By: Carol R. Merchant
I. Introduction.
“Look folks, I’m all for businesses making profits. It’s how they hire and grow our economy. But enjoying high profits on the back of vulnerable workers is not only unacceptable – it’s illegal! And employers need to play by the rules. Period!” When she became Secretary of Labor, Hilda Solis vowed stricter enforcement of wage and hour laws and has lived up to her word, hiring large numbers of enforcement staff, tightening exemption interpretations and emphasizing employer’s responsibilities in ensuring compliance. “Call the Department of Labor under the previous administration, and you’d hear crickets. The time had come to awaken this sleeping giant -- and boy, did we ever. Why -- because providing information and protecting workers and their wages is not only a moral imperative – it’s my job!” Solis has declared that she wants to restore some of the enforcement intensity and effectiveness that she believes were taken away in the eight years of the Bush administration.
Not many people know that the Department of Labor is the second-largest enforcement agency in the federal government. Only the Department of Justice is larger. And, even with a proposed budget cut for the Department of Labor of $40 billion for fiscal year 2012, enforcement agencies like the Wage and Hour Division will actually see a budget increase. Secretary Solis and the administration clearly believe that during these difficult economic times, ensuring that workers receive all the wages required by the law is of vital importance.
This continued increased focus on enforcement coupled with the explosion of class action litigation, as well as the addition of several hundred new investigators hired at the Department of Labor, make it more likely that bigger numbers of employers will find themselves faced with compliance issues in the coming years. This makes it all the more important for employers to have a solid understanding of the requirements of the wage and hours laws, and particularly the Fair Labor Standards Act. Of course, each state has its own set of wage and hour laws as well, and these laws must be taken in to consideration for compliance purposes, however, this article will focus on the requirements of the Fair Labor Standards Act (“FLSA”). The FLSA, enacted in 1938, establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.
II. Hot Buttons
So, what are those hot buttons that trigger the interest of Wage and Hour and private action attorneys? A few immediately come to mind:
·Deductions (other than legally required deductions) from the salaries of exempt employees
·A high percentage of employees considered exempt (probably more than 25%), particularly if a significant number are being considered exempt administrative employees
·More than one exempt manager at small branches
·Time records that do not show variations in hours worked
·Time records that always show exactly 30 minutes for meal periods
·Employees eating lunch at their work stations
·Workers paid as independent contractors
·Drivers of personal vehicles or small trucks not being paid overtime, even if they transport goods across state lines
It may be that all of these hot buttons could apply to your business and that you are actually in complete compliance with the FLSA, but they are also issues that leave you vulnerable to allegations of noncompliance. A good understanding of the requirements of the FLSA is vital to your company’s well-being.
III. The Basics - Minimum Wage and Overtime.
A. Minimum Wage. The Fair Labor Standards Act (“FLSA”) requires that most employees in the United States be paid at least the federal minimum wage (currently $7.25/hour) for all hours worked, and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees.
B. Overtime Requirements. Section 7 of the Fair Labor Standards Act contains provisions setting forth overtime pay requirements for employees who are within the general coverage of the Act and who are not specifically exempt from its overtime pay requirements. It prescribes the maximum weekly hours of work permitted for the employment of such employees in any workweek without extra compensation for overtime. It sets forth a general overtime rate of not less than one and one-half times the employee's regular rate. Employees must receive the overtime rate of pay for all hours worked in any workweek in excess of the applicable maximum hours, usually after 40 hours per week.
Overtime in its simplest form (but not its only form) requires one and one-half times the regular rate of pay for hours worked over forty hours in a work week. A seven-day workweek is the time measure by which this provision is applied. In order to compute the overtime premium due an employee, the employee's total straight time pay must be converted to an hourly rate (the "regular rate") and then the employee must then be paid at one and one-half times the regular rate for all hours worked over the maximum (usually forty).
Overtime pay, generally, must be computed on a weekly basis under the FLSA, i.e., the regular rate must be computed each week. Except in extremely limited circumstances, each workweek must stand alone. All payments that are remuneration for employment must be included in determining the regular rate for any workweek, except certain payments which the statute designates as excludable. An employee’s "regular rate" includes all remuneration for employment, except specified types of payments. These include:
·Discretionary bonuses,
·Gifts and payments in the nature of gifts on special occasions,
·Contributions by the employer to certain welfare plans,
·Payments made by the employer pursuant to certain profit-sharing,
·Thrift and savings plans, and
·Certain kinds of premium pay.
Bonuses which do not qualify for exclusion from the regular rate must be added in with other earnings to determine the regular rate on which overtime pay must be based. These include production bonuses, attendance bonuses and longevity bonuses and virtually all commissions.
There is no absolute limitation in the Act (apart from the child labor provisions and the regulations thereunder) on the number of hours that an employee may work in any workweek. An employee may work as many hours a week as he and his employer see fit, so long as the required overtime compensation is paid to him for hours worked in excess of the maximum workweek prescribed by Section 7(a). The Act does not generally require that an employee be paid overtime compensation for hours in excess of eight per day, or for work on Saturdays, Sundays, holidays or regular days of rest, but employers are advised to consult state law on these issues. If no more than the maximum number of hours prescribed in the Act is actually worked in the workweek, overtime compensation pursuant to Section 7(a) need not be paid.
