Wage and Hour Law Update:What You Need to Know

11:40 a.m.- 12:10 p.m.

Presented byBecky Knutson

Davis Brown Law FirmThe Davis Brown Tower215 10th St. Ste. 1300Des Moines, IA 50309

Phone: (515) 288-2500

Friday, November 13, 2015

2015 Labor and Employment Seminar

#2658283

2015 ISBA LABOR AND EMPLOYMENT LAW SEMINAR WAGE AND HOUR ISSUES

Becky S. Knutson

BeckyKnutson@DavisBrownLaw.com www.DavisBrownLaw.com

515-246-7874

I. FAIR LABOR STANDARDS ACT – CURRENT LAW (2004) A. Statutory Background

The Federal Fair Labor Standards Act (“FLSA” or “Wage Hour Act”) 29 U.S.C. § 201 et. seq. is the federal law that governs minimum wage standards, the payment of overtime, child labor and equal pay. The Department of Labor enforces all claims regarding minimum wage and overtime pay. The FLSA was enacted on June 25, 1938, with the first rules issued on October 20, 1938. The Department revised regulations in 1940, and updated salary levels required for the various exemptions in 1949. Salary levels were updated in 1958, 1961, 1963, 1967, 1970, 1973 and 1975. While the Department reviewed various regulations, no additional rulemaking concerning exemption salary requirements was completed until 2004, raising the salary requirements for the first time since 1975, and making additional changes. 29 C.F.R. §§541, et seq. In 2014, the President directed the Department to update the regulations defining which “white collar” workers are protected by the FLSA’s minimum wage and overtime standards. 79 FR 18737 (Apr. 3, 2014). Iowa statutes relating to wages include Iowa Code Chapter 91A, the Wage Payment and Collection Act, as well as Iowa Code Chapter 91D, which provides for a state minimum wage. Chapter 91D essentially relies on the FLSA standards for interpretation.

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B. MINIMUM WAGES

The FLSA requires the payment of minimum wages (currently $7.25 per hour unless exceptions are met) to all persons defined as employees. The Iowa minimum wage is also $7.25 per hour. Other states vary, and an employer should check state and local law to be certain that the business is in compliance with all applicable statutes and rules. 29 U.S.C. § 206(a) provides:

Every employer shall pay to each of his employees who in any work week is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, wages at the following rates:

The term “wage” paid to an employee includes monetary compensation, as well as reasonable costs to the employer of furnishing board, lodging, or other facilities if those items are customarily furnished by the employer to his employees.

There are exceptions to that rule: (1) an employer cannot make a profit on the noncash payments; (2) an employer cannot use the cost of facilities to pay its employees;1 and (3) an employer cannot include the cost if specifically excluded under a collective bargaining agreement.

C. MAXIMUM HOURS WITHOUT OVERTIME

The maximum number of hours which a non-exempt employee may work, without being paid at an overtime rate, is set forth in 29 U.S.C. section 207(a)(1):

Except as otherwise provided in this section, no employer shall employ any of his employees who in any work week is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a work week longer than 40 hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.

The term “regular rate” is defined extensively in section 7(e). The regular rate of pay, for purposes of determining overtime, must be determined according to the specific facts upon which pay to an employee is based. A

1 CCH Business Owner’s Toolkit, CCH Incorporated, 2010.

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workweek is a fixed and recurring period of 7 – 24 hour days. There are some exceptions for health care workers that are discussed later in this outline. 1. There is no statutory maximum number of hours that may be

worked in a workweek. The FLSA simply addresses the pay for overtime hours.

2. All worked hours must be paid, even if the employer did not

authorize work hours or overtime.

II. CURRENT EXEMPTIONS FROM MINIMUM WAGE/OVERTIME PAYMENT RULES

A. EXEMPT STATUS

“WHITE COLLAR” EXEMPTIONS

Certain exemptions to the overtime provisions under the FLSA are provided and include what are described as “white collar” exemptions. 29 U.S.C. § 213(a)(1) excepts from the minimum pay/maximum hours limitations:

. . . any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of subchapter II of chapter 5 of title 5, except that an employee of a retail or service establishment shall not be excluded from the definition of employee employed in a bona fide executive or administrative capacity because of the number of hours in his workweek which he devotes to activities not directly or closely related to the performance of executive or administrative activities, if less than 40 per centum of his hours worked in the workweek are devoted to such activities);

The United States Department of Labor has issued regulations that changed the tests for the executive, administrative, professional, computer and outside sales exemptions. The regulations took effect on August 23, 2004.

