Too few law firms follow best practices for paying employees who work more the 40 hours a week, an employment lawyer warns. The new federal overtime rules, effective December 1, are a fresh reason for getting it right.

In 2014, President Obama tasked the Department of Labor ("DOL") with modernizing its overtime rules for executive, administrative, and professional ("EAP") employees under its Fair Labor Standards Act ("FLSA") rule-making authority. After a 10-month comment period, the DOL published its final rule on May 18, 2016. The rule, which takes effect on December 1, 2016, makes significant changes to the FLSA regulations regarding exempt and nonexempt employee compensation. (For more, see Phillip T. Barrett's article in the November 2015 Journal.)

This change will impact many law-firm employers to the extent they have traditionally been paying, or not paying, employees with certain job responsibilities for hours worked in excess of 40 per week.

In general, EAP employees are exempt from the FLSA's overtime provisions. According to the DOL's fact sheet, the Department has historically required three tests to be met before the FLSA's EAP exemption applies. See https://www.dol.gov/whd/overtime/final2016/overtime-factsheet.htm.

To qualify for the exemption, employees must (1) be paid a fixed, predetermined salary; (2) the amount paid must meet a specific minimum salary level; and (3) the employee's job duties must primarily involve executive, administrative, or professional duties.

The new rule raises the minimum salary from a weekly salary of $455 ($23,660 annually) to $913 per week ($47,476 annually), doing away with the requirement that the rate be an annual salary as opposed to a fixed hourly rate. Teachers, lawyers, and doctors are considered bona fide professionals under the rule; whether they make $913 per week is irrelevant. Law firms need to audit positions within their ranks to determine both whether the weekly amount and the duties tests are met.

Historically, most law firms have not paid various legal secretaries, paralegals, or administrators for hours worked in excess of 40 per week, deeming them exempt employees because they made at least $455 per week. They completely ignored whether the third prong of the exemption was met - whether the employee fell within one of the EAP positions. Those tests have not changed, but the weekly threshold amount has (https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf).

To qualify as exempt under the FLSA regulations, administrative employees must, among other things, perform office or non-manual work that is directly related to the management or general business operation of the employer or its customers. Administrative employees also must be able to exercise independent judgment regarding matters of significance.

A law firm's office manager likely fits under this description, but might not, depending on how much discretion the managing partner or management team has provided them. It is important to note that, under the FLSA, job titles are meaningless. The DOL looks at the specific duties of an employee when determining whether the EAP exemption to the overtime rule applies.

Executive employees are those who have the duty of managing the enterprise or a customarily recognized division or subdivision. Executives also manage at least two other full-time employees and have a certain level of hiring/firing authority; if the employee's input regarding hiring, firing, advancement, etc. is given a particular weight, then the employee is likely an executive. Administrative and executive employees, must meet the duties test as well as make the minimum salary established under the rule or else they are eligible for overtime.

Time for an audit

According to employment attorney Alisa Arnoff, many law firms have traditionally misclassified clerks, paralegals, and secretaries as exempt from the overtime laws. She says it is also possible, based on the specific duties of an individual, that employees in the same job classification - such as legal secretaries - might be paid differently. Legal secretaries for managing partners or department group leaders may have responsibilities that render them exempt administrative employees. However, legal secretaries that work for lower level lawyers might be entitled to overtime because their duties are different.

"Now is the perfect time to do an internal audit and see who is truly executive, administrative, or professional. See actually how many hours employees whose positions are impacted by the new law are working," Arnoff says.

There are a number of different things a law firm can do with audit results. For example, assume a paralegal meets the professional exemption, but falls just short of the salary test. One option is to raise the paralegal's salary. If it is clear that a paralegal does not meet the duties test, then ensure that the paralegal is not working more than 40 hours per week.

Doing nothing can have severe consequence, Arnoff says. All it takes is one unhappy employee to trigger an audit with the DOL. In addition, she warns that the FLSA has a fee-shifting provision giving attorneys an incentive to file lawsuits to recover employee overtime even if the amount of unpaid overtime does not appear to be that great.

Under the new rule, employers are required to track and maintain records of the hours that non-exempt employees work. This is not a change in the law.

Arnoff notes that communicating the need to track time to employees may be difficult and can cause morale problems because some people believe that tracking time is only something "lesser" employees do. Firms need to consider how to tailor the message they are sending to their employees, as well as when to send it.

It is always possible that there may be some legal challenges before the December 1 implementation date. Arnoff advises her clients to do the audits now, considering whether they are compliant with the current law. "Anything can happen between now and December 1," she says.

That does not change the fact that many firms currently misclassify employees. Another potential pitfall is when an employer tries to use time off to pad an employee's hours. Overtime is calculated based on a seven-day work week, not a 14-day period. Failing to conduct audits and track employee time "is a class or collective action waiting to happen. Until the DOL or courts say whether a specific type of employee is exempt or non-exempt, employers need to do their due diligence."

There is a real risk that unaware employers may find themselves subject to a lawsuit, Arnoff says. In fact, the DOL provides a free labor tracker app to help employees document their hours. If your firm hasn't been paying attention to overtime, then now is the time to act - December 1 is just around the corner.