INTEGRATED HR SOLUTIONS FLSA: Exempt or Non Exempt

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INTEGRATED HR SOLUTIONS Lawrence M. Donoghue Lawrence has been practicing law and counseling individuals and businesses on labor and employment law for over 25 years. Phone:

INTEGRATED HR SOLUTIONS Classifying workers into exempt or non-exempt pay status is an important decision for any employer and is fraught with consequences for doing it incorrectly. These consequences include: Having to pay back overtime for two years to workers who should have been classified as non- exempt. Additional matching Social Security contributions and penalties for the employer on the back pay for unpaid overtime; Additional scrutiny from the Department of Labor over other pay practices. So, how does an employer determine how workers are classified?

INTEGRATED HR SOLUTIONS Fair Labor Standards Act The law governing classifying employees and eligibility for overtime is the federal Fair Labor Standards Act. (Please note that most states also have laws governing overtime but defer to the FLSA in terms of who is exempt or non- exempt). The FLSA grants an “exemption” from overtime “premium pay” for managerial, professional, administrative, outside sales and computer employees provided that: The employees earn at least $ per week; They are paid on a salary basis, meaning that their weekly compensation doesn’t vary based on their productivity, the company’s performance or the availability of work; Their job duties fall within the definition of manager/ executive, administrative, professional, outside sales or computer workers. What do these categories mean?

INTEGRATED HR SOLUTIONS Executive or Managerial An employee in this classification is one whose primary duty is in managing an enterprise or department or part of an enterprise. In doing so, the managerial employee exercises individual discretion in carrying out these duties, usually supervises two or more employees and has the authority to hire or fire people. Please note that these are the “customary duties” and the employee may engage in some non-managerial work, provided that those incidental duties don’t become primary.

INTEGRATED HR SOLUTIONS Administrative Employees classified as administrative primarily perform office or non-manual work relating to carrying out management policies or general business operations. This is someone who usually acts in a support role for an executive or proprietor and is subject to only a minimal amount of day to day supervision. This exemption also requires the administrative employee to use a great deal of individual discretion in carrying out these duties. A typical example of this classification would be the office manager. Clerical employees such as administrative assistants, billing clerks or payroll processors are non-exempt and are eligible for overtime pay.

INTEGRATED HR SOLUTIONS Professional Employees A professional employee must perform work that is predominately intellectual and varied and must be carried out with a great deal of discretion and judgment. In addition, the work must: Require knowledge of an advanced type in a field of science or learning customarily acquired throughout a prolonged course of study. This classification would be a staff lawyer or accountant. The work involves invention, imagination or creativity in a recognized field or artistic or creative endeavor. A marketing director for a company would meet this definition.

INTEGRATED HR SOLUTIONS Computer Employees Under the revised regulations issued by the Department of Labor in 2004, employees working in computer occupations perform duties relating to systems analysis, programming, software engineering or another position requiring an advanced level of skill are exempt. The job title does not matter, only that the person is engaged in these functions. The employee who sets up your office computer, plugs in the wires and turns it on is not a “computer employee” for purposes of this exemption.

INTEGRATED HR SOLUTIONS Outside Sales Employees Someone who works as an outside sales employee is exempt from OT pay under the FLSA. To be eligible for this exemption, this employee’s primary duties are: Making sales or obtaining orders or contracts for services or the use of facilities; Is regularly engaged away from the employer’s place of business; Sets his or her own schedule in meeting with customers; and Is largely unsupervised.

INTEGRATED HR SOLUTIONS Outside Sales Employees Outside sales employees generally work for commissions only, although they may receive a draw. They may have some incidental duties relating to delivery of the product or setting up and collecting payments without jeopardizing this status. Please note that employees working on company premises, taking orders or servicing customer’s accounts are not considered “outside sales” and are eligible for OT pay.

INTEGRATED HR SOLUTIONS Please note that these are the “duties” that these employees must perform to qualify for exempt status. Each of these employees, except outside sales, must be paid on a salary. What does this mean? What Classifies an Exempt Employee?

INTEGRATED HR SOLUTIONS The simple answer to this question is that exempt employees must receive the same amount of pay every week regardless of their hours worked so long as they present themselves as ready and willing to perform. Exempt employees may not have their pay reduced or “docked” based on hours worked or production. There are a few occasions when an employer may reduce a salaried employee’s pay but doing so for any reason other than those allowed by the FLSA regulations can cause the employee to be reclassified to non-exempt and qualify the employee for OT pay for the prior two years. What is a Salary under FLSA?

INTEGRATED HR SOLUTIONS You may calculate an exempt employee’s pay based on an hourly rate but may not vary the weekly salary compensation due to hours actually worked. Employers may also pay an amount over this hourly wage in recognition of performance or as a bonus without imperiling the exempt status. Do not give employees “comp time” meaning time off in lieu of pay or overtime unless you work for the federal government. Doing so will cause you endless headaches later if you’re audited by Department of Labor. Don’t alter how you calculate the “workweek” from pay period to pay period. Choose a starting day and time for the workweek and stick with it. You can change it but talk to a labor lawyer before you do so. What is a Salary under FLSA?