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1. EXECUTIVE EMPLOYEES

The current FLSA regulations, found at 29 C.F.R. 541.100, contain a single set of criteria for determining whether an employee is an exempt executive (as opposed to the long test and short test criteria which preceded the current regulations). Under this test, exempt executives must:

(a) Receive a salary of at least $455 per week; (b) Have the primary duty of managing the enterprise or a

recognized department or subdivision of the enterprise; (c) Customarily and regularly direct the work of at least two

other employees; and (d) Have hiring and firing authority or, at a minimum, influence in

the hiring, firing, advancement, promotion, or other status changes of other employees.

In addition, any employee who owns at least a bona fide 20 percent equity interest in an organization and actively engages in managing the organization is exempt under the revised regulations. Under the FLSA, the following definitions apply:

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.

Management

Generally, “management” includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials,

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supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures. 29 C.F.R.§541.102

Department or Subdivision

The phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function. 29 C.F.R.§541.103

Customarily and Regularly

The phrase “customarily and regularly” means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.

Two or More

The phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers. 29 C.F.R.§541.104

Particular Weight

Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given “particular weight” include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions. An employee’s

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recommendations may still be deemed to have “particular weight” even if a higher level manager’s recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee’s change in status.

See Fact Sheet #17B: Exemption for Executive Employees Under the Fair Labor Standards Act (FLSA) For an interesting comparison, see In re Family Dollar FLSA Litigation, 637 F.3rd 508 (4th Cir. 2011)(manager of retail chain store considered an exempt executive even when performing duties considered non-exempt such as sweeping, stocking, scheduling other employees, operating cash register) with Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233 (11th Cir. 2008) (store managers not exempt when most of the time was spent performing manual tasks). Performance of both exempt and non-exempt work will not disqualify an employee from an executive exemption, however, there must be a case-by-case analysis of factors, such as the amount of time spent with different types of work, freedom from direct supervision by others, comparison of wages for the employee and other employees, and the type of non-exempt work done. 29 C.F.R.§541.106(a), 541.700(a)

2. ADMINISTRATIVE EMPLOYEES

The revised FLSA regulations replaced the old long and short tests in favor of a single set of criteria for determining whether an employee is an exempt administrative employee. Under the revised test, exempt administrative employees must:

(a) Receive a salary of at least $455 per week; (b) Perform primarily office or other nonmanual work directly

related to the management or general business operations of the employer or the employer’s customers; and

(c) exercise discretion and independent judgment on significant

matters. Under the FLSA, the following definitions apply:

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,

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with the major emphasis on the character of the employee’s job as a whole.

Directly Related to Management or General Business Operations

To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities. 29 C.F.R.§541.201(a) and (b)

Employer’s Customers

An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, employees acting as advisors or consultants to their employer’s clients or customers — as tax experts or financial consultants, for example — may be exempt. 29 C.F.R.§541.201(c)

Discretion and Independent Judgment

In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether

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the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation. The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. 29 C.F.R.§541.202(a)

Matters of Significance

The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer. 29 C.F.R.§541.202(b)

Educational Establishments and Administrative Functions

The administrative exemption is also available to employees compensated on a salary or fee basis at a rate not less than $455 a week, or on a salary basis which is at least equal to the entrance salary for teachers in the same educational establishment, and whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field. Employees engaged in academic administrative functions include: the superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program; the principal and any vice-principals responsible for the operation of an elementary or secondary school; department heads in institutions of higher education responsible for the various subject matter departments;

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academic counselors and other employees with similar responsibilities. Having a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment includes, by its very nature, exercising discretion and independent judgment with respect to matters of significance.

