Who’s What? — Part 2

Who’s What? — Part 2

 Prepared for the PHCC Educational Foundation by TPO, Inc.

Many business leaders and owners face frustrations in attempting to comply with the classification requirements of the Fair Labor Standards Act (FLSA).  The FLSA is a federal regulation that establishes the federal minimum wage (currently $7.25/hour), overtime pay eligibility and rates, recordkeeping requirements, and youth employment standards, as well as a definition of what constitutes actual work.

This article focuses on sets of classifications to help you determine your employees’ treatment under the FLSA: exempt versus non-exempt employee. Clarification of these classifications can give you some tools to review and classify each position in your company and to be in compliance with the FLSA.

Exempt vs. Non-Exempt Employees
The construction trade industry is one that the Labor Department pays particular attention to, and being a small or new business or one that has previously been found to have violated Fair Labor Standards Act (FLSA) regulations further increases the chances of an audit.  Proper classification of employees as exempt or non-exempt is crucial to compliance with the FLSA.

You may have read that the DOL is proposing changes to the standards for classifying employees as exempt or non-exempt. If those changes became law, they wouldn’t be effective until 2016, so it’s not time to worry about them yet.  It’s important to understand how to classify your employees as exempt or non-exempt under the current rules to ensure your company is in compliance right now.

Exempt vs. Non-Exempt Classification
Of the areas regulated by the FLSA, the questions surrounding exempt and non-exempt classification and overtime pay are the most frequent stumbling blocks for employers.

There are three tests that must be satisfied before a position, and the person who occupies that position, may be considered exempt from the minimum wage and overtime provisions of the FLSA. We’ll discuss these individually, starting with the easiest.

Salary Level
To be considered exempt, an employee must be paid a minimum amount, currently $455 per week or its equivalent on a biweekly, semimonthly, or monthly basis.  (Note: This is not the same as the mandated federal and state minimum wage.)  The minimum salary must be paid “free and clear,” which means that it cannot include the value of any non-cash items, such as board or lodging.

Salary Basis
To be considered exempt under the Salary Basis test, an employee must receive a predetermined amount of compensation that may not be reduced because of variations in the quality or quantity of work performed, and aside from the exceptions below, must receive his or her full salary for any week in which he/she performs any work, regardless of the number of days or hours worked.

Note that the Salary Level and Salary Basis tests do not apply to outside sales employees, doctors, lawyers, teachers, and certain computer-related occupations paid at least $27.63 per hour.

There are seven conditions under which employers may make deductions from the salary of exempt employees:

1. Absence from work for one or more full days for personal reasons, other than sickness or disability (for example, for vacation or unpaid personal leave);
2. Absence from work for one or more full days due to sickness or disability if deductions are made under a bona fide plan, policy, or practice that provides wage replacement benefits for such absences (in other words, an established sick leave program);
3. To offset payment to employees for jury fees, witness fees, or military pay;
4. Penalties imposed in good faith for violating safety rules of “major significance,” the standard example of which is violation of a “no smoking” rule in a coal mine;
5. Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules, such as those prohibiting sexual harassment or workplace violence;
6. The proportionate part of an employee’s full salary for time not actually worked in the employee’s first and last weeks of employment;
7. Unpaid leave under the Family and Medical Leave Act (FMLA).

This is a tricky area and one in which employers can incur substantial penalties for making improper deductions from exempt employees’ salaries. Note that except for an exempt employee’s first and last weeks of work or under the FMLA, deductions may not be made for partial-day absences. If, for example, an exempt employee is absent for 1.5 days for personal reasons, the employer may only deduct for one full-day absence; the employee must receive a full day’s pay for the partial day worked.

So what are the consequences if it’s determined by the Department of Labor that an employer made improper deductions from an exempt employee’s pay? The answer is, “It depends.” If the mistake is determined to be isolated or inadvertent, the exempt status of the position will not be lost if the employer reimburses the employee for the improper deductions. If, however, the employer had an actual practice of making improper deductions, the costs can be substantial. In that case, the exemption for the position would be lost, and overtime pay would be due for all hours worked over 40 per week during the time period in which the improper deductions were made to all employees in the same position and reporting to the same managers responsible for the improper deductions. Thus, in such a scenario, back pay could potentially be due to several employees, not just one.

