FLSA Regulations Must Receive Appropriate Attention (Part I)

Bart Castle SPHR
December 3, 2007 — 2,050 views  
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Fair Labor Standards Act Regulations Must Receive Appropriate Attention (Part I) Apparently, What We Know, Ain’t So Employers who choose to have their individuals produce at high levels increase employee confidence and decrease leadership stress must pay proper attention to how the organization administers the Fair Labor Standards Act (FLSA). “Bart, come on. Its been around nearly 70 years and we’ve been around X years. It’s a business basic. We got that right years ago.” Mark Twain has a comment that seems apt regarding the FLSA. Twain noted, “It’s not what you know. It’s what you know that AIN’T so that can get you in trouble.” Litigation related to the FLSA continues to be one of the growing areas of employment litigation. Consider just a few of the cases from the past five (5) years: • State Farm Insurance - $200 million paid to misclassified claims adjusters; • Wal-Mart - $172 million jury verdict for missed meal periods; • SNET - $14.5 million paid to employees who were being improperly docked a meal period; and • The Pepsi Bottling Group, Inc. – $30+ million paid to employees for unpaid overtime. Notice something? Even the smallest number in that short list is large enough to give a stout CFO or group of shareholders serious heartburn. Hit with one of the largest fines and an organization likely is not hitting its goals for that year, or several years to come. Further, in addition to the obvious blow dealt to the financial statements by a large verdict, such complaints tend to be detrimental to employee morale, erode confidence in leadership, and generally make an already challenging employment environment even more so. Litigation in this area has become so popular that plaintiff attorneys have set up websites specifically designed to prompt employees to initiate legal challenges against their employers. Examples include, though are not limited to: • www.overtime-flsa.com • www.overtimelawyer.com The Fair Labor Standards Act may have been around almost 70 years, but as the verdict sizes and websites above demonstrate, even the largest organizations are finding themselves the subject of FLSA-related controversy because what they assert they “know,” “ain’t so!” In this installment, we will discuss briefly the first of six (6) common errors that potentially open the door to wage and hour claims, wage-related litigation, or both. These six (6) areas merit reexamination on a regular basis in virtually all organizations to make certain unintentional errors are not being made. The six include: • Improper classification of employees (exempt or non-exempt); • Ineffective time-keeping practice; • Improper docking for time; • Improper calculation of overtime; • Improper use of “Comp” time in lieu of overtime; and • Improper deductions from paychecks. While there are additional areas which could be considered, depending upon the industry and organization, regular, accurate reexamination of how these six items are administered within any organization will greatly decrease the likelihood that an organization will join the ‘Hit Parade’ alluded to in the opening paragraphs. Who Should We Put On a Salary (Exempt and Non-Exempt Status) Misunderstanding still exists among company leaders and employees alike, in companies large and small, that whether an individual is paid a salary or paid an hourly wage is determined by the preference of the owner, the employees, or both. In practical terms, it is. A business owner, or group of business leaders can certainly do anything they choose, including choosing a course outside the law. However, most business owners want to avoid non-compliance of the law (in any area) and the FLSA contains regulations regarding which employees should be exempt, the classification typically referred to in organizations as “salaried” and those that should be non-exempt, the classification typically referred to in organizations as “hourly.” An exhaustive explanation of exempt and non-exempt is beyond the scope of this piece. The purpose is to summarize this area at a basic, though oft times overlooked, level and discuss several specific areas within the topic where problem spots tend to occur with some regularity. According to the FLSA, employees in one of these categories are exempt from some or all aspects of minimum wage and overtime considerations: • Executive – Individuals whose duties materially involve the supervision of at least two individuals (could be four part-time individuals); • Professional – Individuals who possess and regularly use either (a) advanced knowledge which they acquired through a prolonged course of rigorous study (read – degree), or (b) creativity and imagination which they use to produce original works of some type; • Administrative – Individuals whose duties involve high-level activity which supports or helps the organization operate and involve independent judgment and discretion; • Outside sales – Individuals whose work involves outside sales (note, other types of sales do not meet the test); • Computer professionals – Individuals who are involved in high-level systems design, analysis, and operations, and who are paid at least $27.63 per hour; and • White-collar employees – Individuals whose compensation will be $100,000 or greater on an annual basis. REMEMBER – the comments above describe each of the areas above at the most general level. A tome of some length could be written on each. That said; consider the following items in attempting to reduce the likelihood of a classification error. 1. The responsibilities of a job, NOT the title, determine whether an employee may properly be classified as exempt or non-exempt. The Department of Labor has seen virtually every attempt to describe pedestrian or routine work in elaborate ways in an effort to justify exempt classification. Thus, they are seldom fooled. What does the employee actually do, most of the time? 2. An employee who has a degree, which he or she does not use on a regular basis to carry out the responsibilities of his or her position, should not be classified as a professional. Likewise, to merit the “creative professional” designation, an employee needs to be creating things as the substance of his or her position the mere mortal typically could not create. 3. In our experience, at least 75% of the individuals whose title is “Administrative Assistant” do not meet the Administrative exemption tests! Deciding whether the supplies come from ABC Office Supply versus DEF Office Products – even if it involves a large volume of supplies, as a rule, is not enough independent judgment over a matter of discretion. Deciding to transform the entire organization from paper to paperless AND other decisions of such consequence day-in-and-day-out, on the other hand, would likely rise to a level where the Administrative classification was correct. 