See Fact Sheet #17C: Exemption for Administrative Employees Under the Fair Labor Standards Act (FLSA)

3. LEARNED PROFESSIONALS

The revised FLSA regulations establish separate exemption tests for learned professionals and creative professionals. To qualify as a learned professional, an employee must:

(a) Receive a weekly salary of $455; and (b) Perform work that:

requires advances knowledge in a field of science or

learning that is customarily acquired by a prolonged course of study;

is predominantly intellectual in character; and

involves exercising discretion and independent judgment.

The following definitions apply to the determination of exempt professional status under the FLSA:

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.

Work Requiring Advanced Knowledge

“Work requiring advanced knowledge” means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment. Professional work is therefore distinguished from work involving

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routine mental, manual, mechanical or physical work. A professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.

Field of Science or Learning

Fields of science or learning include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.

Customarily Acquired by a Prolonged Course of Specialized Intellectual Instruction

The learned professional exemption is restricted to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best evidence of meeting this requirement is having the appropriate academic degree. However, the word “customarily” means the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.

Teachers

Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include, but are not limited to, regular academic teachers; kindergarten or nursery school teachers; teachers of gifted or disabled children; teachers of skilled and semi-skilled trades and occupations; teachers engaged in automobile driving instruction; aircraft flight instructors; home economics teachers; and vocal or instrument music teachers. The salary and salary basis requirements do not apply to bona fide teachers. Having a primary duty of teaching, tutoring, instructing or

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lecturing in the activity of imparting knowledge includes, by its very nature, exercising discretion and judgment.

Practice of Law or Medicine

An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds the requisite academic degree for the general practice of medicine is also exempt if he or she is engaged in an internship or resident program for the profession. The salary and salary basis requirements do not apply to bona fide practitioners of law or medicine.

See FLSA Fact Sheet #17D: Exemmption for Professional Employees Under the Fair Labor Standards Act (FLSA)

4. CREATIVE PROFESSIONALS

To qualify as an exempt creative professional under the current FLSA rules, the following test must be met:

(a) The employee must be compensated on a salary basis at a

rate not less than $455 per week; and (b) 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.

Two important terms in this test are “recognized field of artistic or

creative endeavor” and “invention, imagination, originality or talent.”

Invention, Imagination, Originality or Talent

This requirement distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy. Exemption as a creative professional depends on the extent of the invention, imagination, originality or talent exercised by the employee. Whether the exemption applies, therefore, must be determined on a case-by-case basis. The requirements are generally met by actors, musicians, composers, soloists, certain painters, writers, cartoonists, essayists, novelists, and others as set forth in the regulations. Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent. Journalists are not exempt creative professionals if they only

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collect, organize and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.

Recognized Field of Artistic or Creative Endeavor

This includes such fields as, for example, music, writing, acting and the graphic arts.

See FLSA Fact Sheet #17D: Exemmption for Professional Employees Under the Fair Labor Standards Act (FLSA)

5. COMPUTER EMPLOYEES

To qualify for the computer employee exemption under the current FLSA rules, the following tests must be met:

(a) The employee must be compensated either on a salary or

fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;

(b) 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;

(c) The employee’s primary duty must consist of:

The application of systems analysis techniques and

procedures, including consulting with users, to determine hardware, software or system functional specifications;

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;

the design, documentation, testing, creation or

modification of computer programs related to machine operating systems; or

A combination of the aforementioned duties, the

performance of which requires the same level of skills.

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The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment. Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs (e.g., engineers, drafters and others skilled in computer-aided design software), but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations identified in the primary duties test described above, are also not exempt under the computer employee exemption.

Computer programmers and analysts may qualify as exempt executive, administrative, or professional employees if they independently meet the criteria for such exemptions. This area continues to change almost as rapidly as technology changes information technology job requirements, and future changes in this area are to be expected.