There is nothing in the FLSA that will relieve an employer from any obligation he may have assumed by contract or of any obligation imposed by other federal or state law to limit overtime hours of work or to pay premium rates for work in excess of a daily standard or for work on Saturdays, Sundays, holidays or other periods outside of or in excess of the normal or regular workweek or workday. Employee handbooks should be carefully reviewed to avoid unintentional obligations created by the policies.
The "workweek" is the basis for applying the overtime requirements of the Act. An employee's workweek is a fixed and regularly recurring period of one hundred sixty-eight hours - seven consecutive twenty-four hour periods. It need not coincide with the calendar week and may begin on any day and at any hour of the day. For purposes of computing pay due under the FLSA, a single workweek may be established for a plant or other establishment as a whole, or different workweeks may be established for different employees or groups of employees. Once the beginning time of an employee's workweek is established, it remains fixed regardless of the schedule of hours worked by him. The beginning of the workweek may be changed if the change is intended to be permanent and is not designed to evade the overtime requirements of the Act. When changes are made in the official payroll workweek, care must be taken to use the proper method for computing overtime pay in such a period when a change in the commencement of the workweek is made.
Employers often mistakenly presume that only hourly employees must be paid overtime; this is not true. Overtime pay generally must be given to all non-exempt employees who work in excess of 40 hours per week, regardless of how they are paid (salary, hourly, piece rate, commission, etc.). Unless an employee qualifies under one of the exemptions, payment of overtime for hours worked is required. Overtime is paid at 1½ times the regular rate of pay. Merely putting someone on a salary does not result in an exemption from the obligation to pay overtime.
C. Exemptions. The FLSA contains a number of exemptions and partial exemptions from its minimum wage and overtime requirements, but not from the equal pay requirements of the FLSA. Most of the exemptions are determined by the individual employee's activities; a few are establishment-wide or industry-wide. Certain retailing, selling, servicing and distributing industries have the advantage of numerous exemptions. Exemptions are available for some domestic service workers, hospitals, nursing homes and schools, police and firefighters, fishing and seafood processing, transportation, farming, farm processing and forestry, seasonal operations involving processing activities on green leaf tobacco, sugar and cotton, communications, guaranteed employment under union contracts, and overseas employment. Tolerances may be allowed for inexperienced and disabled workers in some industries or jobs. Exemptions are construed strictly.
The exemptions for executive, administrative and professional employees are addressed in detail below, but some of the other, commonly-utilized exemptions by category are the following, some of which are full exemptions from both minimum wage and overtime, while others are only partial exemptions:
1. Seasonal Amusement and Recreational Establishments. Employees of summer camps, amusement parks, religious or non-profit educational conference centers, or hotels and restaurants in national parks, forest and wildlife refuges may be exempt from minimum wage and overtime if the establishment does not operate more than 7 months in a calendar year or if average receipts for any six months are no more than 1/3 of average receipts for the other six months.
2. Fishing and Off Shore Seafood Processing. Employees in this industry are exempt from minimum wage and overtime.
3. Agriculture. Farm workers, harvesters – even those who work in irrigation and cowboys may be exempt from minimum wage and/or overtime. To be exempt from minimum wage and overtime, workers must usually be employed on small family farms. Employees working exclusively in agriculture are exempt from overtime. Interestingly, forestry is not considered agriculture, and forestry workers such as tree planters are subject to minimum wage and overtime. Special rules apply to hand harvesters who are paid on a piece rate basis and farm family members.
4. Learners, Apprentices, Messengers, Disabled Workers and Student. These workers may be exempt from minimum wage, but only with the Secretary of Labor’s blessing: The employer must obtain a certificate from the Secretary to use this exemption.
5. Local Newspapers. Local papers, those with a publication of 4,000 or less and mainly circulated only locally, are exempt from minimum wage and overtime.
6. Computer professionals. There is an exemption from both minimum wage and overtime pay for computer systems analysts, computer programmers, software engineers, and other similarly skilled workers in the computer field who meet certain tests regarding their job duties and who are paid at least $455 per week on a salary basis or paid on an hourly basis, at a rate not less than $27.63 an hour.
7. Outside salespersons. To qualify for the outside sales employee exemption, all of the following tests must be met: (1) the employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) The employee must be customarily and regularly engaged away from the employer’s place or places of business. The salary requirements do not apply to the outside sales exemption.
8. Hospital and Nursing Home Exemption: Section 7(j) of the Act provides an exemption from the requirement that overtime compensation be computed on a workweek basis for employees of hospitals and (establishments which are) institutions primarily engaged in the care of the sick, the aged, or the mentally ill or defective who reside on the premises. Section 7(j) permits hospitals and nursing homes to use a 14-day work period, rather than a 7 day workweek period, in computing overtime, if the employees agree to this in advance, and if the employees are paid one and one-half times their regular rate of pay for hours worked over 8 in a day and for hours worked over 80 in the 14-day work period.
The agreement required for this exemption does not need to be in writing, but if it is not, the employer must create a memorandum summarizing its terms, and showing the date the agreement was entered into and how long it remains in effect. 29 CFR § 516.23(b). The 14-day work period can begin at any hour of any day of the week and consists of 14 consecutive 24-hour periods, at the end of which a new 14-day period begins. 29 CFR § 778.601(c). If a hospital or nursing home utilizes this exemption, employees must be paid time and a-half for all time worked more than 8 hours in a workday, whether or not they work more than 80 hours in the 14-day work period. However, any payments at the premium rate for daily overtime within a 14-day work period may be credited toward the overtime compensation due for hours worked in excess of 80 during that period. 29 CFR § 778.601(d).
