In light of recent litigation that has cost employers billions of dollars, it is not surprising the Fair Labor Standards Act (FLSA) has been regarded by employers as anything but fair.
Enacted in 1938, the federal law was meant to mandate minimum and overtime wages to employees who were, at the time, perceived as being victimized by oppressive employers. The employment landscape has changed dramatically during the past 70 years.
Employees currently enjoy a wide variety of rights and privileges that provide them with many protections previously unavailable. Likewise, employers are far more cognizant of their obligations under numerous laws and regulations that govern the employer-employee relationship. Rather than regulating relationships between victims and bullies, FLSA now regulates relationships between more well-informed employees and more well-intentioned employers.
Notwithstanding the numerous piecemeal amendments to FLSA and promulgation and revision of a multitude of Department of Labor (DOL) interpretive regulations, courts continue to struggle with uniformly interpreting and applying FLSA's complex provisions. It is no surprise FLSA is one of employers' most persistent headaches and, for some, a living nightmare. Indeed, FLSA collective actions are viewed and understood by many employers as "company killers."
Employers have good reason to fear FLSA as more plaintiffs' attorneys have become aggressive in pursuing FLSA collective actions. This is because FLSA requires employers to pay prevailing plaintiffs' attorneys' fees and costs—making FLSA collective actions low-risk and lucrative for employees and their attorneys.
What is FLSA?
FLSA requires that most employees receive overtime pay at 1 1/2 times their regular pay rate for all hours worked in excess of 40 hours in a workweek. FLSA also requires that employees be paid at least the federal minimum wage, which currently is $7.25 per hour.
Various state laws and "living wage" ordinances require the payment of a higher minimum wage than that imposed by FLSA. Additionally, many state laws provide different rules for employee classification, as well as the payment and calculation of overtime.
Who is exempt?
FLSA exempts several types of employees from its minimum wage and/or overtime pay requirements. These include:
You must apply certain rules under FLSA to determine whether specific employees are exempt. The most problematic and widely misunderstood FLSA exemptions are the white collar employee exemptions.
White collar exemptions
Generally, employees may qualify for one of FLSA's white collar exemptions if they meet the salary level, salary basis and job duties tests for the specific exemption. In other words, to qualify for exemption from minimum wage and overtime pay, an employee must earn a certain amount, a portion of which must be paid on a salary or fee basis, and must perform specified duties.
These exemptions do not apply to manual laborers or other workers who perform work involving repetitive operations with their hands, physical skill or energy. The exemptions also do not apply to certain nonmanagement level employees, such as carpenters and electricians, or rescue workers, such as police officers.
Salary level test
An exempt white collar employee must earn a minimum of $455 per week (or total annual compensation of at least $23,660) paid on a salary or fee basis. Total annual compensation includes commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period. It does not include credits received for board, lodging and other facilities; payments for medical or life insurance; contributions to retirement plans; or other fringe benefits. The salary level requirement is the first step in satisfying the white collar exemptions.
Certain "highly compensated" employees more easily qualify for an exemption. To be exempt under FLSA, a highly compensated employee must earn a minimum total annual compensation of $100,000, which must include a minimum of $455 per week paid on a salary or fee basis.
Highly compensated employees are not required to satisfy all the stringent job duties tests under the executive, administrative, professional or outside sales exemptions. Instead, the employees only must customarily and regularly perform one or more exempt duties identified in any of the job duties tests for the executive, administrative or professional exemptions.
According to DOL, the frequency with which highly compensated employees perform exempt duties must be "greater than occasional" but may be "less than constant." Accordingly, merely performing exempt duties on an isolated or one-time basis is insufficient; such employees must perform exempt duties normally and recurrently every workweek.
As with all white collar exemptions, the highly compensated employee exemption applies exclusively to employees whose primary duties include performing office or nonmanual work and explicitly does not apply to nonmanagement production line workers or other nonmanagement employees.
