The Fair Labor Standards Act (FLSA)

Transcription

1 By Robert D. Hayes, CPA, Ph.D., CMA, ChFC, Kenneth W. Hollman, Ph.D., CLU, ChFC, CEBS, CIC, CPCU and Sami M. Abbasi, DBA The Fair Labor Standards Act (FLSA) is one of the landmark acts in the field of labor relations and employment law. Passed in 1938, its purpose is to mandate certain employment practices and to proscribe others. For example, it is the first federal law to give American workers a 40-hour workweek and a federally-guaranteed minimum wage (which began at 25 cents per hour in the late 1930s). The FLSA also regulates the employment of children and specifies that certain full-time employees must be paid time-and-a-half after working more than 40 hours in a seven-day period. It affects the pay of several million workers who are subject to one or more of its several provisions, and recent changes in the overtime eligibility requirements of the law have ramifications for many other workers. Purpose Accounting firms are clearly impacted by the FLSA. CPAs can be of greater service to clients if they are knowledgeable of the major provisions of the law and of the latest modifications to the overtime rules. Further, any accounting firm that hires professional or non-professional employees may fall within the scope of the FLSA. Hence, owners and partners will not only be advising others about the law, but they will be forced to make decisions in their own organization about how workers should be classified for overtime purposes. The decisions they reach will have important consequences for their bottom line and bring severe penalties and fines if their classifications are later shown to be incorrect. The purpose of this article is to familiarize readers with the FLSA and its purposes, and to explain the recent 4 TENNESSEE CPA JOURNAL: April 2005 revisions in the law that will impact the overtime eligibility of workers across the country. The new law is intended to strengthen and restore the overtime protections originally afforded by the law, reflect current workplace conditions, and stem the tide of costly and burdensome class-action lawsuits spawned by ambiguously-worded wage and hour regulations. Particular emphasis is given in this article to the relevance of the changes to and the potential impact on accounting firms. Also provided are strategies that accounting firms can use to remain in compliance with the new regulations regarding overtime and to avoid hefty penalties that may result from violations of the law. Requirements for Exemption While not determinative, the primary factor used to ascertain whether an employee is or is not eligible for overtime pay is the basis for payment. The terms exempt and nonexempt, which change under the new law, are crucial for understanding and complying with provisions of the FLSA. Nonexempt means that an employee qualifies for time-and-a-half pay for all hours worked over 40 in a workweek. Exempt means that the employer is not obligated to pay the employee for hours worked beyond the standard 40-hour week. Nonexempt applies to occupations where individuals are paid on an hourly basis, receive compensation below a specific minimum or perform certain kinds of work if their salaries are above the specified minimum (e.g., a salaried bookkeeper with no managerial responsibilities making more than the specified threshold would be eligible for overtime pay). Workers who are paid for a job on a salary basis (a predetermined weekly or annual rate of pay, regardless of the number of hours worked) rather than on an hours-worked basis, and who meet certain job-duty tests, may qualify for exemption from FLSA overtime pay requirements. The question of whether a particular employee is exempt is very fact intensive and circumstance specific. It requires a case-by-case analysis of the employee s job duties, method and base of compensation, and actual earnings. The exceptions in the new law are so broadly written that it is often difficult to determine whether workers are exempt or nonexempt. Figuring out which employees are covered and which are not is very confusing and has become a rapidly growing area of labor law. If the employer misinterprets the FLSA rules and inadvertently misapplies exemptions or loses them due to prohibited pay practices, the misclassification may evoke class-action lawsuits or bring costly government actions and fines. Workers who are disgruntled over pay problems have ready access to advocates who can help them government investigators, unions and private-plaintiff s lawyers. Class-action lawsuits challenging employers over compliance with FLSA rules are brought more frequently than class actions under any other federal employment law. They may involve multi-million dollar judgments and settlements. The Department of Labor (DOL) is the federal government agency charged with enforcing the mandates of the FLSA. In some cases, all it takes to trigger an investigation of a firm s entire classification process is one phone call to the DOL from a rankled employee about the company s pay practices. continued on page 6

