FLSA UPDATE: NEW REGULATIONS ON EXEMPT STATUS MAY OR MAY NOT HARM YOUR MUNICIPALITY

LEAGUE OF WISCONSIN MUNICIPALITIES ATTORNEYS INSTITUTE Lake Dawn Resort Delavan, WI June 18, 2015 FLSA UPDATE: NEW REGULATIONS ON EXEMPT STATUS MAY OR MAY NOT HARM YOUR MUNICIPALITY Presented by: Dean R. Dietrich, Esq. Ruder Ware, L.L.S.C. P.O. Box 8050 Wausau, WI 54402-8050 ddietrich@ruderware.com Wausau Office: 500 First Street, Suite 8000 Wausau, WI 54403 715.845.4336 Eau Claire Office: 402 Graham Avenue Eau Claire, WI 54701 715.834.3425 {W1084384.DOC/1} www.ruderware.com

I. WHAT LAWS APPLY TO YOUR ORGANIZATION? A. Fair Labor Standards Act and Wisconsin Wage and Hour Laws. B. Wisconsin employers must comply with both the FLSA and state law. A Wisconsin employee receives the benefit of both laws. If there is a conflict between the Wisconsin and federal law, the law with the greater benefit to the employee will apply. II. WHO GETS OVERTIME? A. Non-exempt employees must be paid overtime. B. Exempt employees are not covered by the overtime laws. The most popular exemptions are executive, administrative, professional, computer, and outside salesperson. (There are others that are beyond the scope of this outline.) The FLSA and Wisconsin laws differ regarding the requirements for each exemption. The DWD has drafted forth these differences in a comparison chart that is attached to this outline. The following section summarizes this information for these categories. C. Executive exemption. 1. Primary duty. Manages an enterprise, department, or subdivision. 2. Supervision. Customarily and regularly directs the work of two or more other employees. 3. Authority. Can hire and fire or suggest changes in status of other employees. 4. Discretion. Customarily and regularly exercises discretionary powers. 5. Non-exempt work. Is limited in performance of non-exempt work to 20% of weekly hours worked or 40% if an employee of a retail or service establishment. 6. Salary. Is compensated a weekly salary of at least $455.00 per week. 7. Examples. CEO, vice president, director, manager (if manages two or more employees). {W1084384.DOC/1} -2-

D. Administrative exemption. 1. Primary duty. Performs office or nonmanual work relating to management policies or general business operations of the employer or the employee s customers. 2. Other duties. a. Regularly and directly assists a proprietor, an executive, or an administrative employee; b. Works under only general supervision along specialized or technical lines, requiring special training, experience, or knowledge; or c. Executes special assignments and tasks under only general supervision. 3. Discretion. Customarily and regularly exercises discretion and independent judgment. 4. Non-exempt work. Is limited in the performance of non-exempt work to 20% of weekly hours worked or 40% if an employee of a retail or service establishment. 5. Salary. Is compensated a weekly salary of at least $455.00 per week. 6. Examples. This is the most difficult exemption to classify. Some examples are tax experts, insurance experts, sales research experts, wage-rate analysts, investment consultants, foreign exchange consultants, and statisticians. Also included are persons who are in charge of a socalled functional department, which may frequently be a one-employee department. Typical examples of such employees are credit managers, purchasing agents, buyers, safety directors, personnel directors, and labor relations managers. E. Professional exemption. 1. Primary duties. a. Performs work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction (must require more than high school diploma), as distinguished from apprentice training and training for routine work; or {W1084384.DOC/1} -3-

