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FLSA Administrative and Executive Exemptions:
Avoiding, Auditing and Correcting Misclassifications
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, AUGUST 5, 2015
Presenting a live 90-minute webinar with interactive Q&A
Robert M. Hale, Partner, Goodwin Procter, Boston
Janet A. Hendrick, Of Counsel, Fisher & Phillips, Dallas
Staci Ketay Rotman, Partner, Franczek Radelet, Chicago
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FOR LIVE EVENT ONLY
Overview
What does the FLSA require?
What are the requirements for the executive exemption?
What are the requirements for the administrative exemption?
What are the key considerations for self-audits and correcting misclassifications?
5
The FLSA Requires Employers to:
Pay non-exempt employees at least the minimum wage (currently $7.25 per hour)
Pay employees 1.5 times their regular rate of pay for all hours worked over 40 in a workweek
Maintain accurate pay records for all employees
6
State Laws
May impose more demanding standards
Stricter exemption standards
Higher salary basis
Higher minimum wage
Different overtime requirements
7
The Dangers of Noncompliance
Tens of thousands of FLSA lawsuits filed in last
decade
The trend is not waning
Billions in judgments and settlements
8
FLSA Exemptions
Starting point:
Employers must comply with minimum wage, overtime and recordkeeping requirements for ALL employees UNLESS an employee is “exempt” (not subject to one or more requirements)
Default position: Employee=non-exempt
9
Exemptions Generally
Exemptions are
defined by law, not by agreement, job descriptions,
or parties’ intentions
strictly interpreted
If an exemption is disputed, the employer has the
burden to prove that each requirement is met
(otherwise, the employer loses)
10
Exemptions Generally
Exemptions relate to individuals
Detailed, accurate, current job information is essential
Based upon actual work, real facts
Job descriptions do not “make employees exempt"
USDOL, plaintiffs’ lawyers will dig into the work the
employees actually do
11
Three Criteria For Exemption
Salary Level
Salary Basis
Job Duties
12
Current Minimum Salary Level
$455 per week
Paid “free and clear”
Cannot off-set with board, lodging or other facilities
May be paid in equivalent amounts for periods longer
than one week
Biweekly: $910
Semimonthly: $985.83
Monthly: $1,971.66
13
Proposed Overtime Rule Changes
7/06/15: DOL published proposed changes to FLSA
overtime regulations. Proposed changes:
100% increase in the minimum salary threshold for exempt employees
from $455 to $921 per week (from $23,660/year to $47,892/year)
Annual updates to minimum salary threshold
22% increase in “highly compensated employee” exemption ($100,000 to
$122,148)
Annual updates to “highly compensated” threshold
14
So What’s the Good News?
DOL did not propose changes to the “duties test” for exemptions
“The Department is also considering revisions to the duties test in
order to ensure that they fully reflect the purpose of the exemption
. . . [and] is seeking additional information on the duties test for
consideration for the Final Rule.”
Stay tuned – buckle up
15
Salary Basis Test
Must be paid on “salary basis” (rather than an hourly basis)
Employee regularly receives predetermined amount of
compensation each pay period
Cannot be reduced because of variations in the quality or
quantity of the employee’s work
Employee must receive his/her full salary for each week he/she
performs any work, regardless of days/hours worked, but . . .
16
Permissible Deductions
Absence of one or more full days for personal reasons other than sickness/disability
Substitution of accrued paid leave for partial day absences does not destroy the salary basis
Absence of one or more full days due to sickness/disability if deduction is consistent
with bona fide plan, policy, or practice of providing compensation for salary lost due
to illness
Offset of amounts employees receive as jury/witness fees or military pay
Penalties imposed in good faith for infractions of safety rules of major significance
Unpaid disciplinary suspensions of one or more full days imposed in good faith for
workplace conduct rule infractions
17
Consequence of Impermissible Deductions
“Actual practice” of making improper deductions?
Lose exemption
Isolated or inadvertent? No loss of exemption if
employer reimburses employee for improper
deductions
18
Duties Test
“Primary duty” must be performance of exempt work
Principal, main, major or most important duty
Based on all facts, with “major emphasis” on job as a whole
Comparative importance of exempt duties
Amount of time spent performing exempt work (“useful guide”)
• >50% generally satisfies primary duty test
Employee’s relative freedom from direct supervision
Relationship between employee’s salary and wages paid to others for same
nonexempt work performed by exempt employee
19
Copyright © 2015, Franczek Radelet P.C. All Rights Reserved. Disclaimer: Attorney Advertising. This presentation is a publication of Franczek Radelet P.C.
This presentation is intended for general informational purposes only and should not be construed as legal advice.