6. OUTSIDE SALESPEOPLE

The current regulations continue to require the primary duty of making sales or obtaining orders or contracts for services away from the employer’s place or places of business, but eliminate the prior requirement that outside sales employees spend no more than 20 percent of their work time on non-sales activities. It is important to note that the salary requirement of $455 per week does not apply to outside sales employees. Under the revised FLSA rules, outside sales employees must:

(a) Make sales or obtain orders or contracts for services for

which a consideration will be paid by the client or customer; and

(b) Customarily and regularly be engaged away from the

employer’s place(s) of business. 7. HIGHLY COMPENSATED EMPLOYEES

The current regulations now recognize that highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more, which must include at least $455 per week paid on a salary or fee basis, are exempt if they customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee identified in the standard tests for exemption. Total annual compensation includes commissions,

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nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board, lodging and other facilities, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits. The phrase “customarily and regularly” means a frequency that must be greater than occasional but which may be less than constant. Tasks or work performed “customarily and regularly” include work normally and recurrently performed every workweek; it does not include isolated or one-time tasks. If a highly compensated “white collar” employee customarily and regularly performs one or more exempt duties, detailed analysis of all the job duties performed is not necessary. For example, an employee may qualify as a highly compensated executive employee if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive. Special rules allow for prorating the annual compensation if employees work only part of the year, and allow the employer to make one final payment within one month after the end of the year to satisfy the required $100,000 annual amount. Employees whose compensation does not equal $100,000 by the end of the year can still be tested for exemption on the standard duties tests. The highly compensated test is not available for non-management production line workers and non-management employees in maintenance, construction and similar occupations such as:

carpenters electricians mechanics plumbers iron workers craftsmen operating engineers longshoremen construction workers laborers other employees who perform work involving repetitive

operations with their hands, physical skill and energy 8. ADDITIONAL EXEMPT CATEGORIES

(a) Trainees/Interns. In order to qualify for such an exemption

all of the following criteria must apply:

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(1) The training is similar to that which would be given in

a vocational school or is provided as part of a school program;

(2) The training is for the sole benefit of the trainee; (3) The trainee does not displace a regular employee;

rather, the trainee augments the regular employee’s work and works with close supervision of regular employees;

(4) The employer derives no immediate benefit from the

trainees; (5) The trainees are not specifically entitled to a job at the

conclusion of the training period; and (6) Both the employer and the trainee clearly understand

that the trainee will not be paid wages for the time spent in training.

These requirements are not easily met. Many employers will

want or need to derive some benefit from the activity of the trainees. If benefit is derived, the trainees become employees and are subject to the requirements of the FLSA. There are specific federal grants and programs available which may provide for partial payment of trainees’ salaries and each of these are typically reviewed by the DOL for compliance on a case-by-case basis.

(b) Volunteer/Charitable Activities. Persons who provide

services on a public, religious, or humanitarian basis, who perform such services without the expectation of any pay and on their own time, typically are not required to be compensated for the voluntary activity. However, there are factual circumstances which may turn a volunteer into an hourly employee. If the employer requires that an employee participate in charitable services in order to maintain his/her job, time spent in such an activity is not considered to be exempt. Circumstances such as these may occur when local employers require their employees to participate on local community boards, volunteer fire departments, or other charitable organizations in order to facilitate the company’s business in the community. If the charitable activity is a job requirement and the employee is a non-exempt employee,

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he/she must be paid for the time spent participating in that activity. If participation in charitable activities is simply encouraged, without any detriment to the employee if he/she fails to participate in the activity, then the time is not considered to be compensable time.

Another example occurs when an employee is providing

charitable services for his/her actual employer and those services are of the type similar to his/her normal work responsibilities. This occurs most frequently in service-oriented public relations or public sales organizations where additional outside work or attendance at company-sponsored charitable events is required.

For true volunteers, the payment of expenses, nominal fees

or benefits will not defeat the exemption. If volunteers are required to travel and receive a travel or meal stipend or other nominal benefits, those benefits do not constitute wages or trigger coverage of the FLSA. 29 C.F.R. §§ 785.42-785.45.

(c) Independent Contractors. Many employers attempt to

utilize independent contractors as a way to avoid the provisions of the FLSA. The United States Supreme Court has created an economic reality test that must be applied to each independent contractor situation to determine whether or not the contractor is in fact an employee. Bartel’s v. Birmingham, 382 U.S. 126 (1947). The mere title of independent contractor is not determinative. The Internal Revenue Service has developed a number of factors it considers in determining employee status. These include whether:

(1) The employer has the right to require compliance with

instructions.

