Last week, the Department of Labor’s Wage & Hour Division (WHD) finally announced its long-promised proposal to amend the Fair Labor Standards Act (FLSA) Regulations and, in particular, those governing the “white collar” exemption for executive, administrative, and professional employees. For our comprehensive discussion of the changes in the DOL’s Notice of Proposed Rulemaking (NPRM), see our previous coverage on What Changed, What Didn’t, What’s Next for Employers. Today, I want to dig a bit deeper into the DOL’s rationale set forth in the 285+ pages of preamble, and in particular one place where the DOL’s analysis left me scratching my head. The DOL concludes that the new FLSA regulations mean all of your soon-to-be-formerly exempt employees will receive a big raise—to the tune of $1.5 billion in the first year alone. Surprised? I thought so.

As you know by now, the proposed rule more than doubles the salary level for exempt workers to $970 per week ($50,440 per year). In a conference call with reporters on Tuesday, Secretary Perez said that the Department estimates that the new salary level in the regulations will result in a $1.5 billion raise for workers in the first year. The DOL explains this conclusion in the NPRM in a section where it discusses “transfers due to the overtime pay provision.” The DOL believes that “[t]he proposed rule will also transfer income to affected [white collar exempt] workers working in excess of 40 hours per week through payment of overtime to workers earning between the current and proposed salary levels.” You read that correctly: the DOL has concluded that employers will transfer $1.5 billion in wage increases in the first year, increases that the DOL assumes employers never gave because there was no such regulation. No fancy statistical analysis is required to conclude that this seems implausible on its face, and would be an exceedingly unlikely employer response to the regulations. If this is obvious to employers I have talked to and obvious to me, how did the DOL justify that conclusion? The NPRM includes the Department’s assumptions about five potential employer responses to the salary level increase:

(1) paying the required overtime premium to affected workers for the same number of overtime hours at the same implicit regular rate of pay;

(2) reducing the regular rate of pay for workers working overtime;

(3) eliminating overtime hours and potentially transferring some of these hours to other workers;

(4) increasing workers’ salary to the proposed salary level; or

(5) using some combination of these responses.

All of the DOL’s options share a common thread: an assumption that employers will increase pay in response to the regulation or, at worst keep it the same (Option 2), perhaps while spreading some of the additional overtime pay around to other workers. Again, I don’t think I am going out on a limb when I say that employers have other options than big spikes in compensation costs. To that list, I would add at least these three, more logical responses:

(6) eliminate workers’ positions entirely (part-time exempt managers, for example);

(7) convert salaried workers to hourly pay; or

(8) adjust all hours and staffing levels to keep overall compensation consistent

These have a common theme, too: employers do not increase wages. To me, this outcome seems more likely because employers generally make wage adjustments in response to business needs and labor market conditions, not the shuffling of regulatory categories. While certainly some employers will ignore business needs and/or labor market conditions, whether out of loyalty or altruism, others will not. There’s nothing illegal or immoral about that.

Accordingly, the DOL’s regulation is likely to leave employees individually worse off, never realizing the assumed $1.5 billion windfall. The rosy picture described in the NPRM overlooks the fact that unlike minimum wage laws, neither federal nor state laws mandate that employers pay employees any particular higher wage. Optimistically, the net effect may be zero in the aggregate, but employees who lose salaried status, hours, pay, or all three, won’t care about any such aggregate effects.

To get the full picture, let’s put some numbers to it. Take a manager who averages 50 hours per week and receives a $500 weekly salary. Under the new rules, the FLSA would require the employer to pay the manager overtime for the 10 hours over 40 in a workweek. Voila—more pay for the worker, right? That’s what the DOL assumes will happen in the NPRM. However, the employer could—and likely would—reduce the salary to roughly $417, so that the employee receives essentially the same gross pay as before, even with the overtime premium. The DOL’s presumed transfer effect disappears, and this is a best case scenario. The 50 hours is an average. In some weeks, the employee might work more or fewer hours. If the manager does not work at least 10 hours of overtime, he or she would end up earning less. Under the new DOL regime, to maintain income equal to the former salary, our hypothetical manager now must work 40 hours plus 10 hours of overtime every week.

