Qualifying Under New FLSA Exemptions

 

A.  Why is the FLSA so Important

Wage and hour law present a unique challenge to the legal or HR practitioner.  The rules were developed in the Great Depression of the 1930’s where most employees were paid for physical labor, but now the rules must be applied in situations not anticipated by the regulators who developed the rules.

Why is wage and hour law important?  It is important to the employer to prevent unanticipated and unplanned for liabilities that may affect the viability of the employer as a going concern.

In wage and hour law, the general rule is that an employee will be entitled to the laws that are most favorable to the employee.  Thus, it is possible (and quite common) for an employee to be entitled to the minimum wage of state law and the overtime requirements of federal law – or vice-versa– or any mix of state and federal wage and  employee), this means it is necessary to determine the requirements of BOTH state and federal law, not just one or the other.  This presentation is only a very cursory and general introduction to some of the exemptions available under federal wage and hour law.

The general federal statute of limitations is two (2) years for a wage and hour violation; however, if the violation is intentional, the statute increases to three (3) years.

If there is a minimum wage or overtime violation, the federal and many states’ laws provide for a 100% liquidated damages penalty for the underpaid wages plus attorney’s fees.  The federal liquidated damages penalty is 100% of the wage violation.  Attorneys’ fees, even on small violations, may be many times the amount of the violation.  In addition, there may be statutory penalties of up to $1,100 per underpaid employee.

Add to the equation that all employees of a certain class are similarly situated.  This creates the potential for a class-action against an employer, which can be devastating to the employer’s existence and a lucrative opportunity for employees and their attorneys.

Moreover, the federal wage and hour law, the Fair Labor Standards Act (FLSA) may be enforced in any state or federal court of general jurisdiction.  Unless there is some other basis for federal jurisdiction, an employer might find it is stuck in state court with a judge who has never tried a case under the FLSA (and who may doubt he or she even has jurisdiction).  An employer may be unable to remove the case to federal court (which in this presenter’s experience is “friendlier” to employers than the federal courts.

Under the FLSA, the Department of Labor (DOL) is given discretion for interpretation of the statutory requirements.  This means that the wage and hour regulations tend to change with administrations, and with court decisions that occasionally affect or even enjoin the implementation of new regulations.

In this presentation we will review the types of exemptions, the job analysis and primary duties to qualify for each exemption, and the considerations to make before changing a salaried non-exempt employee to an hourly employee.  We will also cover the three (3) legal ways to pay overtime to a non-exempt salaried employee.  In general, the exemptions have not been revised.  The amount of the salary which must be paid to qualify for the exemption has been revised.

CAVEAT:  As the law most favorable to the employee will apply, it is always necessary to check state and local laws before assuming the federal law will apply.  What might be exempt under federal law might not be under state or local law.  For example, there is an exemption under federal law for highly skilled computer workers, but there is not under Minnesota law.  Overtime may be required under the state law, even when it is not under state law.  Moreover, the number of hours worked before overtime is required under state law may be different than under state law.  For example, in Minnesota overtime is required after 48 hours of work in a workweek, not 40.

B.  Types of Exemptions – Defined.

1. Definition of Exempt Employee

An “Exempt Employee” is a worker for whom the employer does not have to pay (i.e., is exempt from paying) minimum wage or overtime.

In general, to qualify for an exemption from minimum wage and overtime, an employee must be paid on a salary basis, which has now been raised to $684 per week effective January 1, 2020[1].  The employee must also have certain job duties, as defined by the regulations (29 C.F.R. Part 541) implementing the exemptions in the Fair Labor Standards Act (FLSA).

2. Types of Exemptions – Defined

In this section we will list the salary basis and

a.  Executive Exemption.

To qualify for the executive employee exemption, all of the following tests must be met:

• The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $684 per week;
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

b.  Administrative Exemption.

To qualify for the administrative employee exemption, all of the following tests must be met:

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

c.  Professional Exemption.

i. Learned Professionals.