Although in all cases employers are responsible for reimbursing employees for all improper deductions, the exempt status of a position would not be lost if:

• The employer had previously distributed to employees a clearly communicated policy that prohibits improper deductions and includes a complaint procedure for employees to use;
• The employer makes a good faith commitment to comply with the regulation in the future; and
• The employer has not willfully violated its policy by continuing to make improper deductions

Your policy on FLSA classification needs to be written, provided to employees at time of hire, included in your employee handbook, and if applicable, included in your intranet or other electronic library with policies.

Job Duties
The job responsibilities of every position in a company, from the CEO to an entry-level apprentice, should be reviewed as the basis for classifying positions as exempt or non-exempt. A position may be classified as exempt only if the job duties fall under one of the following categories as defined by the regulation:

• Executive
• Administrative
• Professional
• Outsides sales
• Computer professional
• Education Administrator
• Business owner

There is also a Highly Compensated classification for those employees whose annual compensation is at least $100,000 and who are paid on a salary basis, perform office or non-manual work, and customarily and regularly perform at least one of the duties or responsibilities of an exempt Executive, Administrative, or Professional employee. However, regardless of the amount of annual compensation, the Highly Compensated exemption is not available for non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, craftsmen, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill, and energy.

For the purposes of this article, we will focus on the Executive, Administrative, and Professional exemptions. Checklists for determining whether or not a position is exempt under these three categories can be found at the end of this article.

Executive
In addition to the salary requirements mentioned above, the Executive exemption applies only if the following three requirements are met:

1. The primary duty must be management of the organization or of a customarily recognized department (such as finance, legal, human resources) or subdivision (benefits, training, compensation, etc.);
2. The position customarily and regularly directs the work of two or more full-time, or full-time equivalent, employees; and
3. The position includes the authority to hire or fire employees or provide suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees that are given particular weight.

Administrative
This is the category that often causes confusion and results in misclassification of positions. In addition to the salary requirements mentioned above, an employee’s position will qualify under the Administrative exemption if the following two requirements are met:

1. The primary duty is 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
2. The primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

To meet the requirement of “management or general business operations,” the employee must perform work that is directly related to assisting with the running or servicing of the business. This means that employees who are acting as advisors or consultants to their employer’s customers, such as tax experts and financial consultants, could be exempt, but employees who sell a product in a retail or service environment would not.

The term “matters of significance” refers to the level of importance or consequence of the work performed. That is, does the employee perform work that affects business operations to a substantial degree?

The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures, or specific standards described in manuals or other sources. It does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent, or routine work. For example, an employee who simply tabulates data is not exempt under the Administrative category, even if that person is called a “statistician.”

Professionals
Professionals can be classified as either “learned” or “creative.” In addition to the salary requirements discussed above, the learned professional exemption only applies if:

1. The employee’s primary duty is the performance of work requiring advanced knowledge,
2. In a field of science or learning, that is
3. Customarily acquired by a prolonged course of specialized intellectual instruction.

The FLSA regulation states that work involving routine mental, manual, mechanical, or physical work is not deemed to be work requiring advanced knowledge, and states specifically that advanced knowledge cannot be attained at the high school level.

Fields of science or learning do not include the mechanical arts or skilled trades. The learned profession exemption is not available for occupations that may be performed:

• With only the general knowledge acquired by an academic degree in any field;
• With knowledge acquired through an apprenticeship; or
• Through training in the performance of routine mental, manual, mechanical, or physical processes.

This exemption also does not apply to occupations in which most employees acquire skill by experience, such as accounting clerks and bookkeepers who normally perform a great deal of routine work, paralegal and legal assistants, and engineering technicians.

This article is intended to give you guidance in classifying your company positions and the employees in those positions as either independent contractors or employees and as either exempt or non-exempt. You should also see the DOL Reference Guide http://www.dol.gov/whd/regs/compliance/hrg.htm for information on FLSA requirements not covered in this article. That being said, no article can cover the particulars of every employment situation, and the ramifications of misclassifying a worker can be significant, if not overwhelming, to a business. Consequently, it is best to check with your employment attorney or human resources professional when making classification determinations, or better yet, proactively conduct a company-wide audit of employment classifications before the DOL comes knocking at your door.