S T E P H E N W . S C H U E L E R 1 1 0 0 J P M O R G A N C H A S E - - PowerPoint PPT Presentation

S T E P H E N W . S C H U E L E R 1 1 0 0 J P M O R G A N C H A S E T O W E R 6 0 0 T R A V I S S T R E E T H O U S T O N , T E X A S 7 7 0 0 2 ( 7 1 3 ) 6 5 0 - 2 7 6 3

S S C H U E L E R @ W I N S T E A D . C O M

AGENDA

• Overview of the FLSA
• Employee vs. Independent Contractor
• General Requirements for Exemptions
• “White Collar” Exemptions
• Application to Public Agencies

OVERVIEW OF THE FLSA

• Enacted in 1938
• Revisions in 1986 extended coverage to public employers
• Revised again on April 20, 2004
• Main provisions:
• Federal minimum wage ($7.25/hour as of July 24, 2009)
• Overtime pay and threshold (40 hours)
• Exempt

ptio ions ns to to overtime time pay (focus of most FLSA litigation)

• Youth employment
• Recordkeeping
• Classifies employees as exempt (not covered by the FLSA) or non

non-exem empt (covered by the FLSA), and all employees are presumed umed to be non-exem empt unless the employer establishes that the position meets specific exemption criteria.

TWO TYPES OF COVERAGE

• Enterprise coverage -
• At least two (2) employees and $500,000 a year in business
• Individual coverage – workers engaged in:
• Interstate commerce
• Production of goods for commerce
• Closely related process or occupation directly essential (CRADE)
• Domestic service
• Engaging in interstate commerce includes:
• Making telephone calls
• Sending letters to other states
• Processing credit card transactions
• Travelling to other states
• Bottom line – Almost every employee in the US is covered by the FLSA

REQUIREMENTS FOR NON-EXEMPT EMPLOYEES

• Employee must be compensated (i) at or above minimum wage and (ii) at

a rate of time and one-half for any hours worked over forty (40) hours in a “workweek” (i.e., the seven (7) day workweek defined by the employer)

• Employer required to keep the following wages and time records:
• Time and day of week when workweek begins
• Hours worked each day
• Total hours worked each workweek
• Basis on which wages are paid (i.e., per hour, piecework)
• Regular hourly pay rate
• Total daily or weekly straight-time earnings
• Total overtime earnings
• Additions to or deductions from wages
• Total wages paid each pay period
• Date of payment and pay period covered by payment

REQUIREMENTS FOR NON-EXEMPT EMPLOYEES (CONT.)

• Employers may use any timekeeping method they choose (e.g., time

clocks, manual timesheets, electronic timesheets)

• Payroll records must be retained for at least three (3) years
• Records on which wages are based (e.g., time cards, timesheets,

computer records) must be retained for at least two (2) years

• Some states have enacted overtime and minimum wage laws which differ

from the FLSA

• Employees subject to both the state and federal overtime and

minimum wage laws are entitled to the standard overtime and minimum wage that would provide higher compensation

ENFORCEMENT OF THE FLSA

• United States Department of Labor - Wage and Hour

Division (WHD)

• Investigation of claims; and
• Lawsuits for injunctive relief, back pay and liquidated

damages

• Private Lawsuits or Collective Actions
• Recoverable damages include back wages and

liquidated damages for up to three (3) years if violation was willful, attorneys’ fees and costs

• United States Department of Justice
• Criminal prosecution, imprisonment and civil money

penalties

SUPPORT FOR EMPLOYEES

• WHD’s Timesheet App (iOS)
• Record hours worked
• Calculate amount owed by employer, including
• vertime pay
• Sends an email report of timesheet
• Does not include tips, commission, bonuses,

deductions, holiday or weekend pay, shift differentials or rest pay

• If accurate, could provide evidence in an FLSA

lawsuit

EMPLOYEE VS. INDEPENDENT CONTRACTOR

• In order for the FLSA to apply, there must be an emplo

loym yment ent relati tion

• nshi

ship between the “employer” and the “employee”

• Implications of Misclassifications:
• Workers' Compensation
• Unemployment
• Taxes
• Employee benefits
• Payment of overtime and minimum wage
• Discrimination
• Recordkeeping

HOW IS CONTRACTOR STATUS DETERMINED?

