EMPLOYEES NOT EXEMPT FROM FAIR LABOR STANDARDS ACT LITIGATION

By: Bruce S. Harrison* and Mark J. Swerdlin*

Introduction

The recent phenomenon of plaintiffs pursuing wage-hour class action lawsuits should prompt employers to take a preventive look at their wage-hour practices. Most employers should review white-collar exemptions, salary administration and record keeping procedures.

Aggressive, well-funded law firms that have, in the past, pursued consumer and securities class actions have now turned their sights on employers. The incentive for bringing class action wage and hour lawsuits is substantial. Anecdotal evidence suggests that a significant percentage of employers unknowingly are committing wage-hour violations. Even sophisticated employers are want to misclassify employees as exempt from overtime, violate the salary basis test for exempt employees, or fail to record all hours worked by their non-exempt employees. [1] Even if the potential recovery for each individual is relatively small, the aggregate award can total millions of dollars, as can the plaintiffs' attorneys' fees. For example, in 2001, a California state court jury awarded $90 million in unpaid overtime to employees of an insurance company. [2] The judgment is expected to exceed $130 million after interest and attorneys' fees are calculated.

Suits for wage-hour violations are being filed not only in the federal courts, but also increasingly in state court, under state laws which do not always completely parallel federal law. [3] State court judges may be more likely to allow wage-hour actions to proceed to a jury for resolution.

In addition to actions "initiated" by class action law firms, unions are getting into the act. Class action litigation may play a part in corporate campaigns designed to pressure employers into dropping their opposition to union organizing or to settle a labor dispute.

Background

The Fair Labor Standards Act ("FLSA" or "the Act") was enacted in 1938 when the country was still in the throes of the Great Depression. The Act initially established a minimum wage of $0.25 per hour for most manufacturing businesses, or $10.00 a week for a 40-hour work week. The Act also required covered employers to pay employees an overtime premium of time and one half their regular hourly rate of pay for hours worked in excess of 40 in a single work week.

The Act's social purposes were twofold: (1) to prohibit exploitation of the large pool of unemployed willing to work for any wage, however minimal, and (2) to penalize employers who worked their employees more than 40 hours in a work week to accomplish production goals rather than supplement their work force from the ranks of the unemployed. The FLSA also established restrictions and limitations on homework and child labor, areas of potential wage and hour abuse stemming from the early days of the Industrial Revolution. In order to provide for meaningful investigation of complaints of alleged violations, the Act required covered employers to keep and maintain accurate daily and weekly records of time worked and straight time and overtime payments made to their employees.

Over the years the scope of FLSA coverage has been enlarged by Congress and by judicial interpretation. Today, the FLSA has been expanded to cover manufacturing, wholesale and retail enterprises, construction and health care industries, and federal, state and local governmental agencies. The Act in its present form is far removed from its origins and has grafted onto the American consciousness the concept of weekly overtime after 40 hours as a premium for working more than a 5-day work week, rather than an incentive to employ the unemployed.

Overtime

Under the FLSA, overtime generally must be paid for all hours over forty that an employee works in a seven-day workweek, with the overtime computed at one and one-half times the employee's "regular rate." 29 U.S.C. ß 207(a)(1). [4] The "regular rate" for a workweek is determined by dividing an employee's total wages earned by the total hours the employee worked.

In calculating an employee's "regular rate," all sums received must be included (e.g., non-discretionary bonus, shift differentials), unless the payment at issue is covered by a specific exclusion. One such exclusion is for certain "premium" payments that are calculated based upon the number of hours an employee worked (i.e., statutory or contractual overtime). [5] Basically, when the premium is paid for statutory or contractual overtime, e.g., hours in excess of forty in a week, eight in a day, or for work on Saturday, Sunday or a holiday, the premium moneys paid may be excluded from the calculation of the employee's regular rate and credited towards any overtime liability in the work week in question. [6]

Reimbursements and allowances made by the employer to an employee are generally excludable from the regular rate of pay if (1) they are for travel expenses or other expenses that were incurred for the benefit or convenience of the employer; and (2) the reimbursement reasonably approximates the amount actually expended. [7] In contrast, reimbursements or allowances that are personal to the employee (that is, expenses normally incurred by the employee, such as commuting costs) are included in the regular rate of pay. [8] Generally, meal allowances must be included in the regular rate of pay unless they are incurred in connection with overnight travel on behalf of the employer. This is true with respect to all meals, even though lunch is an expense that an employee would normally incur. [9]

Exemptions

The FLSA contains a number of statutory exemptions that render its standards inapplicable on an industry-wide basis or to specific types of employment, regardless of the industry involved. Some exemptions apply to both the minimum wage and overtime provisions, while others apply only to the overtime provisions. The question of whether an exemption applies is factual, and its answer depends on the particular circumstances of the employment involved.

A major exemption from the FLSA's overtime provisions is that applicable to executive, administrative and professional employees. These are the so-called "white collar" exemptions. To qualify for these "white collar" exemptions, an employee must satisfy two criteria. One criterion involves the nature of the duties performed; the other criterion concerns the manner in which the employee is compensated. [10] With respect to determining whether the white collar exemption for overtime pay applies because an employee is a professional, the implementing regulations of the FLSA set out a "long test" and a "short test." The short test applies to employees who are paid "on a salary or fee basis at a rate of not less than $250 per week." [11] The "long test" has lesser rate of pay requirement, $170 per week, but requires a slightly higher burden as to discretion of the employee and duties performed. Because the salary requirements are so minimal, usually employees will qualify under the "short test."

Primary duty requirement

The first criteria focuses on the nature of the employee's "primary duty." In a situation where the employee is performing both exempt and non-exempt work and the "joint employment" hours must be aggregated, the exempt work must constitute 50% or more of the total hours worked to be considered the employee's primary duty. Up to 49% of the employee's time may be spent in non-exempt work without jeopardizing the employee's exempt status, where an employer has an exempt employee performing part-time, non-exempt work. So long as the employee spends at least 50% or more of her time on truly exempt duties, the part-time hours will not jeopardize the employee's exempt status.

In general, executive employees are normally those who manage and supervise, while administrative employees are those who assist management in "staff" functions rather than "production." To be considered as exempt professional, the employee's primary duty must require scientific or specialized study and the employee's work must require the consistent exercise of discretion and judgment. [12]

Executive

In order to be exempt as an "executive" the employee's primary duty must consist of the management of the enterprise in which he/she is employed or of an established organizational component and must include the customary and regular direction of the work of two or more other employees in the enterprise or component. This exemption is typically at issue with respect to "working supervisors" who spend a significant portion of their day doing the same tasks as the employees they supervise. Managerial duties include the following: [13]

Administrative

To qualify for exemption as an "administrative" employee, the person's primary duty must be responsible office or non-manual work directly related to management policies or general business operations. The phrase "directly related to management policies or general business operations" is not limited to persons who participate in the formulation of management policies or in the operation of the business as a whole. [14] Business operations include those whose work affects policy or whose responsibility it is to execute or carry it out. The phrase also includes a wide variety of persons who either carry out major assignments in conducting the operations of the business, or whose work affects business operations to a substantial degree, even though their assignments are tasks related to the operation of a particular segment of the business.

Moreover, it must include work that requires the exercise of discretion and independent judgment. This involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. [15] An employee who merely applies knowledge in following prescribed procedures or determining which procedures to follow is not exercising discretion and independent judgment. [16] The appropriateness of an employer's application of this exemption most oftentimes turns on the extent to which the employee's tasks are routinized and his/her discretion circumscribed by detailed procedures. For example, Wage-Hour takes the position that the following positions do not generally qualify as "administrative: bank tellers, bookkeepers, private secretaries, shipping and receiving clerks." [17]

Case law analysis is useful in illustrating the administrative exemption. For example, in Piscione v. Ernst & Young, LLP, [18] an employee for an accounting firm helped improve client services by developing methodologies, acted as supervisor for several employees, was responsible for several clients and served as the primary contact, communicated with clients about problems in their account and suggested solutions, and trained junior employees and provided them with greater responsibility. The court determined that these activities required the use of discretion and independent judgment. The fact that some of the decisions were reviewed and could be reversed by higher-level management did not refute a finding of discretion and independent judgment. Moreover, the client responsibilities were directly related to the general business operations, and were of substantial importance to the employer.

In Ale v. Tennessee Valley Authority, [19] a group of shift supervisors did not qualify for the administrative exemption because they spent much of their time doing clerical work because the clerical support position had been eliminated. In addition, the supervisors spent a great deal of time completing payroll forms and calling employees in an attempt to get them to fill empty shifts.

Professional

To satisfy the professional exemption, an employer must prove that: (1) it paid an employee on a salary or fee basis; (2) the employee's work required "knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual or physical processes;" [20] and (3) the employee's job duties required him to customarily and regularly exercise discretion and independent judgment. [21] Typically, this exemption applies to individuals with a graduate degree, such as a M.D., Ph.D, or J.D., or those in "artistic" professions such as musicians, composers, and soloists.

Salary basis requirement

The second criterion for qualifying for a "white-collar" exemption concerns the manner in which the employee is compensated. In order to qualify for the "white collar" exemption as either an executive or administrative employee, the individual must be paid "on a salary basis." Department of Labor regulations provide that an employee is compensated "on a salary basis" if he/she regularly receives, on a weekly or less frequent basis, a predetermined amount of pay that constitutes all or part of his/her compensation and that is not subject to reduction because of variations in the quality or quantity of work done. Accordingly, the employee must receive his/her full salary for any week during which he/she performed services, even if the employer did not have sufficient work to keep him/her fully occupied. The employer, however, does not have to pay a salaried employee for a week during which an absence results in the employee performing no services during the entire week.

Deductions From Salary

Unwitting employers frequently violate the salary basis requirement by reducing an employee's pay for certain periods of absence. Such reductions can automatically disqualify the employee for exemption regardless of the nature of the duties being performed. The rules governing reductions in an exempt employee's salary are as follows:

The fact that salaried exempt employees use time clocks to record their hours of work does not, standing alone, make them hourly employees. It will raise a "red flag," however, that the employer may be treating them as hourly for some purposes. Similarly, the fact that an employee is paid overtime for certain hours is not fatal to a claim that he or she is an exempt employee, as the provision of additional compensation beyond an employee's base salary will not affect the person's exempt status. An employee may even be paid an hourly overtime rate for certain hours of work beyond his normal work schedule and still be exempt from the overtime provisions of the law for the balance of his "overtime" hours.The unintentional misapplication of the "on a salary basis" criterion can trigger liability for many thousands of dollars of overtime compensation. Hence, employers should continuously monitor how the pay of their "white collar" employees is being treated.

Conclusion

When viewed in the context of individual actions, FLSA lawsuits may not seem to be the most significant claims that employees or former employees can raise against employers. In fact, it is often not until an employer is faced with a multiple plaintiff or class action wage-hour case that an employer becomes aware of numerous FLSA violations within its midst. As this article suggests, the best time to consider and address wage hour compliance is before the court papers are filed.

"This article was originally published in Matthew Bender's, Employment Law Bulletin."