To qualify for the learned professional employee exemption, all of the following tests must be met:

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which  is predominantly intellectual  in character and which includes  work requiring  the consistent exercise of discretion  and judgment;
• The advanced knowledge must be in a field  of science or learning;  and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

ii. Creative Professional Exemption

To qualify for the creative professional employee exemption, all of the following tests must be met:

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week; and
• The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

d.  Highly skilled Computer Workers

To qualify for the computer employee exemption, the following tests must be met:

• The employee must be compensated either on a salary or fee basis at a rate not less than $684 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
• The employee’s primary duty must consist of:
  1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
  2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
  3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
  4. A combination of the aforementioned duties, the performance of which requires the same level of skills.

e.  Outside Sales.

To qualify for the outside sales employee exemption, all of the following tests must be met:

• The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

The salary requirements of the regulation do not apply to the outside sales exemption.

f.  Highly Compensated Employees.

Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

C.  Additional Definitions.

1. Primary Duty

“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.

2. Salary basis

To qualify for exemption, employees generally must be paid at not less than $684 per week on a salary basis. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine. Exempt computer employees may be paid at least $684 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour.

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a “salary basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Additionally, if after the 52-week period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.

D.  Job Analysis and Duties Test.

1. Standard Duties Tests.

If an employee meets both the Salary Level and Salary Basis tests, the employee may be exempt if s/he meets the Standards Duties Test on the Executive, Administrative, Professional Exemptions, Computer, or Outside Sales Exemptions.

a.  Executive Exemption.

The Executive Exemption may be available if the employee:

1. regularly supervises two or more other employees, and also
2. has management as the primary duty of the position, and also,
3. has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments).

Supervision means what it implies. The supervision must be a regular part of the employee’s job, and must be of other employees. Supervision of non-employees does not meet the standard. The “two employees” requirement may be met by supervising two full-time employees or the equivalent number of part-time employees. (Two half-time employees equal one full-time employee.)

“Mere supervision” is not sufficient. In addition, to qualify for the executive exemption, the employee must have “management” as the “primary duty” of the job. The FLSA Regulations contain a list of typical management duties. These include (in addition to supervision):

• interviewing, selecting, and training employees;
• setting rates of pay and hours of work;
• maintaining production or sales records (beyond the merely clerical);
• appraising productivity; handling employee grievances or complaints, or disciplining employees;
• determining work techniques;
• planning the work;
• apportioning work among employees;
• determining the types of equipment to be used in performing work, or materials needed;
• planning budgets for work;
• monitoring work for legal or regulatory compliance;
• providing for safety and security of the workplace.

Determining whether an employee has management as the primary duty of the position requires case-by-case evaluation. A “rule of thumb” is to determine if the employee is “in charge” of a department or subdivision of the enterprise (such as a shift). One handy clue might be to ask who a telephone inquiry would be directed to if the caller asked for “the boss.” Typically, only one employee is “in charge” at any particular time. Thus, for example, if a “sergeant” and a “lieutenant” are each at work at the same time (in the same unit or subunit of the organization), only the lieutenant is “in charge” during that time.

An employee may qualify as performing executive job duties even if s/he performs a variety of “regular” job duties as well. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers. S/he is, however, still “the boss” even when not actually engaged in “active” bossing duties. In the event that some “executive” decisions are required, s/he is there to make them, and this is sufficient.

The final requirement for the executive exemption is that the employee has genuine input into personnel matters. This does not require that the employee be the final decision maker on such matters, but rather that the employee’s input is given “particular weight.” Usually, it will mean that making personnel recommendations is part of the employee’s normal job duties, that the employee makes these kinds of recommendations frequently enough to be a “real” part of the job, and that higher management takes the employee’s personnel suggestions or recommendations
seriously.

b.  Administrative Exemption.

The most difficult exemption to apply is to determine if an employee’s “administrative” job duties qualify the employee for the administrative exemption.