b. Performs original and creative work in a recognized field of artistic endeavor, depending primarily on the employee s invention, imagination, or talent. 2. Other duties. Performs work predominately intellectual and varied in character and of such character that the output produced or the result accomplished cannot be standardized in point of time. 3. Discretion. Consistently exercises discretion and judgment. 4. Non-exempt work. Is limited in performance of non-exempt work to 20% of weekly hours worked. 5. Salary. Is compensated a weekly salary of at least $455.00 per week. 6. Examples. Licensed legal or medical practitioners, teachers, architects, actors, musicians, composers, soloists, certain painters, writers, cartoonists, essayists, novelists. F. Computer exemption. 1. Primary duties. a. Applies systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional applications; b. Designs, creates, or tests computer systems and programs, including prototypes, based on and related to user or system design specifications; c. Designs, creates, or tests computer programs related to machine operating systems; or d. Performs any combination of these duties. 2. Other duties. Performs work predominately intellectual and varied in character and of such character that the output produced or the result accomplished cannot be standardized in point of time. 3. Discretion. Consistently exercises discretion and judgment. 4. Non-exempt work. Is limited in performance of non-exempt work to 20% of weekly hours worked. {W1084384.DOC/1} -4-

5. Salary. Is compensated a weekly salary of at least $455.00 per week or $27.63 or higher per hour. 6. Note: This exemption does not apply to employees engaged in the manufacture or repair of computer hardware and related equipment. G. Outside Sales. 1. Primary duties. Employed for the purpose of and customarily and regularly engaged away from the employer s place of business in: a. Making sales; or b. In obtaining orders or contracts for services for the use of facilities for which a consideration will be paid by the client or customer. 2. Other duties. Spends at least 80% of time away from employer s place of business. 3. Salary. Need not be paid on salary basis. H. Job titles are not determinative. The employees for whom exemption is sought under the term administrative have extremely diverse functions and a wide variety of titles. However, the title alone is of little or no assistance in determining the employee s exempt or non-exempt status. Questions of whether the employee meets the criteria of the administrative exemption must be considered on a case by case basis. III. HOW IS OVERTIME CALCULATED? A. Forty hour workweek. Each workweek stands alone. Employees receive one and one-half times their regular rate for hours worked in excess of 40. Employers cannot average two or more workweeks for purposes of overtime. (There is an exception for hospitals and residential care establishments for employees on 8/80 schedules. See Wis. Admin. Code. 274.04(11) ). B. Regular rate. This is generally the employee s average hourly earnings, including incentive bonuses, shift premiums, on-call payments, and other payments that are regarded as part of regular compensation. Note that non-discretionary bonuses (e.g., bonuses for accuracy of work, good attendance, production and quality of work) must be included for purposes of overtime calculation. However, discretionary bonuses, premium pay for holidays, pay for time not worked (holidays, PTO, e.g.), and severance pay are examples of payments that are excluded. Recently courts have held payments for vacation or sick time ( buy {W1084384.DOC/1} -5-

back ) payments) are non-discretionary bonuses and must be included as part of the regular rate. Talk to your attorney about the risk for your company in this area. C. Fluctuating workweek. Employers may pay non-exempt employees a fixed salary if they work a fluctuating workweek. Under this method, the employee is paid a fixed salary for all hours worked, whether the employee works less than 40 hours or more than 40 hours. 29 CFR 778.114. In weeks in which the employee works more than 40 hours, the employee is paid an overtime premium for the extra hours at 50% of the employee s regular rate of pay. Because of the complex nature of the fluctuating workweek rules, employers should carefully consider whether implementation of this system is practical for their workplaces. D. Compensatory time. In the private sector, comp time must be taken within the same workweek. There are exceptions for public sector employees. IV. WHAT DOES SALARY-BASIS TEST MEAN? A. The employee must be guaranteed a set amount of wages regardless of the amount of time he or she works each week. Improper deductions can jeopardize exempt status. 29 C.F.R. 541.603(a). B. As Wisconsin did not adopt the 2004 changes to the Federal Regulations, employers may only make the following deductions from an exempt employee s salary: 1. Deductions in partial or full day increments from accrued leave banks, e.g., PTO bank; 2. Deductions in partial or full day increments for intermittent FMLA leave; 3. Deductions in full day increments for absence due to personal reasons; 4. Deductions in full day increments for absence due to sickness (if the company has bona fide plan or policy). Deductions may be made before the employee qualified for the plan and after he exhausted leave under plan; 5. Deductions in full day increments for serious violation of a safety policy; 6. Deductions for full week if employee performs no work in the workweek; or {W1084384.DOC/1} -6-

