


3. You tolerate the situation for the time being and/or complaining to HR or higher management about the issue, and you ask them for help with your schedule and compensation. Again, there is a retaliation risk here, but it's probably lower than going straight to filing a wage claim with DLSE.


If you are facing this type of situation, you should consult with an experienced employment attorney to discuss which legal options is best of you, and whether there are other (creative) ways of handling it.  

This week, we settled on small wage claim for unpaid overtime on behalf of our client, a former IT administrator. Even though his total claim was for over $80,000.00, he elected to not wait for the hearing and accept an earlier smaller settlement with the employer. This claim was supported by evidence in a form of payroll records, and support tickets on which our client worked. 

At first, the employer did not want to pay anything arguing that our client was not entitled to overtime because he was exempt under administrative or professional exemption. However, we managed to show that the majority of our client's duties were not those of a manager. He was providing typical support to the company's network systems. He was not building or designing, but only maintaining and configuring the network - a critical difference in claims of unpaid wages and overtime.   

It is harder to prevail in a case where the claimant's word goes against the word of the employer and a large number of the employer's witnesses, who come to support the employer in part out of fear of retaliation if they refuse to support the company's side or especially if they decide to support the claimant. However, in this case, our client has his own former manager ready to testify about his non-exempt duties and his work hours, which was very helpful in settlement discussions. 

California Labor Code section 510 requires the payment of overtime to non-exempt employees who work for more than 8 hours per day or 40 hours a week. Under Labor Code section 515, a fixed salary paid to a non-exempt employee only compensates that employee for non-overtime hours. Recently, the legislature
passed and Governor Brown signed a new subdivision (d)(2) to section 515, providing that "payment of fixed salary to a non-exempt employee shall be deemed to provide compensation only for the employee's regular, non-overtime hours, notwithstanding any private agreement to the contrary." This subsection was added specifically to overturn the recent court decision in Arechige v Delores Press, Inc. (2011), in which the court held that that explicit, written mutual wage agreement waiving an employee's right to overtime compensation may be valid.

This means that an employer and employee can no longer enter into such an agreement, circumventing overtime laws, and even if the employee agrees to work for an employer and not be compensated for overtime hours worked, failure to pay overtime due will still be a labor code violation, exposing the employer to liability for past unpaid wages, penalties and possibly attorneys fees, if the case goes to a labor board hearing or court.

Having represented both employees of start-ups and start-ups themselves in wage related claims, I have had a chance to see for myself what the reasons are that so many start-ups and other kinds of new companies get in trouble with the law, when it comes to overtime pay and misclassification of employees as contractors.

Consider the evolution of a typical start-up. A small group of bright, highly motivated and very hard working professionals gather and start working around the clock in order to build all aspects of their business, and to make their idea, which they hope will be at least in some ways revolutionary, come true as soon as possible. Just a few people are trying to handle every aspects of this newborn business - from basic logistics, such as renting a work space, buying furniture and office supplies, to company administration, accounting and marketing, among many other things. If their idea gets attention and they are good and lucky enough to raise capital, they will immediately start hiring people to move their business forward. Between hiring and working with new people, training, developing online presence, and working on launching their business full gear, the last thing these entrepreneurs have in mind is worrying about compliance with labor laws that they have never even heard of. Upon superficial study of how the wage laws work, they decide that classifying some of their employees, who work 12 or more hours a day every day, as exempt will be a good idea for at least three reasons: first, the owners don't need to worry about keeping track of the number of hours that these employees work; secondly, there is no incentive for those exempt employees to work more hours than than need to get the work done, since they will not be paid more regardless of how much they work, which is supposed to promote their efficiency; and 3. classifying employees as exempt will save that young company the funds that are so desperately needed at the start-up stage for so many other things.  

However, the legal point that these start-up managers are missing is that simply calling someone "exempt" doesn't make that employee exempt, unless they meet the criteria of an exempt employee under California law, based on their duties and their hourly rate. Calling someone a manager, doesn't make that employee a manager, unless his or her duties are in fact managerial under the law. Many low-level accountants, office administrators and HR personnel are classified as exempt by these new companies, when in fact these employees are almost never exempt under California law, because their duties are not related to managing the company, and they do not exercise significant independent judgement and discretion in company's operations.   