Salary basis test
An exempt white collar employee must be paid—at least in part—on a salary or fee basis, meaning the employee must receive a predetermined amount of compensation during each scheduled pay period. The employee must be paid the full salary for any defined workweek in which he or she performs any work. The compensation cannot be reduced because of variations in work quality or quantity. It also cannot be reduced because of absences imposed by you or operating requirements of your business (regardless of how short in duration). So if an employee is ready, willing and able to work, you cannot make deductions for time when work is not available.
However, an exempt employee is not entitled to payment for any workweek in which he or she does not perform work. Further, you are entitled to make seven types of deductions from exempt employees' salaries without compromising their exempt status. These permissible deductions include:
If you maintain an actual practice of making improper deductions from exempt employees' salaries, employees will lose the exemption during the time periods in which the improper deductions are made. This loss of exempt status will apply not only to the employee subjected to the impermissible deduction but also to all other employees in the same job classification working for the same managers responsible for making the improper deductions.
You will be deemed to have an actual practice of making improper deductions based on the existence of the following factors:
Isolated or inadvertent improper deductions will not result in the loss of exempt status if you reimburse employees for the improper deductions. Further, there is a safe harbor provision in DOL's interpretive regulations that prevents exempt employees from losing their exempt status if their employer maintains a clearly communicated policy prohibiting improper deductions that includes a complaint mechanism, reimburses employees for any improper deductions and makes a good-faith commitment to comply with FLSA in the future.
As with all employment policies, the policy prohibiting improper deductions should be written and distributed to employees at their time of hire, published in an employee handbook or published on your company's intranet homepage. The safe harbor provision will not apply if you willfully violate your policy by continuing to make improper deductions after receiving employee complaints.
Job duties test
In addition to meeting the salary level and salary basis tests, to qualify for a white collar exemption, employees must satisfy the job duties test.
Employees are exempt under the executive exemption if they:
DOL defines "primary duty" as the principal, main, major or most important duty an employee performs. Whether a particular duty constitutes the employee's primary duty can be determined by looking at the exempt duties' relative importance; amount of time spent performing exempt work; relative freedom from direct supervision; and relationship between the employee's salary and wages paid to other employees for the same kind of nonexempt work.
Considered together, these factors will determine whether an employee satisfies the primary duty requirement. No one factor alone is sufficient—not even if the employee spends more than 50 percent of his or her time performing exempt management duties. Because of the ambiguity of DOL's guidance, different courts have classified similarly situated employees differently.
For example, in 2009, the Eastern District Court of Louisiana in Johnson v. Big Lots Stores Inc. held that store managers who spent less than 50 percent of their time supervising two or more employees were not exempt under FLSA. In stark contrast, in 2007, the Northern District Court of Alabama in Allen v. Dolgencorp Inc. ruled store managers of Dollar General Stores who spent less than 15 percent of their time handling managerial tasks were exempt under FLSA because management was their primary duty. Such contradictory decisions exemplify employers' confusion and misunderstanding in attempting to classify workers as exempt executive employees.
The duty of management is defined broadly. It includes but is not limited to:
Employees only need one or more of these management duties as their "primary duty" to be eligible for the executive exemption.
Employees also must be in charge of managing the company or a customarily recognized company department or subdivision that has a permanent status and continuing function. Examples of such departments include a human resources department's benefits subdivision or a national sales department's regional subdivision.
On the other hand, a group of employees assigned from time to time to a specific job or series of jobs does not constitute a recognized subdivision. Therefore, supervising such a collection of employees would not satisfy the executive exemption requirements.
Executive employees also must customarily and regularly direct two or more full-time employees or the equivalent. Full-time employees generally work 40 hours per week. So an executive employee can satisfy this part of the job duties test if he or she manages a total of 80 hours of work per week performed by various employees irrespective of whether the work is performed by full- or part-time employees.
The terms customarily and regularly have the same meaning with respect to executive employees as they do with highly compensated employees. Accordingly, the frequency with which executive employees perform exempt duties must be "greater than occasional" but may be "less than constant." The exempt duties must be performed normally and recurrently every workweek and not just on an isolated or one-time basis.
Executive employees must have the authority to hire or fire other employees or make suggestions and recommendations that are given particular weight about hiring, firing, advancement, promotion or other changes in employees' status.