The Regulatory definition provides that exempt administrative job duties are

(a) office or nonmanual work, which is

(b) directly related to management or general business operations of the employer or the employer’s customers, and

(c) a primary component of which involves the exercise of independent judgment and discretion about

(d) matters of significance.

The administrative exemption is designed for relatively high-level employees whose main job is to “keep the business running.” A useful rule of thumb is to distinguish administrative employees from “operational” or “production” employees. Employees who make what the business sells are not administrative employees. Administrative employees provide “support” to the operational or production employees. They are “staff” rather than “line” employees. Examples of administrative functions include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising (as differentiated from direct sales), quality control, public relations (including shareholder or investment relations, and government relations), legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration).

To be exempt under the administrative exemption, the “staff” or “support” work must be office or nonmanual, and must be for matters of significance. Clerical employees perform office or nonmanual support work but are not administratively exempt. Nor is administrative work exempt just because it is financially important, in the sense that the employer would experience financial losses if the employee fails to perform competently. Administratively exempt work typically involves the exercise of discretion and judgment, with the authority to make independent decisions on matters which affect the business as a whole or a significant part of it.

Factors to consider determining if the administrative exemption applies are:

• whether the employee has the authority to formulate or interpret company policies;
• how major the employee’s assignments are in relation to the overall business operations of the enterprise (buying paper clips versus buying a fleet of delivery vehicles, for example);
• whether the employee has the authority to commit the employer in matters which have significant financial impact;
• whether the employee has the authority to deviate from company policy without prior approval.

An example of administratively exempt work could be the buyer for a department store. S/he performs office or nonmanual work and is not engaged in production or sales. The job involves work which is necessary to the overall operation of the store — selecting merchandize 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,” and most employees who operate machines are not administratively exempt.

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. Many 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 supplies from) is not likely to be considered high- enough to qualify the employee for administratively exempt status. There is no “bright line.” Some secretaries may indeed be high-level, administratively exempt employees (for example, the secretary to the CEO who really does “run his life”), and while some employees with fancy titles (e.g., “administrative assistant”) may really be performing nonexempt clerical duties.

c.  Professional Exemption.

The job duties of the traditional “learned professions” are exempt. These include lawyers, doctors, dentists, teachers, architects, and clergy. Also included are registered nurses (but not LPNs), accountants (but not bookkeepers), engineers (who have engineering degrees or the equivalent and perform work of the sort usually performed by licensed professional engineers), actuaries, scientists (but not technicians), pharmacists, and other employees who perform work requiring “advanced knowledge” similar to that historically associated with the traditional learned professions.

Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. Professionally exempt workers must have education beyond high school, and usually beyond college, in fields that are distinguished from (more “academic” than) the mechanical arts or skilled trades. Advanced degrees are the most common measure of this, but are not absolutely necessary if an employee has attained a similar level of advanced education through other means (and perform essentially the same kind of work as similar employees who do have advanced degrees).

Some employees may also perform “creative professional” job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. It is meant to cover employees in these kinds of jobs whose work requires invention, imagination, originality or talent; who contribute a unique interpretation or analysis.

Identifying most professionally exempt employees is usually pretty straightforward and uncontroversial, but this is not always the case. Whether a journalist is professionally exempt, for example, or a commercial artist, will likely require careful analysis of just what the employee actually does.  Does the journalist create articles or does s/he merely compile data without creative input.

d.  Computer Employee Exemption

The employee’s primary duty must consist of:

1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system function specifications;
2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user system design specifications;
3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
4. A combination of the aforementioned duties, the performance of which requires the same level of skills.

It is important to note that the computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment, nor does it cover employees whose work is highly dependent on the use of computers or computer software programs. The computer employee exemption targets employees whose primary job function involves software engineering or systems analysis. These professionals most likely hold higher degrees to perform these duties; however the exemption does not require a computer professional to hold certain degrees or certifications. Holding a degree is irrelevant to the analysis of whether an employee meets the computer employee exemption.

