Wage and Hour Law/FLSA Overview

WAGE & HOUR LAW/FLSA OVERVIEW

April, 2004/August 2004/September 2006

This overview is for informational purposes only, and is not intended as a substitute for obtaining legal advice about a specific policy, practice, or circumstance.

I. FLSA BASICS

The Fair Labor Standards Act, 29 U.S.C. §201, et seq. (2002) (the “FLSA” or the “Act”), more commonly known as the “wage and hour law,” establishes federal wage and hour standards for covered employees.

The FLSA requires that employers pay employees at least the hourly minimum wage currently ($5.15 per hour) for all hours worked. Certain states may have a different state minimum wage; Florida does not.

Under the FLSA, non-exempt employees must be paid overtime compensation for hours worked in excess in 40 hours in a workweek. The employer is required to maintain detailed records of the employees’ daily and weekly hours worked.

The FLSA has many nuances, which may make reading and understanding the Act very complicated. In fact, the FLSA is one of the most convoluted of all federal employment laws, and, consequently, one of the most challenging with which to comply. As evidence of employer compliance difficulties, the U.S. Department of Labor (DOL) recently noted that in 2002 there were more FLSA claims and collective actions than there were claims and class actions alleging job discrimination. Note that such cases are expected to multiply in South Florida – with already the highest percentage of FLSA claims in the country – due to a combination of economic and employment factors, the high number of immigrant workers, employer noncompliance, and aggressive plaintiffs’ attorneys.

Question: What is the FLSA?

Answer: The FLSA is the most general federal labor law. It contains the minimum wage provisions, Equal Pay Act, child labor restrictions, and a variety of other federal labor and employment law sections. A key provision of the FLSA is that most employees (known as “non-exempt” employees) must be paid time and one-half for overtime “hours worked.” The FLSA contains no requirement for “double time” pay. Double time pay, if available, is a matter of agreement between an employer and employee.

Question: When is overtime due?

Answer: For covered, nonexempt employees, the FLSA requires overtime pay at a rate of not less than one and one-half times an employee's regular rate of pay after 40 hours of work in a workweek. Some exceptions to the 40 hours per week standard apply under special circumstances to police officers and firefighters employed by public agencies and to employees of hospitals and nursing homes.

Some states also have enacted overtime laws. Where an employee is subject to both the state and federal overtime laws, the employee is entitled to overtime according to the higher standard (i.e., the standard that will provide the higher rate of pay).

Question: What activities are considered "work?"

Answer: Work time under the FLSA includes all time spent performing job-related activities which (a) genuinely benefit the employer, (b) which the employer "knows or has reason to believe" are being performed by an employee, and (c)which the employer does not prohibit the employee from performing. These can include activities performed during "off-the-clock" time, at the job site or elsewhere, whether "voluntary" or not.
Courts have awarded FLSA damages for "off-the-clock" time spent by employees maintaining equipment, staying late after normal shifts without "putting in" for overtime, doing job-related paperwork "at home," making and responding to job-related telephone calls, working through meal periods, and many other activities. Employees sometimes underestimate the amount of "off the clock" time they spend performing compensable tasks.

Question: How many hours is full-time employment? How many hours is part-time employment?
Answer: The FLSA does not define full-time employment or part-time employment. This is a matter generally to be determined by the employer. Whether an employee is considered full-time or part-time does not change the application of the FLSA.

Question: How are vacation pay, sick pay, and holiday pay computed and when are they due?
Answer: The FLSA does not require payment for time not worked, such as vacations, sick leave or holidays (federal or otherwise). These benefits are a matter of agreement between an employer and an employee (or the employee's representative).

Question: Is extra pay required for weekend or night work?
Answer: Extra pay for working weekends or nights is a matter of agreement between the employer and the employee (or the employee's representative). The FLSA does not require extra pay for weekend or night work. However, the FLSA does require that covered, nonexempt workers be paid not less than time and one-half the employee's regular rate for time worked over 40 hours in a workweek.

Question: When are pay raises required?
Answer: Pay raises are generally a matter of agreement between an employer and employee (or the employee's representative). Pay raises to amounts above the federal minimum wage are not required by the FLSA.

Question: When can an employee’s scheduled hours of work be changed?
Answer: The FLSA has no provisions regarding the scheduling of employees, with the exception of certain child labor provisions. Therefore, an employer may change an employee's work hours without giving prior notice or obtaining the employee's consent (unless otherwise subject to a prior agreement between the employer and employee or the employee's representative).

Question: When must breaks and meal periods be given?
Answer: The FLSA does not require breaks or meal periods be given to workers. Some states (not Florida, as applied to adults) may have requirements for breaks or meal periods. If you work in a state which does not require breaks or meal periods, these benefits are a matter of agreement between the employer and the employee (or the employee's representative).

Question: Can an employee be required to perform work outside of the employee's job description?
Answer: Yes. The FLSA does not limit the types of work employees age 18 and older may be required to perform. However, there are restrictions on what work employees under the age of 18 can do. This is true whether or not the work asked of the employee is listed in the employee's job description.

Question: Must young workers be paid the minimum wage?
Answer: The federal minimum wage is $5.15 per hour. However, a special minimum wage of $4.25 per hour applies to employees under the age of 20 during their first 90 consecutive calendar days of employment with an employer. After 90 days, the FLSA requires employers to pay the full federal minimum wage.
Other programs that allow for payment of less than the full federal minimum wage apply to workers with disabilities, full-time students, and student-learners employed pursuant to sub-minimum wage certificates. These programs are not limited to the employment of young workers.

Question: Must employers grant leave to employees called up by the National Guard or Reserve?
Answer: Yes, an employee must be granted a leave of absence to perform military service.

Question: Are federal employees covered by the FLSA?
Answer: Yes, with some differences. The FLSA applies to federal employees, unless some specific federal statute creates different wage rules. There are some of these (typically in Title 5). In addition, federal employees rights under the FLSA are regulated by OPM, whose regulations are similar but not identical to the FLSA regulations.

II. EMPLOYERS AND EMPLOYEES

A. The Employment Relationship

Essentially, the FLSA applies to “employment” relationships. Under the FLSA, “employ” is defined as “to suffer or permit to work.” For example, people who provide services to an employer are considered employees when the value of such services benefit the employer and the employer could have discovered the performance of such services through reasonable diligence. In addition, the FLSA generally applies to all employers. “Employer” is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee…” Similarly, to be covered under the FLSA, an individual must be an “employee.” “Employee” is defined as “any individual employed by an employer.”
Ordinarily, employees fall under FLSA’s coverage if they work for an “enterprise” which has employees who handle, sell or otherwise work on goods or materials that have been moved in or produced for interstate commerce, and the business has an annual business dollar volume of at least $500,000.00. But be aware that, even if an employer’s “annual business dollar volume” does not exceed $500,000.00, employees may individually fall within the scope of the FLSA if they are involved in interstate commerce, assist with the production of goods for interstate commerce, or meet the requirements of interstate commerce. For example, a restaurant may only transact $50,000.00 annually, but if the wait person obtains credit card authorizations for patrons’ checks, he/she has likely obtained them telephonically through telephone lines that cross state boundaries and, thus via interstate commerce.

B. Independent Contractors

Beware of classifying workers as “independent contractors.” The FLSA uses the “economic realities” test, which basically looks at whether the individual is economically dependent upon the business to which the individual renders service based on control, profit potential, degree of skill, permanency, and integration considerations. If the individual is economically dependent, then that “ independent contractor” may actually be an employee, and entitled to the protections of the FLSA.

C. Volunteers and Trainers

Note that “volunteer” and “trainee” status are the most common non-statutory exclusions from the FLSA’s “employee” definition. Any “volunteer” relation must be truly voluntary without any expectation of compensation, monetary or otherwise. Any “trainee” relation requires enrollment in a program of a professional nature without any expectation of compensation and the benefit obtained through the training must be for the benefit of the student trainee.

Accordingly, if an employer and employee fall within the FLSA’s broad umbrella, the employer must pay overtime to that employee unless he/she falls under one of the FLSA’s specific “white collar” exemptions (discussed later).