Contract tract with h individ vidua ual and Simp mply y paying ng on a 1099 are not

• t det

etermi minat ativ ive! e!

• More than one test exists:
• IRS and TWC test = "Right to Control“
• USDOL test = "Economic Reality“
• Common law test
• Highly factual intensive tests

IRS AND TWC – “RIGHT TO CONTROL” TEST

• Rev. Rul. 87-41 contains a 20-factor test to determine worker

classification, including (also contained in Treas. Reg. 31.3121(d)-1(c)(2) and IRS Manual – Audit, Part IV, Exhibit 4640-1):

• Extent of control, training and integration
• Whether services must be personally rendered
• Full-time nature of employment, set work hours
• Whether the work may be performed outside of the employer’s location
• Whether reports must be regularly submitted
• Whether individual is paid by the hour, week or month
• The identity of the person responsible for the payment of business

expenses, the furnishing of equipment/tools

• Whether the individual performing services has the right to work for

more than one entity at a time

• No one factor is dispositive, but a primary factor tends to be “control

DOL – “ECONOMIC REALITIES” TEST

• Different from the IRS, the DOL applies an economic realities test:
• Is the worker economically dependent upon the employer or “in

in busi sine ness ss for himsel self”?

• Plumber
• Is the work an integr

gral part of the employer’s business?

• Dole v. Snell: Cake decorators
• Secty of Labor v. Mauritzen: Pickle pickers
• How does the worker’s relative investment compare to the employer’s

investment?

• - Who provides the tools and equipment?
• Does the work performed require special skill and initiative?
• Is the relationship between the worker and employer permanent or

indefinite?

• What is the nature and degree of the employer’s control?

HIGH RISK SCENARIOS

• Performing the same duties as employees
• Performing essential function of the business
• Employee resigns or retires and then rehired as an independent

contractor doing the same job

• Working a long time or exclusively for one company
• Being provided tools, equipment, office space, etc.

HIGH RISK SCENARIOS

• Being paid a salary
• Being able to direct or control employees
• Being disciplined by the company or given a performance review
• Receiving benefits along with other employees (non-cash awards,

bonuses, insurance)

• Staffing companies can provide a safe haven
• Must be legitimate staffing company – other customers

TIPS TO PREVENT MISCLASSIFICATION

• Avoid classifying former employees as independent contractors
• Use independent contractors who are incorporated and market their

services to the public

• Do not be an independent contractor’s first or only customer
• Pay by invoice and negotiate rate
• No training, reporting obligations, evaluations, handbook
• Do not permit independent contractor to make employment decisions for

your employees

• Have signed agreement (but not determinative as to status)
• Confirm status
• No benefits
• Pay by project (not hourly)

HERE IS ALL YOU NEED TO REMEMBER TO AVOID MISCLASSIFICATION

EXEMPT VS. NON-EXEMPT

• Genera

erally, to be exempt an employee must:

• Qualify for one of the exemptions based on the employee’s primary

duties (more than 50% of time spent working)

• Regularly exercise discretion and independent judgment, and

and

• Be paid on salary basis for the job, not
• t the number of hours worked
• “White Collar” Exemptions:
• Executive employees
• Administrative employees
• Learned or creative professionals
• Computer professionals
• Outside sales employees

THE SALARY BASIS TEST

• Employee “regularly receives each pay period on a weekly, or less frequent

basis, a prede determin ermined ed amount nt constituting all or party of the employee’s compensation, which amount is not

• t subject

ect to reducti duction n becau ause e of va varia iati tions

• ns in the quality

ity or quantit tity of the work rk performed

• rmed”
• Minimum salary of $455.00/week ($23,600/year)
• No pay docki

king! ng! Employee must be paid the full salary for any week in which the employee performs any work, but need not be paid for any workweek when no work is performed

• Seven (7) exceptions
• Full day deductions permitted in very limited circumstances (e.g.,

employee's personal choice – sick leave, vacation, etc.)