7. Deductions in full day increments for days not worked in initial and last weeks of employment. C. Safe Harbor A "Safe Harbor" exists that will save an exemption even when improper deductions are made. The exemption will not be lost if the employer: Has a "clearly communicated" policy prohibiting improper deductions, which includes a complaint mechanism; reimburses employees for any improper deductions; and, makes a good faith commitment to comply in the future. This safe harbor is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. 29 C.F.R. 541.603(d). {W1084384.DOC/1} -7-

FLSA - EXEMPT V. NON-EXEMPT EMPLOYEES I. WHITE COLLAR EXEMPTIONS. The FLSA provides an exemption from both minimum wage and overtime pay requirements for employees employed in bona fide executive, administrative, and professional positions, outside sales positions, and certain computer positions. 29 U.S.C. 206-207. To qualify for exemption under the FLSA, employees must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. The burden is on the employer to prove that an employee satisfies both a salary test and a duties test, rendering the employee exempt from the FLSA requirements. See Id. 213. The Department of Labor last revised its exemption regulations effective August 2004. II. SALARY TESTS. A. Salary Basis Test. An employee must receive each pay period a predetermined amount constituting all or part of her compensation. 29 C.F.R. 541.600. This amount must not be subject to reduction based on the quality/quantity of work performed. Id. at 541.602(a). The amount must be at least $455/week, but may be paid on a less frequent basis. Id. at 541.600(a). The minimum applies even if the employee works part-time, and may not include board or lodging. Id. at 541.600. The employee must be paid his full salary for any week in which he performs any work, unless a permitted deduction applies. Id. at 541.602(a). However, the employee may be paid a proportionate amount of his salary for a partial initial or final week of employment. Id. at 541.602(b)(6). 1. An employer may not deduct from an exempt employee s salary where the employee is ready, willing, and able to work just because the work is not available. 29 C.F.R. 541.602(a). An employer may not deduct from an exempt employee s fixed salary due to short-term business needs. 2. An employer is permitted to prospectively reduce exempt employees salaries to accommodate business needs unless it is done with such frequency that the salary is the functional equivalent of an hourly wage. See Wage and Hour Op. Letter 2009-14 ( Deductions from the fixed salary based on short-term business needs are different from a reduction in salary corresponding to a reduction in the normal scheduled work week, which is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement, and does not bring the salary below the applicable minimum salary. ). See also Archuleta v. Wal-Mart Stores, 543 F.3d 1226, 1235 (10th Cir. 2008) (ruling for Wal-Mart at the summary judgment stage; most of the Wal-Mart pharmacists professional exemptions were deemed intact, as only 1-2 salary changes had occurred per year). {W1084384.DOC/1} -8-

3. Quarterly prospective adjustments to an employee s salary based on the quality/quantity of her work will not defeat her exempt status, so long as the $455/week minimum always remains guaranteed. See Havey v. Homebound Mortgage, 547 F.3d 158, 167 (2d Cir. 2008). Mid-quarter reductions of salary, however, would defeat exempt status. Id. at 164. 4. [A]n employee need not be paid for any workweek in which he performs no work. 29 C.F.R. 541.602(a). III. HIGHLY COMPENSATED EMPLOYEE TEST. An employee with total annual compensation of at least $100,000 is deemed exempt...if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an... administrative... employee[.] 29 C.F.R. 541.601(a). An employer may use any 52-week period for calculating an employee s total annual compensation, but the default is the calendar year. Employees must also meet the salary basis test or fee basis test for at least $455/week of the total compensation. 29 C.F.R. 541.601(b)(1). A highly-compensated employee still must meet a duties test, but the test is relaxed: the employee must customarily and regularly perform any one or more exempt duties of an administrative, executive, or professional employee. The employee does not have to meet all parts of the duties tests for those exemptions, just perform one exempt duty. 29 C.F.R. 541.601(c). See also In re RBC Dain Rauscher Overtime Litigation, --- F.Supp.2d ----, 2010 WL 1324938, at *30 (D. Minn. March 31, 2010) ( [E]ven if the employee s exempt duties are ancillary to nonexempt duties, and even if the employee spends most of his or her work time performing nonexempt duties, the employee may qualify for the exemption if he or she customarily and regularly performs at least one exempt duty. ). The test is considered a short cut to exemption for highly paid employees who do office or non-manual work. 69 Fed. Reg. 22, 174. If an employee is expected to earn $100,000 and is treated as exempt by the employer, but does not ultimately earn this amount, the employer may make up shortfall with a final payment within 1 month after the end of a year. 29 C.F.R. 541.601(b)(2). IV. FEE BASIS TEST. Administrative, professional and computer employees may be paid on a fee basis instead of a salary basis. If the employee is paid a predetermined amount for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a fee basis. This method is not permitted for the executive duties exemption. A. Under the Fee Basis Test. 1. An employee must be paid an agreed sum for a single job, regardless of the time it takes to complete the job; {W1084384.DOC/1} -9-