III. FLSA OVERTIME REQUIREMENTS

Question: What is "overtime?"
Answer: The word overtime has a technical definition under the FLSA, and means all time actually worked over a "threshold." The usual threshold is 40 hours per work week. Some government or medical jobs may have alternative thresholds.

Question: What is an FLSA threshold?
Answer: The FLSA generally requires overtime for hours worked in excess of 40 hours per week. In a regular, 40 hour week situation, the FLSA "threshold" is thus 40 hours per week. For FLSA purposes, only "actual" work time counts toward the overtime threshold. Leave time does not count as work time under the FLSA, even if the time is paid for and considered working time for other purposes. For example, an employee who works 4 to 5 regularly scheduled eight-hour days in a week, and takes leave on the fifth day, will have worked 32 "regular" hours that week. Any additional time worked by the employee during that week (whether "on the clock" or "off the clock") will not "count" for FLSA overtime until (and to the extent that) the total number of hours worked that week exceeds 40 -- in the example, the first 8 "extra" hours need not be paid as overtime under the FLSA.

Question: A labor practice or contract may provide for overtime for employees working in excess of 8 hours per day, or 37.5 hours per week, or some other formula. Must this overtime be paid at time and one-half the employee's FLSA regular rate?
Answer: Not necessarily. The word overtime has a technical and restricted definition in the FLSA. FLSA requirements typically apply only when hours worked exceed the applicable FLSA overtime threshold in a work week or work period. FLSA overtime is due only for hours worked over the FLSA threshold, even if "contract overtime" may provide employees with overtime on some other formula (such as hours worked over 8 per day). Until and unless the FLSA overtime thresholds are met and exceeded, the FLSA rules for regular rates or overtime rates are generally inapplicable (assuming no minimum wage violations). If a labor-management contract or practice calls for overtime to be paid for hours worked below the FLSA threshold, neither the FLSA regular rate nor overtime rate requirements necessarily apply. Until and unless the FLSA overtime threshold is met and exceeded, an employee's wage rate can be different from the FLSA-mandated rate without violating the FLSA (again, assuming no minimum wage violation).

Question: Does leave time count as work time?
Answer: No. "Hours not worked" need not be counted as "hours worked" for purposes of FLSA wage computations, even if they are counted as work time for some other purpose such as pensions or for pay computations under employment agreements.

Question: The employee gets "compensatory time" (also called “comp time”) in lieu of cash for overtime. Is this allowed?
Answer: No except, for public sector (government) employees. “Comp time” in lieu of cash for FLSA overtime is not generally permitted in the private sector. A public sector employer may pay (at least some) FLSA overtime with comp time.

Question: What is the 7(k) Exemption?
Answer: The FLSA generally requires overtime at time and one-half for all hours worked over 40 per week. There is, however, a special rule for government police agencies and fire departments which allows a different "work period" in some circumstances. If the employer establishes an alternative work period under section 7(k) of the FLSA, overtime is owed (under the FLSA) only for hours worked in excess of a threshold number of hours per work period, which will be different from (and more than) the normal 40 hours per week. For example, a police employer may establish a 7(k) work period of 14 days. If the employer has complied with the requirements for establishing such an alternative work period, FLSA overtime is owed only for hours worked in excess of 86 hours in a 14 day work period. This type of calculation is not allowed in the private sector.

The Workweek
There is no limitation on the number of hours that an employee may work in any workweek, as long as the employer pays the required overtime compensation – time and one-half of an employee’s regular rate of pay – to an employee for hours worked in excess of the maximum 40-hour workweek prescribed by the FLSA. The FLSA defines “workweek” as a fixed and regularly recurring period of 168 hours or seven (7) consecutive 24-hour periods and requires that the workweek be used as the basis for compensation. Note, however, that employees need not be paid on a weekly basis. The workweek may begin at any time, on any day. The workweek must be consistent for an individual employee, but can vary from employee to employee.

1. Each Workweek must be counted separately.

Each workweek stands alone. Thus, if an employee works 20 hours in one week and 60 hours the next, he/she must be paid overtime compensation for the overtime hours worked in the second week, even though the average number of hours is only 40 hours per week. The FLSA, however, does not require that the employer pay an employee overtime for hours worked in excess of eight per day.

For example, if an employee works more than 8 hours in one day, but not over 40 hours in 1 week, he/she is not entitled to overtime compensation for the hours worked in excess of 8 in that one day. However, if the employee works over 40 hours in one week by working six 8 hour days, then he/she is entitled to eight hours of overtime compensation. Note that some states, like California, mandate that employees who work more than 8 hours in one day must be paid overtime for the hours worked in excess of 8 hours in that one day, regardless of whether he/she worked over 40 hours that week. Florida is not one of those states.

2. Comp time does not satisfy the employer’s overtime obligations.

Giving employees compensatory time off or “comp-time” generally does not satisfy the employer’s obligation to pay overtime. The only known exception is for public sector employees if there is mutual agreement before the employee performs the work at issue. Although there are proposals pending before Congress that would allow employers to voluntarily offer, and employees to voluntarily choose, comp-time in lieu of overtime pay, employers should not engage in this manner of pay, as it currently violates the FLSA.

Computing an Employee’s “Regular Rate” of Pay

Computing Overtime

Question: At what rate must FLSA overtime be paid?
Answer: Time and one-half the "regular hourly rate." (For employees whose normal pay is not an "hourly" rate, their regular rate requires converting pay to an hourly equivalent. There are some peculiar FLSA arithmetic rules about how to do this.) Longevity pay, shift differentials, and similar nondiscretionary wage augments paid for work should generally be included in calculating the FLSA overtime rate. There are provisions which may permit arrangements to pay for some work at a different rate, but only if the work is different from the employee's regular job, and only by agreement before the work is performed.

An employee’s “regular rate” may be different from his hourly rate of pay, but must be at least equal to the minimum wage. It is determined by dividing the total remuneration for employment in a workweek by the total number of hours worked. Additional pay such as on-call pay, contest winnings, employer-paid lunches or mealtimes, non-discretionary bonuses (both as to payment and amount), salary increases, shift differentials, and employer-paid traveling expenses to and from work may (and generally should be considered to) increase the employee’s regular rate of pay. Note that stock options are generally not included in calculating an employee’s regular rate of pay.

1. Rest Periods.

Rest periods or “breaks” of short duration, running from 5 minutes to about 20 minutes, are common but are not required in Florida. If they are provided, however, the time must be counted as hours worked and, thus, compensable. Paid rest periods may not be offset against other working time such as compensable waiting time or on-call time.

2. Waiting time.

Waiting time may be compensable depending on the individual employee’s status. The distinction is whether the individual is “engaged to wait” (compensable) or “waiting to be engaged” (not compensable). “Engaged to wait” means the employee is on-duty, but inactive for short periods while waiting to receive an assignment and cannot effectively use this time for the employee’s own purposes. “Waiting to be engaged” is when an employee can effectively use in-between time for personal activities.

A. Hourly Rate Employees.

To properly calculate overtime for hourly rate employees, the employer must use the employee’s regular rate of pay as the hourly rate. The regular rate is calculated by dividing the employee’s total compensation (except statutory exclusions) in any workweek by the total number of hours actually worked in that workweek for which such compensation was paid.

B. Salaried Employees.

To properly calculate overtime for weekly salaried employees, the employer must use the employees’ regular rate of pay as calculated by dividing the salary (plus non-excluded other compensation) by the number of hours the salary is intended to cover. If the employee’s salary covers a period longer than the workweek, the employee’s regular rate of pay is computed by converting the wages into the workweek equivalent. For example, this calculation can be achieved by taking the weekly pay and dividing it by the number of hours worked during the regular workweek.

C. Piece Rate Employees.

To properly calculate overtime for piece rate employees, the employer must take the employee’s regular rate of pay as the employee’s total compensation, derived from piece-rates and all other sources, and any earnings paid for waiting time or other hours worked, divided by the number of hours worked that week for which the employee received compensation.

D. Fixed Salary for Fluctuating Workweek.

To properly calculate overtime for fluctuating workweek salaried employees, the employer must calculate the employee’s regular rate of pay by dividing the salary by the number of hours worked in the given week. Of course, the employee’s regular rate of pay will vary from week to week based on the number of hours worked. If an employer uses the fluctuating workweek salary mode, it must ensure that the employee clearly understands the salary paid covers whatever hours are demanded in that particular workweek, even if the workweek is one in which a full schedule of hours is not worked. Make sure that the amount of the employee’s salary is sufficient to ensure that the regular rate is not less than minimum wage.

E. Different Jobs Worked During The Workweek.

To properly calculate overtime for an employee who works in two different pay scaled jobs during a workweek, the employer must calculate the employee’s regular rate of pay by adding the total compensation from all sources of employment and dividing that figure by the total number of hours worked.

Other Considerations

1. On-Call Duty. Generally, all work performed by an employee while “on call” is compensable. If the employee is not obligated to stay on the job-site and uses the on-call time mainly for personal purposes, then that time generally does not require compensation. But be aware of the 24-hour distinction. If an employee must be on on-call duty for less than 24 hours and can rest/sleep when not occupied, then this time is likely compensable. If the employee is on on-call duty for more than 24 hours and is allowed to sleep, then the sleep hours are likely deductible. On-call time is compensable if the employee is restricted to the employer’s premises or to a fixed geographical location in such a way that he/she is prevented from using her time for personal use.

2. Commuters. Normal commuting in an employee’s own vehicle is non-compensable. Travel times between the employee’s “normal workplace” and another “assigned workplace” and travel between assignments during a regular workday are compensable. If an employee uses the employer’s vehicle, and the travel therein is not subject to an agreement between the two and/or is outside the normal commuting range of the employer’s business, then the travel time is compensable. If the employee drives the company vehicle merely as a matter of convenience, travel time is not compensable.

3. Training. If an employee attends implicit or explicitly-required training, then attendance at such training must be compensated. Training programs are not compensable if: attendance is outside normal working hours; is voluntary; is not directly related to the employee’s job; and the employee performs no productive work during attendance. Homework for required training programs can also be compensable unless the employee is given allotted time during working hours.

4. Tipped Employees. If an employee is engaged in an occupation in which the employee customarily and regularly receives more than $30.00 a month in tips, then he/she is a “tipped employee.” Employers with such employees must ensure that the employees keep all of their tips, other than in the case of valid tip pools. The employer’s compensated wage obligation to a tipped employee is fixed under the FLSA at $2.13 per hour. This means that if the employee’s tips plus $2.13 per hour does not equal at least the minimum wage of $5.15 per hour, the employer must pay the employee the difference. If the employee’s tips plus the mandated employer-paid $2.13 per hour equal more than the minimum wage, then the employer must use the higher amount to compute any overtime pay due.

5. Homeworkers. For homeworking employees, the employer may pay the employee according to any reasonable agreement that takes into account pertinent facts such as periods of complete freedom from duties and difficulties with tracking the exact hours worked. The exception applies only if the employer and employee have an agreement for the number of hours worked. If there is no agreement, all homework that is controlled or required by the employer is compensable.

6. Grievance Time. Time spent regarding employee grievances is, generally, compensable unless a union agreement states otherwise.

Once the “regular rate” and workweek are established, the employer can calculate overtime compensation due by multiplying the regular rate by one and one-half the number of hours worked in excess of 40 hours in a given workweek. Calculating a fluctuating workweek schedule is more complicated. For example, if an employee’s employment agreement provides a salary of $500.00 per week as straight time compensation regardless of hours worked in a week and the employee works 40, 50 and 48 hours over the next three weeks, her regular hourly rate of pay for each of these weeks is approximately $12.50, $10.00 and $10.42 (calculated by dividing $500.00 by hours worked in that workweek). Since employee already has received straight time compensation on a salary basis for all hours worked (unless there is a minimum, wage violation), only an additional half-time pay must be paid for hours worked in excess of 40. Thus, for week #1, compensation is $500.00 (no overtime compensation). For week #2, compensation is $550.00 ($500.00 plus 10 hours at $5.00). For week #3, compensation is $541.76 ($500.00 plus 8 hours at $5.21). While this calculation may be acceptable under the FLSA, the employer may wish to consider paying overtime at the highest rate ($500 / 40 hours = $12.50 per hour or $6.25 for one hour of overtime)[since straight time was already paid] under this scenario.
IV. THE “WHITE COLLAR” EXEMPTIONS

Most jobs are governed by the FLSA. Some are not. Some jobs are excluded from FLSA coverage by statute. Other jobs, while governed by the FLSA, are considered "exempt" from the FLSA overtime rules.

Exclusions from FLSA coverage.
Particular jobs may be completely excluded from coverage under the FLSA overtime rules. There are two general types of complete exclusion. Some jobs are specifically excluded in the statute itself. For example, employees of movie theaters and many agricultural workers are not governed by the FLSA overtime rules. Another type of exclusion is for jobs which are governed by some other specific federal labor law. As a general rule, if a job is governed by some other federal labor law, the FLSA does not apply. For example, most railroad workers are governed by the Railway Labor Act, and many truck drivers are governed by the Motor Carriers Act, and not the FLSA. Many of the FLSA exclusions are found in §213 of the Act.

Exempt or Nonexempt.
Employees whose jobs are governed by the FLSA are either "exempt" or "nonexempt." Nonexempt employees are entitled to overtime pay. Exempt employees are not. Most FLSA employees are "nonexempt."
Some jobs are exempt by statutory definition. For example, "outside sales" employees are exempt ("inside sales" employees are nonexempt). For many FLSA employees, however, whether they are exempt or nonexempt depends on (a) how they are paid and also (b) what kind of work they do.
With a few exceptions, to be exempt an employee must (a) be paid on a salary basis, and also (b) perform exempt job duties. These phrases are defined in the Act (and the Regulations). An employee who is not paid on a salary basis is generally nonexempt no matter what kind of work the employee does. However, being paid on a salary basis is not the same as being exempt. An employee who is paid on a salary basis is exempt only if the employee also performs exempt job duties.
Salary Basis Pay.
Generally, an employee is paid on a salary basis if the employee has a "guaranteed minimum" amount of money the employee can count on receiving for any work period during which the employee performs "any" work. With a few exceptions, the base pay of a salary basis employee may not be reduced based on the "quality or quantity" of work performed (provided that the employee does "some" work in the work period). For example, a salary basis employee should receive the same base pay if the employee works 30 hours in a work period as if the employee worked 35 hours in a work period. This is sometimes called the "no docking" rule.
The FLSA prohibition against reducing the base pay of salaried employees applies only to reductions in monetary amounts. Requiring an employee to charge absences from work to leave accruals is not a reduction in base pay, because the monetary amount of the employee's paycheck remains the same. Similarly, paying an employee more when the employee works more than the normal number of hours is not normally inconsistent with salary basis pay status, because that does not result in any reduction in the base pay.
Base pay may be reduced under certain circumstances without compromising the salary basis pay status of an employee. The salary basis pay rules are primarily designed to prohibit reductions in base pay for absences from work occasioned by the employer. Work absences occasioned by the employee may sometimes validly result in reductions in the salary without changing the employee's salary basis pay status. For example, a salary basis employee's pay may be reduced for absences of a day or longer (but not for partial day absences) for personal reasons, or for sickness under a bona fide sick leave plan. Salary may not be reduced, however, for absences caused by lack of work, or "furloughs" or layoffs, or disciplinary suspensions (provided that the employee does "some" work in the work period).
The FLSA Regulations provide that actual reductions in pay are not strictly necessary to compromise an employee's salary basis pay status (and thus the employee's exempt status if the employee also performs exempt job duties). An employee is not paid on a salary basis if the base pay is "subject to" reduction for reasons inconsistent with salary basis pay status. This does not mean a merely theoretical possibility that an employee's base salary might be reduced for absences. However, it is possible that an employee's pay is subject to reduction if there is an actual practice by the employer of docking the salaries of similar employees, or if there is a specific employment policy requiring reductions in salaries of similar employees in specified situations. An actual practice of reductions means a sufficient number of actual instances to show that the employee's pay really will in fact vary depending on the quality or quantity of work performed. An employment policy may also be sufficient to show this, if it is specific to the type of employee involved and equally specific that pay docking "will" (not just "might") result based on the quality or quantity of work performed.
Some "rules of thumb" indicating that an employee is paid on a salary basis include whether an employee's base pay is computed from an annual figure divided by the number of paydays in a year, and whether an employee's actual pay is lower in work periods when the employee works fewer than the normal number of hours. However, whether an employee is paid on a salary basis is a "fact," and thus specific evaluation of particular circumstances is necessary. Whether an employee is paid on a salary basis is not affected by whether pay is expressed in hourly terms (as this is a fairly common requirement of many payroll computer programs), but whether the employee is in fact paid a "guaranteed minimum" amount not subject to impermissible docking based on the quality or quantity of work performed.
The salary basis pay requirement for exempt status does not apply to some of the "learned professions," such as lawyers, doctors, or schoolteachers. These jobs are exempt even if the employees are paid hourly. Another exception is for "computer professionals" (as defined under the Act), who may be exempt if they are paid on a salary basis or if they are paid hourly at a rate of at least $27.63.
Exempt Job Duties.
A salary basis employee is exempt only if the employee also performs exempt job duties. The FLSA overtime exemptions are limited to employees who perform relatively high-level work involving a good deal of judgment and discretion. Whether the duties of a particular job qualify as exempt depends on what they are. Job titles or position descriptions are of limited usefulness in this determination. (A secretary is still a secretary even if the employee is called an "executive assistant," and the chief executive officer is still the CEO even if the employee is called an associate). It is, rather, the actual job tasks that must be evaluated (along with where and how the particular job tasks "fit" into the employer's overall operations). There are three typical categories of exempt job duties, called "executive," "professional," and "administrative."