9. Motor Carrier Exemption
The Motor Carrier overtime exemption now applies only to commercial motor vehicles that weigh 10,000 pounds or more, carry more than 8 passengers for hire, transport more than 15 passengers for no compensation or transport hazardous materials. This exemption generally excludes drivers, drivers’ helpers, loaders and mechanics who drive, load or service such vehicles from entitlement to overtime pay. However, if an employee drives or works on a non-qualifying vehicle during a week, the exemption is lost for that week. For example, if Mike the mechanic normally works only on big rigs and is usually exempt under the Motor Carrier exemption, but his supervisor asks him to check out the transmission on someone’s Honda Accord one morning, Mike is entitled to overtime for the week in which he worked on the Accord.
10. Other Exemptions. The following employees may be exempt or partially exempt from overtime under certain circumstances: Independent switchboard operators for small exchanges; seamen; domestic employees; outside buyers of poultry, eggs, cream, or milk; radio and television employees; salesmen, partsmen or mechanics working for automotive, farm implement, boat and aircraft dealers; country elevator operators; sugar processors; harvesters and transporters of fruits and vegetables; taxi cab drivers; house parents for institutionalized children; small forestry and logging operations; overseas employees; and urban transit charter workers may be exempt from overtime. Railroad workers, airline employees and certain employees of interstate motor carriers are exempt from the FLSA’s overtime requirements but are closely regulated by other governmental authorities. A partial overtime exemption is available for fire protection and law enforcement employees. Newspaper deliverers and home workers making evergreen wreaths are exempt from minimum wage, overtime, child labor and equal pay requirements.
D. The “White-Collar” Exemptions. Section 13(a)(1) of the FLSA provides and exemption from overtime for certain employees employed in an executive, administrative, or professional capacity. This is still one of the most troubling areas for employers made today. In 2004, the DOL overhauled its regulations for the “white collar” exemptions. Many employers continue to make the same mistakes with the exemptions that they did before the 2004 revisions.
In applying the exemptions, there are several important concepts, beginning with the “salary basis”. To qualify under the executive, administrative or professional exemptions, an employee must be paid on a salary basis rather than on an hourly basis; but remember that merely paying an employee on a salary basis is not enough to constitute an exemption. The salary basis requirement means an employee must receive a full salary for any workweek in which any work is performed without regard to the number of days or hours worked.
As a result of the 2004 overhaul of the FLSA Regulations by the Department of Labor, the “tests” for each of the “White Collar” exemptions are as follows:
1. Executive Exemption
a. Requirements
To qualify for the executive employee exemption, all of the following tests must be met:
· The employee must be compensated on a salary basis at a rate not less than $455 per week;
· The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
· The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
· The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
b. Primary Duty
“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
c. Management
Generally, “management” includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.
d. Department or Subdivision
The phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.
e. Customarily and Regularly
The phrase “customarily and regularly” means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
f. Two or More Other Employees
The phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers.
g. Particular Weight
Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given “particular weight” include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions. An employee’s recommendations may still be deemed to have “particular weight” even if a higher level manager’s recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee’s change in status.
2. Administrative Exemption
a. Requirements
To qualify for the administrative employee exemption, all of the following tests must be met:
· The employee must be compensated on a salary basis at a rate not less than $455 per week;
· The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
· The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
b. Primary Duty
“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
c. Directly Related to Management or General Business Operations
To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.
d. Employer’s Customers
An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, employees acting as advisors or consultants to their employer’s clients or customers — as tax experts or financial consultants, for example — may be exempt.
e. Discretion and Independent Judgment
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation. The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.
f. Matters of Significance
The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer.
3. Professional Exemption
a. Requirements
To qualify for the learned professional employee exemption, all of the following tests must be met:
· The employee must be compensated on a salary basis at a rate not less than $455 per week;
· The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
· The advanced knowledge must be in a field of science or learning; and
· The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
b. Primary Duty
“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
c. Work Requiring Advanced Knowledge
“Work requiring advanced knowledge” means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment. Professional work is therefore distinguished from work involving routine mental, manual, mechanical or physical work. A professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.
d. Field of Science or Learning
Fields of science or learning include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.
e. Customarily Acquired by a Prolonged Course of Specialized Intellectual Instruction
The learned professional exemption is restricted to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best evidence of meeting this requirement is having the appropriate academic degree. However, the word “customarily” means the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.
IV. Common Mistakes and Misconceptions.
A. Voluntary Unpaid Overtime.
There is no such thing as "voluntary unpaid overtime" or "donated" time under the FLSA. Any manager who expects or allows his or her staff to put in unrecorded work time, otherwise known as working "off the clock", is a wage claim or lawsuit waiting to happen. It is simply impossible under the FLSA for an employee to waive the right to receive at least minimum wage and applicable overtime pay for all hours worked. An agreement to the contrary (other than a wage claim settlement supervised and approved by the DOL) is null, void, and completely unenforceable. Employers must ensure that all non-exempt employees properly record all time worked and that they are paid for all such time. If an employer has true volunteers (generally accepted as possible only with governmental entities and non-profit charitable organizations), it should have all such individuals sign a volunteer agreement.