2 Overtime Overhaul: How the New FLSA Changes Could Affect You continued from page 4 FLSA Overhaul The new FLSA rules for employers on when and in what circumstances overtime pay is owed to workers were implemented on Aug. 23, The new law constitutes the first changes to overtime eligibility under the FLSA since 1975, and few would argue the law should not have been updated. The rickety scaffolding upon which the overtime regulations rest needed to be overhauled due to several forces that have reshaped the American workforce since the 1930s. These include an influx of women and foreigners into the labor force and a shift from manufacturing to service industries. The new law significantly amends the method of computing worker compensation and the way that overtime issues are handled. The rules are daunting and represent a serious compliance challenge to employers. Of the many changes inherent to the new law, the ones relating to the salary test are perhaps the most significant. Under the new rules, blue-collar workers whose annual earnings are under $23,660 a year (regardless of their job title or duties) are automatically entitled to the overtime protection of the FLSA. Under the old rules, the threshold was $8,060. There are also new guidelines as to which workers making more than $23,660 per year qualify for time-and-ahalf pay after working more than 40 hours per week. Workers earning a salary of over $100,000 annually ( highly-compensated employees ) who perform at least one duty of an exempt administrative, executive or professional employee (defined below) do not get overtime pay. The biggest problem for many employers will be whether or not to reclassify the huge swath of middleclass workers with salaries between $23,660 and $100,000. Employees earning a salary between the two figures are entitled to overtime unless their job duties qualify them for exemption under one of the new standard duty tests. The new FLSA regulations provide better information and clearer statements about which job duties (with emphasis on character of work) qualify workers for overtime pay. They also update the rules defining exemptions for white-collar workers in seven categories highly compensated employees, executives, business owners, administrative employees, learned and creative professional employees, outside sales employees, and computer employees. To help employers determine which workers meet the standard-duty tests, and hence may be exempted, the new rules provide samples of exempt kinds of work under each of the white-collar categories. Employers with their eye on controlling compensation costs will find that they now have more freedom to disqualify workers from overtime pay. However, any reclassification may rankle employees who feel that overtime pay is unjustifiably being denied to them. With observations about the likely impact on accounting firms, listed is a summary of the criteria necessary for employees in the indicated categories to qualify for the white-collar exemption: Highly Compensated Employee Exemption As noted, a worker who earns at least $100,000 per year on a salary or fee Winners and Losers from the New FLSA Law Generally Paid for Overtime Bookkeepers Clerks Computer Hardware Repairmen Cooks Firefighters Licensed Practical Nurses Manual Laborer Paramedics Policemen Rangers Reporters Generally Not Paid for Overtime Accountants Computer Programmers Computer Systems Analysts Dental Hygienists Editorial Writers Executive Assistants Executive Chefs Financial Service Employees HR Managers Insurance Claims Adjusters Registered Nurses basis and meets a reduced duty test is exempt from the overtime pay provisions. To qualify, the employee s primary duty must be the performance of office or non-manual work, and the employee must customarily and regularly perform at least one of the sets of job duties of an exempt white-collar worker. These criteria make it difficult for highlycompensated employees to now qualify for overtime pay. This exemption category will have relevance to some accounting firms, but the number of workers affected may be limited because of the high salary threshold inherent therein. Executive Exemption Under the new rules, executive employees are exempt if they earn the minimum salary required for exemption as a white-collar employee, at least $455 per week, and if they customarily exercise independent judgment and discretion in their work. There are three sides to this latter test. The employee must have the primary duty of managing the enterprise or a department or recognized subdivision thereof, customarily and regularly supervise the work of two or more fulltime employees, and have the authority to hire and fire employees or have his/her hire-and-fire recommendations be given particular weight. This exemption category could affect many accounting firms that are organized into departments (tax, auditing, financial services) headed by persons who are paid more than $23,660 in salary per year. To meet the duties test of the exemption, department heads must have the authority to hire and fire or have important weight given to their recommendations concerning such matters. Without question, this exemption category will offer greater opportunity for employee reclassification among larger accounting firms than smaller ones. The negative impact on worker morale aside, its application will enable 6 TENNESSEE CPA JOURNAL: April 2005