THE SALARY BASIS TEST (CONT.)

• Employers may require exempt employees to take vacation or PTO,

including for a facility or plant shutdown

• Employers may institute “voluntary time-off” programs and may make

deductions from salary for full-day increments

• Employers may reduce an exempt employee’s salary in relation to a

reduction in hours in the normal scheduled workweek

• Must be a bona fide reduction not for the purpose of circumventing the

salary basis requirement, and must not lower compensation below minimum salary

• May not determine the length of the workweek on a week-to-week

basis

SAFE HARBOR POLICY

• An actual practice of making an improper deductions from salary will

result in the loss of the exemption

• During the time period in which improper deduction were made
• For employees in the same job classifications
• Working for the same managers responsible for the actual improper

deductions

• Exempt status not lost over salary basis if:
• Clearly communicated policy prohibiting improper deductions with a

complaint mechanism

• Reimburse employees for improper deductions
• Good faith commitment to comply with requirement
• Not available if employer willfully violates policy by continuing to make

improper deductions after complaints are made

DOL’S PROPOSED RULE CHANGES TO SALARY LEVEL

• June 30, 2015 – DOL announced a proposed rule change that will

substantially reduce the number of executive, administrative, and professional employees who would be exempt under the FLSA by doubli doubling ng the threshold salary level for exemptions to $970/week ($50,440/year)

• Estimated five (5) million previously exempt workers will become subject

to the FLSA’s minimum wage and overtime requirements beginning in 2016

• Substantial increase in payroll costs and new recordkeeping requirements

for employees who were previously exempt

• Employers should consider revising their job descriptions and auditing the

exemption status of all positions

EXECUTIVE EXEMPTION

• Paid on a “Salary Basis,” plus
• Manageme

gement nt: Primary duty is management of business or customarily recognized department or subdivision

• Setting and adjusting employee pay and hours
• Maintaining production or sales records
• Evaluating employee performance
• Handling employee complaints and grievances
• Supervision

ision: Customarily and regularly supervises work of two (2) or more

• ther employees in department
• Author

horit ity: Hires or fires other employees or makes recommendations as to hiring, firing, or other status changes given particular weight

EXECUTIVE EXEMPTION (EXAMPLES*)

Exempt pt:

• Plant manager
• Business operations manager
• Department supervisor
• Store manager
• Construction project superintendent

Non-exem empt pt:

• Working foreman
• Relief supervisor
• Store “manager” who spends only a small portion of time on exempt work

*depends on facts, position or title alone insufficient to establish status

EXECUTIVE EXEMPTION (CASE LAW)

• Two (2) store managers covered by the executive exemption
• Primary duties (more than 50%) were managerial, including:
• Hiring, supervising, and disciplining employees
• Promoting, demoting, and firing employees
• Training and setting or adjusting work schedules
• Delegating and prioritizing tasks and assignments
• Exercised discretion in performing managerial duties
• Paid more than nonexempt employees and could earn bonus based on

store profitability

BUSINESS OWNER EXEMPTION

• The executive exemption also covers employees who:
• Own at least a bona fide 20% equity interest in the enterprise
• Are actively engaged in management of the enterprise
• The salary level and salary basis requirements do not apply

ADMINSTRATIVE EXEMPTION

• Paid on a “Salary Basis,” plus
• Primary duty is
• The performance of office or non-manual work directly related to

managem ement ent or general ral operati rations

• ns of employer or employer’s

customers, and and

• The exercise of discretion and independent judgment with respect to

matters of significance (e.g., comparing and evaluating possible courses of conduct, and acting or making decision after various possibilities are considered)

MANAGEMENT OR GENERAL BUSINESS OPERATIONS

• Tax
• Finance
• Accounting
• Budgeting
• Auditing
• Insurance
• Quality Control
• Purchasing
• Procurement
• Advertising
• Marketing
• Research
• Safety and Health
• Human Resources
• Employee Benefits
• Labor Relations
• Public and Government Relations
• Legal and Regulatory Compliance
• Computer Network, Internet, and

Database Administration

ADMINSTRATIVE EXEMPTION (EXAMPLES*)