White Collar Exemptions:
The Executive Exemption
Staci Ketay Rotman
www.franczek.com
21
White Collar Exemptions
“any employee in a bona fide executive,
administrative, or professional capacity” is
exempt from the minimum wage and
maximum hour requirements of the FLSA 29
U.S.C. § 213
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22
Exempt v. Non-Exempt:
That is the Question!
www.franczek.com
23
$2.7M $38M
$35.6M $3M
$3.3M
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24
Not Necessarily Exempt
Salaried employee
Supervisor / foreperson
Non-union employee
Office staff
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25
Executive Exemption
Currently must be compensated on a salary basis at not less than $455 per week (pending increase with the DOL’s proposed rules)
Primary duty: managing enterprise or customarily recognized department or subdivision
Customarily and regularly directs at least 2 FTEs or equivalent
Authority to hire / fire, or recommendations as to hiring, firing, advancement, promotion, or change of status carry “particular weight”
25
www.franczek.com
26
Determining Primary Duties for the Executive
Exemption
Under the FLSA, the amount of time spent on each duty is considered, but not determinative
Other Considerations include:
– The relative importance of the exempt duties (i.e., management) as compared with other types of duties
– The employee’s relative freedom from direct supervision
– The relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee
Concurrent Duties
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27
What May Constitute Management?
Interviewing, selecting, and training employees;
Setting rates of pay and hours of work;
Maintain production or
sales records (beyond
merely clerical
maintenance);
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28
What May Constitute Management?
Appraising employee productivity and efficiency;
Handling employee complaints;
Disciplining employees;
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29
Other Management Activities
Planning the work;
Determining the techniques to be used;
Apportioning work among the employees;
Determining the types equipment to be used in performing the
work;
Planning budgets for work;
Monitoring work for legal or regulatory compliance;
Providing for the safety and security of the workplace
www.franczek.com
30
Management Rule of Thumb
Ask who is “in charge” of a department or
subdivision of the company
www.franczek.com
31
Who is a Supervisor?
Mere supervision is not enough; it must constitute a
primary duty of the employee’s job
Supervision of non-employees is not included
A supervisor must supervise at least two full-time
employees
– An equivalent number of part-time employees is sufficient
32
www.franczek.com
32
Compare Example 1 to…
Store Manager supervises an
Assistant Manager & Clerks
Performs non-managerial work 80%
of the time
Is only paid $2.21 per hour more
than the Assistant Manager
33
www.franczek.com
33
…Example 2
Store Manager with
supervisory authority
Spends 75-80% of his time
performing non-managerial
tasks
Is paid 18-30% more per hour
than the next highest paid
employee
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34
Dollar General Litigation
Both examples involved Store Managers, but resulted in different
outcomes
– Example 1: the court found in favor of the employee [SJ Denied]
– Example 2: the court found in favor of Dollar General [SJ Granted]
But:
– Employees had same job title
– Both were paid 18-30% more than the next highest paid employee in the store
– Both spent the overwhelming majority of their time performing non-managerial
tasks
So why the different decisions?
35
www.franczek.com
35
Information You Need
What does the job
description say?
If different, what does the
employee do?
How is the employee paid?
36
www.franczek.com
36
Job Titles to Watch For
Assistant Manager
Executive Assistant
Office Manager
Paraprofessionals
©2015 Goodwin Procter LLP
FLSA Administrative and Executive Exemptions:
Avoiding, Auditing and Correcting
Misclassifications
Robert M. Hale, Esq.
Goodwin Procter LLP
August 5, 2015
Goodwin Procter LLP 38
Administrative Employees – Duties Test Overview
The primary duty must consist of office or non-manual work
That work must directly relate to the management or general business operations of:
› the employer or
› the employer’s customers
The primary duty must include:
› the exercise of discretion and independent judgment
› with respect to matters of significance
Goodwin Procter LLP 39
Administrative Employees – Office or
Non-Manual Work
Manual work – work involving “repetitive operations with . . . hands.” 29 C.F.R. § 541.3(a)
Non-Manual work includes:
› fieldwork by a union organizer. Rincon v. AFSCME (N.D. Cal. 2013)
› piloting an aircraft. McCoy v. North Slope Borough (D. Alaska 2013)
Goodwin Procter LLP
Administrative Employees – Directly Related to Management or General
Business Operations
Running or servicing a business vs. producing or selling a product.
Examples:
› Loan Underwriters – Assessing credit risk is part of a bank’s lending function, which is production
work. Davis v. J.P. Morgan Chase & Co. (2d. Cir. 2009)
› Mortgage Loan Officers – Treatment of mortgage loan officers is in flux. Compare Henry v.