There is no such thing as "voluntary" overtime. Even “unauthorized” overtime must be paid if the company actually "permits" it to happen. The definition of "employ" in the FLSA is "to suffer or permit to work." Any employer who tolerates employees working is liable under the Act to compensate them. There is no such thing as "voluntary" overtime and it is not recognized by DOL in any circumstances. If an employee works “unauthorized” overtime and you let him or her do so, you must pay the overtime. However, you can discipline the employee for having worked overtime without permission.
B. Compensatory time in lieu of overtime.
Substitution of paid time off in lieu of additional pay for overtime, known as "compensatory time" or "comp time," is popular with both employers and employees, but violates the FLSA except in limited circumstances. Compensatory time off in lieu of overtime pay is something that public and governmental employers may use, but private sector employers may not use compensatory time to substitute for overtime. Private employers may use an informal variety of compensatory time by adjusting the schedule within the same workweek to ensure that total hours worked do not exceed 40. However, overtime hours may not be averaged out over a longer period of time except in exceedingly narrow cases of certain employees of residential care facilities, and in the case of certain police, firefighting, and EMS employees. Otherwise, any overtime worked within a workweek must be paid for that workweek.
A private sector employer may use a time-off plan or compensatory time for non-overtime purposes. Overtime exempt employees can be given paid time off to reward them for “extra” work. But giving comp time for non-exempt private sector employees who work more than 40 hours in a workweek is flatly prohibited by the FLSA.
C. Independent contractors.
The difficulty here is not that independent contractors should be getting overtime pay for excessive hours they might put in on a project – they do not get overtime pay, regardless of how many hours they work, since independent contractors are not "employees" and are thus not covered under the FLSA. Rather, the problem occurs when an employer fails to understand that it takes a lot more than a contract to make a worker an independent contractor. Independent contractor status does not depend upon the existence of a contract specifying that the worker is an independent contractor, or upon what the parties might call the relationship, but rather on the underlying nature of the work relationship. Some employers hire temporary workers to help them with a rush period and think that they are "contract labor" or "contract employees", when in reality such terms are practically meaningless under wage and hour laws and payroll tax laws. If such workers are truly employees, and they work more than 40 hours in a workweek, the employer must pay them overtime pay if they do not qualify for one of the overtime exemptions. There is no way to contract around that; no piece of paper and no amount of explanation will overcome the evidence of an employment relationship if the DOL or the IRS examines the situation. For this reason, employers must be very familiar with the tests for determining whether a worker is an employee or an independent contractor.
There is no single test that determines whether a worker is an employee or independent contractor under the FLSA. Most courts use a 6-factor “economics realities” test. These 6 factors are described below. None of these factors, standing alone, is dispositive. Courts employ these factors because they are indicators of economic dependence on the alleged employer. The focus of the economic realities test is whether the individual is economically dependent on the business to which he renders service as an employee or is, as a matter of economic fact, in business for himself as an independent contractor. The weight of each of the 6 factors depends on the light it sheds on the alleged employee’s dependence (or lack thereof) on the alleged employer:
1. The degree of control exercised by the alleged “employer” over the alleged “employee.”
2. The degree to which the “employee's” opportunity for profit or loss is determined by the employer.
3. The relative investments of the alleged employer and “employee.”
4. The degree of skill and initiative required in performing the job.
5. The duration or permanency of the working relationship.
6. The extent to which the “employee's” work is an integral part of the alleged employer's business
D. Voluntary Work.
The FLSA defines the word "employ" to be any arrangement in which one person "suffers or permits" another person to work. 29 U.S.C. § 203(g). Any employer who tolerates employees working must compensate them in accordance with the FLSA. When employees “volunteer” to work during a lunch or a break, this is considered work time and must be compensated. Work not requested but suffered or permitted is work time. For example, an employee may voluntarily continue to work at the end of the shift. He may be a pieceworker, he may desire to finish an assigned task or he may wish to correct errors, paste work tickets, prepare time reports or other records. The reason is immaterial. The employer knows or has reason to believe that he is continuing to work and the time is working time.
E. Failure to keep and maintain records
Some employers fail to strictly follow the FLSA's recordkeeping requirements, which are located in DOL's wage and hour regulations. An employer that allows employees to keep their own time records may be asking for trouble. For instance, if an employee files a wage claim for unpaid overtime, and the employer has no time records to dispute the employee's own records showing that overtime was worked, the DOL and the courts may accept the employee's records as valid, unless there is a good reason to doubt the credibility of such records. Another problem will occur if the DOL audits the employer for compliance with the FLSA; part of any compliance audit is an inspection of the required records, and non-existent records may be cause for further DOL action.
Employers subject to the FLSA are required to retain records concerning both nonexempt employees and exempt employees so that in the event of investigation by government inspectors, it can be determined whether the conditions for exemption are satisfied. The irony in all this is that the absence of a record is sometimes no worse than accurate records that document your violation of the law
The following information is required and must be clearly and accurately recorded by the employer:
(1) the employee’s full name and social security number;
(2) the employee’s home address;
(3) the employee’s date of birth, in the event that such employee is under 19 years of age;
(4) the sex of each employee and the occupation in which each employee is engaged;
(5) the time of day and the day of the week on which the employee’s workweek begins (if this is the same for all employees, a single notation may be made for the entire work force);
(6) the employee’s regular hourly rate of pay for any week in which overtime is worked;
(7) the number of hours worked each workday and the total number of hours worked each workweek;
(8) the total wages due for hours worked during the workday or workweek, including wages due for overtime;
(9) the amount of excess compensation for overtime worked;
(10) the total additions or deductions from wages paid;
(11) the total wages paid for each pay period; and
(12) the date of payments.