The following factors are used to determine whether an employee's suggestions or recommendations are actually given particular weight: whether it is part of the employee's job duties to make suggestions or recommendations; the frequency with which the employee's suggestions or recommendations are made or requested; and the frequency with which the employee's suggestions or recommendations are relied upon or followed.
Therefore, an exempt executive employee need not have authority to make the ultimate decision and the fact that the employee's suggestions or recommendations are reviewed by a higher-level manager does not destroy the employee's exempt status. This is a fact-intensive analysis that will vary based on the particular employee's work experiences.
Administrative employees are exempt if they have the primary duty of performing office or nonmanual work directly related to your management policies or general business operations or those of your customers and exercise discretion and independent judgment with respect to matters of significance in performing their primary duties.
The type of work performed by an administratively exempt employee must be directly related to assisting with the running or servicing of a business or that of its customers. Work directly related to management policies or general business operations includes but is not limited to work in functional areas such as tax, finance, accounting, quality control, purchasing, advertising, safety and health, human resources, and legal and regulatory compliance. However, it does not include working on a manufacturing production line or selling a product in a retail or service establishment.
Exercising discretion and independent judgment generally involves the comparison and evaluation of multiple courses of conduct and then making a decision after considering all the various possibilities. Decisions and recommendations may be reviewed at a higher level and subsequently revised or reversed, but merely applying well-established techniques, procedures or specific standards described in manuals or other employment resources does not constitute exercising discretion and independent judgment. Similarly, merely performing clerical or secretarial work; recording or tabulating data; or performing mechanical, repetitive, recurrent or routine work do not constitute exercising discretion and independent judgment.
Additionally, discretion and judgment must be exercised with respect to matters of significance. Whether work is related to a matter of significance is determined by evaluating the level of importance or consequence of the work performed. Factors include, for example, whether an employee:
The administrative exemption requires significant factual analysis on a case-by-case basis and will vary greatly depending on the actual work performed irrespective of job titles. So it is not surprising courts have reached opposite conclusions for seemingly similar employees.
For example, the Circuit Court of Appeals for the District of Columbia in the 2010 case Robinson-Smith v. Gov't Employees Ins. recently held insurance claims adjusters who assessed, negotiated and settled client claims were exempt administrative employees. In contrast, the Second Circuit in the 2009 case Davis v. J.P. Morgan Chase & Co. held that loan underwriters in charge of selling loans to customers through the use of credit guidelines were not exempt administrative employees. These employees appeared to have the same level of discretion and independent judgment, and yet the courts reached different conclusions as to their exempt statuses.
Professional employees are exempt if their primary duty is work requiring advanced knowledge in a field of science or learning or requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Advanced knowledge generally is acquired through a prolonged course of specialized academic training that exceeds basic education, best evidenced by an advanced academic degree.
Occupations that may be performed with only the general knowledge acquired by an academic degree in any field or the general knowledge acquired through an apprenticeship or on-the-job experience are excluded from the professional exemption. Some occupations generally excluded from the professional exemption include accounting clerks and bookkeepers, paralegals and legal assistants, engineering technicians and cooks who perform routine work.
To be exempt, creative professionals must have the primary duty of performing work in a recognized field of artistic or creative endeavor. Such fields include, for example, music, writing, acting and graphic arts. Recognized creative professionals include musicians, composers, conductors, soloists, essayists, novelists, short-story writers, play writers, painters, photographers and cartoonists.
Ultimately, the most important factor is whether and to what extent an employee performs work that requires invention, imagination, originality or talent. Work that primarily depends on intelligence, diligence or accuracy that can be produced by a person with general manual ability and training destroys exempt status.
Outside sales employees are exempt if they are customarily and regularly engaged away from their places of business and have the primary duty of making sales or obtaining orders or contracts for services or for the use of facilities. Outside salespeople do not have to comply with the salary level or salary basis tests to be exempt under FLSA.