So, how do these legal problems with overtime pay for these companies start? Here are two of the most common situations:
 
1. As the company grows to a hundred or more employees, one of the curious employees, who has been classified as exempt, but who believes that he should be entitled to overtime, approaches a class action lawyer, who then encourages him and a number of other employees to bring a class action lawsuit against the company for failure to pay overtime. That lawyer would only need three or so claimants to represent a class of many other employees in order to file a class action.  

2. Another common situation is where a disgruntled employee who is being fired and who believes he has been wrongfully terminated goes to a lawyer, and that lawyer determines that regardless of whether the employee has a wrongful termination case, he has an overtime claim. That individual claim is filed, and then other employees file their own claims after finding out about that first claim.   

So, how much can the company be potentially liable for in these overtime cases?  

Lets take an average situation as an example, which is likely to happen and which has happened many times before in California. After 5 years of operating, the company has 50 employees who are improperly classified as exempt. They are paid $40,000 year but work on average 60 hours a week. All of the employees have been working for the company for more than 3 years. They decide to bring a class action claim against the employer.  
The employer's liability in that case, excluding any penalties and attorneys fees, can be calculated as follows:  
each employee can go back as far as three years (and in some cases four years) in claiming unpaid overtime.  
Those employees' hourly rate is $20/hour based on the above annual salary. This means that for every week they worked 20 hours over their 40 hour schedule, they are entitled to their overtime hourly rate of $30/hour times 20 hours which equals to $600 per week in unpaid overtime. If those employees worked on average 50 weeks a year then, 50 times 3 years equals 150 weeks times $600 equals $90,000.00 per employee per three years. This means that the company's total liability to all the fifty employees will be $90k times 50 equals $4.5 million. This amount doesn't include legal fees, penalties, interest which can add up to another million or more, and above all - the distraction that this kind of process will cause to the company's management and its operations.   

The above headaches and liability are relatively easy to avoid, if the company decides to complay with overtime laws from the very beginning and only classify those employees as exempt, whose duties actually make them fall into that category. Consult a knowledgeable employment attorney and reviewing compensation practices before any legal issues arise is a much better and a much cheaper option than disregarding the rules or not bothering to find out what these rules are, because history shows that sooner or later every company that doesn't comply with wage and hour laws and overtime pay laws gets hit with a class action, which ends up costing the company millions of dollars.

Many software companies routinely classfy their implementation and troubleshooting consultants as exempt employees, not entitle to overtime. The Third District's holding in Eicher v. Advaned Business Integrators, Inc. 151 Cal.App.4th 1363 (2007) illustrates that many of such consultants are likely entitled to overtime compensation and are wrongfully classfied as exempt. 

In Eicher, the consultant's duties were typical of a software employee. His work involved spending half of his working time in the office, and the rest of the time on the customers' site. The employee's work involved implementing his employer's software, helping the customers learn how to use it, as well as troubleshooting. The employer argued that the employee fell into the administrative exemption category. The court disagreed. One of the several requirements of administrative exemption is that  the employee's work must be "directly related to management policies or general business decisions" as per the IWC wage oreder 4-2001. The court found that since the employee was not engaged in any management policies such as hiring or firing, did not negotiate contracts with customers and did not otherwise affect his employer's operation, his was a "production worker" entitled to overtime. 

The employer argued that installation and troubleshooting are exempt administrative duties, relying on Levie v. AT&T Communications, Inc. N.D. Ga. (1990). The court distinguished the claimant in Levie, pointing out that in the latter case the employee, in addition to performing the stated non-exempt duties, also identified impacts of the work on the company's operations, as well as designed and coordinated project teams. The court reiterated that in Eicher, the employee had no such effect on how the company was run. 

The above analysis demonstrates that whether a software consultant is entiteled to overtime is a very fact sensitive inquiry, where the court would carefully analyze the specific duties in which an employee is engaged before determining whether the exemption applies.