Exempt vs. Nonexempt: How to Find and Fix Misclassification Mistakes

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1 Exempt vs. Nonexempt: How to Find and Fix Misclassification Mistakes Presented by: Austin E. Smith Ogletree Deakins Thursday, June 27, :30 p.m. to 3:00 p.m. Eastern 12:30 p.m. to 2:00 p.m. Central 11:30 a.m. to 1:00 p.m. Mountain 10:30 a.m. to 12:00 p.m. Pacific or For CD and other purchasing information, contact customer service at: or BLR and HR Hero Business & Legal Resources and HR Hero. All rights reserved. These materials may not be reproduced in part or in whole by any process without written permission. This program has been approved for 1.5 credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI).The Program ID number will be ed to the registered participant at the completion of the conference. For more information about certification or recertification, please visit the HRCI website at

2 Exempt vs. Nonexempt: How to Find and Fix Misclassification Mistakes Presented by: Austin E. Smith Ogletree Deakins June 27, 2013 Today s Webinar Key differences between exempt and nonexempt employees. The federal salary level test v. the salary basis test. Common mistakes employers continue to make regarding FLSA exemption classifications and how to fix them. Job duties that present tricky challenges for employers. Exemption traps to avoid. Strategies to help you get to the bottom of what your exempt employees really do day in and day out and why relying exclusively on what the job description says is a bad idea. Pointers on how to jump start an internal wage and hour audit to uncover misclassification errors.

3 Exemptions from Minimum Wage & Overtime: Common Misconceptions If any employee is salaried (or paid enough), he/she is automatically exempt from overtime requirements. All professional employees are, by definition, exempt from overtime. Our job classifications must be correct because they have been in place for many years and no one has challenged them. Exemptions A. Minimum wage and overtime 1. Traditional white collar exemptions: a. Executive employees; b. Administrative employees; c. Professional employees; and d. Outside sales employees 2. Highly skilled computer employees. 3. The highly compensated employee. 4. Agricultural employees. 5. Domestic service employees: a. Babysitters; and b. Companions.

4 Exemptions B. Overtime exemption only 1. Retail big ticket sales. 2. Salesmen, partsmen, and mechanics employed by retail car, truck, and farm implement dealers. 3. Movie theater employees. 4. Employees subject to regulation under the Motor Carrier Act (drivers, loaders, and mechanics). 5. Certain employees subject to jurisdiction of the Railway Labor Act. 6. Live-in domestic employees. Three Key Tests for Exempt Status 1. Level of pay paid enough? 2. Paid on a salary basis? 3. Satisfy the primary duty test?

5 The Salary Level Test Increased to $455 a week $23,660 annually Biweekly $910 Semi-monthly $ Monthly $1, Compensation for Skilled Computer Employees $455 per week if exempted as a professional employee and paid on a salary basis. $27.63 per hour if paid on an hourly basis.

6 The requirements: The Highly Compensated Employee Exemption Must receive total annual compensation of at least $100,000. Must include a $455 weekly guarantee paid on a salary basis. Must customarily perform one or more exempt duties required of an executive, administrative, or professional employee. If less than $100,000, employer may make a make-up payment within one month of the end of the 52-week period. May pay a pro rata portion of $100,000 if works less than a year. The Salary Basis Test Paid on a salary basis means Employee must receive each pay period a predetermined amount constituting all or part of the employee s compensation; and The predetermined amount may not be reduced because of variations in the quality or quantity of work performed. Subject to a few permissible deductions, employee must be paid full salary without regard to the number of hours or days worked. Do not have to pay if no work performed during the workweek.

7 Exempt Employees Permissible Deductions from Salary Personal full-day absences for reasons other than sickness or disability. Full-day absences for sickness or disability may be docked under a bona fide plan that compensates for a loss of salary. Do not have to compensate for all salary loss; and May deduct for absences after employee has exhausted benefits. Permissible Deductions (Cont. d) Disciplinary suspensions for infraction of major safety rules Rules that relate to prevention of serious danger in the workplace. The full-day rule does not apply may dock for partial-day suspensions. New: Deduction for disciplinary suspension for violation of workplace conduct rules. Must be imposed pursuant to a written policy. Will be construed narrowly to serious misconduct sexual harassment, workplace violence, possession or under influence of drugs or alcohol. The full-day rule does apply.