4. Outside sales means, well, outside sales. Contrast the salesperson who prospects, develops and makes sales from leads outside his or her place of business (many of those leads being individuals or organizations who are reluctant, disinterested, or openly hostile at the outside of the relationship) from an individual who greets customers at a door, or who takes in-bound calls. Indeed, some inside salespersons prospect, develop, and make sales from leads. Yet, for most, they are treated differently by the FLSA than their outside colleagues. 5. Virtually every office has an individual who tinkers with computers in his or her spare time and, as a result, becomes his or her office or department “go to person” when a printer has a bad hair day. Understanding which cable goes into which USB or other slot in the back of various pieces of hardware IS NOT the same as the individual described in the FLSA under the test for exemption as a “Computer” professional! In addition, understanding why the software is frozen up or how to use macro key strokes versus staring blankly into a monitor when the word processing application is performing strangely, DOES NOT meet the test in this area either. The FLSA is written in English, but so is a Chilton manual regarding how to repair a vehicle. Despite its English content, when I spend time in vehicle repair manuals my head feels as if it is going to explode! Because of limited mechanical aptitude and time under vehicle hoods, vehicle repair manuals use English words in ways that mean little or nothing to me. Such is the case with the FLSA and its accompanying regulations for many business owners and managers, even in human resources. Consider the litigation noted at the outset. Is it a stretch to assume that those national companies had knowledgeable HR departments at the time the FLSA challenges arose? They almost certainly did. Yet, they still found themselves on the wrong side of wage-related challenges. What then is an organization to do to increase the likelihood its FLSA-related decisions will comply with the law? Consider using the recommendations as a basic roadmap for increasing the likelihood of compliance success. • Understand the reality that common “Industry practice” may be common, yet incorrect. The phrase, “everyone we know does this,” will not provide an adequate defense against non-compliance. In recent years, a partial list of common industry practices that have been struck down as non-compliant include the misclassification of these positions; bank lobby managers, insurance claims adjusters, and assistant managers in most quick-service restaurant settings. • Understand how much difference can be present in positions that sound or are perceived to be similar. The responsibilities of a position should ultimately be examined on their own merits. Positions in similar organizations, departments, etc., can provide a helpful starting place for the potential classification of a position. However, whether a position is exempt or non-exempt is most accurately determined on a position-by-position basis. • Understand that because of common misunderstandings, classification as exempt or non-exempt may prompt strong emotion in some employees especially if they are being reclassified from exempt to non-exempt. Explain that the value of an employee is not determined by whether the employee is salaried (more prestigious in the minds of some) or hourly and that the law, not the organization, makes the determination. • Develop and schedule the strategic tasks of an organization and the annual reexamination of each position for its actual key responsibilities. Consider, for example, adding this as a step into formal performance evaluation processes. • Research and make an appropriate classification decision regarding newly created or significantly revised positions before beginning to interview candidates. Once attractive candidates begin commenting on how they have been paid in similar posts, or expect to be paid, despite the fact that either (or both) may be non-compliant, it is tempting to acquiesce to the candidate’s demands rather than lose the candidate. • Reevaluate newly created or significantly revised positions no less than twelve (12) months after an individual occupies the post. Regardless of intent, organizations cannot always accurately predict how the responsibilities of a position, especially a new one, will materialize within the organization or department as a whole. Things change, options present themselves, and priorities change. Appropriate for positions needs to be based upon what the incumbent (the individual (occupying the position) is actually doing rather than what a leader or the organization believes, or hopes, he or she is doing, or what a generic position description indicates he or she is doing. Position responsibilities are dynamic rather than static. • Opinion letters issued by the U.S. Department of Labor (DOL) provide some initial guidance regarding the proper classification of the position in question. The DOL disclaims the value of such letters as guidance, noting each letter is guidance regarding a specific situation. Further, using such letters as the definitive guide to a classification would violate the principle outlined earlier in this piece (each position’s responsibilities are typically unique). However, especially as those letters in numerous cases provide organizations with explanations regarding why a position should not be classified as exempt, they can provide information at an early stage in development of a position regarding the potential appropriate classification. • Consult advisers (consultants or attorneys) who regularly work with the FLSA and the DOL. If an individual needed a heart transplant would he or she be more effectively served by a general practitioner or a cardiovascular surgeon who specialized in transplants? Similarly, an adviser who is very effective at e-learning solutions consulting, or contract law might be very competent in that area but not as effective at classification issues as an adviser who regularly converses and negotiates with the DOL and who regularly assists companies with DOL classification issues. • Remember, once a claim for misclassification is initiated, the examination period for the claim is two (2) years. Additionally, the examination will likely include every employee occupying the position under examination. Therefore, classifying a position properly at the outset is MUCH less time and resource consuming than reclassifying it as the result of a claim lost. Proper classification of positions under the six (6) exemptions outlined in the Fair Labor Standards Act remains a misunderstood aspect of the employment process. As a steadily growing area of employment litigation, organizations can reduce the likelihood they will be subject to claims or improper classification by carefully administering this key aspect of wage and hour law.

Bart Castle SPHR


Bart W. Castle, of the Sapio Group, LP, has been involved in virtually all facets of human resource management over the past two decades.