(2) The worker’s job is an integral part of the employer’s overall business.

(3) The employer has the right to discharge the worker. (4) The worker has the right to terminate his/her services

without incurring liability.

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(5) The worker is required to perform services personally and does not have the right to delegate the work to someone else.

(6) If the worker requires assistants, these assistants are

hired, supervised and paid by the employer rather than the worker.

(7) The employer trains the worker. (8) The worker is paid by the hour, week or month rather

than the job or on a straight commission or some other basis.

(9) Business and/or traveling expenses of the worker are

reimbursed by the employer. (10) There is a continuing relationship between the worker

and the employer. (11) The employer establishes set hours of work for the

worker. (12) The worker must devote substantially full-time to the

business of the employer. (13) The worker does not work for more than one

employer. (14) The worker does not make his/her services available

to the general public. (15) The employer furnishes significant tools, materials

and equipment which the worker requires in order to perform services.

(16) The worker performs services on the employer’s

premises. (17) The worker is not free to follow the worker’s own

pattern of work but must follow the established routines and schedules of the employer.

(18) The worker is required to submit oral or written

reports to the employer.

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(19) The worker does not make any significant investment in the facilities that are used by the worker in performing services.

(20) The worker is not subject to any real risk of economic

loss due to significant investments or liability for expenses.

No single factor is determinative, and a court will closely

examine the contractor’s control of his/her work environment. The more control an individual exerts over work hours, assignments, type of work, and other elements of the job, the more likely it is that that person will be found to be an independent contractor.

The IRS and the Department of Labor have both taken an

increasing interest in employees who are designated as independent contractors over the last several years. Various industries are discovering that they cannot simply rely on prior industry practice in designating certain persons as independent contractors and each situation must be viewed with an eye to the accepted IRS factors in order to avoid both payroll tax and overtime liability.

(d) Other Exemptions. Other exemptions to the FLSA,

including child labor laws, are:

(1) Newspaper delivery people. (2) Home workers making evergreen wreaths.

Exemptions to the FLSA, but not child labor laws, are:

Sailors. Newscasters where the primary location of the station is

in a town of 100,000 or less so long as that town is not part of a larger metropolitan area.

Automobile sales people and parts suppliers who are engaged in primary sales to individual users.

Taxi drivers. Those persons who provide transportation for agricultural

products to the first point of processing. Certain other agricultural employees. Casual domestic workers. Other occupations set forth under the FLSA.

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B. SALARY BASIS

Under the FLSA, an employee must generally be paid not less than $455 per week on a salary basis. The salary requirements do not apply to outside sales employees, teachers, lawyers, doctors and judges. Exempt computer employees may be paid either a salary of at least $455 per week, or be paid on an hourly basis at a rate of at least $27.63 per hour. 29 C.F.R. §541.602(a) provides:

1. An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.

2. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee's predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.

3. If the employee is ready, willing and able to work, deductions may not

be made for time when work is not available

For administrative and professional employees, there are also alternative pay arrangements that qualify for exempt treatment. Administrative and professional employees may be paid on a ”fee basis.'' This occurs where an employee is paid an agreed sum for a single job regardless of the time required for its completion. 29 C.F.R.§ 541.605(a). Salary level test compliance for fee basis employees is assessed by determining whether the hourly rate for work performed (i.e., the fee payment divided by the number of hours worked) would total at least $455 per week if the employee worked 40 hours. See 29 C.F.R.§ 541.605(b). Some employees, such as doctors and lawyers (Sec. 541.600(e)), teachers (Sec. 541.303(d); Sec. 541.600(e)), and outside sales employees (Sec. 541.500(c)), are not subject to a salary or fee basis test. Some, such as academic administrative personnel, are subject to a special, contingent salary level. See Sec. 541.600(c). There is also a separate salary level in effect for workers in American Samoa (Sec. 541.600(a)), and a special salary test for motion picture industry employees (Sec. 541.709).