Exempt pt:

• Insurance claims adjuster or internal auditor
• Certain financial industry employees
• Team leader for major projects
• Administrative assistant to senior executive
• HR manager or generalist
• Purchasing agent

Non-exem empt pt:

• Inspector or examiner/grader
• Comparison shopper
• Mortgage loan officers
• Financial industry employees whose duty is to sell financial products

*depends on facts, position or title alone insufficient to establish status

ADMINSTRATIVE EXEMPTION (CASE LAW)

• Ninety-one (91) “Special Investigators” qualify for administrative

exemption

• Primary duties (more than 50%) were conducting investigations to resolve

indicators of fraud in suspicious claims, including:

• Interview witnesses
• Gathered information
• Recommended and sometimes supervised vendors
• Involved the exercise of discretion and independent judgment
• Used “experience and knowledge . . . to distinguish relevant from

irrelevant, fact from untruth, to resolve competing versions of events”

• Had “nearly unilateral discretion” in referring cases with unresolved

fraud indicators to law enforcement

• Significant matters: Determined if claims were paid or not

LEARNED PROFESSIONAL EXEMPTION

• Paid on a Salary or Fee Basis, plus
• Primary duty is the performance of work requiring advanced knowledge
• The work must be predominantly intellectual and require consistent

exercise of discretion and judgment

• Advanced knowledge must be in field of science or learning

customarily acquired by prolonged course of specialized intellectual instruction

FIELDS OF SCIENCE OR LEARNING

• Occupations with recognized professional status, as distinguished from

the mechanical arts or skilled trades

• Law
• Accounting
• Actuarial computation
• Theology
• Teaching
• Physical, chemical, and biological sciences
• Medicine
• Architecture
• Pharmacy
• Engineering

LEARNED PROFESSIONAL EXEMPTION (EXAMPLES*)

Exempt pt:

• Medical doctor, physician, dentist, dental hygienist or registered nurse
• Pharmacist
• Lawyer or accountant
• Engineer or architect
• Teacher or professors
• Executive chef or sous chef

Non-exem empt pt:

• Licensed practical nurse, nurse aide, or paramedic
• Paralegal or legal assistant
• Accounting clerk or bookkeeper
• Cook who perform routine mental, manual, mechanical or physical work

*depends on facts, position or title alone insufficient to establish status

CREATIVE PROFESSIONAL EXEMPTION

• Paid on a Salary or Fee Basis, plus
• Primary duty is the performance of work requiring invention, imagination,
• riginality, or talent in recognized field of artistic or creative endeavor

FIELDS OF ARTISTIC OR CREATIVE ENDEAVOR

Music ic:

• Musician, composer, conductor, or soloist

Writing ng:

• Essayist, novelist, short-story writer or play writer
• Screen play writers who choose their own subjects
• Responsible writing positions in advertising agencies

Ac Acti ting ng Graphi hic c Arts:

• Painter, cartoonist or photographer
• Investigative news reporter

COMPUTER PROFESSIONAL EXEMPTION

• Paid at least $27.63/hour for every hour worked, including overtime, or
• Paid on a Salary or F

r Fee Basis, plus

• Primary duties are:
• Applying systems analysis techniques
• Design, develop, document, analyze, create, test or modify computer

systems or programs

COMPUTER PROFESSIONAL EXEMPTION (EXAMPLES*)

Exempt pt:

• Computer systems analyst
• Software engineers
• Most computer programmers

Non-exem empt pt:

• Entry level programmers
• Computer manufacture and repair
• CAD operators
• Help desk workers

*depends on facts, position or title alone insufficient to establish status

OUTSIDE SALES EXEMPTION

• No compensation test
• Primary duty must be making sales or obtaining orders or contracts for

services or use of facilities for consideration paid by customer

• Customarily and regularly engaged awa

way from employer’s place of business in performing primary duty

OUTSIDE SALES EXEMPTION (EXAMPLES*)

Exempt pt:

• Most sales representatives
• Some real estate agents

*depends on facts, position or title alone insufficient to establish status

HIGHLY COMPENSATED EMPLOYEES

• Total annual compensation of at least $100,000/year
• At least $455/week on salary basis
• Including commissions, non-discretionary bonuses, and other non-

discretionary compensation

• Excluding cost of benefits
• Customarily and regularly performs at least one exempt duty of an

executive, administrative or professional employee

• Primary duty includes performing office or non-manual work:

PUBLIC AGENCIES UNDER THE FLSA

• A “public agency” covered by the FLSA include the U.S. Government,

Government of a State or political subdivision thereof, any agency of the U.S., a State, or political subdivision of a State, any interstate governmental agency

PUBLIC AGENCIES UNDER THE FLSA

• The calculation of overtime pay may differ for certain employees if:
• Employees who solely at their option occasionally work on a part-time

basis for the same agency in a different capacity

• Employees who solely at their option with agency approval substitute

for another during scheduled work hours in the same capacity

• Mass transit employees who spend some time engaged in charter

activities

• Employees working in separate seasonal amusement or recreational

establishments (e.g., swimming pools, parks, etc.)

• Hospital or residential care establishments may, with agreement or

understanding of employees, adopt a fixed work period of fourteen (14) consecutive days and pay overtime after eight (8) hours in a day

• r eighty (80) in the work period, whichever is greater

FIRE PROTECTION AND LAW ENFORCEMENT

• No limit on the amount of nonexempt work that an employee “emp

mployed ed in fire prot

• tection

ection acti tiviti ties es” may perform.

• Fire protection personnel include firefighters, paramedics, emergency

medical technicians, rescue workers, ambulance personnel, or hazardous materials workers who:

• Are trained in fire suppression
• Have the legal authority and responsibility to engage in fire

suppression

• Are employed by a fire department of a municipality, county, fire

district, or State

• Are engaged in the prevention, control and extinguishment of fires or

responses to emergency situations where life, property or the environment is at risk

FIRE PROTECTION AND LAW ENFORCEMENT (CONT.)

• Employees engaged in law enforcement activities may perform some

nonexempt work that is not performed as an incident to or in conjunction with their law enforcement activities.

• Law enforcement personnel are employees who:
• Are empowered by State or local ordinance to enforce laws designed

to maintain peace and order, protect life and property, and to prevent and detect crimes

• Who have the power to arrest
• who have undergone training in law enforcement
• A person who spends more than 20% of the workweek or applicable work

period in nonexempt activities is not considered to be an employee “engaged in law enforcement activities.”

FIRE PROTECTION AND LAW ENFORCEMENT (CONT.)

• Fire protection and law enforcement employees may at their own option

perform special duty work in fire protection and law enforcement for a separate and independent employer without including the wages and hours in regular rate or overtime determinations for the primary public employer

• Fire Departments or Police Departments may establish a work period

ranging from 7 to 28 days in which overtime need be paid only after a specified number of hours in each work period

• Any employee who in any workweek is employed by an agency employing

less than 5 employees in fire protection or law enforcement may be exempt from overtime

COMMON ERRORS EMPLOYERS SHOULD AVOID

• Failing to keep proper wage and time records
• Misunderstanding what is “compensable time” outside of principal work

activities (e.g., travel, on-call duty, training, short rest and meal periods, changing clothes or preparing for work)

• Assuming that all employees paid a salary are not due overtime pay
• Improperly applying an exemption to a non-exempt position (applies to

each position individually based on duties and responsibilities, not to a class, role, working title or category of position)

• Making improper deductions from an employee’s salary
• Not updating job descriptions and employee handbook and policies to

conform with laws and regulations

• Failing to pay an employee for working overtime without authorization (a

disciplinary issue, not a compensation issue)

GREAT REFERENCES FOR ASSISTANCE

• The statute (29 U.S.C. § 201)
• The implementing regulations (29 C.F.R. Part 500-899)
• Interpretive Guidance from the WHD (opinion letters, field operations

handbook, and field bulletins)

• FLSA poster
• WHD’s Handy Reference Guide and Fact Sheets
• Department of Labor or WHD’s Website (http://www.wagehour.dol.gov)

4823-5732-4326