2. The job must be unique, not a series of jobs for which identical payments are repeatedly made; and 3. The fee divided by the numbers of hours worked must amount to a rate of at least $455/week. Thus, employers may pro-rate the minimum guaranteed salary. For example, if an employee was paid $250 for a 20 hour job, the pay would amount to $500 (greater than $455) if 40 hours were worked, meeting the requirement. V. DAILY OR SHIFT BASIS TEST. An employer may compute an exempt employee s pay on an hourly, daily, or shift basis, if the arrangement still guarantees $455/week; and there exists a reasonable relationship between the salary and the amount actually earned. 29 C.F.R. 541.604(b). VI. DEDUCTIONS. A. Federal. Although some deductions from an employee s pay are permissible, others are impermissible and will destroy the exempt status of the employee. The following full-day deductions from pay are permissible and will not destroy the exemption: 1. The employee is absent for one or more days for personal reasons, other than sickness and disability. Id. at 541.602(b)(1). 2. The employee is absent for one or more days for sickness or disability, and there is in place a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. Id. at 541.602(b)(2). 3. The employee is put on an unpaid disciplinary suspension for violation of workplace conduct rules established by written policy. Id. at 541.602(b)(5). Partial-day deductions may be made for FMLA leave ( 541.602(b)(7)) and infractions of major safety rules. Id. at 541.602(b)(4). In addition, an employer may deduct from a salaried paycheck the amount of fees the employee received for jury duty, attendance as a witness, or temporary military leave, if the employee was absent for less than one week. 29 C.F.R. 541.602(b)(3). However, it is impermissible to deduct from an exempt employee s salary for time when work is not available ( 541.602(a)) and for absences occurring because of the business operations of the employer. Id. A safe harbor provision provides that an employee s exempt status will not be lost, despite improper deductions, if the employer: reimburses employees, makes a good faith commitment to comply going forward, has a clearly communicated policy forbidding improper deductions, and has a complaint system in place. Isolated, inadvertent, improper deductions will not destroy an exemption. Id. at 541.603. {W1084384.DOC/1} -10-

B. As Wisconsin did not adopt the 2004 white collar changes to the Federal Regulations, employers may only make the following deductions from an exempt employee s salary: 1. Deductions in partial or full day increments from accrued leave banks, e.g., PTO bank; 2. Deductions in partial or full day increments for intermittent FMLA leave; 3. Deductions in full day increments for absence due to personal reasons; 4. Deductions in full day increments for absence due to sickness; 5. Deductions in full day increments for serious violation of a safety policy; 6. Deductions for full week if employee performs no work in the workweek; or 7. Deductions in full day increments for days not worked in initial and last weeks of employment. VII. DUTIES TESTS. The duties tests contained in the August 23, 2004 final regulations are equally or more protective than the short duties test of the old regulations. Prior to the issuance of these final regulations, the last major revision of the FLSA duties tests occurred in 1949. To qualify for exemption under the FLSA, an employee must both be paid on a salary basis, as described above, and his duties must meet the criteria in one of the categories described below. A. Administrative. The administrative exemption will apply where the employee s primary duty is the performance of office or non-manual work that is directly related to management or general business operations, and includes the exercise of discretion and independent judgment with respect to matters of significance. Id. at 541.200(a). Primary duty means the principal, main, most important duty that the employee performs. The employee s job as a whole must be considered to determine the primary duty. To meet the requirement that the work is directly related to management or general business operations, an employee must perform work directly related to the running the business. Running the business is distinguished from selling a product or working on a production line. Work directly related to management or general business operations includes, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities. US DOL Fact Sheet #17. 1. Factors relevant to determine whether the employee exercises sufficient discretion and judgment include whether or not the employee: {W1084384.DOC/1} -11-