This exemption is not designed to exempt a company’s IT support employee. Rather, this exemption is designed for computer consulting firms that create computer systems or programs based on how a user interfaces with the underlying system.

e.  Outside Sales Exemption

To qualify for the outside sales exemption, all of the following tests must be met:

1. The employee’s primary duty must be making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
2. The Employee must be customarily and regularly engaged away from the employer’s place or places of business.

“Customarily and regularly” means greater than occasional but less than constant. This would include work normally done every workweek, but does not include isolated or one-time tasks. An outside sales employee makes sales at the customer’s place of business, or at the customer’s home. In some circumstances if the sales work is done primarily for promotional purposes the exemption does not apply. If the promotion work is incidental to sales made, the work is likely exempt.

E.  Determining When to Raise Pay or Reclassify.

1. Employer considerations: Classified as salaried non-exempt or as hourly.

In general, an employer with receipts in excess of $500,000 per year will be subject to the FLSA.

However, an employee of an employer with less than $500,000 of annual gross receipts may also be subject to the FLSA if s/he has duties that affect interstate commerce such as interstate telephone sales or other interstate activities.

If a salaried employee subject to the FLSA is paid less than $684 per week the employee will no longer be exempt under the after January 1, 2020.  The employer then must make the choice to raise the salary to keep the exemption, or not raise the salary and pay overtime instead.  The correct answer for the employer may be to keep the employee salaried and pay overtime under one of three legally appropriate methods.  Similarly, if after examining job duties the employer realizes a salaried employee has been misclassified as exempt, when s/he should have been non-exempt, the employer should consider whether to pay the overtime for hours worked over 40 in each workweek of the previous two years and pay overtime in the future.  The answer again may be to keep the employee salaried and pay the back overtime plus overtime in the future.  The decision to keep the employee salaried and pay overtime requires the employer to consider under which method it will pay overtime in the future.

As an aside, many employees receive satisfaction and feel more appreciated if they are salaried as opposed to hourly.  It may be the employee’s preference to remain salaried due to the “psychic” satisfaction of being salaried.

2. Calculating Overtime.

A salary is supposed to compensate an employee for all hours worked in a workweek.  If an employer does not desire to raise an employee’s salary to an amount of $684 per week or more, the employer should determine under which method it will pay the employee overtime and communicate that (preferably in writing) to the employee prior to January 1, 2020.  Similarly if an employer has misclassified a salaried employee as exempt when s/he should have been non-exempt, there is more than one way to calculate overtime.  The same holds true if the employee has been paid a daily wage, but not overtime for hours worked in excess of 40 in a workweek.  In the oil and gas industry, particularly, and some construction trades, employers pay an employee a daily wage and erroneously assume they don’t have to pay overtime for hours worked over 40 in a workweek.

a.  One-and-One-Half Times Hourly Pay.

The easiest, but most expensive, method for an employer to administer overtime is to pay an additional 1.5 times the hourly wage for any hours worked over 40 in a workweek.

For example, if Ryan earns $15.00 per hour and works 45 hours in a workweek for the 5 hours over 40 he is paid 1 ½ x $15.00/hour or $22.50/hour.  5 hours x $22.50 = $112.50 overtime pay.

If Ryan were to work 50 hours, the 10 hours of overtime would equal an additional 225.00 in overtime pay for the week.

However, under this method, an employer may be paying more overtime than under other legally appropriate methods for non-exempt salaried or daily wage employees.

b.  The Fluctuating Workweek Method: Overtime Based on the Total Number of Hours Worked Each Week.

When an employee is a non-exempt salaried employee, or is paid a “daily wage” there are another methods that legally may be used to calculate overtime – the fluctuating workweek method and the 40-hour week method.