Exempt Executive Job Duties.
Job duties are exempt executive job duties if the employee (a) regularly supervises two or more other employees, and also (b) is, as a practical matter, "in charge" of a unit or subunit of the organization when on duty. The supervision must be of other employees. Supervising people who are not employees does not count. The supervision must be regular, a normal part of the job, and must be of two or more full-time employees (or enough part-timers to be the equivalent of two full-time employees). In addition, the employee must be "in charge" of a unit or subunit of the organization, such as a "department" or a "shift." This means that the employee is, as a practical matter, "the boss" of the unit or subunit when on duty. As a rule of thumb, if a telephone call comes into the unit or subunit, and the caller asks to speak to "the boss," the employee (at that unit or subunit) to whom the call is forwarded is usually the one "in charge."
Generally, only one person is in charge of a unit or subunit at any particular time. Thus, if an "assistant manager" is never on duty alone, but a "manager" is always on duty at the same time, then only the "manager" is in charge and the "assistant manager" is not. If a sergeant and lieutenant are both on duty at the same time at the same unit or subunit, then the lieutenant is probably the "executive" and the sergeant is not. However, if a sergeant is the highest ranking employee on duty at the unit or subunit at a particular time, the employee is probably the executive at that time even if there is a lieutenant with overall managerial responsibility but who is not actually on duty.
An employee may qualify as performing executive job duties even if the employee performs a variety of "regular" duties in additional to the supervisory responsibilities. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers. The employee is, however, still "the boss" even when not actually engaged in "active" bossing duties. In the event some "executive" decisions are required, the employee is there to make them, and this is what it means to be "the boss." On the other hand, an employee who holds a fancy title implying that the employee is "the boss" but who does not in fact supervise two or more employees or who is not really "in charge" when on duty is not performing executive job duties. Thus, for example, a "manager" who is "demoted" to a purely production job but retains the job title is not performing executive job duties.
Exempt Professional Job Duties.
Employees are performing exempt professional job duties if their work involves the application of advanced, usually specialized, learning or credentials of the type commonly associated with the "traditional learned professions" such as medicine, law, accounting or engineering. Typically, but not necessarily, a professionally exempt employee will hold a specialized academic degree in the field, and professionally exempt job duties imply that the employee exercises a good deal of judgment and discretion in performing the work. The FLSA distinguishes the exercise of judgment and discretion from the application of particular skills, even high-level skills. A lumber grader, for example, may be highly trained in distinguishing subtle variations in wood but is not performing professionally exempt job duties. On the other hand, the professional exemption is not limited to the traditional learned professions. A "real" computer programmer, for example, is performing exempt professional job duties. Of course, to be professionally exempt even a traditionally credentialed employee must actually "practice" the profession for which the employee is qualified. An engineer doing real engineering work is performing professionally exempt job duties, but an engineer working as a technician is not. An accountant doing accounting is performing professionally exempt work, but a CPA whose job is really bookkeeping is not.
The increasing use of computers in business has generated some "special rules" in the FLSA defining "computer professionals." "Real" programmers, systems analysts, and systems engineers are considered to be performing professional job duties. However, employees are not performing professional job duties merely because they may happen to work with computers. Jobs such as computer installation or troubleshooting computer problems are not typically professionally exempt (although employees in these jobs may be exempt as executives or administrators if their actual job duties fit within those definitions). As noted above, computer professionals are exempt if they are paid on a salary basis, or hourly at a rate of at least $27.63.
Exempt Administrative Job Duties.
The most elusive and imprecise of the definitions of exempt job duties is for exempt administrative job duties. Employees are performing exempt administrative job duties if they do (a) nonmanual or office work which (b) "supports" the overall business operations of the employer, and (c) which involves their exercising independent judgment and discretion on important matters. Administratively exempt work is limited to support or "staff" jobs, as distinguished from "production" or "operations" or "line" jobs. Administrative employees are engaged in work related to company policy or the general operations of the employer, as distinguished from work related to "producing" what the employer "sells." For example, employees involved in preparing a company's payroll are performing administrative work (but not necessarily exempt work), while employees involved in manufacturing products sold to customers are not. A police detective is not performing administrative work. The employee is "doing law enforcement," which is the "product" of a police department. Police officers who work in "records" may be performing administrative work, in "support" of the operational law enforcement mission of the police department. To be exempt, the work must be at a relatively high-level, involve a good deal of judgment and discretion, and be important to the overall operation of the enterprise. An example of administratively exempt work could be the buyer for a department store. The employee performs nonmanual or office work and is not engaged in production or sales. The job involves work which is necessary to the overall operation of the store -- selecting merchandise to be ordered as inventory. It is important work, since having the right inventory (and the right amount of inventory) is crucial to the overall well-being of the store's business. It involves the exercise of a good deal of important judgment and discretion, since it is up to the buyer to select items which will sell in sufficient quantity and at sufficient margins to be profitable. Other examples of administratively exempt employees might be planners and true administrative assistants (as differentiated from secretaries with fancy titles). Bookkeepers, "gal Fridays," many "executive secretaries" and most employees who operate machines or devices are not administratively exempt employees.
Merely clerical work may be administrative, but it is not exempt. Most secretaries, for example, may accurately be said to be performing administrative work, but their jobs are not usually exempt. Similarly, filing, filling out forms and preparing routine reports, answering telephones, making travel arrangements, working on customer "help desks," and similar jobs are not likely to be high-level enough to be administratively exempt. Some primarily clerical workers do in fact exercise some discretion and judgment in their jobs. However, to "count" the exercise of judgment and discretion must be about matters of considerable importance to the operation of the enterprise as a whole. Routinely ordering supplies (and even selecting which vendor to buy paper clips from) is not likely to be considered high-level enough to qualify the employee for administratively exempt status. There is no "bright line." Some "secretaries" may indeed be high-level, administratively exempt employees (if they are paid on a salary basis), while some employees with fancy titles (e.g., "administrative assistant") may really be performing nonexempt clerical duties.