C. LOSS OF SALARIED STATUS

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Once an employer appropriately classifies an employee as exempt it is possible by future actions to lose the exemption status for either an individual or an entire group of employees. When individual employees have been reclassified as nonexempt, by far the most common triggering factor is the employer treating the exempt employees as if they were paid on an hourly basis. One of the common methods by which employers defeat their own purposes is to dock exempt employees for partial day absences. Exempt employees are not paid on an hour-for-hour time worked basis. Therefore, exempt employees cannot have time deducted from them for absences on an hour-for-hour time not worked basis. The current regulations contain seven exceptions to the salary basis, “no pay-docking” rule. 29 C.F.R.§541.602(b) Employers may make deductions from salary of exempt employees in the following situations:

1. An absence from work for one or more full days for personal

reasons, other than sickness or disability 2. An absence from work for one or more full days due to sickness or

disability if deductions made under a bona fide plan, policy or practice of providing wage replacement benefits for these types of absences

3. To offset any amounts received as payment for jury fees, witness

fees, or military pay 4. Penalties imposed in good faith for violating safety rules of “major

significance,” such as “no smoking” rules in explosive plants, oil refineries and coalmines

5. Unpaid disciplinary suspension of one or more full days imposed in

good faith for violations of workplace conduct rules, such as rules prohibiting sexual harassment or workplace violence

6. Proportionate part of an employee’s full salary may be paid for time

actually worked in the first and last weeks of employment 7. Unpaid leave under the Family and Medical Leave Act.

CASE NOTE: Employers must use caution in drafting disciplinary policies that incorporate pay docking. In Auer v. Robbins, 519 U.S. 452 (1997), the United States Supreme Court determined that docking of employees through the use of unpaid suspensions violates the FLSA “salary basis”

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test under 29 C.F.R. §§541.1(f), 541.2(e) and 541.3(e). Consequently, discipline must be imposed by other methods – evaluations and reviews, oral and written warnings, denial of promotions, raises or other rewards, or discharge. Under a sick leave policy, plan or practice which does not apply to a particular employee because the employee has not worked long enough to qualify, a deduction of one full day of pay may be made in the event of illness. The exempt status of the employee will not be lost for such a deduction. If deductions are made for any of the following reasons, a salaried employee will lose exempt status:

(a) Deductions for non-working time when work is not made

available by the employer; (b) Deductions for absences from the workplace caused by the

employer; (c) Deductions for absences from work of less than a whole day.

Because exempt employees are to be paid on a salary basis, deductions for absences of less than a day may not be taken if an employee is to retain his or her exempt status. This rule is based upon two theories:

(a) An employee is to be paid for tasks performed in a given

week without a preset number of hours. For this reason, the courts have viewed dividing a week into anything less than an entire workday as impermissible.

(b) The salary of an exempt employee is deemed to include paid

time off, such as vacation pay or sick leave pay. Deduction from paid time off categories must also be taken in full day increments.

(c) Cases decided by the federal courts have further explained

the limitations and requirements for pay to salaried, exempt personnel:

The $455 salary must be salary alone - not commissions or other wages.

Chao v. Vidtape, Inc., 66 Fed Appx. 261, WH Cases 2d 1344 (2d Cir. 2003). Penalties for failing to work required shifts or hours may not be monetary - but they may include non-monetary components such as reduction of leave, paying other employees to substitute, or other non-monetary discipline.

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Haywood v. North American Van Lines, Inc., 121 F.3rd 1006 (7th Cir. 1997). Employers may require employees to work a certain number of hours, or, alternatively, make them up or have deductions from leave banks.

An employer may institute a bona fide sick, vacation or PTO plan, and require that employees adhere to the plan. Deductions from time in the plan for absences is permitted. An employer may deduct a full day of pay from an employee’s pay once the plan days are exhausted. If an employee’s absences are covered by the FMLA, and employer may make deductions of less than a full day. 29 U.S.C.§2612(c), WH Admin. Op. 06-32, WHM 99:8640, Rowe v. Laidlaw Transit, Inc., 244 F.3d 1115 (9th Cir. 2001). An employer may pay straight time overtime to employees in addition to a fixed salary, and not lose an exemption. Fife v. Harmon, 171 F.3rd 1173 (8th Cir. 1999). Under Auer v. Robbins, 519 U.S. 452 (1997), if an employer discovers an improper deduction, there is a “window of correction”, wherein an employer may promptly correct an inappropriate pay deduction made for reasons other than a lack of work. This defense is not available in the case of a pattern of violations. V. PROPOSED RULE CHANGES TO EXEMPTIONS

On July 6, 2015, the Department of Labor issued a notice of proposed rulemaking. 80 FR38516, et seq (July 6, 2015). This notice was in response to the Presidential Memorandum of March 13, 2014, directing the Department to update existing FLSA regulations. 79 RE 18737 (Apr. 3, 2014). The Notice provided the following information, beginning at p. 38602-3: A. Reasons Why Action by the Agency Is Being Considered

The EAP exemption salary level test that is the focus of this proposed rulemaking has been updated seven times since the FLSA was originally enacted in 1938. These updates were necessary in order for the required salary level to keep pace with increases in earnings in the economy so that it could continue to serve as an effective bright- line test that separates workers who Congress intended to remain entitled to minimum wage and overtime protection and those who may qualify as bona fide EAP exempt workers. The standard salary level and HCE total compensation levels have not been updated since 2004 and, as described in detail in section VII.A.ii., the standard salary level has declined considerably in real terms relative to both its 2004 and 1975 values. As a result, the exemption removes workers from overtime protection who were not

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intended to be within the exemption. Similarly, the HCE annual compensation requirement is out of date; more than twice as many workers earn at least $100,000 annually compared to when it was adopted in 2004. Therefore, the Department believes that rulemaking is necessary in order to restore the effectiveness of these levels. B. Statement of Objectives and Legal Basis for the Proposed Rule Section 13(a)(1) [29 U.S.C. §13(a)(1)] creates a minimum wage and overtime pay exemption for bona fide executive, administrative, professional, outside sales employees, and teachers and academic administrative personnel, as those terms are defined and delimited by the Secretary of Labor. The regulations in part 541 [29 C.F.R. §541, et seq.] contain specific criteria that define each category of exemption. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). To qualify for exemption, employees must meet certain tests regarding their job duties and generally must be paid on a salary basis at not less than $455 per week. The Department's primary objective in this rulemaking is to ensure that the revised salary levels will continue to provide a useful and effective test for exemption. The salary levels were designed to operate as a ready guide to assist employers in deciding which employees were more likely to meet the duties tests for the exemptions. If left unchanged, however, the effectiveness of the salary level test as a means of determining exempt status diminishes as nonexempt employee wages increase over time. The Department last updated the salary levels in the 2004 Final Rule, setting the standard test threshold at $455 per week for EAP employees. The 2004 Final Rule also created a new ``highly compensated'' test for exemption. Under the HCE exemption, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the duties or responsibilities of an exempt EAP employee identified in the standard tests for exemption. Sec. 541.601. Employees who meet the requirements of 29 C.F.R. §541, et seq are excluded from the Act's minimum wage and overtime pay protections. As a result, employees may work any number of hours in the workweek and not be subject to the FLSA's overtime pay requirements. Some State laws have stricter exemption standards than those described above. The FLSA does not preempt any such stricter State standards. If a State law establishes a higher standard than the provisions of the FLSA, the

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higher standard applies in that specific state. See 29 U.S.C. 218. In order to restore the ability of the standard salary level and the HCE compensation requirement to serve as appropriate bright-line tests between overtime-protected employees and employees who may be EAP exempt, the Department proposes to increase the minimum salary level test from $455 to the 40th percentile of the weekly wages of all full- time salaried employees ($921 per week), and the level for the HCE test from $100,000 to the annual equivalent of the 90th percentile of weekly earnings for full-time salaried employees ($122,148 in annual earnings). The Department reached the proposed salary levels after considering available data on actual salary levels currently being paid in the economy. In order to ensure that these levels continue to function appropriately in the future, the Department also proposes to automatically update them annually either by maintaining the respective earnings percentile or updating the levels based on changes in the CPI-U.

A. STATUS OF PROPOSED RULES

The Department conducted listening sessions and conference calls, which were attended by “stakeholders”, including various employer, employee, business, organizational, governmental and other representatives to address issues concerning the appropriate salary levels, changes to duties for exempt employees and simplification of regulations. 80 FR 38521 (July 6, 2015).

The Notice of Proposed Rulemaking was published on July 6, 2015, and the 60 day comment period ended on September 4, 2015. Final rules are anticipated not before January 2016. B. PROPOSED CHANGES TO SALARY BASIS REGULATIONS

1. The proposed rule revisions will raise the weekly salary level for exempt

employees to the 40th percentile of full-time salaried workers. As currently proposed, the changes are:

Current exempt salary level - $455/week $23,660/year 2015 proposed salary level - $921/week $47,892/year 2016 projected salary level - $970/week $50,440/year Current highly compensated pay level - $100,000/year 2015 proposed pay level- $121,148/year

2. Notably, there are no currently proposed changes to the duties tests.

However, depending on comments received during the comment period, the final rules may contain changes. The Department is considering

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whether changes should be made, including a minimum time requirement for performing exempt/non-exempt duties.

3. The Department has not considered bonuses toward meeting the salary level requirement in the past. As bonuses are a part of standard compensation in many industries, there was discussion concerning including nondiscretionary bonuses and incentive payments toward meeting the salary level test for executive, administrative and professional exemptions. 80 FR 38535 (July 6, 2015). The initial Department considerations would propose a cap at 10% of the standard weekly salary level. However, the timing of required bonus payments at issue, with initial considerations at the monthly or more frequently level. 80 FR 38536 (July 6, 2015). See 29 C.F.R. 778.208-201 for non-discretionary bonuses for non-exempt employees. See 29 C.F.R. 541.601(b)(2) for make-up payments for highly compensated employees.

4. There will be no impact on employees who meet the tests for one of the

exemptions to which the salary requirement does not apply. 29 C.F.R 541.600. Workers in these “named occupations” include:

a. Outside sales employees (29 C.F.R. 541.500C), b. Computer employees who are employed at the rate of at least $27.63

per hour (29 C.F.R. 541.400(b), c. Academic administrative personnel who are paid at least the rate f the

entrance salary for teachers in the same educational establishment (29 C.F.R. 541.204(a)(1)),

d. Physicians (29 C.F.R.541.304), e. Lawyers (29 C.F.R.541.304), and f. Judges (29 C.F.R.541.304).

C. FUTURE CHANGES TO RULES AND IMPACT OF CHANGES

1. Automatic updates. The Department has historically dealt with updates to

the salary levels by administrative regulation. In 1990, Congress directed the Department to include in the exemption regulations certain computer employees, setting the pay rate for inclusion at not less than 6.5 times the mimimum wage on an hourly basis. See Sec. 2, Pub. L. 101-583. 104 Stat. 2871 (Nov. 15, 1990).

The current Department proposal is for annual updates, with regulations in a final rule that establish the methodology. Comments were solicited using a fixed percentile of wage earnings or using the CPI-U. A Notice of Proposed Rulemaking is anticipated along with publication of the Final Rules concerning the currently proposed salary changes. 80 FR 38540 (July 6, 2015).

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2. Examples in rules. The Department is considering adding additional examples of exempt/non-exempt duties and occupations in the final rules and the application of rules to specific occupations. Among the occupations for which specific duties and titles are sought are the computer related occupations, given the growth in the computer industry.

3. Impact. In the Notice of Rulemaking, it is anticipated that 4,646,000 individuals will be impacted by the proposed salary changes under the executive, administrative and professional exemptions, and approximately 36,000 under the highly compensated employee changes in the first year after adoption. 80 FR 38540 (July 6, 2015).

a. Employers. Employers will need to assess job descriptions,

essential job functions, exempt functions, and potentially reclassify employees who do not meet the minimum weekly salary requirements, or increase pay levels for employees who are to retain the exempt classification. Employees who are reclassified will need to have an hourly wage established, and may be subject to different employer policies. Policies should be assessed to check intent and language such as “hourly”, “salaried” and similar references. Additionally, there will be an impact on record keeping and control of overtime related to reclassified employees.

b. Employees. Employees subject to reclassification will need to keep track of hours for overtime purposes, and follow the appropriate employer policies related to non-exempt employees.