3 partners and owners with their eye on the bottom line to exempt many employees who now receive overtime pay for work in excess of 40 hours per week. Business Owner Exemption Employees who own a 20 percent or more equity interest of their employer and are actively engaged in the management of the business may fall within the scope of the business owner exemption. It should be noted that the concurrent performance of both exempt and nonexempt duties does not automatically disqualify an employee from this exemption. For example, a waiter who owns 20 percent or more of a restaurant and who supervises the work of other waiters (exempt work) might qualify even if he/she also performed work as a waiter (nonexempt work). However, to qualify for this exemption, the primary work of the owner/waiter would have to be in the management of other waiters. The business owner exemption category would impact a few accounting firms, but only in cases where an employee has substantial ownership interest and is actively engaged in management of the firm. It would be unusual for more than one or two CPAs in a firm to qualify for this exemption. In any case, most CPAs with a 20 percent or more equity interest in the business would probably not be receiving overtime pay. Administrative Exemption To qualify for the administrative exemption, employees must meet the minimum weekly salary test ($455) and have the primary duty of performing office or non-manual work that bears upon the authority to formulate or implement management policies. To meet the duties test, the employee s work must include the exercise of discretion and independent judgment with regard to matters of significance. The ambiguous wording in the administrative exemption provides little guidance to employers and makes this exemption category the most vague and dicey of all the exemptions for employers to work with and for the DOL to enforce. It has been (and will likely continue to be) an issue with human resources professionals and the source of much uncertainty and litigation. Financial service employees would generally meet the requirements for the administrative exemption, as would insurance claims adjustors, team leaders, executive assistants and human resources managers. Unlike small accounting firms, larger ones may have employees who fall within the purview of the administrative exemption. Included are employees who make decisions about what the composition of the book of business should be, the composition of the pay package of staff accountants and the standards that must be met for them to be retained or receive bonuses, and the criteria necessary for a consumer service representative to be kept on or to receive raises. Also included would be those who help establish the firm s mission statement, the long-run and shortrun goals of the firm, and the strategies and tactics that will be used to reach its mission and goals. Accounting firm owners and partners will likely invoke this exemption category more than any other. Professional Employees Exemptions The new FLSA regulations are more inclusive than the old ones with regard to who is a professional employee. They speak to three types of professional employees who are exempt from the overtime pay provisions of the FLSA. Two of the three were dealt with in the former law learned professionals and creative professionals. The new regulations identify a third type of professional employee, the computer professional, which now comprises a separate exemption category. Factors relevant to the determination of exemption as a learned professional are that the employee must (a) meet the earnings test, and (b) have the primary duty of performing work that is primarily intellectual in nature, requiring the consistent exercise of discretion and judgment and advanced knowledge in a field of science or learning that is acquired by specialized instruction. By using the term specialized instruction instead of specifying an advanced degree, the DOL is broadening the exemption to include on-the-job training and work experience. Physicians and attorneys are included in the DOL s qualifying fields, and CPAs (but not accounting clerks and bookkeepers) would generally be listed there. Registered nurses (but not licensed practical nurses) and chefs (but not cooks) are identified in the regulations as having duties that ordinarily satisfy the exemption. It seems clear that many accounting firms will be affected by this exemption category. The core definition of a creative professional employee is one who meets the earnings test and primarily performs work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Journalists would generally satisfy the duties requirements of the creative professional exemption category if the primary duty of their work required invention, imagination and originality, but