Updates on Exempt Employees Under the FLSA Joshua R. Woodard Snell & Wilmer L.L.P. 602.382.6281 | jwoodard@swlaw.com

Goals for Today’s Discussion FLSA Refresher White Collar Exemptions Proposed Changes to Salary Requirement Salary Basis Test How to Reduce Overtime Costs Timing of New Rules Quiz Consequences of Misclassification Preparations to Consider Implementing

FLSA Refresher Generally, employees are entitled to 1.5 times their regular wage for every hour of overtime (>40) they work per week FLSA has “White Collar” and “Highly Compensated Employee” exemptions

White Collar Exemptions 2 Part test for employee to qualify for exemption from overtime (1) Duties test (2) Salary Level test*

Executive Employee Primary duty consists of management of the enterprise or a department or subdivision thereof. Primary duty defined as: The principal, main, major, or most important duty the employee performs Customarily and regularly directs two full-time employees Has authority to hire or fire, or suggestions regarding hiring, firing, advancement, and promotion receive particular weight

Administrative Employee Primary duty consists of performing office or non-manual work directly related to management or general business operations. Directly and closely related defined as: Tasks that are related to exempt duties and that contribute to or facilitate performance of exempt work Work that is directly and closely related to the performance of exempt work is also considered exempt work Exercises discretion and independent judgment regarding matters of significance

Professional Employees Learned Performs work requiring advanced knowledge in a field of science or learning, customarily acquired through schooling Advanced knowledge may also be acquired through a combination of schooling and work experience

Professional Employees Creative Primary duty consists of performing work requiring invention, imagination, originality, or talent in a recognized field of artistic endeavor

Highly Compensated Employees Customarily and regularly performs at least one of the exempt duties of an executive, administrative, or professional employee. Customarily and regularly defined as: Greater than occasional but less than constant Tasks performed customarily and regularly include work normally and recurrently performed every workweek Does not apply to “manual laborers” or “first responders”

Salary Level History 1975: 38% of full-time workers above the salary threshold for exempt employees 2015: 92% of full-time workers above the salary threshold for exempt employees DOL wants to get back to the approximate 40% threshold 22404905.1

Salary Level For White Collar Exemptions Currently – $23,660 per year or $455 per week Poverty level is $24,008 per year (family of four) Proposed – $50,440 per year or $970 per week Tied to 40th percentile of weekly earnings of full-time salaried workers Automatic annual updates using weekly earnings data or CPI-U with 60 days’ notice 22404905.1

Other Aspects of Proposed Rule Increases Highly Compensated Employee annual compensation to $122,248 Tied to 90th percentile of weekly earnings of full-time salaried workers More guidance coming on whether nondiscretionary bonuses could help satisfy Salary Level Test Comments period is closed (300,000 submitted) 22404905.1

Salary Basis The employee is paid a predetermined amount each pay period that is not subject to reduction due to the quality or quantity of work The employee receives a full salary for any week in which the employee works regardless of the number of days or hours worked

No Docking Rule Deductions can only be made for: An absence of one or more full-days for personal reasons An absence of one or more full-days due to sickness or disability The deduction must be made in accordance with a policy or practice providing compensation for loss of salary occasioned by sickness or disability A penalty for an infraction of a safety rule of major significance

Improper Pay Deductions Employers who make improper pay deductions will lose the exemption if the facts show the employer did not intend to pay employees on a salary basis

Safe Harbor for Improper Pay Deductions The employer must: Have a policy prohibiting improper pay deductions that includes a complaint mechanism Reimburse for the improper pay deductions Commit to future compliance If the foregoing are met then the employer does not lose the exemption unless the employer continues to make improper pay deductions after receiving complaints

How to Legally Reduce Overtime Wages From Time and One-Half to Half-Time Five requirements for the fluctuating workweek:  (1) Hours must fluctuate from week to week (2) The employee must receive a fixed weekly salary that remains the same regardless of the number of hours worked during the week (be careful of PTO and bonus issues) (3) The fixed amount must be no less than minimum wage; (4) The employer and the employee must have a clear mutual understanding that the employer will pay the employee a fixed salary regardless of the number of hours worked; and (5) The employee must receive 50% overtime premium in addition to the fixed weekly salary for all hours that the employee works in excess of 40 during the week.