An outside salesperson must be customarily and regularly engaged away from his or her place of business (or any fixed place regularly used by the employee for performing work, including the employee's home). Sales must take place at the customer's place of business or home. Sales and transactions made via mail, telephone or Internet do not constitute "outside" sales.
Outside salespersons must have the primary duty of making sales or obtaining orders or contracts for services or for the use of facilities. "Sales" includes the transfer or other disposition of tangible, intangible and real property. Work that is incidental to the employee's performance of these primary duties, such as deliveries and collections, also is considered exempt work.
There is significant confusion among courts regarding what constitutes "sales" for purposes of the exemption.
For example, in 2009, the Southern District Court of New York in In Re Novartis Wage and Hour Litigation held pharmaceutical sales representatives who did not actually sell drugs to the doctors they visited were exempt outside salespeople because they made sales in the manner used in the pharmaceutical industry. In contrast, also in 2009, the District Court of Connecticut in Kuzinski v. Schering Corp. held pharmaceutical sales representatives who did not sell drugs to the doctors they visited were not exempt outside salespeople because they could not consummate the sales and were merely laying the foundation for other employees to complete the sales.
As courts continue to reach different employee classification decisions based on similar facts, it is not surprising employers continue to struggle with employee classifications.
Overtime and hours worked
In addition to the myriad of issues related to FLSA exempt status, you must grapple with equally perplexing issues for nonexempt employees related to determining such employees' actual number of hours worked and proper calculation of overtime payment.
You must include all time worked by employees in your calculation of the employees' hours worked. This includes, for example:
Similarly, you must include all time worked by employees while away from the workplace in calculation of employees' total hours worked. This includes, for example:
Not all time spent in the workplace or doing work must be counted toward an employee's total hours worked. For example, you need not count:
Because so much of employees' work occurs away from the watchful eyes of their employers, particularly with the current technologically savvy work force, it is important you carefully track and calculate employees' compensable and noncompensable number of hours. This can significantly alter the amount of overtime due a particular employee.
Calculating overtime
It is equally important to properly calculate overtime pay based on actual hours worked. Employers often are unaware of the potential difficulties associated with determining an employee's regular rate of pay for overtime calculations. In general, the regular rate of pay determination must include an employee's salary or wages and any compensation for time spent working, such as:
For instance, if you pay a quarterly bonus to nonexempt employees, you may be required to incorporate the bonus amount to determine overtime compensation retroactively depending on the nature of the bonus. But payments for the following purposes need not be included when calculating an employee's regular rate of pay:
An employee's regular rate of pay is calculated by multiplying the employee's regular hourly rate by the total number of hours worked in a given workweek; determining what portion of additional compensation earned (if any), including bonus, commission or other payments, corresponds to a given workweek and adding this amount to the employee's total regular pay for the given workweek; and dividing the subtotal by the total hours worked by the employee in the given workweek. This can be a complicated and difficult task requiring significant time and resources.
Once you arrive at the appropriate regular rate of pay for a given employee, you must pay the employee 1 1/2 times his or her regular rate of pay for every hour worked in excess of 40 hours in any given workweek. However, simply providing employees with the appropriate amount of overtime pay owed does not satisfy FLSA obligations.
Maintaining records
You also must adhere to various recordkeeping requirements, including maintaining payroll records, collective-bargaining agreements, and sales and purchase records for at least three years. You also must maintain accurate time cards, work tickets, and work and time schedules for at least two years. These records must be made available to DOL on demand and can be used as a sword against you or as a shield if you face wage and hour litigation. It is in your best interest to maintain complete, accurate records for FLSA compliance.
Recent developments
FLSA litigation has become a hot area for plaintiffs' attorneys and DOL activity. The number of wage cases filed is growing faster than traditional employment lawsuits. The number of FLSA collective actions far outpaced the number of traditional employment class action filings in 2009 and will continue to do so in 2010. State and local laws have further complicated the wage and hour landscape by placing additional minimum wage and overtime obligations on employers.
Most recently, President Obama signed the Patient Protection and Affordable Care Act on March 23, which includes a provision entitled Reasonable Break Time for Nursing Mothers.