Rights of Exempt Employees.
An exempt employee has virtually no rights at all under the FLSA overtime rules. About all an exempt employee is entitled to under the FLSA is to receive the full amount of the base salary for any work period during which the employee performs "any" work. Nothing in the FLSA prohibits an employer from requiring exempt employees to "punch a clock," or work a particular schedule, or "make up" time lost to absences. Nor does the FLSA limit the amount of work time an employer may require or expect from any employee, on any schedule. ("Mandatory overtime" is not restricted under the FLSA.)
Rights of Nonexempt Employees.
Nonexempt employees are entitled under the FLSA to time and one-half their "regular rate" of pay for each hour they "actually work" over the applicable FLSA "overtime threshold" in the applicable FLSA "work period."

Question: 1. What does it mean to be paid on a “salary basis”?

Answer: To be exempt from the FLSA, and not entitled to overtime, an employee must meet certain job duty requirements, generally involving the use of independent judgment and discretion, and be paid on a “salary basis.” The FLSA provides for five broadly used classifications of exemptions, including:
1. bona fide administrative employees,
2. bona fide executive employees,
3. bona fide professional employees,
4. outside sales employees, and
5. highly skilled computer-related employees.
Salary basis is defined as the payment on a weekly or less frequent basis of a predetermined amount that constitutes all or part of compensation, without reductions for variations in the quality or quantity of the work performed. Under this definition, exempt employees generally must receive their full salary for any week in which they perform work, without regard to the number of days or hours worked. Deductions may be made from their salary, but only in limited circumstances. (See questions 2 through 7, below.) It should be noted, however, that the FLSA regulations indicate that doctors, lawyers, and teachers (typically categorized as professional exempt employees) do not have to be paid on a salary basis to be considered exempt.

Question: 2. Do exempt employees have a right to paid vacation days, sick days, and holidays?
Answer: Paid time off generally is considered a benefit given at the employer’s discretion. However, if the employer makes deductions from an exempt employee’s salary for unpaid time off, the employer should be sure that it does not violate the salary basis test or the employer may lose the exemptions. The type and amount of time off taken determines whether the employer can make the deductions. According to the FLSA regulations, the employer may make a pay deduction when an employee is absent for a full day for personal reasons. Thus, if the employer does not provide paid vacation or personal days, the employer may deduct the day off from the employee’s salary. Similarly, if the employer gives paid vacation days and the employee has used them all, the employer may deduct any additional personal time off.
The employer also may make deductions for a day’s absence due to illness or injury if the employer has a bona fide plan, policy, or practice that provides compensation for loss of salary due to sickness or disability, such as a policy that allows employees to accrue paid sick leave. This deduction is permissible even if the exempt employee has not yet qualified for the plan or has exhausted the plan’s sick leave allowance. However, according to the regulations, if the employer does not have a paid sick leave plan, the employer may not deduct the day from the employee’s salary if the employee has worked any day that week. An exception to this rule is sick leave taken under the Family and Medical Leave Act (FMLA). The FMLA allows deductions from an exempt employee’s salary for leave required by the FMLA.
The FLSA regulations do not specifically allow deductions for holidays. Therefore, the employer should not make deductions from an exempt employee’s pay for unworked holidays
Question: 3. Does the employer have to pay exempt employees when work is not available?
Answer: If the exempt employee is ready, willing, and able to work, deductions may not be made for time when work is not available.

Question: 4. What about for jury duty and military leave?
Answer: Deductions for partial week absences caused by jury duty, attendance as a witness, or temporary military leave are not permitted. The employer may offset any military pay or monetary payments received as jury or witness fees for a particular week against the employee’s salary for that same week. Remember, however, that payment usually is not required if the employee does not work the entire week.

Question: 5. Does an employer have to pay exempt employees on days they cannot work because of inclement weather?
Answer: The FLSA regulations do not specifically allow employers to reduce an exempt employee’s pay for time off related to inclement weather. Therefore, exempt employees generally should be paid for absences resulting from bad weather if they have worked during any of the workweek in which the absences occur.

Question: 6. Can deductions be made from an exempt employee’s salary for partial day absences?
Answer: No. Generally, the regulations indicate that if the employer makes deductions from an exempt employee’s pay for absences of less than a day, the employer is considered to be treating the employee as an hourly worker, instead of an exempt employee paid on a salary basis. (As discussed in question 2, above, you may make deductions for certain full day absences.)
Many employers have attempted to avoid the partial day pay docking issue by requiring exempt employees to use paid leave for these absences. The Department of Labor (DOL), the agency that enforces the FLSA, traditionally has permitted this type of arrangement since the employee does not experience an actual reduction in salary. There also are special rules for exempt public sector employees that allow them to be considered exempt even if their pay is reduced for partial day absences.
A number of courts have sided with the DOL’s position on this issue. However, other courts have disagreed and have determined that this practice does, in fact, treat an exempt employee like an hourly, nonexempt employee and, therefore, causes loss of the exemption.
Because of the split in the courts, you should consult legal counsel on this matter. As a practical matter, an employer may find that exempt employees resent being required to use paid leave for partial day absences, particularly if they regularly work more than 40 hours per week. Under this type of policy, they are not entitled to additional pay when they put in long hours, but are required to use vacation or sick leave if they need a few hours off.
Finally, as discussed in question 2, above, the FMLA allows employers to require the use of accrued paid leave for partial day absences for any hours taken as intermittent or reduced FMLA leave, without affecting the employee’s exempt status.
Question: 7. Can the employer make deductions for disciplinary reasons, such as a suspension?
Answer: No, unless the employer suspends the exempt employee for a full week. However, the employer may make deductions for penalties imposed for infractions of “safety rules of major significance.” These infractions include rules relating to the prevention of serious danger to the worksite or to other employees, such as no smoking rules in explosives plants, oil refineries, and coal mines. Remember, the employer can suspend an exempt employee for less than a week as long as the employer pays him. Since a suspension is often the final step before termination, the employee will most likely understand the seriousness of the suspension even if the employee does not lose any pay.

Question: 8. Can an employer require exempt employees to work 40 hours a week or to be at work during set times?
Answer: If the employer requires exempt employees to work a specific number of hours or arrive at a specific time, you will appear to be treating them like nonexempt employees and may, thus, jeopardize their exempt status. Instead of focusing on the number of hours an employee works or starting time, the employer is better advised to focus on the employee’s job requirements and output. For example, if an employee manages nonexempt employees who must be at work between 9 a.m. and 5 p.m., then the employer can require that employee to be at work during the same hours to supervise properly. Similarly, the employer may discipline an employee who does not complete a project on time or is not available for a meeting because he left at noon on Friday.
Question: 9. Can the employer pay exempt employees extra compensation?
Answer: Generally, the employer may pay extra compensation to exempt employees without affecting the salary basis qualification. The FLSA regulations give only limited examples of acceptable additional compensation, and these include the payment of commissions and bonuses.
Some employers pay exempt employees additional compensation that is based on the number of hours the employees work in excess of 40 in a single workweek. The regulations do not specifically discuss this practice; however, the courts that have addressed the issue disagree. Some courts have held that an otherwise exempt employee who receives extra payments based on the number of hours worked in excess of 40 is not “paid on a salary basis” and must therefore be paid overtime. Other courts, however, have determined that payment of an hourly rate in addition to the salary does not affect the exempt status of the employee. Because of this split in the courts, most experts recommend paying extra compensation in the form of bonuses or other lump sum payments so that it does not look like overtime pay.

Question: 10. Can an employer keep track of the number of hours exempt employees work?
Answer: Employers that require exempt employees to account for their work time on an hourly basis may jeopardize the status of these employees if the accounting has the effect of treating them like hourly workers. For example, if the employee’s salary fluctuates based on the number of hours worked, the employee most likely will not be considered exempt. However, the employer generally may keep track of hours worked for other purposes unrelated to the employee’s pay, such as to account for work time to be billed to clients or under a federal contract. You also may record daily attendance.