Quicken Loans (9th Cir. 2012) (mortgage loan officers exempt) with Administrator’s Interpretation
2010-1 (DOL interpretation concluding that office-based mortgage loan originators are exempt;
DOL authority upheld in Perez v. Mortgage Bankers Assn. (U.S. Sup. Ct. 2015))
40
Goodwin Procter LLP
Administrative Employees – Directly Related to Management or General
Business Operations
› Product Managers – Training staff and advising on product enhancements to increase sales is
administrative work. Blanchar v. Standard Ins. Co. (7th Cir. 2013)
› Sales Managers – Sales managers for banquet facilities provider were responsible for making
sales and customizing events; due to extensive customization, work was primarily exempt
administrative rather than sales work. Hines v. State Room, Inc. (1st Cir. 2011)
› Investigators – Insurance company investigators perform work directly related to the insurance
company’s general business operations; court concluded that the business of the insurance
company was creating and marketing policies rather than asset protection. Foster v. Nationwide
Mut. Ins. Co. (6th Cir. 2013)
41
Goodwin Procter LLP
Administrative Employees – Discretion and Independent Judgment
“Discretion and independent judgment” involves selecting from among courses of conduct.
The exercise of a learned skill is not sufficient.
“Matters of significance” concerns the importance of the matter to the business. The risk of
bad consequences from mistakes is not sufficient.
Both elements need to be satisfied.
42
Goodwin Procter LLP
Administrative Employees – Discretion and Independent Judgment
Regulatory factors: Consider whether the employee:
› has authority to formulate, interpret or implement management policies or operating practices
› carries out “major assignments” in conducting business operations
› performs work that affects business operations to a “substantial degree”
› has authority to make commitments with “significant financial impact”
› has authority to deviate from policies
› negotiates for the employer concerning significant matters
› serves as a consultant or expert advisor to management
› is involved in business planning
› investigates and resolves significant matters or handles complaints
43
Goodwin Procter LLP
Administrative Employees – Discretion and Independent Judgment
Examples:
› Investigators – Treatment depends on whether employees are limited to gathering facts following
established procedures or whether they are expected to use judgment in planning, conducting and
concluding investigations. Compare Calderon v. GEICO Gen. Ins. Co. (D. Md. 2012), Ahle v.
Veracity Research Co. (D. Minn. 2010) (investigators were non-exempt) and Fenton v. Farmers
Ins. Exchange (D. Minn. 2009) with Foster v. Nationwide Mut. Ins. Co. (6th Cir. 2013) and Mullins v.
Target Corp. (N.D. Ill. 2011) (investigators were exempt)
44
Goodwin Procter LLP
Administrative Employees – Discretion and Independent Judgment
› Field Inspectors – Field inspectors at construction sites who rely on manuals to guide the
inspection process were not exempt. Blotzer v. L-3 Communications Corp. (D. Ariz. 2012)
› Account Managers – Persons managing customer accounts under limited supervision exercise
discretion and independent judgment with respect to matters of significance. Verkuilen v.
MediaBank LLC (7th Cir. 2011) and Hines v. State Room, Inc. (1st Cir. 2011)
› Bookkeepers - Bookkeepers who made improvements in accounting systems and tax compliance
exercised discretion and independent judgment with respect to matters of significance. Fox v.