The law became effective immediately. It amended FLSA by requiring all employers to provide female employees who are nursing infants with reasonable, unpaid break time throughout the workday for expressing breast milk as well as access to a place (other than a bathroom) that is shielded from view and free from the intrusion of co-workers and the general public for this limited use. This benefit must be provided to such employees for up to one year after a child's birth. The law applies to all employers subject to FLSA but provides a limited exception for employers with fewer than 50 employees who would face undue hardship if made to comply with the law's provisions.
The Obama administration's agenda suggests additional changes to FLSA may be in the works. Indeed, there are numerous proposed amendments to FLSA pending before Congress. As exemplified by the Reasonable Break Time for Nursing Mothers law, you must stay informed of developments in this area to ensure your workplace remains FLSA-compliant.
Why FLSA?
Employers have been pummeled by the sudden influx of wage and hour litigation and administrative investigations. FLSA is an attractive and lucrative area of litigation for plaintiffs' attorneys for two main reasons.
First, unlike federal employment discrimination laws that set a limit of 300 days within which employees are required to file their lawsuits, FLSA provides a generous limit of two years for nonwillful violations, three years for willful violations and five years for related criminal actions. Further, the applicable statute of limitations period restarts with each individual paycheck.
Accordingly, an employee who has had his or her employment voluntarily or involuntarily terminated and has been disconnected for years from his or her past employer is an easy target for plaintiffs' attorneys seeking collective FLSA actions.
Second, FLSA plaintiffs can recover all unpaid wages and overtime for the applicable time period, liquidated damages (which means double the underlying back wage liability) and, most notably, attorneys' fees. Often, FLSA collective actions are settled (or adjudicated) for a figure that is predominantly composed of plaintiffs' attorneys' fees. Additionally, FLSA includes an anti-retaliation provision that makes it unlawful for an employer to retaliate against an employee who has filed a complaint regarding the employer's FLSA violation. Some courts have interpreted the provision to mean a plaintiff asserting a retaliation claim can seek punitive damages, as well.
FLSA is a magnet for plaintiffs' attorneys looking for lucrative litigation. There is no reason to believe these financial incentives will decrease in the future. Indeed, it is likely employers will continue to see an increase in wage and hour litigation.
An internal audit
Although FLSA continues to be one of employers' most troublesome headaches, you can take adequate precautions to minimize potential liability.
The best precaution you can take is to conduct an internal wage and hour audit of your wage payment practices and job classifications.
At a minimum, the audit must review and evaluate your exempt and nonexempt job classifications and timekeeping, recordkeeping, and pay practices and policies, which will necessarily include an assessment of your regular rate calculations, overtime calculations and the number of actual hours worked by employees. You can reduce liability for existing and future FLSA violations by conducting an internal wage and hour audit and adjusting your practices accordingly.
Conducting an internal wage and hour audit and taking appropriate action also can help you establish you acted in good faith and reasonably believed you were in compliance with the law. This also can help set a damages cutoff date to prevent additional damages from accruing. You should conduct internal wage and hour audits preventively and regularly—even if there is no threat of pending wage and hour litigation. Although internal wage and hour audits may appear to be a daunting task, defending against costly, time-consuming wage and hour litigation is far worse.
If conducting a thorough internal wage and hour audit is impossible or impractical, consider engaging in a similar process during an extended time period that begins with a review of employee classifications, continues with a review of FLSA timekeeping and recordkeeping policies, and concludes with a review of your pay practices and policies. Being unable to perform a full internal wage and hour audit is no excuse—you should still do the best you can to prevent costly wage and hour litigation, one step at a time.
Looking ahead
Wage and hour litigation, particularly FLSA collective actions, is here to stay. Prepare your workplace now to prevent costly wage and hour litigation in the future. Although FLSA promises to continue to plague employers, you have the tools to minimize liability.
Jason C. Kim is a partner and Gray I. Mateo-Harris is an associate in the labor and employment practice group of the Chicago-based law firm Neal, Gerber & Eisenberg LLP.
COMMENTS
Be the first to comment. Please log in to leave a comment.