they probably would not if their primary duty consisted only of collecting, organizing and recording information that is already in the public domain. The creative professional employee exemption is irrelevant to most accounting firms. Computer Employee Exemption Under the new regulations, certain employees who work with computers are exempt from the overtime pay provisions if specified conditions are satisfied. First, they must meet the earnings test ($455 per week or if compensated on an hourly basis, at a rate not less than $27.63 an hour). Regulations concerning this exemption speak of employees whose primary work includes one or more of the following kinds of duties: the application of systems analysis techniques and procedures;... the design, development, analysis, creation, testing or modification of computer systems or programs;... or the design, documentation, testing, creation, or modification of computer programs related to machine operating systems. This is an area where job titles are particularly helpful. Computer systems analysts, computer programmers and software engineers would satisfy the conditions of this exemption category if their primary duty involves the kind of work described in the exemption. continued on page 8 TENNESSEE CPA JOURNAL: April

4 Overtime Overhaul: How the New FLSA Changes Could Affect You continued from page 7 Many accounting firms have one or more computer personnel on their payroll who would qualify for exemption from overtime pay under this exemption category. It seems probable that most computer experts are paid a high enough salary to meet the earnings test, and many perform functions that would qualify them for the exemption under the duties test. Hence many owners/ partners wishing to cut compensation costs could apply for an exemption for their computer personnel and reduce the size of their payroll. Outside Sales Employee Exemption To qualify under this exemption, the employee must meet the earnings test and have as his/her primary duty be the selling of goods or products or obtaining orders or contracts for services and facilities. Another base for the exemption is that the employee must customarily and regularly engage in their work away from the employer s place of business. Most accounting firms will have very few employees, if any, that qualify for this exemption. All of the above exemptions are narrowly interpreted by the DOL. The initial presumption is that the employee is not considered exempt, and the ultimate burden of supporting the application rests with the employer. The particular facts of an individual s employment, not job titles or job descriptions, are determinative as to whether or not an exemption applies. To avoid misclassification and run serious and potentially expensive risks, the employer must stand ready to prove to the DOL that the employee is performing work that satisfies the specific requirements of one of the exemption categories. The Salary or Fee-Basis Test As noted above, those qualifying for one of the seven exemptions must be compensated on a salary basis (or, alternatively, for administrative and professional employees, on a fee basis) at a minimum rate (except for computer programming professionals who receive the minimum hourly rate). Merely designating an employee s compensation as a salary (or fee or commission), does not automatically position that worker for exempt status. Rather, the employee must be paid a predetermined amount on a weekly or less frequent basis for each work week in which the employee performs any work. The salary-basis test is concerned not only with the amount of payment but the manner of payment for exempt workers. With some exceptions, an employee s salary cannot be reduced for time not worked during a week. Among the most notable exceptions, employers may reduce a worker s salary for one or more full days of work missed for vacation or other personal reasons (other than sickness or accident) such as intermittent family or medical leave. Special rules apply to absences due to sickness and disability. Further, manual laborers and other blue-collar workers who are paid on an hourly basis, licensed practical nurses, and most first responders law enforcement officers, firefighters, and other emergency and public safety workers are automatically entitled to overtime pay. The new law also protects workers subject to collective bargaining or other private agreements. Veteran s rights to overtime continue to be protected. Strategic Steps for Compliance The new FLSA salary and duty tests raise many questions about which workers are exempt and make the reclassification process a perilous one. However, the application of sound risk management techniques can help employers reduce the risk of claims. Here are a few guidelines that will help CPAs to remain compliant and avoid or reduce the risk of an injunctive proceeding, the potentially devastating liability from a DOL lawsuit, or a class-action lawsuit from disgruntled employees for an inadvertent and perhaps isolated infraction of the classification or overtime rules: 1. Evaluate actual job duties and wages to check whether currently exempt employees particularly those whose classifications were potentially uncertain before the passage of the new law are still classified properly under the new DOL guidelines. 