How to Legally Reduce Overtime Wages From Time and One-Half to Half-Time Standard Overtime Calculation – Assuming 45 hours $500 / 40 hours = $12.50/hour $12.50 x 1.5 = $18.75 $18.75 x 5 hours of overtime = $93.75 Total Wages for Week = Weekly salary + OT = $593.75 Fluctuating Workweek Calculation – Assuming 45 hours $500 / 45 hours = $11.11/hour $11.11 x .5 = 5.56 $5.56 x 5 = $27.78 Total Wages for Week = Weekly Salary + OT = $527.78

Department’s Goals Regarding New Salary Requirements Protect the FLSA’s intended O/T protections Simplify identification of non-exempt employees DOL concludes that 2004 level was too low

Politics to Blame? Administration directed DOL to update exemptions on March 13, 2014 Pushing minimum wage agenda w/out Congress

Criticisms Should have smaller increases to minimum salary periodically (every 3-4 years) Ignores cost of living differences Doesn’t include value of benefits and other “soft compensation” Set up a scenario in which minimum salary would automatically increase in time of recession

Timing July 2016 – Likely that new rule will be issued October 2016 – Likely earliest implementation (120 days given in ‘04) Caveat – DOL recently stated that the new rule could be effective as early as Summer 2016!

Projections & Magnitude In 2013, 144 million wage & salary workers in United States 43 million estimated exempt white collar workers (21 million “at risk”) Year 1 4.6 million workers impacted 36,000 HCE employees impacted

Unintended Consequences The DOL recognizes that employers are likely to reduce the working hours of currently exempt employees reclassified as a result of these regulations, and that the reduction in hours will probably lead to lower overall pay for these employees.

Potential Good News DOL is considering to allow non-discretionary bonuses and incentive-based payment to count towards part of Salary Test

Quiz All salaried employees are exempt. True False

Quiz “Salaried” employees are not eligible for overtime. True False

Quiz You cannot require an exempt employee to punch a time clock. True False

Quiz The Fair Labor Standards Act requires employers to provide meal periods. True False

Quiz You may require an exempt employee to work 50 hours per week as well as make up time he or she has missed. True False

Quiz Bob, a non-exempt employee, works 10 hours on Monday and 8 hours on Tuesday, Wednesday and Thursday. Friday he is out sick and takes 8 hours of accrued PTO. He is owed 42 hours of straight time and no overtime. True False

Quiz Sally, a non-exempt employee, works 10 hours on Christmas Day. She must be paid double time for the two hours of overtime for working on the holiday. True False

Quiz Billy, an exempt employee, takes 4 hours off for PTO. You can dock 4 hours of his accrued PTO or 4 hours of his salary if he does not have PTO accrued. True False

Quiz If a company requires its non-exempt employees to attend training meetings before or after normal working hours for their benefit, it does not have to pay for that time. True False

Quiz By paying a salary and allowing an employee discretionary powers, a company will have met all the criteria for exempt status under the Fair Labor Standards Act. True False

Quiz If an employee is part-time, they are considered a non-exempt employee. True False

Consequences of Misclassification DOL Audit Lawsuit Overtime Wages Liquidated Damages Treble Damages Attorneys’ Fees Personal Liability Under FLSA

Preparations to Consider Budget for increased wages Consider treating some employees as non-exempt Review current pay and number of hours worked On average, how many hours are employees working? Spread work among more employees Accurate time records Clock-In / Clock-Out No Automatic Lunch Deductions Signed Time-Sheets Management Review

QUESTIONS? Joshua R. Woodard Snell & Wilmer L.L.P. 602.382.6281 | jwoodard@swlaw.com