Are Temporary or Contract Workers Eligible for Overtime Pay?
Question: I just learned that our staffing agency is not paying their employees an overtime pay rate even though they often work more than 40 hours in any one work week. Are temporary employees exempt from overtime pay requirements? Is my company at risk to pay this employee for overtime if our agency doesn’t?
– Submitted by a Worried HR Manager. Redmond, Washington
A: You bring up a really good point! Even though in most staffing arrangements, your staffing agency is the common law employer, responsible to pay their employee in accordance with DOL/FLSA standards, there are situations where both you and your staffing agency are considered “co-employers” exposing your company to back wages and penalties if your staffing agency isn’t operating in full compliance with FLSA requirements.
Because FLSA regulations, administered by the DOL, have been interpreted by some courts to allow for personal as well as corporate liability in the face of overtime violations, the case has been made that anyone who exercises control over the terms and conditions of an employee’s pay (i.e. considered the employer) may be liable for unpaid wages rightfully due. This includes any person in your company asked to approve an employee’s hours of work.
For example, if you or someone in your company was aware that one of their “temps” worked additional hours worked over 40 and inadvertently put pressure on those employees to report less than the full number of hours worked, (or knowingly approved incorrect hours of work), you may be subject to legal action for your role in a process that resulted in a failure to pay overtime pay rates.
While the outcome of these court tests have been mixed, not paying attention to how your temporary employees are being paid for the hours they work, can have consequences most managers may not have considered. Knowing that a temporary employee worked more than 40 hours in a week and was not paid an overtime rate for those hours, is not where you want to be.
FLSA Standards Applied to Temporary and Contract Workers
While many temporary and contract staff are assigned to do work that would otherwise allow them to be classified as exempt, most are paid on an hourly basis and are, therefore, not eligible for the exempt status. This means they must be paid time and a half for all hours over 40 worked in any calendar week even if they earn over the $455 minimum pay requirement, even if they are doing work that otherwise meets one of the executive, administrative, or professional FLSA standards for exemption.
Exceptions are temporary workers paid hourly in certain professional roles that are otherwise exempt from FLSA overtime pay requirements – doctors, lawyers, teachers, outside sales people, or computer professionals earning more than $27.63/hr. This is a finite pool of employees, and for all other temporary employees, if your temporary staffing agency is not paying them 1.5 times their regular rate of pay for all hours worked over 40, your agency may be subjecting themselves (and ultimately you) to unforeseen costs that would include not just back wages, but fines and penalties for an FLSA violation.
The big take away? Do not assume that a temporary or contract employee doing work similar to a core employee you have classified as exempt, are exempt from overtime pay requirements. High level roles in engineering, accounting or finance are often mistakenly assumed to be exempt, when in fact they are subject to all overtime provisions because they are paid hourlie.
What are the Potential Costs of an FLSA Violation?
An employee who believes they have not been paid for overtime in the way the law requires, may file a private suit for the previous 2 years of back pay plus an amount equal to that back pay in liquidated damages. They also may claim attorney and court fees and punitive damages if the violation was considered willful, extending the time of back pay entitlement to 3 years.
If the courts were to find that supervisors knew and put pressure on an employee not to report hours of work accurately, the Department of Justice can get involved with penalties up to $10,000 per violation and imprisonment.
Bottomline, knowingly violating FLSA standards is no small matter. Knowing that your staffing agency is violating FLSA standards, and not doing something about it, is not where you want to be.
Internal Policies Prohibiting Unauthorized Overtime
In an attempt to work around FLSA requirements, many temporary staffing companies have developed policies that prohibit their temporary or contract staff from working more than 40 hours a week without pre-approval from their on site supervisor (the client) – or in some cases one of their own, off-site supervisors. While these policies require that an employee go through an approval process before working hours over 40, they do not mitigate the staffing agency’s requirement to pay overtime rates if the employees works hours over 40 even if the employee did not follow policy and worked without the necessary approvals.
The DOL rules are all encompassing: If the employer knows, should know, or has reason to suspect that the employee is working more than 40 hours in a week, the extra hours must be compensated at the required 1.5 times pay rate. While the burden would be on the employee to prove their employer had this knowledge in a court of law, in most FLSA scenarios, it is not hard to do.
What can you do to manage your risk/avoid unforeseen overtime costs?
- Make sure your staffing agency is familiar with and in compliance with all FLSA standards. Ask them how they administer the overtime pay requirement and how they manage when and how their temporary employees are asked to work more than 40 hours in a week.
- Make sure your staffing agency contract details their responsibility to abide by FLSA pay standards and states clearly that it is their exclusive role, not yours, to manage to the requirements to all payroll related statutory requirements, including FLSA mandates.
- In contract negotiations, allow your staffing agency to specify both a regular bill rate and an overtime bill rate. Why? If you require your staffing agency to absorb all the costs of the overtime pay requirement, under court test it may look like you’re coercing your staffing agency into avoiding FLSA overtime pay requirements.
- The job the employee is doing can legitimately be classified as exempt under FLSA guidelines.
- You have agreed to a weekly or monthly bill rate that will be paid regardless of how many hours the employee works
- Your invoice is formatted to show a weekly, rather than hourly, bill rate.
- You no longer are required to review and approve the employees hours of workIf your staffing firm intends to pay an employee a weekly or monthly salary to avoid overtime pay requirements, make sure…
NOTE to PURCHASERS OF STAFFING SERVICES: Keep in mind that even though you can’t change FLSA standards regarding overtime pay, you can negotiate the rate you are willing to pay your staffing agency for hours worked over 40. While staffing agencies need to cover the increase in their direct costs for hours over 40, most are willing to lower their mark up for hours paid at overtime rates. For example if your basic pricing agreement allows for your staffing agency to charge a bill rate equivalent to 150% of the employee’s regular pay rate, you can ask them to reduce their mark up for all hours worked and paid at overtime rates.