Furthermore, the added administrative burden of tracking salaried, non-exempt workers’ hours and pay is likely to lead many employers to simply convert salaried, formerly exempt workers to hourly, non-exempt workers. This outcome is no better for the manager. The manager now punches a time clock and receives pay for only the actual hours he or she works each week. Coming to work a few minutes late or leaving a few minutes early, stepping out to run errands, picking up a sick child, going to the doctor, or being away from the workplace never impacted the manager’s income before the new rule. Now, as an hourly worker, those absences would require use of accrued benefit time or the loss of earnings.

In passing, the DOL’s NPRM recognizes this issue, too. For instance, on pages 202-03, the DOL acknowledges in a caveat that one result of the rule will be “increased time off for a group of workers.” Without any hint of irony, the DOL admits that the “total benefit” of this extra time off is “likely an overestimate” because some workers do not want to work fewer hours and would be unwilling to trade some of their income for more time off. Once again, the DOL ignores the fact that this may not be the employee’s choice. Elsewhere, on page 195, the DOL admits that while the NPRM quantifies the assumption that employers will increase employees’ incomes, the DOL did not quantify some of the costs, such as workers “[c]onverted to hourly status from salaried status” and “[r]educed earnings for some workers.”

The DOL’s rule in practice is unlikely to result in employers handing out $1.5 billion per year in raises to employees, as the NPRM assumes. This number makes for a good sound bite, but the rule functionally incentivizes employers to remove the flexibility of a guaranteed weekly salary and to replace it with the uncertainty of an hourly wage. Even if an employer takes on the administrative burden of tracking salaried, non-exempt workers, the aggregate effect will be little or no additional take home pay for the employee, and certainly not an additional $1.5 billion per year. 

The DOL and the Obama administration are marketing this rule as a boon for employees that (inexplicably) requires employers to give employees a raise, either through more overtime or higher salaries. Helping a broadly defined middle class is a noble and admirable goal, and the rule has some merit, even if it has no economic effects. Whatever positive effects the rule will have, I would not count on substantial wage increases being among them. Just like there’s no pot of gold at the end of the rainbow, you won’t find $1.5 billion in wages at the end of this rule making process, either.

Note: This post relates to the Department of Labor’s proposed rules issued in 2015. For a summary of the final rules issued May 18, 2016, please check out this post, and see this post for a link to the recording of our May 23, 2016 webinar.

This morning, the Department of Labor’s Wage & Hour Division (WHD) announced its long-awaited proposal to amend the Fair Labor Standards Act (FLSA) Regulations and, in particular, the regulations governing the “white collar” exemption for executive, administrative, and professional employees.  The Notice of Proposed Rulemaking (“NPRM”) is as surprising for what it includes as what it did not.  This comprehensive summary outlines what changes were made in the proposed FLSA regulations, what did not change, what it means for employers, and what employers should do now in response to the DOL’s announcement.

One thing is clear: the WHD’s proposed FLSA regulations will mean higher minimum salaries for exempt employees, even those who are highly compensated.  Everything else in the regulations will stay the same, at least for now.  However, the WHD has asked for comments on a number of topics, including the duties test and the inclusion of non-discretionary bonuses for purposes of the salary basis test.  Because these are proposed rules, nothing changes today, but the impact of these rules will be far reaching.  Employers should start planning now for the impact on their operations and finances, and consider participating in the public comment period with WHD.

What Changes Are in the Proposed FLSA Regulations

In short: Higher minimum salaries for exempt employees, even those who are highly compensated.

To briefly recap, the FLSA generally requires that employers pay employees overtime—at least straight time plus one-half times their “regular rate” of pay for every hour they work in excess of 40 hours in a particular workweek. 29 U.S.C. § 207(a). The FLSA and its interpretative regulations published by the DOL, however, exempt certain groups of employees from the overtime pay requirements. One such exemption, and by far the most commonly used, relates to employees working in jobs that the FLSA describes as executive, administrative, or professional—the so-called “white collar” exemptions. 29 U.S.C. § 213(a)(1). In order for employees to fall within one of the white collar exemptions, they must perform executive, administrative, or professional duties (the “duties” test) and make a certain weekly salary (described in the NPRM as the “salary level” requirement).  The regulations also exempt “highly compensated” employees who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee, but who do not otherwise meet the duties test. 29 C.F.R. § 541.601.