INTEGRATED HR SOLUTIONS Does this mean that everyone who isn’t exempt is eligible for over-time?

INTEGRATED HR SOLUTIONS Over-time Pay The FLSA and its regulations generally require that if someone does not meet the definition of exempt they are eligible for OT pay. However, there are certain jobs that are “excluded” from receiving OT, largely due to the nature of the work and the hours involved. Here are some examples: Cab drivers; Limousine drivers, provided that they are engaged in interstate commerce and are regulated by the Department of Transportation; Over the road truck drivers who customarily spend their time away from the employer’s premises and must comply with DOT regulations; People who work in concessions at places that are only open for a limited period of time such as beaches, professional baseball stadiums or golf courses; Carnival workers.

INTEGRATED HR SOLUTIONS Final Thought There are many other exclusions in a host of industries. My best advice is to seek advice from a labor lawyer or consult with the US Department of Labor if your business is out of the ordinary and is only open seasonally. Clearly a manufacturer or office environment would not apply.

INTEGRATED HR SOLUTIONS How is OT Calculated? Employees receive time and a half their regular rate of pay for all hours worked in excess of forty in a work week. The formula is simple but the definitions of these terms are not.

INTEGRATED HR SOLUTIONS What is a Work Week? The work week is any consecutive period of 168 hours with no breaks. The employer may designate when the work week begins but may not change the beginning of the work week when doing so is intended to deprive employees of overtime.

INTEGRATED HR SOLUTIONS What is a Work Week? Caution: The FLSA only recognizes the “work week” as the basis for overtime. The typical employer’s two week “pay period” does not factor in. Employers may not spread hours out over the pay period when calculating OT. An employee who works 60 hours in the first week of a pay period and 20 hours in the second is entitled to twenty hours of OT for that first week.

INTEGRATED HR SOLUTIONS What is the Regular Rate of Pay? Typically, the regular rate is the currently agreed upon hourly wage. Caution: Employees who receive a weekly or monthly bonus for perfect attendance or recognition of good performance must have that amount factored into their regular rate for purposes of OT.

INTEGRATED HR SOLUTIONS What is the Regular Rate of Pay? Example: An employee has an hourly wage of $ At the end of each week he receives $40.00 for perfect attendance. His regular rate is $ plus the $40.00 bonus divided by 40 hours or $ Overtime is calculated using that amount, not the $10.00 hourly wage.

INTEGRATED HR SOLUTIONS What is the Regular Rate of Pay? Paid holidays or vacation are not included in the calculation of regular rate. Bonuses paid annually or based on many factors such as company performance, unit performance or as profit sharing are not included in regular rate calculation.

INTEGRATED HR SOLUTIONS What are Hours Worked? In the old days, this was an easy question to answer. Employees’ hours were those spent from the time they clocked in until they clocked out. Now with the advent of cell phones, computers and telecommuting, this is a much more difficult question to answer.

INTEGRATED HR SOLUTIONS What are Hours Worked? The rule of thumb is that hours worked are those the employee spends at the request of the employer advancing the business’s interests. The employee is also entitled to receive pay for time the employer “suffered or permitted” the employee to work. What does “suffer or permit” mean?

INTEGRATED HR SOLUTIONS What are Hours Worked? Suffering or permitting means the employer either knew or allowed the employee to engage in “off hours” activities which benefited the employer. Example: With the employer’s knowledge, an employee comes in thirty minutes early every day and begins working at her computer.

INTEGRATED HR SOLUTIONS What are Hours Worked? Since the employer knew of the activities, this is compensable time. The same is true for employees allowed to work through lunch. Employees who take work home and return with a completed product the next day must also be compensated. Employers should also tell them not to do it again without prior approval.

INTEGRATED HR SOLUTIONS In the Computer Age, How Can an Employer Control Work Hours? The single most important way to control hours is to have each employee sign a weekly time card indicating hours worked by day and week. The time card should state that the employee is verifying these are the hours worked.

INTEGRATED HR SOLUTIONS In the Computer Age, How Can an Employer Control Work Hours? An employer may not coerce employees into listing fewer hours than actually worked. Even with a signed time card, employees often tell the Department of Labor they were not allowed to list OT hours. DOL will believe them unless you have a policy consistently enforced. The employer must have a policy telling employees that OT pay can only be worked with prior approval.

INTEGRATED HR SOLUTIONS New DOL App for Smartphones As if it weren’t hard enough to control workers’ hours, the Department of Labor has a free app for employee smart phones which employees use to keep track of hours, calculate OT and pay. Although this is new, my assumption is that DOL is likely encouraging employees to record time spent even thinking about work. If you don’t have a signed time sheet from the employee this app will be the record DOL believes.

INTEGRATED HR SOLUTIONS Please feel free to ask any questions you may have…

INTEGRATED HR SOLUTIONS Lawrence M. Donoghue Feel free to contact me: Phone: