1 BB. An Update on the Fair Labor Standards Act and How the New White Collar Exemption Regulations will Affect Long Term Care Facilities Cohen & Grigsby PC Pittsburgh, PA Cohen & Grigsby, PC Pittsburgh, PA I. INTRODUCTION W. Scott Hardy, Esq. John E. Lyncheski, Esq. A. Background The Fair Labor Standards Act ( FLSA ) requires that certain employees be paid a minimum wage of at least $5.15 per hour. The FLSA also requires that employees not classified as exempt be compensated at the rate of time and one half of their regular rate for all hours worked in excess of forty (40) in a workweek. A special provision allows healthcare employers to calculate overtime in certain circumstances based on a fourteen (14) day period and to instead pay overtime after eighty (80) hours of work in that fourteen (14) day period provided the employer also pays overtime for all hours worked in excess of eight (8) in a given workday. The FLSA also requires that records be maintained of hours worked and pay for a period of three (3) years and that a notice be posted notifying employees of their rights under the Act. B. The DOL's New White Collar Exemption Regulations On April 20, 2004, U.S. Secretary of Labor Elaine Chao announced revised regulations that affect millions of employees including employees working in long term care and their eligibility for overtime under the FLSA. These new regulations, which constitute the first broad revision in the DOL's overtime guidelines in 50 years, seek to clarify and simplify the tests that must be applied by employers in determining which employees are entitled to receive overtime compensation. These new regulations address the so-called white collar exemptions under the FLSA which encompass employees who work within certain administrative, professional and executive classifications. The regulations became effective on August 23, II. AREAS OF POTENTIAL VULNERABILITY A. Hours Worked ( 29 C.F.R ; 29 C.F.R ) 1. Principal activities -- any work of consequence performed for an employer, no matter when the work is performed. Includes all activities that are an integral part of the principal activity including those closely related activities that are indispensable to its performance. 2. Preliminary activities -- activities engaged in before the
2 commencement of an employee's principal activity or activities on any particular workday a. Equipment maintenance b. Changing clothes, showering or washing if required by the nature of the work ( 29 C.F.R ) 3. Postliminary activities -- activities engaged in after the completion of principal activities on any particular workday a. Cleaning cash register or totaling receipts b. Arranging or putting merchandise away 4. Regular working hours a. Non compensable lunch breaks 1) Uninterrupted 2) Minimum one-half hour in duration B. Travel Time ( 29 C.F.R ) 1. Generally, employers do not have to pay employees a. For time spent traveling between their homes and the first work site and between the last work site and their homes, when driving the employer's vehicle is strictly voluntary and not a condition of employment; b. If the vehicle is the type that normally would be used for commuting; c. If the employee incurs no costs for driving or parking the vehicle; and d. The work sites are within the normal commuting area of the employer's establishment 2. Home to work on special one-day assignments in another city 3. Home to work in emergency situations 4. Travel away from employee's home city when the employee uses his own vehicle 5. Travel away from employee's home city C. Lectures, meetings and training programs ( 29 C.F.R ; 29 C.F.R ) 1. Generally, attendance at lectures, meetings, training programs need not be counted as working time so long as all of the four following criteria are met: a. Attendance is outside of the employee's regular working hours b. Attendance is in fact voluntary c. The course, lecture or meeting is not directly related to the employee's job d. The employee does not perform any productive work during such attendance 2. Exceptions: a. Program of instruction which corresponds to outside courses at institutions of learning 1) Voluntary attendance by an employee at such courses outside of
3 working hours would not be hours worked even if they are directly related to the job or paid for by the employer b. Voluntary, independent training c. Apprenticeship training 3. Training designed to upgrade skill level a. Where training course is instituted for advancement through upgrading the employee's skill and is not intended to make the employee more efficient in his present job, the training is not considered to be directly related to the employee's job even though the course incidentally improves his skill in doing his regular work D. Volunteer Activities ( 29 C.F.R ) E. Non-Exempt vs. Exempt Status III. THE NEW SECTION 541 REGULATIONS: THE NEW CONTOURS OF THE WHITE-COLLAR EXEMPTIONS Section 13(a) of the FLSA provides exemptions from the minimum wage and overtime provisions for employees employed as bona fide executive, administrative, and professional employees, as well as certain computer employees and outside sales personnel. To be an executive, administrative, or professional employee exempt from overtime provisions of the FLSA under the DOL's new whitecollar exemption regulations, the employee (or employee classification) in question must satisfy the salary amount, salary basis, and duties tests. The contours of these tests have been redefined by new regulations as follows: A. Salary Amount Test 1. Threshold Salary Level The new regulations establish a required minimum guaranteed weekly salary of $455 (or $910 bi-weekly; $ semi-monthly; $1, monthly; or $23,660 annually) for most exempt executive, administrative and professional employees. See 29 C.F.R There is no minimum salary amount for professional employees engaged as teachers, lawyers, and doctors. See 29 C.F.R (e); 29 C.F.R Exempt computer employees may meet the compensation threshold by earning an hourly rate not less than $ See 29 C.F.R (d) and 29 C.F.R (b). Academic administrative employees may meet the compensation threshold by earning a salary at a rate at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed. See 29 C.F.R (c) and 29 C.F.R (a)(1). The minimum salary amount must be exclusive of board, lodging or other facilities, that is, free and clear of any claimed credit for non-cash items of value that the employer may provide to an employee. See 29 C.F.R. Sec ; see also 29 C.F.R. Sec.
4 The minimum salary amount does not apply to any employee who owns at least a bona fide 20% equity interest in the enterprise if the employee is actively engaged in its management. See 29 C.F.R. Sec Highly Compensated Employees The new regulations create an exemption for any employee with total annual compensation of at least $100,000 if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. See 29 C.F.R B. Salary Basis Test Except for teachers, lawyers, doctors, and computer employees, all executive, administrative and professional employees must be paid a bona fide salary to be exempt. 1. Salary Basis Defined An employee will be considered to be paid on a salary basis if the employee regularly receives each pay period a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Except in limited circumstances, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. See 29 C.F.R Fee Basis Is Acceptable For Certain Employees As an acceptable alternative to the salary basis, Administrative and professional employees may be paid on a fee basis ( i.e., the employee is paid an agreed sum for a single, unique job regardless of the time required for its completion) and remain exempt. See 29 C.F.R Deductions. Certain deductions may be taken from an exempt employee's salary without destroying their exempt status. Deductions are permissible in the following circumstances: 1) Absences of a day or more for personal reasons other than sickness or accident, 29 C.F.R (b)(1); 2) Absences of a day or more because of sickness or disability if the employer has a plan, policy or practice providing compensation for loss of salary due to sickness or disability (similarly, if benefits are provided in accordance with a state sickness and disability insurance law, or private sickness and disability insurance plan), 29 C.F.R (b)(2); 3) Industrial accidents if the employee is compensated for loss of salary in accordance with applicable compensation law or plan adopted by the employer, 29 C.F.R (b)(2);
5 4) Penalties imposed in good faith for violations of major safety rules, 29 C.F.R (b)(4); 5) Partial days under the Family and Medical Leave Act, 29 C.F.R (b)(7); 6) Deductions from vacation or sick leave credits, provided that the deductions do not reduce the compensation for any week in which some work is performed, 29 C.F.R (b)(2); 7) Prorating an employee's salary for the initial or terminal week of employment for time actually worked, 29 C.F.R (b)(6); and 8) Deductions for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace rules if imposed pursuant to a written policy applicable to all employees, 29 C.F.R (b)(5). This deduction is newly permissible. The prior regulations required unpaid disciplinary suspensions to be at least a week in duration to avoid destroying the disciplined employee's exempt status. However, certain other deductions will result in the destruction of an employee's exempt status, including the following: 1) Salary deductions for part-day absences; 2) Benefits deductions for part-day absences from sick, personal or vacation leave; 3) Payment of additional compensation, including overtime pay or compensatory time off, tied directly to the number of extra hours worked; 4) Salary deductions for absences caused by jury duty, attendance as a witness or temporary military leave; 5) Suspensions without pay for temporary budget-related business requirements. 6) Effect of Improper Deductions From Salary An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis. 29 C.F.R An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis. Factors to consider to determine if the employer has such an actual practice include: (i) the number of improper deductions; (ii) the time period during which the employer made improper deductions; (iii) the number and geographic location of employees whose salary was improperly reduced; (iv) the number and geographic location of managers responsible for taking the improper deductions; and (v) whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. 29 C.F.R (a). If an employer is deemed to have an actual practice of taking impermissible deductions, then the exempt status is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. 29 C.F.R (b).
6 4. Safe Harbor Improper deductions that are either isolated or inadvertent will not result in loss of the exemption if the employer reimburses the employee for such improper deductions. See 29 C.F.R (c). An employer will not lose exemptions for any employees if the employer has a clearly communicated (and written) policy that prohibits improper pay deductions and includes a complaint mechanism, if the employer reimburses employees for improper deductions, and if the employer makes a good faith commitment to comply in the future. See 29 C.F.R (d). 5. Minimum Guarantee Plus Extra An employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis. See 29 C.F.R C. Duties Test 1. Definitions & Common Rules For All Exemptions: (a) Primary Duty. To qualify as exempt, an employee's primary duty must be the performance of exempt work. The term primary duty means the principal, main, major, or most important duty that the employee performs. Factors to consider when determining the primary duty of an employee include: (i) relative importance of exempt duties as compared to other duties; (ii) the amount of time spent performing exempt work (while time along is not a controlling factor, spending more than 50% on exempt work will generally satisfy the primary duty requirement); (iii) the employee's relative freedom from direct supervision; and (iv) the relationship between the employee's salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. See 29 C.F.R. Sec (b) Directly and Closely Related. Work that is directly and closely related to the performance of exempt work is also considered exempt work. The phrase directly and closely related means tasks that are related to exempt duties and that contribute to or facilitate performance of exempt work. See 29 C.F.R. Sec (c) Customarily and Regularly. The phrase customarily and regularly means a frequency that is greater than occasional but which may be less than constant, including work normally and recurrently performed every workweek; it does not include isolated and one time tasks. See 29 C.F.R. Sec ; see also 29 C.F.R. Sec (defining occasional tasks ). (d) Emergencies. An exempt employee will not lose the exemption by performing work of a normally nonexempt nature because of the existence of an emergency that threatens the safety of employees, a cessation of operations, or serious damage to the employer's property. In this context, emergencies are events that the employer cannot reasonably anticipate. See 29 C.F.R. Sec (e) Concurrent Duties. Concurrent performance of exempt and
7 nonexempt work does not disqualify an employee from an exemption if the exemption requirements are otherwise met. See 29 C.F.R. Secs Executive Exemption ( 29 C.F.R. Sec et. seq. ) (a) An exempt Executive's primary duty is the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision of the enterprise. See 29 C.F.R. Sec (a)(2); see also 29 C.F.R. Sec (defining management by way of various illustrative examples such as: interviewing, selecting, and training employees; setting and adjusting rates of pay and hours of work, etc.). (b) An exempt Executive must customarily and regularly direct the work of two or more other employees. See 29 C.F.R. Sec (a)(3); see also 29 C.F.R. Sec (defining two or more employees as two full-time employees or its equivalent, such as one full-time employee and two half-time employees; the hours worked by the supervised employees cannot be counted by more than one putative exempt executive employee; and an employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager's absence does not meet this requirement); and (c) An exempt Executive must have the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight. See 29 C.F.R. Sec (a)(4); see also 29 C.F.R. Sec (identifying several factors to consider when a putative executive's suggestions and recommendations are given particular weight : (i) whether it is part of the employee's job duties to make such suggestions and recommendations; (ii) the frequency with which such suggestions and recommendations are made or requested; and (iii) the frequency with which the employee's suggestions and recommendations are relied upon. 3. Administrative Exemption ( 29 C.F.R. Secs et. seq. ) (a) An exempt administrative employee's primary duty is the performance of office or non-manual work directed related to the management or general business operations of the employer or the employer's customers. See 29 C.F.R. Sec (a)(2); see also 29 C.F.R. Sec (defining directed related to the management or general business operations as work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a production line or selling a product in a retail or service establishment). (b) An exempt administrative employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. See 29 C.F.R. Sec (a)(3); see also 29 C.F.R. Sec (defining exercise of discretion and independent judgment as involving the comparison and the evaluation of possible courses of conduct, and acting or making a decision after
8 the various possibilities have been considered; also defining matters of significance to mean the level of importance or consequence of the work performed ). (c) Examples of exempt administrative employees include: insurance claims adjusters; certain executive assistants to a senior executive; certain human resource managers; and purchasing agents with authority to bind the enterprise on significant purchases. See 29 C.F.R. Sec (a) (j). (d) Separate provision for defining the exemption for administrative employees of educational establishments provides exemption for employees' whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision of it. See 29 C.F.R. Sec Professional Exemption ( 29 C.F.R. Secs et. seq. ) (a) Learned Professionals Primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. 29 C.F.R. Secs (a). (i) Work requiring advanced knowledge is defined as work which predominately is intellectual in character, and which includes the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical or physical work. Advanced knowledge is used generally to analyze, interpret or make deductions from varying facts or circumstances; advanced knowledge cannot be attained at the high school level. 29 C.F.R. Sec (b). (ii) Field of science or learning means traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades. 29 C.F.R. Sec (c). (iii) The phrase customarily acquired by a prolonged course of specialized intellectual instruction limits this exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. 29 C.F.R. Sec (d). (iv) The learned professional exemption does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction. 29 C.F.R. Sec (d) (v) Examples of exempt learned professional employees include: registered or certified medical technologists; registered nurses; certain dental hygienists; certain physician assistants; certified public accountants; certain chefs; certain athletic trainers; certain licensed funeral directors and embalmers. 29 C.F.R. Sec (e)(1) (9) (vi) Possibly other occupations that require advanced specialized degree and require accreditation and/or licensure.
9 (b) Creative Professionals Primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic endeavor as opposed to routine mental, manual, mechanical or physical work; this exemption does not apply to work which can be produced by a person with general manual or intellectual ability and training. 29 C.F.R. Sec (a). (i) The term recognized field of artistic endeavor includes such fields as music, writing, acting, and the graphic arts. 29 C.F.R. Sect (b). (ii) The phrase work requiring invention, imagination, originality or talent is meant to distinguish the creative/artistic professions from work that depends primarily on intelligence, diligence, and accuracy. 29 C.F.R. Sec (c). (c) Teachers A teacher is an exempt professional employee if he or she has the primary duty of teaching in an educational establishment, including teachers of skilled and semiskilled trades and occupations. 29 C.F.R. Sec (d) Lawyers & Doctors Doctors and lawyers are exempt professionals if they hold a valid license or certificate permitting the practice of law or medicine (or any of their branches) and is actually engaged in the practice of law or medicine. Any employee who holds the requisite academic degree for the general practice of medicine and is engaged in an internship or resident program is also an exempt professional employee. 29 C.F.R. Sect (a)(1) (2). Exempt doctors include: medical physicians, osteopathic physicians, podiatrists, dentists, and optometrists. 29 C.F.R. Sec (b). 5. Computer Professionals ( 29 C.F.R. Secs et. seq. ) (a) Exempt computer professionals must have as a primary duty: (i) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (ii) The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specification; (iii) The design, documentation, testing, creation or modification or computer programs related to machine operating systems; or (iv) A combination of duties (i) through (iii) above. (b) Employees engaged in the manufacture or repair of computer hardware and related equipment are not exempt. 29 C.F.R. Sec Outside Sales Employees (a) An outside sales employee is exempt if his or her primary duty is: (i) making outside sales; or
10 (ii) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (b) Who is customarily and regularly engaged away from the employee's place or places of business in performing such primary duty. IV. TIPS FOR RESPONDING TO DOL-WAGE HOUR DIVISION INVESTIGATIONS A. Requests for Information B. Self Audits C. Waiver of Statute of Limitations D. Settlements and Releases E. Litigation Strategies V. CIVIL MONEY PENALTIES A. A penalty of up to $1,000 per violation may be assessed against any person who repeatedly or willfully violates the minimum wage or overtime provisions of the Act. B. Repeat violations defined 1. Employer has previously violated the minimum wage or overtime provisions of the Act, provided the employer has previously received notice, through a responsible official of the Wage and Hour Division or otherwise authoritatively, that the employer allegedly was in violation of the provisions of the Act; or 2. Where a court or other tribunal has made a finding that an employer has previously violated the minimum wage or overtime provisions of the Act, unless appeal there from which has been timely filed is pending before a court or other tribunal with jurisdiction to hear the appeal, or unless the finding has been set aside or reversed by such appellate tribunal C. Willful violations defined 1. Employer knew that its conduct was prohibited by the Act or showed a reckless disregard for the requirements of the Act. All facts and circumstances shall be taken into account a. Knowing -- employer received advice from a responsible official of the Wage and Hour Division to the effect that the conduct in question was not lawful b. Reckless disregard -- employer should have inquired further into whether its conduct was in compliance with the Act and failed to make adequate further inquiry D. Determination of Penalty Amount 1. Administrator shall consider the seriousness of the violations and the size of the employer's business. Where appropriate, the administrator may also consider other relevant factors in assessing the penalty, including but not limited to: a. Whether the employer made efforts in good faith to comply with the provisions of the act and this part;
11 b. Explanation for the violations, including whether the violations were the result of a bona fide dispute of doubtful legal certainty; c. Previous history of violations, including whether employer is subject to injunction against violations of the Act; d. Employer's commitment to future compliance; e. Interval between violations; f. The number of employees affected; and g. Whether there is any pattern to the violations VI. BE MINDFUL OF MORE STRINGENT STATE WAGE-HOUR LAWS The FLSA provides only minimum standards, and while no State can waive or reduce FLSA protections, States can grant employees greater protections. Employers must obey the FLSA and any state or municipal law, in whatever combination is most beneficial to the employee. Thus far, 18 jurisdictions currently have comprehensive wage/hour regulations that are more generous than the FLSA Employers operating in these States will be required to apply the State Regulations, as well as any new DOL Regulations from the FLSA that would grant non-exempt status to previously exempt employees. Employers are under a double burden: they must satisfy two different tests to ensure that their employees are exempt from overtime pay eligibility. The remaining 32 states and the District of Columbia either do not have comprehensive wage/hour statutes or their overtime definitions are directly related to, and are commensurate with, the FLSA. VII. RECOMMENDATIONS FOR LIMITING FLSA EXPOSURE A. Conduct Self Audits & Ensure Proper Classification and Pay Practices B. Implement Accurate Job Descriptions C. Implement Safe Harbor D. Educate HR and Payroll Personnel