Payroll records, collective bargaining agreements, certificates, plans and notices and records showing the total dollar volume of business must be retained for 3 years. Other “supplementary basic records” must be kept by the employer for a period of two years (e.g., basic time cards and time schedules).
Records also must be kept of retroactive payment of wages. For example, if an audit of payroll records reveals that a salaried, exempt employee’s pay was improperly docked, the employer can avoid liability by rectifying the error and paying the employee the amount due. The employer must keep a record of such payments to show compliance with the law.
F. “Hours Worked” Problems.
Among the most expensive potential liabilities under FLSA are a series of situations in which employers do not measure “hours worked” properly, including:
1. Making automatic 30-60 minute deductions for “lunch periods” when employees remain on duty of some sort during the “break”, or take the period in several segments so that less than 30 minute “uninterrupted” increments are involved. Meal periods must be at least 30 minutes to qualify as non-compensable time. The employee must be completely relieved from duty for 30 minutes or more. And it’s best not to allow employees to work through lunch or eat at their desks if you want to have unpaid lunch periods. As noted above, under the FLSA you are liable to pay employees if you “suffer or permit” them to work -- not just when you make them work. If the employee cannot be required to perform any duties during this period: even "catching the phone" or requiring the employee to remain at his or her work station while eating will render the period compensable.
2. A belief that there is such a thing as an “unpaid break” of less than twenty (20) minutes. Don’t attempt to reduce payroll costs by "docking" employees for short break or meal periods. This practice frequently leads to FLSA violations. Short rest periods (between 5 and 20 minutes) are compensable time and may not be offset against other working time.
3. Not understanding that certain “waiting time” is compensable (you should learn the distinction between “waiting to be engaged” and “engaged to be waiting”). An employee who appears to be idle and simply waiting for work may in fact be engaged in a compensable activity. For example, an employee who reads a book while waiting for dictation or plays checkers while waiting for a fire alarm to ring is "engaged to wait" and is due to be compensated for that time. On the other hand, an employee who is completely relieved of duties for a period long enough to enable him or her to use the time effectively for his or her own purposes, or who has been told in advance that he or she may leave the job and will not have to commence work until a definitely specified later hour, is "waiting to be engaged," which is not compensable. Special rules apply to some jobs, such as residential care facilities.
4. Not understanding how to calculate “travel time” as “hours worked”, particularly if it is away from the plant or office. Some travel time is compensable under the FLSA, and some is not. Study the regulations on travel time, especially if you have employees who regularly travel away from their normal worksite. The law provides that, subject to certain exceptions, an employer is not liable to pay minimum wage or overtime compensation for time spent traveling to and from the worksite. The ordinary commute is not compensable, but an employee who is called away from home on an emergency basis or who travels after the work day has begun must be compensated. For example, an employee who takes a company vehicle home at night (e.g., appliance repair) does not have to be compensated for the time spent traveling to the first assignment of the day. However, problems may arise when an employee who regularly works at one location is required to work at another for a short time, or when travel is an integral part of the day's work. In that situation, if the employee has to do any work at all before the travel commences (such as going by the shop or plant to pick up supplies), the travel time is compensable.
G. The “Regular Rate” is not (necessarily) the Hourly Rate.
It is amazing that some otherwise quite sophisticated employers misunderstand (or just forget) that almost all bonuses and shift differentials must be included in calculating the basic hourly rate for overtime. Commissions are often forgotten, too, and can be a very expensive omission when they involve a significant portion of an employee’s compensation.
An employee’s "regular hourly rate" includes all remuneration for employment except seven specified types of payments: These include: (1) truly discretionary bonuses, (2) gifts and payments in the nature of gifts on special occasions, (3) contributions by the employer to certain welfare plans, (4) payments made by the employer pursuant to certain profit-sharing, (5) thrift and savings plans, and (6) certain kinds of premium pay.
Few bonuses are deemed “discretionary”, because that definition excludes incentive systems which induce employees to perform better. Bonuses which do not qualify for exclusion from the regular rate must be added in with other earnings to determine the regular rate on which overtime pay must be based.
H. Time cards.
If you want to make a DOL investigator’s day, show them time cards that don’t match the payroll records. Failing to pay employees for all the hours that are recorded on their time sheets is an invitation to a “willful” violation.
If time card errors are discovered, make a special notation on any time card which shows time recorded but not paid. While it is quite easy to correct time entry errors when they occur, such as with a supervisor's notation, these errors generally will be presumed to be "fact" at a later date.
A contemporaneous correction of a payroll error usually will be accepted without question, but one that occurs at some distance in time from the event will immediately arouse an investigator's suspicion.
I. Training Time.
Failing to pay employees for time spent in certain meetings, training sessions and other job-related educational sessions can violate the Act. Time spent by employees attending lectures, meetings, training programs, and similar activities need not be compensated if: (1) attendance is outside the employee's regular working hours; (2) attendance is in fact voluntary; (3) the course, lecture, or meeting is not directly related to the employee's job; and (4) the employee does not perform any productive work during such attendance. Attendance at any program that does not satisfy all four of these criteria is compensable time.