2. Review all pay practices, including employee wage and hour 2. classifications, to ensure their compliance with the new FLSA criteria. Then update them accordingly. The classifications may have changed due to the redefinitions in the new law. 3. Carefully calculate overtime pay for nonexempt employees. Employers often run afoul of FLSA rules by failing to consider all sources of employee income. Be sure that nondiscretionary bonuses and shift-premiums are included in the calculation of the regular rate of pay for nonexempt employees. As a corollary, nonexempt employees should not be permitted to work before or after their scheduled time without overtime compensation. They must be paid for all time worked, whenever and wherever and in whatever amounts it is performed, even if the work was not requested and even if it was prohibited (if the employer knew or should have known that the unauthorized work was being preformed). 4. Scrutinize written job descriptions, job titles and personnel policy statements to ensure that they are accurate in light of the new regulations. If not, they should be rescinded and appropriately revised before they are used again. In some cases, material changes in job duties, coupled with appropriate job description changes, could enhance the employer s contention that an employee should be reclassified as exempt. 5. Inspect pay records for prior misclassification of employees which resulted in underpayment. If errors are discovered, the overtime earned should be promptly paid to the employees. This is a better alternative than being involved in a DOL audit and settlement or a class-action lawsuit from discontented employees. 6. Make no exemption classifications without consulting an attorney or labor law expert who is knowledgeable of and familiar with the wageand-hour compliance rules in the updated FLSA. Conclusion Without question, the recent changes in the FLSA regarding overtime pay can serve as a cost-saving strategy that CPAs and other financial professionals 8 TENNESSEE CPA JOURNAL: April 2005

5 can suggest when clients ask for help in reducing the impact of rising labor costs on their profit margin. CPAs can also use these strategies when reclassifying workers in their own operations. However, CPAs should be mindful of the employment practices exposures they or their clients face if their wage and hour classification practices breach legal boundaries. For their own protection, employers should make comprehensive audits of job titles and classifications to ensure that all people and positions are classified correctly. In our challenging cost environment where employee compensation continues to escalate, CPAs should understand that the reclassification of workers for exemption from overtime pay is now easier than before. Many clients will likely choose this measure to help get a handle on compensation costs. However, workers who now receive overtime pay may perceive that their employer has reclassified them or will attempt to reclassify them to avoid paying overtime. Hence, owners and partners are admonished to remember before they begin a reclassification process that no firm has a birthright to the commitment of its workforce. In all of its personnel and compensation practices, a firm must work diligently and exercise good human relations skills to harness its employees skills and abilities and leverage their willingness to use those attributes to the firm s advantage. The most prudent policy for owners and partners of accounting firms who decide to reclassify workers is to communicate honestly with the workers and keep them informed about impending changes in compensation and personnel practices. The firm should educate employees about FLSA status changes and what the organization hopes to achieve with these changes, and explain to them that the changes being made are permissible and possibly even required by law. Partners and owners should be ready to answer any questions the workers have about their status. This honest and open approach to explaining changes in the system of compensation will help allay the fears of employees and encourage them to be more innovative and enthused and to be more deeply motivated to share in the firm s mission. Hopefully, it will positively impact the quality of work by the employees and the productivity and profit of the firm. About the authors Robert D. Hayes, CPA, Ph.D., ChFC, CMA, is a professor of accounting and business law at Tennessee State University in Nashville, Tenn. He can be reached at rhayes@ tnstate.edu. Kenneth W. Hollman, Ph.D., CLU, ChFC, CPCU, CIC, CEBS, holds the Tommy T. Martin Chair of Insurance at Middle Tennessee State University in Murfreesboro, Tenn. He can be reached at khollman@mtsu.edu. Sami M. Abbasi, DBA, is a professor of management at Norfolk State University in Norfolk, Va. He can be reached at TENNESSEE CPA JOURNAL: April