a. Has the authority to formulate, affect, interpret, or implement management policies or operating practices; b. Carries out major assignments in conducting the operations of the business; c. Performs work that affects business operations to a substantial degree; d. Has the authority to commit the employer in matters having significant financial impact; e. Has the authority to waive or deviate from established policies and procedures without prior approval; f. Has the authority to negotiate and bind the company on significant matters; g. Provides consultation or expert advice to management; h. Is involved in planning long- or short-term business objectives, i. investigates and resolves matters of significance on behalf of management; and j. Represents the company in handling complaints, arbitrating disputes, or resolving grievances. Id. at 541.202(b). The administrative exemption does not include clerical or secretarial work, data management, or other mechanical, repetitive, or routine work. The work must require more than just knowledge of how to apply certain skills. However, it is not necessary that the decisions made by the employee be final; the administrative exemption will not be destroyed because the decision is reviewed by a higher level employee. Courts now take a more holistic approach to the dichotomy between production and staff, as the revised regulations have diminished the importance of this factor. See, e.g., Carlson v. C.H. Robinson Worldwide, Inc., No. 02-3780, 2005 WL 758601, at *10 (D. Minn. March 30, 2005) (explaining that the administrative/production dichotomy is useful only to the extent it helps to clarify the phrase work directly related to the management policies or general business operations as one piece of a larger inquiry); In re Farmers Ins. Exch. Claims Representatives Overtime Pay Litig., 481 F.3d 1119, 1132 (9th Cir. 2007) (criticizing the application of the production versus staff dichotomy to insurance adjusters, because this tactic elevates form over substance, when the real question is whether the work affects business operations to a substantial degree. ). Courts are still likely to accord some weight to this fact, especially because it may support a finding that the employees are merely applying techniques or procedures laid out by the employer, rather than truly exercising discretion. Some courts may still use the dichotomy as a tool, generally finding that employees who work to produce the business s product are likely not administrative employees. Before the revised regulations went into effect, courts afforded significance to the fact that employees were carrying {W1084384.DOC/1} -12-

out the day-to-day activities of the business, rather than running the operation. See Casas v. Conseco Fin. Corp., No. Civ. 001512, 2002 WL 507059, at *9 (D. Minn., Mar. 31, 2002) (holding that loan originators, whose primary duty was selling loans, but did not have the ability to prove or deny the loan, did not fall within the administrative exemption). The most litigated issue seems to be the discretion and independent judgment test. For this requirement, courts will look to additional factors other than those laid out in the regulations. E.g., Amendola v. Bristol-Meyers Squibb Co., 558 F.Supp.2d 459, 476 (S.D.N.Y. 2008) (looking beyond the enumerated factors to an employee s discretion to set her schedule and to tailor communications to a client s individual needs ). Computer employees who do not meet the computer professionals exemption often can satisfy the requirements of the administrative exemption. Only the employee s primary duty is required to be non-manual in nature. The fact that some of the employee s work is physical, such as installing broadband services, will not defeat an exemption that is otherwise supported. See Bagwell v. Fla. Broadband, LLC, 385 F.Supp.2d 1316, 1323-24 (S.D. Fla. 2005). B. Executive. To qualify for the executive exemption, the employee s primary duty must be the management of an enterprise/subdivision/department. The factors used to determine an employee s primary duty include: the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee s relative freedom from direct supervision; and the relationship between the employee s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. Id. at 541.700. 1. Management, as used in the executive exemption, includes, but is not limited to: a. Interviewing, selecting, and training of employees; b. Setting and adjusting their rates of pay and hours of work; c. Directing the work of employees; d. Maintaining production or sales records for use in supervision or control; e. Appraising employees productivity and efficiency for the purpose of recommending promotions or other changes in status; f. Handling employee complaints and grievances; g. Disciplining employees; {W1084384.DOC/1} -13-