J. Deductions against Salaried Employees.
The rules for permissible deductions from salaried employees differ for overtime exempt and non-exempt employees.
1. Pay Deductions from Salaried Exempt Employees: For salaried, exempt employees, employers can deduct from an employee’s salary in seven (7) situations, as follows:
a. Deductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. Thus, if an employee is absent for two full days to handle personal affairs, the employee's salaried status will not be affected if deductions are made from the salary for two full-day absences. However, if an exempt employee is absent for one and a half days for personal reasons, the employer can deduct only for the one full-day absence.
b. Deductions from pay may be made for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. The employer is not required to pay any portion of the employee's salary for full-day absences for which the employee receives compensation under the plan, policy or practice. Deductions for such full-day absences also may be made before the employee has qualified under the plan, policy or practice, and after the employee has exhausted the leave allowance thereunder. Thus, for example, if an employer maintains a short-term disability insurance plan providing salary replacement for 12 weeks starting on the fourth day of absence, the employer may make deductions from pay for the three days of absence before the employee qualifies for benefits under the plan; for the twelve weeks in which the employee receives salary replacement benefits under the plan; and for absences after the employee has exhausted the 12 weeks of salary replacement benefits. Similarly, an employer may make deductions from pay for absences of one or more full days if salary replacement benefits are provided under a State disability insurance law or under a State workers' compensation law.
c. While an employer cannot make deductions from pay for absences of an exempt employee occasioned by jury duty, attendance as a witness or temporary military leave, the employer can offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption.
d. Deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries and coal mines.
e. Deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees. Thus, for example, an employer may suspend an exempt employee without pay for three days for violating a generally applicable written policy prohibiting sexual harassment. Similarly, an employer may suspend an exempt employee without pay for twelve days for violating a generally applicable written policy prohibiting workplace violence. Such suspensions of one or more days cannot be made for chronic absenteeism or tardiness as these type of performance problems are not considered workplace conduct issues within the terms of the regulations.
f. An employer is not required to pay the full salary in the first or last week of employment. Rather, an employer may pay a proportionate part of an employee's full salary for the time actually worked in the first and last week of employment. In such weeks, the payment of an hourly or daily equivalent of the employee's full salary for the time actually worked will meet the requirement. However, employees are not paid on a salary basis within the meaning of these regulations if they are employed occasionally for a few days, and the employer pays them a proportionate part of the weekly salary when so employed.
g. An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Rather, when an exempt employee takes unpaid leave under the Family and Medical Leave Act, an employer may pay a proportionate part of the full salary for time actually worked. For example, if an employee who normally works 40 hours per week uses four hours of unpaid leave under the Family and Medical Leave Act, the employer could deduct 10 percent of the employee's normal salary that week.
2. Pay Deductions from Salaried, Non-Exempt Employees: With respect to salaried, non-exempt employees who are paid on a “fluctuating workweek” basis, under a 2006 U.S. Dept. of Labor Opinion Letter, it is almost impossible to reduce their salary for absences. The opinion letter applies specifically to salaried, non-exempt employees who are paid using the fluctuating workweek method, which permits an employer (after entering into an agreement with an employee) to compute overtime by taking the employee’s weekly salary, dividing it by the number of hours worked, and paying an extra half time for the hours worked over 40. This is a cheaper way of computing overtime than at time-and-a-half their regular rate. For salaried non-exempt employees who are not paid via this fluctuating workweek method, it may be easier for an employer to make pay deductions when the employee is absent in full-day increments.
3. Effect of Improper Deductions from Salary. An employer will lose the exemption if it has an “actual practice” of making improper deductions from salary. Factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to: the number of improper deductions, particularly as compared to the number of employee infractions warranting deductions; the time period during which the employer made improper deductions; the number and geographic location of both the employees whose salary was improperly reduced and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. If an “actual practice” is found, the exemption is lost during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions. Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
4. Safe Harbor. If an employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
III. Miscellaneous Developments Worth Remembering.
Break Time for Nursing Mothers (Patient Protection and Affordable Care Act)
The Patient Protection and Affordable Care Act, which took effect on March 23, 2010, amended the FLSA to require employers to provide “reasonable break time for an employee to express breast milk for her nursing child for 1 year after the child’s birth each time such employee has need to express the milk.” Employers are also required to provide a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by an employee to express breast milk. Employers are not required to compensate nursing mothers for these breaks unless the employee is not complete relieved from duty during the breaks.
Highly Compensated Employees (29 C.F.R. § 541.601)
The 2004 Regulations created a safe harbor for employers with respect to employees earning $100,000 or more a year: these highly-compensated individuals will be presumed to be ineligible for overtime. The $100,000 amount is a significant increase from the first proposal’s $65,000 a year. If the employee performs any exempt duty and makes $100,000 a year, the employee is exempt. The employer is given a 1-month grace period to make up an employee’s pay to reach the $100,000 mark and preserve the exemption. For example, if an inside sales person who supervises 2 employees has a poor final quarter in commissions and earnings fall below the magic number, the employer may make up the difference in the month following the end of the year and preserve that employee’s exempt status.