Penalties for Misclassification of Exempt Employees May be Severe.
As indicated in the above discussion, if an employee is classified as exempt but does not meet the necessary salary basis tests, the employee may lose the exemption. Under the FLSA, the employer can be liable for back overtime pay of up to two years for any employee who is misclassified as exempt. This back pay liability typically is extended to three years if the FLSA is determined to have been willfully (intentionally) violated. In addition, a single misclassification can trigger a loss of exemption for a whole group of employees if the rest of the group has been treated similarly under the organization’s policies and practices. And as a final legal wake-up call, some court decisions interpreting the FLSA have found that the individual decision maker can be personally liable for any violations under the Act. In other words, the employer’s representative decision maker could be personally responsible for any back pay and other penalties.
As a practical matter, it is unlikely that the employer’s decision maker will be assessed personal liability by the DOL or a court unless the employer intentionally violates the FLSA. However, the employer needs to realize that many disgruntled employees and their attorneys threaten legal action against the individual decision maker as a way to put pressure on the employer. Therefore, the employer should make sure not to be exposing the organization, its principals and decision makers to unnecessary legal actions. The best way to do this is to be familiar with the FLSA regulations, in particular the regulations dealing with the salary basis requirements, and then document exempt classification decisions. A good starting point is to compare policies that affect exempt employee pay with the ten questions and answers addressed above. A final common sense tip to help ensure that exempt employees are paid on a salary basis is to focus on their job duties and completed work, not on the number of hours worked or their arrival and departure times.

In general terms, the FLSA excludes exempt employees from its overtime and minimum wage mandates. An exempt employee – or one not subject to overtime – is any employee employed in a bona fide executive, administrative, or professional capacity. We note that on March 31, 2003, the DOL proposed new regulations which will substantially change the exempt employee landscape that has been in place for over 50 years. Although the proposed new regulations are not yet approved, they will likely be and contain two major changes, namely: (1) raising the minimum salary threshold for exemptions, resulting in lower-income employees no longer qualifying as exempt; and (2) clarifying and narrowing the standards for what job duties employees must perform to qualify for an exemption, resulting in increasing the ranks of exempt employees. The regulations once enacted, are expected to affect 6.5 million businesses and increase wages for over 1.3 million lower-income workers.

Current and Proposed Regulations (See later Section regarding enacted changes to the Regulations)

The proposed regulations will be easier to apply, less stringent, and will allow and an estimated 644,000 non-exempt employees to be reclassified as exempt. The proposed regulations will replace the “long” and “short” exemption test with a “single standard duties test.” The proposed regulations raise the minimum salary requirement to qualify for any “white collar” exemption from $250 per week to $425 per week. In other words, to meet this threshold requirement, an employee must be salaried and not earn less than $425 per week. If an employee earns less, the employee will no longer qualify for an exemption, regardless of job duties. Assuming, preliminarily, that the employer pays this minimum salary amount, the employer must next consider the remaining elements of the test for each type of exemption sought:

1. Executive Exemption. The employee’s primary duty is to manage the enterprise or subdivision and regularly direct the work of at least two (full-time) or more (part-time) employees. The proposed regulations include authority to hire and fire other employees or be an individual with sufficient influence over these decisions.

2. Administrative Exemption. The employee’s primary duty consists of office or non-manual work directly related to the employer’s management policies or general business operations. The proposed regulations provide that the employee must also hold a “position of responsibility” defined as either performing work of substantial importance or performing work requiring a high level of skill or training. This new “position of responsibility” standard replaces the ambiguous “discretion and independent judgment” analysis.

3. Professional Exemption. The employee’s primary duty consists of performance of office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. The proposed regulations, however, permit an employee to qualify as exempt when such knowledge was acquired by alternative means such as a combination of instruction and work experience. Moreover, the proposed regulations remove the requirement that the employee must “consistently exercise discretion and judgment.”

Remember, giving employees impressive sounding titles will not protect the employer from the effects of the FLSA. If the employees’ duties make the employer non-exempt, the employer must pay those employees overtime – even if the employee’s title is important sounding such as “Senior Vice President and Director of Global Executive Management.”

The burden lies with the employer to establish that any exempt employee is properly classified. Note that paying an otherwise exempt employee overtime will generally not destroy his exempt status, although some courts have disagreed.

V. PAYROLL DEDUCTIONS

Wages are not considered paid unless they are paid finally and unconditionally or “free and clear.” Note that it is a violation of the FLSA to require employees to “kick back” for the employer’s benefit any part of an employee’s wages. Accordingly, an employer must exercise caution when making payroll deductions from an employee’s paycheck. Although exempt employees are not subject to FLSA’s overtime or minimum wage requirements, the Act does require payment on a salary or fee basis that requires a minimum amount. If an exempt employee does not receive compensation according to a salary or fee basis, then he generally loses his exemption and, thus, must be paid overtime. Generally, an exempt employee’s pay cannot be “subject to” quantity or quality of work deductions.

A. Deductions for Benefit to the Employee

1. Lodging and Board. The only statutory exception to the “free and clear” rule for wages is that employers are allowed to count, “the reasonable cost…to the employer of furnishing such employee with board, lodging, or other facilities if such board, lodging or other facilities are customarily furnished by such employer to his employees.” Note that this type of deduction may be made to an exempt employee’s pay as well without jeopardizing an exemption.

2. Payroll Advances and Loans. Paycheck deductions for free and clear payroll advances by the employer to the employee will not affect the exempt status of the employee. Employers should be very careful when making this type of deduction, especially with respect to non-exempt employees considering the legislative intent of the Act to ensure fair compensation. Any salary advance or loan should be properly documented at the time of distribution should the employer intend on recouping the money through payroll deductions.

B. Deductions for Payments to Third Parties

When an employer pays a third party at the employee’s request, the employee has sufficient control and dominion over the money as to qualify as receiving it “free and clear.” The payment must be made to the third person for the benefit and credit of the employee. Please note that the employer should properly document such an agreement at the time the arrangement was made.

C. Deductions for Payment to the Employer

Repayment of a debt owed by the employee to the employer arising out of a non-loan transaction (e.g., for repayment of damaged equipment) is not to be construed as satisfying the free and clear minimum wage payment required by the Act if the deduction drives the amount below the statutory minimum. An employer can deduct non-loan debt repayments from an employee’s paycheck only if the amount does not drive the employee’s pay below the minimum wage.

D. Deductions for Misappropriations of Funds

A judicial exception regarding “free and clear” wage payments permits payroll deducted repayment of employee-misappropriated funds, even if the deducted payments reduce the net pay to below the statutory minimum. In other words, in a situation in which the employer intends to recoup misappropriated funds from a current employee, the employer may make a deduction that brings the employee’s pay below the statutory minimum wage. To recover such payments, the case must first be proven beyond a reasonable doubt in a court of law. For employers concerned with company-provided credit card fraud and loss recovery, an alternative is to have the employee outlay all expenditures and then provide reimbursement.

E. Miscellaneous Deductions

A non-exempt employee may be subject to many different deductions so long as his pay is not driven below the statutory minimum. For example, a non-exempt employee’s pay may be docked for absences occasioned by the employer, jury duty, portions of a day, and for disciplinary reasons. In addition, the cost for equipment, uniforms and other materials that are a required aspect of a job may be deducted from the employee’s wages provided that the deductions do not decrease the employee’s wage amount below the required minimum wage or cut into any overtime compensation. Note that, if a uniform is wash and wear and/or washable with other personable clothing, then no reimbursements are required to the employee under the FLSA. If the uniform requires “distinct treatment,” the employer must reimburse the employee the difference between the minimum wage and that amount below the minimum wage.

F. Deductions for Disciplinary Reasons for Exempt Employees

Deductions may be taken from an exempt employee’s salary for violations of major safety rules designed to prevent serious danger to the plant or other employees. Such deductions will not compromise the employee’s exempt status. Salary deductions or a policy permitting such deductions for minor disciplinary infractions (actual deductions are not required) will result in an employee’s loss of exempt status.