Lovas (W.D. Ky. 2012)
45
Exemption Disputes
Exemption Disputes Can Arise In Different Ways:
• Complaint To USDOL,
• Random Audit By USDOL,
• Lawsuit By One Or More Employees, Former
Employees
46
47
www.franczek.com
47
Warning Signs of Misclassification
Everyone in the office is
salaried
This is how it’s done in this
industry
Docking / deductions from
salary
48
www.franczek.com
48
Mitigating Risk
Offer Letter / Handbook: Salary
covers all hours worked
Handbook: “Safe Harbor”
language for improper
deductions
Best Practices
Regularly Reconsider Exemption Status:
Don't Fall For "Conventional Wisdom": • "Everybody Treats These Jobs As Exempt.“
• "The Employees Want To Be Exempt.“
• "The Employee Agreed To Be Exempt.“
Whether A Particular Job Will Be Ruled Exempt Is Often
Uncertain
Risk tolerance: rank risk
49
Anatomy of a Self-Audit
Why: risk assessment, compliance
When: now and later
What: one size does not fit all
Who: involve counsel
50
Self-Audit Steps and Tools
• Paper
– Job descriptions
– Policies/handbooks
– CBAs
– Time records
• People
– Counsel
– HR/Legal
– Managers
• Process
– Review
– Interviews
– Checklists/questionnaires
51
Goodwin Procter LLP
FLSA Compliance Audit – Privilege Considerations
Scope of attorney-client and work product privileges
Key elements:
› Attorney-client privilege: Communication is to secure legal advice and confidentiality is maintained
› Work product privilege: Information is collected in anticipation of (or due to existing) litigation; a
generalized concern about litigation is insufficient
52
Goodwin Procter LLP
FLSA Compliance Audit – Privilege Considerations
Best Practices:
› Explicitly authorize the audit for legal compliance
› Primary responsibilities should be with Legal, not HR
› Include privilege legends on communications
› Minimize documents
› Restrict dissemination of audit work product
› Consider document retention protocols
53
Job Descriptions
Current, Accurate, Well-Written Ones Can:
• Help Management Make A Good Decision
• Play A Role In Defending Exempt Status
Unrealistic, Inaccurate, Puffed-up, Out-Of-Date,
Or Poorly-Written Job Descriptions Can:
• Cause Management To Make An Incorrect
Decision
• Hurt Defense Efforts 54
Best Corrective Practices
Best: get it right up front
But, when you didn’t:
Quickly Consider What To Do To Correct Any Problems
Be Careful, Thoughtful About How You Implement The
Changes
55
Goodwin Procter LLP
FLSA Compliance Audit – Damages Considerations
Determining hours worked when time records have not been maintained. Anderson v. Mt.
Clemens Pottery Co. (U.S. 1946) permits proof by plaintiffs via good faith estimates.
Ongoing disputes regarding whether time and one-half or half-time rate applies to
misclassified salaried employees
Calculation of overtime based on bonuses
Statute of limitations – two or three years
Liquidated damages – up to two times back wages
56
www.franczek.com
57
Rectifying a Misclassification
Prospective or retroactive?
How far back?
How many employees?
Self-Report?
What to communicate to employees?
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58
Limited Options
Option Is it legal? Immediate
Cost? Risk of future claims?
Ignore the problem. No. Integrity Higher risk of wilful violations, penalties, if
caught
Fix going forward only. No. $$
May trigger further claims, higher risk of wilful
violations, penalties, but risk diminishes with
time
Fix going forward and
retroactively Yes $$$
Reduced, but employees may still be able to
claim extra pay
Fix going forward and
retroactively with DOL-
supervised or court-
approved settlement
Yes $$$$
Claims will be resolved, but seeking DOL
involvement or waiting for litigation will likely
expand scope of claims, drive up costs
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59
Retroactive Payments
Calculate amount owed and document calculation
If amount is uncertain (e.g., because hours were not tracked)
seek employee’s agreement
Obtain signed acknowledgement from employee
Consider requesting a release in appropriate cases, but
understand it may not be enforceable.
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60
Can FLSA Claims be Waived?
Waiver and Release
Acknowledgement
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61
[COMPANY LETTERHEAD]
ACKNOWLEDGEMENT
The ABC Corporation (the “Company”) employee named below (“Employee”) has been advised as of this date that her job as a Customer Services Account Manager with the Company is being
modified effective September 1, 2015 (“Effective Date”). As of the Effective Date, Employee’s new job title will be (Senior) Customer Service Representative and will thereafter be categorized as “non-
exempt” for purposes of the overtime pay provisions of applicable state and federal wage/hour laws. Employee acknowledges that the basis for this action as been fully explained by the Company and
Employee concurs with this action.
The Company has calculated the amount of additional pay that Employee would have earned if the Employee had been eligible for overtime over the last three years, which equals the payment listed
below. Employee represents that she does not know exactly how may overtime hours she worked but that she worked no more than overtime hours during this period. Employee acknowledges and
agrees that she has analyzed the number of hours she worked during this period and that the payment amount listed is accurate and represent s full compensation for any overtime hours worked during
the three year period. Employee further acknowledges and agrees that the Company has no obligation to make this payment.
Employee agrees that, in exchange for the payment listed below, Employee waives any and all claims for additional unpaid wages, salary, overtime pay or other compensation for work performed for
the Company to date. Employee represents that she has been paid in full for all hours worked fro the Company to day.
Payment to Employee: $___________ (minus applicable withholdings)
Employee has read this acknowledgement and agrees that all statements contained in this document are accurate.
________________________ ABC Corporation
Employee Name (Please Print) By: ______________________ Date: __________________
_________________________
Employee Signature
_________________________
Date
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62
Thank You
Robert M. Hale
Goodwin Procter
Janet A. Hendrick
Fisher & Phillips
Staci Ketay Rotman
Franczek Radelet
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