h. Planning the work; i. Determining the techniques to be used; j. Apportioning the work among the employees; k. Determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; l. Controlling the flow and distribution of materials or merchandise and supplies; m. Providing for the safety and security of the employees or the property; n. Planning and controlling the budget; and o. Monitoring or implementing legal compliance measures. Id. at 541.102. The employee must customarily or regularly supervise at least two full-time employees or their equivalent. The frequency of supervision must be greater than occasionally, but can be less than constant. This generally refers to work that is normally performed every workweek, not an isolated task. Id. at 541.701. To meet the supervision requirement, the employee may supervise any number of part-time employees whose working hours total eighty. The hours worked by the subordinate employees cannot be credited to more than one supervisor, but they can be split among more than one supervisor. The employee must also have the authority to hire and fire, or to make significant recommendations regarding the hiring and firing of the employees supervised. Id. at 541.100(a). The factors relevant to this requirement are whether hiring and firing is in the employee s job description; and the frequency of recommendations that are relied upon. The Department of Labor has refused to assign a percentage to the customarily and regularly supervising requirement. In one case, assistant managers at Papa Johns who supervised two or more employees 86% of the year were held to fall within the executive exemption. Diaz v. Team Oney, 291 Fed. Appx. 947, 950 (11th Cir. 2008). Addressing the requirement that an exempt executive supervise 80 hours of labor a week, courts have held that a manager need not be constantly physically present with the employee. Regulations state that 50%+ exempt work will generally satisfy the primary duty requirement, but time alone is not conclusive. 29 C.F.R. 541.700(b). Primary duty does not require that the employee perform the duty the majority of the time, so long as the managerial duties are more important to the business. See Diaz, 291 Fed. Appx. at 949 (holding the assistant mangers exempt even though the record was unclear as to whether the assistant managers spent more time performing managerial or production duties). {W1084384.DOC/1} -14-

Employers should review regularly how employees are classified to ensure that job descriptions match the actual experience of the job. See Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233, 1269-70 (11th Cir. 2008) (upholding the district court s determination that the store managers were not executives, as their primary duty was manual labor and they had minimal discretionary power; Family Dollar failed to study what the store managers did on a day-to-day basis). The human resources department s best practices should include drafting a revised job description, then having employees sign off on its accuracy after a comment period has passed. Id. C. Professional. To qualify for the learned professional employee exemption, the employee s primary duty must be the performance of work requiring advanced knowledge. Advanced knowledge is defined as work which is predominantly intellectual in character and requires the consistent exercise of discretion and judgment. Advanced knowledge must be in a field of science or learning; and customarily acquired by a prolonged course of specialized intellectual instruction. 541.301(b). Generally, knowledge that can be acquired by any academic degree in any field is not considered specialized. Physicians, lawyers, and teachers are expressly exempt regardless of these requirements. Id. at 541.303-304. A general degree in a non-related field will not satisfy the test, but even where there is no degree a substantial amount of experience in the relevant field may qualify an employee for an exemption. See In re RBC Dain Rauscher Overtime Litigation, - -- F.Supp.2d ----, 2010 WL 1324938, at *12 (D. Minn. March 31, 2010). Employers must be very clear regarding precisely what education is required when writing job descriptions or postings. Courts will look to the position s requirements, not the education the employee actually received, to determine if there was a prolonged course of specialized instruction. D. Computer Professionals. Computer systems analysts, computer programmers, software engineers, and others who are similarly skilled are exempt. However, job titles are not determinative: the regulations do not include many job titles due to the speed with which they become obsolete. To be an exempt computer professional, the employee must have a primary duty of: 1. Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; or 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; or 3. design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or {W1084384.DOC/1} -15-

