1. Updates on Exempt Employees Under the FLSA
Joshua R. Woodard
Snell & Wilmer L.L.P. |

2. 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

3. 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

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

5. 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

6. 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

7. 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

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

9. 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”

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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

17. 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.

18. 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

19. 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

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

21. 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

22. 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!

23. 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

24. 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.

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

26. Quiz
All salaried employees are exempt.
True
False

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

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

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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

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

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

38. 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

39. QUESTIONS? Joshua R. Woodard Snell & Wilmer L.L.P.|