8 Permissible Deductions (Cont. d) FMLA leave deductions for partial-day absences are permitted. Deduction must be proportionate to the employee s normal workweek. Five hours of unpaid FMLA leave in 50-hour workweek may deduct only 10 percent of employee s salary. First and Last Weeks of Employment Full salary not required. May deduct a pro rata amount calculated on daily or hourly basis.

9 Jury Duty, Attendance As Witness, and Temporary Military Leave May not make deduction of less than full workweek. May offset salary with jury fees, witness fees, or military pay. Deductions from Paid Leave Accounts May debit employee s leave account. May deduct for partial-day absences. Caution may not dock salary for partial-day absences when leave account has been exhausted.

10 Effect of Improper Deductions A practice of making improper deductions will result in loss of exemptions for Employees in the same classification working for the same manager. Loss of exemption for all employees in that classification who could have been docked. What is a practice? Factors considered include: The number of improper deductions. The time period. The number of responsible managers. The presence or absence of a policy prohibiting improper deductions. The Safe Harbor Provision Must have a policy prohibiting improper deductions. Must be clearly communicated. Must contain a complaint mechanism. Must promptly reimburse employee for improper deductions. Exemption will be lost if continue to make deductions after receiving complaints. Best evidence of clearly communicated is a written policy.

11 Policy Prohibiting Improper Deductions from Compensation of Exempt Salaried Employees As an exempt salaried employee, you will be paid on a "salary basis." This means that you will be paid a predetermined amount each pay period (which constitutes all or part of your compensation), and this amount is not subject to reduction because of variations in the quality or quantity of your work, nor is the amount subject to deduction for absences during a workweek occasioned by the Company or by the operating requirements of our business. Subject to certain exceptions required or permitted by law, you will receive your full salary for any workweek in which you perform any work without regard to the number of days or hours worked. Should you believe an improper deduction has been made from your salary, you should inform as soon as possible. If it is determined upon investigation that an improper deduction has been made from your salary, you will be promptly reimbursed, and appropriate steps will be taken to prevent a recurrence of an improper deduction from your pay. A copy of this policy was given to the undersigned exempt salaried employee on the date appearing next to his/her signature. Exempt Salaried Employee Date Paying Additional Compensation to Exempt Employees Paying extra is okay as long as arrangement includes a predetermined amount of not less than $455 per week. May pay additional compensation for hours worked beyond normal workweek. The extra may be paid on any basis: Bonus Straight-time hourly rate Time and one-half hourly rate

12 Related Questions May we require exempt employees to punch a time clock or otherwise track and record their time worked? Yes May we require our exempt employees to work a specific schedule? Yes May we suspend our exempt employees for excessive absenteeism or tardiness? Yes if for full workweek No if less than a workweek The Job Duties Test All white collar classifications must satisfy a job duties test. Common to all is a primary duty test. Primary duty means the principal, major, or most important duty performed by the employee. Time spent performing exempt work is not the sole test. Employees who spend more than 50 percent of their time performing nonexempt work may be exempt if they are not closely supervised and do not earn only a little more than nonexempt employees.

13 Job Duties Test for Executive Employees Primary duty must be management of the enterprise or of a customarily recognized department or subdivision; Must customarily and regularly direct the work of two or more other employees; and Must have authority to hire and fire, or to make suggestions and recommendations that are given particular weight with regard to hiring, firing, promotion, or other change of status. Particular Weight and Change of Status Particular weight factors include: Extent to which making suggestions and recommendations is an established part of the job. The frequency with which they are made. The frequency with which they are relied upon. Does not have to be a final decision-maker. Change of status means same as tangible employment action defined in Burlington Industries v. Ellerth, 524 U.S. 742 (1968) a significant change in employment status, such as hiring, firing, failing to promote, reassignment with different responsibilities, or a decision causing a significant change in benefits.

14 Concurrent Duties The concurrent performance of exempt and nonexempt work does not disqualify the exemption. Assistant manager in a fast food restaurant can serve customers, cook food, clean equipment, and direct the work of subordinates at the same time. Job Duties Test for Administrative Employees The primary duty must consist of the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and The primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

15 Directly Related to the Management or General Business Operations Refers to the type of work performed. Assists with the running or servicing of the business. Functional areas common to almost all businesses. Tax, finance, accounting, budgeting, insurance, quality control, purchasing, advertising, computer network, legal compliance, human resources, personnel administration, etc. Discretion and Independent Judgment with Respect to Matters of Significance Discretion and independent judgment Comparing and evaluating options Deciding and acting after considering the options Matters of significance refers to the level of importance or consequence of the work performed. Does not have to be final decision-maker.