G. Deductions for Absences

An employee whose pay is reduced for absences occasioned by the employer or by the operating requirements of the business cannot be paid on a salary basis and is, thus, non-exempt. Deductions cannot be made when an exempt employee is ready, willing, and able to work. Deductions can be made when work is not available, when less-than-a-day absences are taken for personal reasons, for jury duty, attendance as a witness, or for temporary military leave. Note, however, that such deductions will cause an exempt employee to lose exempt status. But any amounts earned in these roles (e.g., jury duty) may be set-off against the employee’s salary without loss of the exemption. Deductions can be made to an exempt employee’s salary when the employee is absent from work for a day or more for personal reasons, other than sickness or accident.

Deductions may also be made for absences occasioned by sickness or disability if the employee is receiving compensation under other means during his time of disability or sickness. If an improper deduction to an exempt employee’s salary is inadvertent, or is made for reasons other than lack of work, the exemption will not be considered to have been lost if the employer reimburses the employee for such deductions and promises to comply in the future. “Inadvertent” is considered to have occurred if the act is a one time event as opposed to deductions that reflect a settled policy of subjecting the pay of its employees to improper deductions. Although corrective action, such as reimbursement, need not be immediate, it should be taken promptly.

VI. RECORD KEEPING AND ENFORCEMENT

Question: Does it matter that an employee did not "put in for" the time spent performing work activities?

Answer: Probably not. "Failure to ask" is not a defense for an employer in an FLSA case. Failure to ask might conceivably be relevant on the question of whether an employer knew or had reason to believe that an employee was performing off duty work, but even in this situation failure to ask would be only one factor on the question.

Question: How does an employee prove that the employer knew or had reason to believe that off the clock work was being performed?
Answer: An employer will be held to "know" what it "could have found out" if it had paid attention to what its employees were doing. The legal standard is whether an employer could have learned of the employees' activities by making reasonably diligent inquiries. According to the courts, it is a "rare" case in which an employer will be found to lack the requisite knowledge when the activities in question are "part and parcel" of an employee's job, unless the employee has deliberately hidden the fact that the employee is performing them.

Question: How does an employer prove the amount of time spent doing off-the-clock compensable activities?
Answer: It is up to the employer to control the work of its employees, and to maintain records of the time spent by employees performing compensable activities. If an employer does not maintain the required records, the employee is entitled to recover based on good faith, reasonable and realistic estimates.

Question: Does it matter that the employee never reported the time or asked for overtime?
Answer: Probably not. It is the employer's obligation to control the work. If an employer does not wish work to be performed it must prohibit it. "Failure to ask" for overtime is usually not a defense for an employer in an FLSA case. An exception might be if the employer has a requirement that generally all time be reported and actually has enforced it, or if an employee's failure to report means that the employer did not know the work was being performed.

In order to avoid liability with respect to record keeping, the wary employer must comply with the DOL’s stringent record keeping rules and regulations. For example, the employer must maintain the following information regarding each employee: name, gender, home address, date of birth (if under 19), occupation, time and day on which the workweek began, all considerations affecting regular rate of pay, total straight time and overtime hours worked and earnings, exclusions and deductions from earnings, and date, amount and period of payment. These records must be kept for a minimum of two to three years. We recommend archiving all of the above-referenced information for a period of at least four years. We also recommend including the following records: payroll and personnel information; collective bargaining agreements; agreements related to overtime exceptions; notices regarding the FLSA; business records of sales/volumes; time cards; wage rate tables; work schedules; invoices/client billing records; and records of additions/deletions regarding wages paid.

The DOL administratively enforces the FLSA and will confidentially, if requested, investigate employee complaints. What generally happens under this scenario is that: violations will be presented to the employer; the employer will be requested to make full restitution and reinstatement if termination occurred following a complaint; and the employer will be required to fully comply with the Act. An injunction may be sought. If the employer has failed to maintain proper time records under the FLSA, the burden of proof can shift from the DOL to the employer who will then be required to prove the difficult negative, namely that no violations occurred. In addition to seeking back pay, the DOL may also seek liquidated damages in an amount equal to any unpaid wages.

VII. STATUTE OF LIMITATIONS

Question: What are the time limits on FLSA suits?
Answer: The FLSA normally permits recovery for work performed beginning two years before a complaint is filed in court (and continuing "forward" until the case is resolved). Recovery for this period is essentially on a "no fault" basis. An additional year's recovery period is permitted if the employer "knew" that its employment and pay practices violated the FLSA, but "disregarded" these obligations. Nothing but the filing of a legal complaint in court "stops the clock." (A complaint to the employer, or the Department of Labor, does not "toll" the FLSA statute of limitations.)

The FLSA has a shifting statute of limitations period. An employee normally has two years to bring an action under the FLSA. The limitations period, however, may be extended to three years upon a showing that the violation in question was “willful.” Such a finding of “willfulness” requires a showing that the employer knew or had reckless disregard for whether its conduct was prohibited by the FLSA. A surprisingly large number of FLSA cases pursue – and prevail – on the willfulness clause. An employer can defend a willful violation by proving it acted in good faith by complying with a written administrative regulation, order, ruling or interpretation or any administrative practice/policy issue by the DOL.

Remember, an FLSA violation can occur each time an employee receives his or her paycheck. Thus, the statute of limitations is constantly renewable.

VIII. PRIVATE AND COLLECTIVE ACTIONS

Question: Do all "similarly situated" employees have to participate in an FLSA suit if one employee decides to sue?
Answer: No. FLSA cases are not "class actions." No employee need bring or join an FLSA suit if the employee does not want to. However, similarly situated employees are permitted to join an existing FLSA case, and this is a common procedure. If an employee does not join an existing FLSA suit the employee will not be entitled to recover any money as a result of the suit. And as a practical matter, any downstream consequences which may result from one employee bringing an FLSA action (such as schedule restructuring) will likely apply equally to all similar employees in an organization.

Question: What effect do the provisions of a collective bargaining agreement have on FLSA overtime rights?
Answer: Almost none. FLSA rights cannot be waived, by collective bargaining or otherwise. (Generally, employees are entitled to the benefits of the FLSA or their CBA, whichever is more favorable. However, a violation of a CBA would not itself be a violation of the FLSA and would not be enforced in an FLSA legal action.)

Question: What are liquidated damages?
Answer: The FLSA provides that a successful employee is usually entitled to double the amount of unpaid back wages, called "liquidated damages." Essentially, liquidated damages are in lieu of interest. An employer can avoid paying liquidated damages only if it shows that it acted in good faith in failing to pay for off the clock work, and that it had a reasonable basis to believe that it need not pay for off the clock work. "Good faith" has a special meaning under the FLSA, and requires that employers have made specific investigation of the application of the FLSA to particular types of employees. Liquidated damages are the rule, not the exception. Employees are normally entitled to liquidated damages.

Once the DOL brings an action on behalf of an employee, the employee no longer has the right to bring a private and/or collective FLSA action. As a consequence, plaintiff’s attorneys are hustling to get the word out that pursuing claims privately, rather than through the DOL, provide a faster resolution, and thus, a faster employee payout. The reality, unfortunately, is that private claims are generally much more expensive to the employer than a DOL action, because the FLSA provides that the employer pays both attorneys’ fees and liquidated damages.

Question: Is money recovered in an FLSA case taxable?
Answer: Yes.
Question: What is the effect of an FLSA recovery on a pension?
Answer: This will depend on the pension system's rules. However, at least some of an FLSA award may be considered "back pay." Therefore, if pensions are based on a percentage of wages earned or "average salary," an FLSA recovery may increase the amount of pension an officer can receive. Thus, in some circumstances an FLSA award can be "the gift that keeps on giving."

Question: Are employees obligated to pay the employer's legal fees if they lose the case?
Answer: No (except in the unlikely event a court were to decide the suit was "frivolous").