We look first at the fluctuating workweek method.  Assume, Ryan has a non-exempt salary of $600 per week.  One workweek he works 45 hours and the next workweek 50 hours.  Under the fluctuating workweek method, the salary is divided by the total hours worked that workweek to determine the “regular hourly rate” for that workweek.  50%, or one-half (1/2) of the “regular hourly rate” is then paid as overtime for the hours worked over 40.[2]

For a 45-hour workweek the “regular hourly rate” would be $600/45 hours which equals $13.33/hour.  50% of $13.33/hour = $6.67/hour.  5 hours overtime at half the regular rate equals 5 hours x $6.67 or $33.35 in overtime pay as opposed to $112.50 for the week under the 1 ½ times method.  The difference is $79.15 less overtime for the workweek.

For a 50-hour week, the regular hourly rate would be $600/50 hours or a regular rate of $12.00/hour for the workweek.  50% of $12.00/hour equals $6.00/hour.   Overtime for the workweek would be 10 hours x $6.00/hour = $60.00.  Contrast this to the $225.00 paid for overtime under the 1 ½ times method.  The difference is $165.00 less in overtime for the workweek!

Under the fluctuating workweek method, the employee’s hourly rate decreases as s/he works more hours.

As a caveat, the implementation of the fluctuating workweek may trigger employees reclassified as non-exempt, after erroneously being classified as exempt, to file wage and hour claims.  As part of the process of reclassification, the employer should make a good faith effort to calculate and pay the overtime the employee should have received over the previous two (2) years.  By doing so, the employer will likely avoid the 100% liquidated damages penalty and possibly attorney fees if the employee files a wage and hour claim upon reclassification.

Please also note, to be valid a release of wage and hour claims must be approved by a court or the U. S. Department of Labor.  Even without a release from the employee, it is still a good practice for the employer to make a good faith effort to calculate and pay the reclassified employee the overtime the employee would have received if s/he had been properly classified as non-exempt.

In addition, the employer needs to consider the effect of the reclassification on when and how an employee chooses to work.  A reclassified employee who regularly travels as a passenger on a bus, train or plane outside of “regular working hours” to work at a remote location, may choose to travel only during working hours so all travel hours are counted as part of “hours worked”.  Decision made by the employer will likely affect employee conduct.

c.  Overtime Based on a 40-Hour Week.

Another method of calculating overtime for a non-exempt salaried employee or employee paid a daily wage is to divide the weekly salary by 40 hours and pay the extra half-time pay for each hour worked over 40.

For example, Ryan’s salary of $600/week = $15.00 per hour.  50% of $15.00/hour = $7.50.  For a 45 hour week the overtime of 5 hours x $7.50 = $37.50.  For a 50-hour week the overtime calculation is: $7.50/hour x 10 hours = $75.00.  Contrast this to the $112.50 and the $225.00 paid for overtime under the first method.  This results in paying slightly more than the fluctuating workweek method, but is easier to administer for the employer.

Like the fluctuating workweek, paying overtime under the 40-hour workweek method to reclassified employees may trigger wage and hour claims.  As part of the reclassification, the employer is well advised to make a good faith effort to calculate and then pay the employee the overtime the employee should have received over the previous two years.

Once a method of paying overtime is chosen by the employer, the method should be maintained.  In other words, the employer should not try to change methods often.

This discussion also assumes that a Collective Bargaining Agreement (CBA) is not in place between a Union and the Employer.  If a CBA is in place, changes in the method of paying must be bargained for and agreed.

 

Questions:

Donald C. Erickson

Senior Counsel

FRYBERGER, BUCHANAN, SMITH & FREDERICK, P. A.

302 West Superior Street, Suite 700

Duluth, MN 55802

derickson@fryberger.com

218.722.0861         Office

218.725.6852         Direct

218.625.9252         Private E-fax

218.391.0145              Mobile

[1] For the outside sales exemption the payment of a salary is not required.

[2] Please note, the “time” part of the equation is the total hours worked.  The longer the employee works, the lower his “regular hourly rate” will be.