16 Discretion and Independent Judgment: Questions to Consider Formulate, interpret, or implement policy? Carries out major assignments? Authority to commit employer in matters that have significant impact? Authority to waive or deviate from policy? Authority to negotiate and bind the company? Involved in planning business objectives? Provides expert advice to management? Professional Employees: Job Duties Test Primary duty of learned professionals is work which requires advanced knowledge in a field of science or learning, with such knowledge customarily acquired through a prolonged course of specialized intellectual instruction. Primary duty of creative professionals is work which requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

17 The Learned Professionals Work must be predominantly intellectual in character, and it requires the exercise of discretion and independent judgment. Field of science or learning means an occupation that has a recognized professional status. Customarily required by prolonged specialized intellectual instruction means that a specialized degree is standard prerequisite for entry into the field. Skilled Computer Employees Primary duty must be one or more of the following: 1. Application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional specifications; 2. Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3. Design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or 4. A combination of duties described in subparagraphs 1, 2, and 3, the performance of which requires the same level of skills.

18 Outside Sales Employees: Job Duties Test Primary duty must be making sales or obtaining orders or contracts; and Must customarily and regularly perform such primary duty away from employer s place of business. Drivers Who Sell Primary duty must be making sales. Driving and delivering incidental to sales is considered exempt work. Frequent calls and deliveries to replenish stock normally not exempt work.

19 The Cost of a Mistake The Facts: Misclassified employee is paid $600 a week and works an average of 50 hours a week. The Good News: The regular rate is not $15 ( hours). The overtime rate is not $225 per week ($22.50 x 10 hours). The regular rate is $12.00 ($600 50). The time has been paid. The half-time rate is $6.00. The overtime premium due is $60. The Bad News: Three years back pay if willful then double it $17,280! The Fluctuating Workweek Plan for Salaried Nonexempt Employees 1. Employee is paid a guaranteed salary covering all hours worked in workweek. 2. Salary must be sufficient to cover all hours worked at minimum wage. 3. Overtime premium is paid at one-half the regular rate for all hours over Regular rate is determined by dividing salary by actual hours worked. 5. Thus, the regular rate will vary with hours worked. NOTE: Employee must understand that fluctuating workweek method will be used.

20 Calculating Overtime Using Fluctuating Workweek Method Pete is paid a guaranteed salary of $600 per week. He worked 50 hours last week. Regular rate is $12 salary divided by hours worked. Note: Pete has been paid the time for all 50 hours. We now owe him the one-half. $6 is half-time rate ($12 x ½ = $6). Pete is owed $60 in overtime premium in addition to his $600 salary. Common Errors (Other Than Misclassification) Failing to include bonuses and other nondiscretionary payments in calculating overtime for non-exempt employees. Making deductions from wages that brings compensation to below minimum wage. Allowing employees to bank comp time. Not policing off-the-clock work.

21 Don t Rely on Job Descriptions Alone Job descriptions ARE important. And they should be carefully drafted to fit the exemption sought. But, they are only A factor; not THE factor. How to Start Your Own Internal Audit Consider who should lead the audit. Must be someone with extensive experience in FLSA compliance often a third-party consultant or attorney. Consider attorney-client privilege. Combine an exemption audit with a full FLSA compliance audit. Gather all relevant documents describing positions and job duties in question. Interview multiple employees in each position/category. Don t forget salary level and basis tests.

22 Disclaimers *This webinar is designed to provide accurate and authoritative information about the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. *This webinar provides general information only and does not constitute legal advice. No attorney-client relationship has been created. If legal advice or other expert assistance is required, the services of a competent professional should be sought. We recommend that you consult with qualified local counsel familiar with your specific situation before taking any action.

23 Speaker Biography Austin E. Smith Attorney Austin E. Smith is a Shareholder in Ogletree Deakins' Denver office. In addition to his litigation practice, which focuses on wage and hour, workplace safety, and traditional labor matters, Mr. Smith also focuses on helping employers avoid potential liabilities down the road. He regularly provides on-site training to employers regarding harassment and discrimination prevention, union avoidance, and workplace safety. A frequent speaker on issues affecting the employment relationship, Mr. Smith also conducts training for numerous employers, economic groups, professional organizations, and continuing legal education seminars across the country.