Question: What actual financial costs or risks are there for an employee to bring an FLSA case?
Answer: To some extent this is between the individual employee and the attorney. If the employee hires attorneys on a contingency fee basis, there are no "up front" expenses for legal fees. However, employees are responsible for court costs, such as filing fees, stenographic transcription fees, etc. These may, or may not, be "fronted" by the attorneys, but employees are ultimately responsible for paying (or reimbursing) these expenses. (Court costs are paid by the loser, so employees are actually "on the hook" for these expenses only if they lose the case.) Individual arrangements with particular lawyers may also involve the employees paying some additional expenses directly, or not.

Question: How long does an FLSA case take?
Answer: Almost everyone understands that legal proceedings are often slow. Most FLSA cases are filed in federal courts, and how fast a case can get to trial varies from district to district (and judge to judge). Many FLSA cases settle before trial, but this is unpredictable.

Question: What are the "downstream consequences" of an FLSA case?
Answer: The FLSA prohibits retaliation or discrimination against an employee who brings an FLSA case. These provisions have "teeth," but do not cover "routine hassling." The FLSA does not prohibit management from changing working conditions or schedules to minimize or eliminate FLSA overtime liabilities in the future. Local laws or collective bargaining agreements may govern and limit the changes an employer may make.

Liquidated damages under the FLSA are presumptive, and an employer may only avoid such a payment by showing by “plain and substantial evidence” that it acted with “subjective good faith and objective reasonableness” in failing to compensate its employees in conformance with the FLSA. These standards are difficult, if not impossible to demonstrate, resulting in the recently coined FLSA catch phrase: “double damages collected – single damages excepted.” If the matter is settled with liquidated damages, note that such payments are not considered remuneration or wages to the employee for tax purposes, but are considered income and, thus reportable. In other words, back wage payouts will generate a W-2 and liquidated damages payouts will generate a 1099 Form.

IX. ATTORNEY’S FEES

The FLSA’s attorneys’ fee provision has generated a rash of attention as of late, primarily due to its guarantee that in addition to a judgment in plaintiff’s favor, the court “shall…allow a reasonable attorney’s fee to be paid by the defendant, and costs of the action” The real “sting” to employers is that the FLSA’s attorneys’ fee provision does not provide that the losing party pay fees, but only that the defendant – in the event of a judgment – pay fees. Thus, on a $500.00 judgment, the fee award could be many thousands when dealing with an aggressive and/or contentious plaintiff’s attorney.

X. CONCLUSION

From incorrect calculations to erroneous classifications to improper deductions, the FLSA is a quagmire of potentially costly employer violations. Preventative measures are the best way to deal effectively with the FLSA. Here are some important tips for employers to help the wary employer comply with the FLSA:

• Be a proactive employer – evaluate and audit your business to determine whether there is room for improvement or clarification regarding FLSA compliance.

• Put a dependable employee in charge of FLSA compliance.

• Analyze every exempt employee classification. Remember that classifications may change when job duties change, particularly in the event of a lay-off.

• Pay every employee the required minimum wage, even when deductions are imposed.

• Pay every non-exempt employee for all overtime based on “regular rate” of pay including bonuses, commissions, and shift differentials.

• Regularly review employee time records.

• Ensure that employees are recording their correct start, leave, breaks and lunch times.

• Comply with all deduction restrictions.

• Be aware of state and/or local laws.

• Pay attention to employee complaints and respond promptly to inquiries regarding hours worked, rates of pay, and overtime compensation. Employees talk to each other and to lawyers – you won’t want a collective action on your hands.

• If you discover a problem, fix it! Liability increases if you are aware of a problem and do nothing to remedy it. Seriously consider paying backpay if deemed due.

New Federal Labor Standards Act Regulations
On Aug. 23, 2004, a new federal rule governing overtime exemption for white-collar workers took effect amid dire predictions from Democrats and organized labor that up to 6 million Americans would lose their overtime pay.

Not only did this massive reclassification of workers fail to materialize, but some administrative employees newly qualified for overtime even told Associated Press they resented their loss of hard-won professional status and benefits.

Federal overtime collective actions brought by employees have doubled since 1997 and now outnumber discrimination class actions. The Southern District of Florida is a hotbed of federal overtime litigation and home to as many as 20 percent of the entire U.S. caseload.

This explosion in costly overtime litigation may be at least partially explained by the provision for an award of reasonable attorney fees and court costs to successful plaintiffs. While that provision still exists in the revised overtime rule, the U.S. Department of Labor had hoped to clarify or remove some of the most confusing language that has made so many employers easy marks for the plaintiff bar.

Unfortunately, few employers or employer counsel expect the rash of federal overtime litigation to subside anytime soon as a result of modifications to the overtime section of the Federal Labor Standards Act put into effect in August. On the positive side, neither will these revisions, themselves, provide myriad new causes of action for federal overtime suits.

Revised salary level test

The FLSA overtime exemptions apply to five categories of white-collar workers — executive, administrative, professional, outside sales and computer. Exemption from overtime for workers in each category is governed by three components: a salary level test, a salary basis test and a duties test. Only the salary level test and the salary basis test have undergone significant change in the new rule.

For the first time, the minimum weekly compensation level for all white-collar employee exemptions is set at a uniform level. In addition, the weekly earnings cap used to qualify an exempt employee has been lifted to $455 a week from $155, an amount that had been unchanged for nearly 30 years.

This uniform minimum salary level applies to exempt employees in Puerto Rico, the Virgin Islands and American Samoa as well as the U.S. mainland.

At the other end of the salary scale, workers earning $100,000 per year are automatically considered exempt if they “customarily and regularly” perform any one or more of the exempt duties of an executive, administrative or professional employee.

Safe harbors

The salary basis rule is that white-collar employees who receive a predetermined amount that is not subject to reduction because of variations in the quality or quantity of their work are exempt from overtime. That rule is unchanged.

The new salary basis test also carves out an additional safe harbor to the “no pay docking” provision.

Employers now are permitted to impose unpaid disciplinary suspensions on exempt employees of one or more full days pursuant to workplace conduct rules that are in writing and applicable to all employees. They may also dock partial days for Family and Medical Leave Act absences and full-day absences for personal reasons, sickness or disability without impairing the salary basis for an employee’s exemption from overtime.

New safe harbor and “window of correction” provisions also state that overtime exemption can only be removed from employees in the case of an “actual practice” of improper salary deductions. “Actual practice” is determined by the number of improper deductions over a span of time in relation to the number of occurrences of the event that led to the deduction.

Any employer that has a “clearly communicated policy that prohibits improper pay deductions and includes a complaint mechanism, reimburses employees for improper deductions and makes a good faith commitment to comply with its policy in the future” will not lose the exemption for any employees subject to improper deductions unless the employer willfully violates the policy after receiving employee complaints.
Deductions considered isolated or inadvertent may be cured by immediate reimbursement.

Revised duties tests

Changes in the FLSA duties tests involve the elimination of the “long and short form” tests for administrative, professional and executive exemptions and the application of a “primary duty” standard that makes the test more practical and straightforward.

In short, any exempt work meeting the specs for the white-collar category under which the employee falls may be aggregated to reach the overall “primary duty” threshold for exemption under that category.

One important change to the executive duties test is the requirement that the exempt employee must have the authority to hire or fire or provide recommendations on hiring, firing and promotion of subordinates that are given particular weight.

Review duties, policies

Many action steps for employers are inherent in the overtime rule changes mentioned above, such as immediately ensuring that all exempt employees earn at least $455 per week, even if they are part-time workers.

Employers should also review the job duties of all current exempt executive employees to assess whether they have the necessary hire/fire authority — if the executive’s recommendations in that area are given “particular weight.”

In addition, employers should review all written disciplinary and Family and Medical Leave Act policies to make sure their pay-docking features comply with those in the new overtime rules. Company policy prohibiting improper deductions from an exempt employee’s salary should be clearly communicated and include a complaint mechanism for those who feel their pay has been improperly docked.

Finally, employers should continue to monitor legislative developments in this area. There is an effort in Congress to reinstate most, if not all, of the old rules or deny funding for much of the Labor Department’s enforcement of its final rule on overtime pay.

We look forward to discussing any aspect of this overview with you.

OSHEROW, SHINER & ASSOCIATES, P.A.