Law Enforcement and Fire Fighters (29 C.F.R. § 541.3(b)(2))
Police officers or firefighters whose primary duty is to investigate crimes or fight fires cannot qualify as exempt under the new rules. Even if the employee directs the work of others in the conduct of the investigation or fighting fires, the employee will not qualify as exempt. This is a major change: in the past, first-line supervisory officers such as police sergeants and fire captains often qualified for the exemption as executives. This will make it very difficult to treat any employee actually involved in the investigation of crimes or fighting fires as exempt, even if that employee has supervisory responsibilities.
Redefine Primary Duty (29 C.F.R. § 541.700)
In the 2004 Regulations, Wage & Hour adopted a definition of “primary duty” that a number of courts had adopted over Wage & Hour’s objection at the time. “Primary duty” is now defined as the main, major or most important duty of the employee. The new regulations affirm that an exempt employee can perform both exempt and nonexempt duties at the same time without losing the exemption. Wage & Hour notes specifically that an assistant manager in a restaurant who performs both exempt and nonexempt duties at the same time can still qualify for the executive exemption. Such employees, who may flip burgers, shelve merchandise, or ring sales alongside the hourly employees whom they supervise, have been at the center of a number of lawsuits in recent decades, but this regulatory change certainly clarifies their status and will make such lawsuits less attractive for plaintiffs’ lawyers.
Eliminate Sole Charge Provision
The 2004 regulations dropped the “sole charge” provision. The concept of that provision was that every establishment has at least one manager who can properly be regarded as exempt, even (for example) if he or she supervised just two employees. Now, employees who are in charge of a small establishment must meet all of the provisions of the regulations to qualify for the exemption. However, since the definition of “primary duty” has been changed from a time-based definition which many small establishment managers could not meet to one emphasizing the importance of the managerial duties, such managers may still qualify for the exemption.
Management and General Business Operations of the Employer (29 C.F.R. §541.200(a)(2)
A March, 2010, interpretation issued by the Deputy Administrator for the Wage and Hour Division has placed more emphasis on this element of the administrative exemption, forcing employers to examine whether a potentially exempt employee is involved in the day-to-day carrying out of the employer’s business rather than administrative work. In that specific interpretation, the Division found “the typical job duties of a mortgage loan officer comprise a financial services business’ marketplace offerings, the selling of loan products. Their duties involve the day-to-day carrying out of the employer’s business and, thus, fall squarely on the production side of the business.” Consequently, it was concluded that mortgage loan officers were not exempt administrative employees.
The interpretation states that in order for an employee’s duties to be directly related to management and general business operations, they must be related to the administrative as distinguished from the production operations of a business. In other words, it relates to employees whose work involves servicing the business itself – employees who can be described as staff rather than line employees. It gives as an example copy editors working for a marketing firm that promotes the sale of books, who read and correct the firm’s marketing promotional materials, as falling squarely on the production side of the line and, therefore, not exempt.
Include Computer Related Administrative Duties (29 C.F.R. § 541.202(b))
Wage & Hour has acknowledged that employees who are engaged in computer network, internet and database administration may qualify for the administrative exemption. Employers have long struggled with how to classify certain employees who have very important duties related to the computer, the internet and database management but do not meet the strict definition of computer professional, often because their duties do not meet the technical definition of computer professional or because they lacked college degrees. Now it will be safer to classify such employees as exempt administrative employees. It should be noted, however, that the courts have generally found that computer help desk employees do not qualify for the exemption.
Specific Listing of Occupations as Meeting or Not Meeting an Exemption
In the 2004 regulations, Wage & Hour specifically lists certain occupations which they declare to meet the duties test of the exemption. Some of the occupations listed as meeting the duties test of an exemption are:
• Insurance Claims Adjustors
• Financial Service Employees (Not Including Selling)
• Major Project Leaders
• Human Resources Managers
• Purchasing Managers
• Buyers
• Dental Hygienists
• Physician Assistants
• CPAs
• Athletic Trainers with 4 Year Degrees in the Area
• Funeral Directors
• Chefs
Some occupations listed as not meeting the duties test are:
• Paralegals
• Public Sector Inspectors
• Ordinary Inspection Work
• Comparison Shoppers
• Cooks
• Examiners or Graders
As previously discussed, mortgage loan officers can now be added to this list.
Allow for One-day Unpaid Suspension of Exempt Employees (29 C.F.R. §541.602(b)(5))
One of the inequities of the old regulations was that in order to suspend an exempt employee for misconduct, the employer had to suspend the employee for the entire workweek or not at all: a suspension of one day could cause the exemption to be invalidated, and trigger liability for up to 3 years unpaid overtime. This problem has been partially alleviated in the new rules. An exempt employee can be suspended for a whole day (or days) based on the employer’s good faith belief that the employee has violated written workplace conduct rules. The written policy must be applicable to all employees. The workplace conduct rules that come under this allowance are rules which govern actions on such issues as workplace violence or sexual harassment. It is not applicable for performance or attendance problems.
Define Effect of Improper Deductions (29 C.F.R. § 541.603)
Correcting another inequity that developed under the old regulations, in the 2004 regulations, Wage & Hour has limited the impact on an employer of making an improper deduction from an exempt employee’s pay. Plaintiffs have long argued – often successfully – that a single improper deduction from an exempt employee’s pay voids the exemption for every employee. Under the updated rules, employers making improper deductions will lose the exemption only for the time period in which the deductions were made, and only for employees in the same job classification working for the same manager. This may be the most valuable change for employers in terms of limiting dollars-and-cents liability. However, a company-wide policy of making improper deductions may still impact the applicability of an exemption to all employees potentially affected by the policy.