4. A combination of the aforementioned duties, the performance of which requires the same level of skills. 29 C.F.R. 541.400(b). The salary basis test is not required for computer employees who meet this exemption s requirements and make at least $27.63/hour. 29 U.S.C. 213(a)(17). (The employee does not have to work full-time.) See also Berquist v. Fidelity Information Systems, 399 F. Supp.2d 1320 (M.D. Fla. 2005) (computer employee did not qualify for computer exemption because hourly rate was under $27.63 per hour; employee still qualified as exempt under salary basis test). Current contested issues include the exemption status of network administrators and software testers. To be exempt under these provisions, an employee need not create source code in the narrowest sense of the term. Young v. Cerner Corp., No. 06-0321, 2007 WL 2463205, at *3 (W.D. Mo., Aug. 28, 2007). In Young, an employee, hired under the title of software engineer, who mainly worked to resolve defects, was still considered exempt, as the very essence of her job had been to analyze[] problems with data retrieval and modify[] (or transform[]) aspects of the program or data in order to correct the error and then test her solution Id. at *5. [No part of the exemption hinges on whether or not source code is created or modified] Id. The court was careful to differentiate this scenario from a situation where the employee is told precisely how to fix each error, or how to follow simple instructions: rather, the employee had to use her own analysis to modify the program. Similarly, a computer programmer remains exempt even if his work changes from application design (writing code using specifications) to the maintenance, debugging, and enhancement of an existing system, when these modifications require the same specialized skills. Pellerin v. Xspedius Mgmt. Co. of Shreveport L.L.C., 432 F.Supp.2d 657 (W.D.La. 2006). This primary duty easily fits under the computer exemption. Id. at 665. The exemption does not extend to first tier help desk support services or computer repair functions, because the employees do not program computer equipment, but rather debug and deal with software and hardware problems by following standard operating procedures and manuals. Customer service oriented help-desk employees are likely not exempt, even if they are technically proficient second-tier representatives. In a recent case, the plaintiff had a degree in computer information systems, and dealt exclusively to identify and resolve client problems with Sprint s internet services. Hunter v. Sprint Corp., 453 F.Supp.2d 44, 47-48, 51-52 (D.D.C. 2006). The plaintiff only dealt with calls that could not be fielded by the initial responder. Although he did upload code modifications provided by a vendor when that was necessary to solve the problem, he did not design or develop the code. Id. The court denied Sprint s motion for summary judgment, though because of a relatively incomplete record, the court left the issues open for trial. Id. E. Outside Sales Exemption. To qualify for the outside sales employee exemption, the employee s primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which regularly engaged away from the employer s place or places of business. {W1084384.DOC/1} -16-

The salary requirements of the regulation do not apply to the outside sales exemption. An employee who does not satisfy the requirements of the outside sales exemption may still qualify as an exempt employee under one of the other exemptions allowed by Section 13(a)(1) of the FLSA and the Part 541 regulations if all the criteria for the exemption is met. F. Things Employers May Do Without Destroying Exemption. 1. Pay overtime or other additional compensation, such as commission, so long as $455/week is guaranteed. Id. at 541.604(a). 2. Take deductions from leave accounts for partial days, even on an hourly basis. However, may not deduct from the employee s paycheck to recoup negative leave accounts. 69 Fed. Reg. 22122, 22178 (Apr. 23, 2004); Wage and Hour Op. Ltr., FLSA 2005-7 (January 7, 2005). 3. Require exempt employees to record their hours. Id. 4. Impose a particular work schedule on exempt employees. Id. 5. Require employees to obtain permission to take time off. Id. 6. Provide manuals relating to highly specialized, complex matters, that only those with advanced knowledge can interpret. (Employees who simply follow well-established procedures laid out in manuals are generally not eligible for an exemption.) 7. Assign an employee to perform a mixture of exempt work, for example, a combination of executive and administrative work. 8. Require employees to use vacation time during a plant shutdown of less than one week, so long as all employees receive their full paycheck for the week, including those who have a negative balance of vacation time. Wage & Hour Opinion Letter FLSA2009-2 (Jan. 14, 2009). G. Common Exemption Mistakes. 1. Importance to the employer is not an exemption test. Your administrative assistant may be indispensable to you, but that does not mean he or she is exempt. 2. Making deductions in a final paycheck for failure to return office equipment or damaged property (for example, a damaged laptop) defeats the soon to be ex-employee s exemption. Wage & Hour Op. Ltr., FLSA 2006-7 (March, 2005). 3. Trainees, who are not yet performing the duties of an exempt employee, are not exempt. 4. State laws can differ from FLSA requirements. The law providing the greatest protection to the employee must be applied. {W1084384.DOC/1} -17-

