Laborious Laws for the Technology Sector

This article is reprinted with permission from the November 2005 issue of Pittsburgh TEQ.

Technology companies face many legal challenges that "brick and mortar" companies often do not face, including dealing with protection of its intellectual property, maintaining confidentiality and retaining a skilled, and, many times very portable, workforce.

Technology companies, however, appear (at least at first blush) to get a break when it comes to compliance with the Fair Labor Standards Act of 1938, as Amended ("FLSA"). FLSA is the federal law that establishes overtime and other requirements for employees. FLSA provides that certain employees are exempt from such requirements.

Of particular interest to technology companies, FLSA provides that "any employee who is a computer systems analyst, computer programmer, software engineer, or similarly skilled worker" may be an exempt employee. Many technology companies, often times operating under the guidance of human resources firms or their own human resources departments and seeking to avoid having to pay overtime for its workers, will take great liberty with this particular exemption.

While the company may see this as an effective money saver with respect to its workers who often put in far in excess of a forty hour work week, this can be risky for a company. In fact, the language of the provision limits the exemption to the above employees whose "primary duty" is one of the following:

A. "the application of systems analysis techniques and procedures…to determine hardware, software or system functional specification;" or

B. "the design, development, documentation, analysis, creation, testing or modification of computer systems or programs…based on or related to user or system design specifications;" or

C. "the design, documentation, testing, creation, or modification of computer programs related to machine operating systems." The provision also includes an exemption based on a combination of the above duties.

So, how can a technology company determine if its "computer guys" or "programmers" are actually exempt from certain FLSA provisions, such as overtime? The easiest way to begin the analysis is to first address three of the most common misperceptions as to the applicability of the exemption:

1. The fact that an employee is a "salaried" employee (as opposed to an hourly wage employee) does not make that employee exempt from overtime. This is the most common misconception about all of the exemptions under FLSA;

2. The fact that an employee is employed in the "Information Technology" section or department of a company, or in another section or department that routinely works with computers, does not make that employee exempt from overtime; and

3. The fact that an employee is a "programmer" does not make that employee exempt from overtime. To be exempt, the employee must meet the definitions stated above, which primarily centers on the fact that the employee must possess the requisite technical skills and must be employed for the primary purpose of using such technical skills.

Generally, an exempt employee should be able take technical specifications and can create or modify programs around those specifications. Alternatively, an exempt employee should be able to create technical specifications based upon problems that users are experiencing. Rarely does a company employ more than a handful of such skilled workers, meaning that the exemption may not be as readily available as many companies may believe.

The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment. Also, any employees that make less than $27.63 per hour (if hourly) or $455 per week (if salaried) are disqualified from the exemption pursuant to FLSA.

A clear warning signal that your company may be relying too heavily on this exemption is if your company treats all, or nearly all, of its employees or Information Technology employees, as exempt from FLSA.

The only way to truly determine exemption is to conduct a careful review of the day-to-day activities of the employee, review the employee's job description, and to develop a workflow assignment process to ensure that the exempt employee is getting the "correct" types of work to preserve any exemptions claimed by the company. Even if employees are properly classified, it is extremely important to maintain adequate documentation through formalized documentation procedures to support the exemption in the event that it should be challenged. Failure to comply with FLSA can result in severe financial penalties, including payment of back wages, attorney's fees, and liquidated damages.

It is also important to note that each state has its own labor laws and regulations. In the event that the FLSA and any state laws differ, the employer must follow the law or rule that provides the greatest protection to the employee.

FLSA actions are becoming more and more prevalent, particularly within the technology sector. With high profile cases (such as the cause of action against video game giant Electronic Arts) hitting the media, you can expect a trickle down effect to occur beyond the entertainment technology sector to the broader technology sector. Every company is advised to be extremely cautious when it determines to treat any employee as exempt from the requirements of FLSA, and should be certain to adequately document the supporting information for such an exemption determination.