Redefine the Window of Correction (29 C.F.R. § 541.603(d))
The window of correction has been redefined. Under the 2004 regulations, an employer may correct an improper deduction from an exempt employee’s salary (avoiding the liability described above) if it has a clearly communicated rule that prohibits improper deductions and which includes a complaint mechanism, it reimburses the employees when it discovers the improper deduction, and makes a good faith commitment to comply in the future. The best evidence of a clearly communicated rule is a written rule.
Clarify the Effect of Additional Compensation to Exempt Employees (29 C.F.R.§ 541.604)
Wage & Hour consistently has taken the position that as long as an employee receives a guaranteed salary, the employees could also receive additional compensation without losing the exemption. In spite of this official position, some courts ruled that such payments caused the exemption to be lost. In the new regulations, Wage & Hour reinforces its position and specifically allows hourly pay, time and half pay and compensatory time to be paid to exempt employees in addition to their guaranteed salary without jeopardizing their exemption.
Allow Guaranteed Hourly, Daily and Shift Pay to Be Considered a “Salary” (29 C.F.R. § 541.604(b))
An employee who is guaranteed a certain number of hours, day pay or shift pay will meet the salary component of the exemption requirement as long as there is a reasonable relationship between the guaranteed amount and the amount actually earned. For example, guaranteeing an employee 20 hours at $25.00 an hour ($500) would not bear a reasonable relationship to $1,000 (40 hours x $25 an hour).
Use of Manuals (29 C.F.R. § 541.704)
Plaintiffs’ lawyers have argued, sometimes successfully, that requiring administrative and professional employees to follow policy manuals divests the employees of independent discretion and judgment necessary for them to qualify as exempt. The Regulations acknowledge that some manuals are highly technical or complex and require an individual to have specialized knowledge or skill to understand them, and thus such manuals do not preclude the employees from qualifying for the exemption.
Supreme Court Decision in IBP v. Alvarez
The Supreme Court’s unanimous decision in IBP v. Alvarez held that employees who work in meat and poultry processing plants must be paid for the time they spend walking between the place where they put on and take off protective equipment and the place where they process the meat or poultry. The Court determined that donning and doffing gear is a “principal activity” under the Portal to Portal Act, 29 U.S.C. 254, and thus time spent in those activities, as well as any walking time that occurs after the employee engages in his first principal activity and before he finishes his last principal activity is part of a “continuous workday” and is compensable under the Fair Labor Standards Act, 29 U.S.C. 201 et seq. The Court also held that waiting time before the first principal activity is not compensable, unless the employees are required to report to work at a specific time.
Bonuses
As noted earlier in this article, employers often make the mistake of failing to pay overtime on some types of bonuses. Certain types of bonuses are included in regular rate computations. Examples of bonuses usually included as a part of the regular rate are production bonuses, bonuses paid for performing work in less than an established time, bonuses paid for the sale of certain types of merchandise, cost of living bonuses, attendance bonuses, and bonuses paid as an incentive to attract employees to undesirable jobs. Moreover, all nondiscretionary bonuses must be considered when determining the regular rate. For a bonus which covers a single weekly period, such bonus is added to the other earnings for that week; however, when a bonus payment is deferred until the amount can be ascertained, such bonus must be apportioned over the workweek(s) of the period during which it was earned. One way to avoid difficulties with including bonuses within regular rate computations is to base the bonuses upon a percentage of the individual employee’s total earnings. This way, the percentage already takes into account both the straight time and overtime pay. For example, an employee who earns $10 an hour and works fifty (50) hours in one week is paid $400 in straight time and $150 in overtime. Therefore, if he receives a ten percent bonus of his total earnings for the week, he is receiving a bonus payment of $55, which already takes into account both straight time and overtime. However, if that employee receives a flat bonus of $55 instead of the percentage bonus, such payment only takes straight time into account and he will be owed an additional $5.50 for the 10 hours of overtime worked ($55/50 = $1.10; $1.10/2 =$.55x10). Bonuses which are discretionary are not normally subject to overtime calculations.
V. Conclusion.
If there is any question of whether your practices are in compliance with the Fair Labor Standards Act or state law, always remember that an audit of your pay practices by legal counsel is a good idea and can identify problem areas and solutions before you have the unwelcome visit from DOL or the even more unwelcome experience of being the subject of private litigation.
_________________________
Carol Merchant is a consultant in the Knoxville, Tennessee office of Wimberly Lawson Wright Daves & Jones, P LLC. She provides consulting services, in conjunction with the firm's attorneys, with emphasis on compliance with regulations under the Fair Labor Standards Act, Family and Medical Leave Act, Davis Bacon and Related Acts, Service Contract Act, Contract Work Hours and Safety Standards Act, Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act and the Federal Wage Garnishment Law.
Carol retired from the US Department of Labor, Wage and Our Division, in December 2007, after 33 years of service with the Division. From 2000 to the end of 2007, she was the Nashville District Director, supervising enforcement of Wage and Hour laws in the state of Tennessee. Prior to that she had been Assistant District Director of the Knoxville Wage and Hour office after 11 years as an investigator in Columbia, South Carolina.
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