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Steak 'N Shake Makes a $7.7 Million Error (You're Probably Making the Same Error)

Inc. logo Inc. 5/20/2019 Suzanne Lucas
a group of people standing in front of a building: A crowd of about 30 people hang out in front of the Steak\© Getty Images A crowd of about 30 people hang out in front of the Steak\

It's not job title that matters.

Managers are always salary exempt and are not eligible for overtime pay.

This is a common belief but it simply isn't true. In fact, your job title has nothing to do with how you have to be paid--it's all about your job responsibilities. Steak 'N Shake found out the hard way that they had misclassified 286 store managers in the St. Louis area and owed them back overtime pay.

Oh, and attorney fees and costs.

Grand total? $7.7 million dollars.

Steak 'N Shake's error

The Fair Labor Standards Act requires that everyone receive overtime pay if they work more than 40 hours in a week unless they meet the qualifications for exemption. People who manage two or more employees, earn at least $23,660 (set to jump to $35,308 in January 2020), and have hire/fire/discipline power generally meet the conditions for exemption from overtime pay and can be paid a straight salary--regardless of how many hours they actually work. (Some states have additional rules, but these are the federal minimums.)

However, that is not enough to make someone exempt--they also need to spend the majority of their time "managing" and not "doing."

The managers claimed, and the court agreed, that they spent far too much of their time carrying out non-exempt tasks, such as cleaning, cooking, and taking orders. Because they spent a large percentage of their day on these tasks, they do not qualify for the exemption from overtime.

As a result, they are owed time and a half whenever they work more than 40 hours in a week.

How should they have been paid?

Steak 'N Shake managers were required to work a minimum of 50 hours per week, and often worked more. That is a minimum of 10 hours of overtime pay per week.

The easiest way to pay a non-exempt employee is with an hourly wage. So, the manager earns $20 an hour and earns $800 in straight time. For the 10 hours of overtime, the employee earns time and a half or $20 + $10 = $30 an hour. So, a 50-hour workweek equals $800 (straight time) + plus $300 (overtime) = $1,100. A 70-hour work week would equal $800 + $900 = $1,700.

You can see how the underpaid overtime adds up.

There is a second method, called the "fluctuating workweek" method. In this case, you offer a salary ($800) and say that that covers all work for the week. Then, to calculate overtime, you take the total salary and divide by the hours worked. You use this new hourly rate to figure out the overtime. So, if you work 50 hours, you take $800/50 = $16 an hour. For the 10 hours of overtime, you pay an additional $8 an hour (the half of time and a half). So, a total paycheck of $880 for a 50-hour work week. For a 70-hour workweek, the hourly wage is $11.42, with a half rate of $5.71, meaning a 70-hour workweek is $800 + $171.42 = $971.42. Clearly, this version is much more beneficial to the employer.

The catch here is that the employee still receives the full $800 per week even if she only works 30 hours one week.

How to check if you're violating the law

If you have employees earning a straight salary (no overtime) who do a lot of lower level work, receive a low salary, or are on the edge of meeting the duties test, you want to double check that they are paid correctly.

It's always legal to pay someone by the hour and give them overtime pay. That's your safest bet. But you can consult the Department of Labor's information or your employment attorney. It will almost always be cheaper to pay a qualified employment attorney in your area (remember, this article is only talking about federal laws, and some states have higher standards) to check your exemptions than it would be to go to court and battle it out.

Steak 'N Shake made a big mistake, but hopefully, others will learn from this and start paying all their employees correctly.

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