5. If an employee does meet the computer professional exemption, he may still meet the administrative exemption. 6. No employee has to be exempt. An employer always has the option to pay the employee for hours worked, and pay time and a half for overtime worked. 7. Delegating payroll activities to a third-party will not allow an employer to establish good faith and escape liquidated: if the defendant should have known that the employees were working at more than one franchise location, the hours from all locations must be added together for purposes of computing overtime. Chao v. Barbeque Ventures, LLC, 547 F.3d 938 (8th Cir. 2008). 8. Non-Exempt Employees. The FLSA expressly provides that the following employees are non-exempt: blue-collar workers who perform work involving repetitive operations with their hands, physical skill and energy; police officers, firefighters, paramedics, EMTs, and similar public safety employees. {W1084384.DOC/1} -18-

APPENDIX A IMPACT OF CHANGES TO THE WHITE COLLAR EXEMPTIONS IN THE FEDERAL FAIR LABOR STANDARDS ACT ON WISCONSIN EMPLOYERS On August 23, 2004 the U. S. Department of Labor [USDOL] adopted changes to the Fair Labor Standards Act [FLSA] that affect whether some employees are eligible to receive overtime premium pay for hours worked in excess of 40 hours per week and minimum wage under federal law. Wisconsin employers need to be aware that Wisconsin also has state minimum wage and overtime pay requirements affecting persons employed in Wisconsin. Wisconsin employers, with rare exceptions, are covered by both the federal FLSA and Wisconsin laws, and must comply with both. While the FLSA contains a minimum wage exemption for outside salespersons, certain computer employees and salaried administrative, executive and professional employees who meet certain criteria, Wisconsin s minimum wage law contains no similar exemption. A Wisconsin employer must pay all of its employees at least the state minimum wage for all hours worked. The most significant change in the USDOL regulations concerns the overtime exemptions that apply to some salaried administrative, executive and professional employees. Wisconsin s overtime regulations also contain exemptions for these types of employees. Up until August 23, 2004, Wisconsin s salary overtime exemptions very closely paralleled the similar federal exemptions. With the adoption of the federal changes, that is no longer to be the case. In order for a Wisconsin employer to comply with both federal and state overtime regulations on the salary overtime exemptions, it will be necessary for the employer to ensure that they meet both sets of criteria for the exemption. Usually an employer may accomplish that by meeting the more stringent requirement of each law. The following chart outlines the criteria to qualify for the federal and state exemption in each category and points out the more stringent requirement. {W1084384.DOC/1} -19-

Executive Exemption State Rule Federal Rule Most Stringent Monthly Salary of $700 Weekly Salary of $455 Federal rule Primary duty of the management of the enterprise or a recognized department or subdivision. Primary duty of the management of the enterprise or a recognized department or subdivision. In some instances the federal rule would allow someone whose principal duty was the management of the enterprise even though the person might not be primarily engaged as a manager or supervisor. State rule Customarily and regularly directs the work of two or more other employees. Has authority to hire or fire other employees (or recommendations as to fire, hire, promotion or other change of status of other employees are given particular weight). Customarily and regularly exercises discretionary powers. Does not devote more than 20 percent (40% in retail or service establishments) of work time to activities that are not directly and closely related to exempt work. Customarily and regularly directs the work of two or more other employees. Customarily and regularly directs the work of two or more other employees. Customarily and regularly exercises discretionary powers. Usually the position spends more than 50% of work time on exempt work but in some positions the exempt work may be their principal or most important duties but not account for 50% of their work time. Same. Same Same State {W1084384.DOC/1} -20-