The feature change in the DOL’s proposed FLSA rules is an increase in the minimum weekly salary to the 40th percentile of weekly earnings for full-time salaried workers, based on Bureau of Labor Statistics (BLS) data.  In 2013, that number would have equaled $921 per week (or just under $48,000 per year).  The DOL projects that the 2016 level will increase to $970 per week, or $50,440 per year.  For highly compensated employees, the threshold would be set to the annualized value of the 90th percentile of earnings for full-time salaried workers, or $122,148 annually. More importantly, for the first time in the FLSA’s history, the salary and compensation levels would be indexed to this BLS data and updated annually, without the need to go through further rulemaking.

In support of the proposed increase to the salary level test, the NPRM reaffirms the DOL’s longstanding position “that the salary level is the ‘best single test’ of exempt status.”  As the NPRM explains in detail (285+ pages of preamble, 9 pages of rules), the Department’s Wage and Hour Division (WHD) historically has set the salary threshold based on “a broad set of data on actual wages paid to salaried employees and then set the salary level at an amount slightly lower than might be indicated by the data.”  The DOL’s frequently asked questions released with the NPRM explains that the DOL believes that the 40th percentile level “represents the most appropriate line of demarcation between exempt and nonexempt employees.”  By raising the threshold significantly, the DOL believes this should adequately distinguish between those workers who may be properly classified as exempt and those who likely are not, without  the need for immediate change to  the duties tests (at least for now).  The DOL invited comments on the proposed salary level and on any alternative salary levels, as well as the methodology for determining the salary levels, that appropriately makes this distinction.

Not to be lost in the 285+ pages of the preamble is the fact that the DOL is considering whether to also permit non-discretionary bonuses and incentive payments to count toward a portion of the standard salary level test for the white collar exemptions, and if so, how to include such payments as part of the salary level test.  Even if such payments were ultimately considered, the DOL is likely to put a cap on the amount of the salary requirement that could be satisfied through non-discretionary bonuses and incentive pay.  The DOL is seeking comments on the inclusion of such payments, as well as including commissions as part of these payments.  We will provide further updates on this portion of the NPRM in upcoming days on the Wage & Hour Insights Blog.

What Does Not Change in the Proposed FLSA Regulations

In short: Everything else stays the same…for now.

The new salary levels still do not apply to outside sales employees, and they still exclude other professionals like lawyers, teachers, and doctors.  American Samoa still get a special salary test because minimum wage in that jurisdiction have remained lower than federal minimum wage.  Similarly, the motion picture industry still has its own special salary rules.

But the key take away is that the WHD did not propose any changes to the duties tests for the white collar exemptions.  Instead, the NPRM explains that the significant salary threshold increase should eliminate a majority of the “continued extensive litigation regarding employees for whom employers assert the [white collar exemptions].”  By the Department’s calcuations, “[a]t the 40th percentile of full-time salaried workers, there will be 10.9 million fewer white collar employees for whom employers could be subject to potential litigation regarding whether they meet the duties test for exemption (4.6 million who would be newly entitled to overtime due to the increase in the salary threshold and 6.3 million who previously failed the duties test and would now also fail the salary level test).”  That being said, the DOL may consider changes to the duties test before issuing the Final Rule and has sought additional information on the duties test.

What the Proposed FLSA Regulations Mean for Employers 

In short: Nothing changes today, but the future impact will be far reaching.

Keep in mind that these are just proposed regulations.  After publication in the Federal Register (which we expect will occur shortly), the DOL estimates that the Final Rule resulting from the NPRM will not be released until mid-2016, since the DOL plans to “rely on data from the first quarter of 2016” in setting the salary level.

There is no way to sugar coat it: the proposed salary level increase to $50,440 is substantial and employers will need to consider the impact that this proposal will have on their bottom line.  As noted above, the WHD estimates that 10.9 million workers will no longer qualify as exempt based on the new salary level.  Other estimates peg this number at 15 million or more.  The biggest impact, according to the NPRM, will be on educational and health services, with substantial impacts on wholesale/retail trade, professional and business services, and the leisure and hospitality industries.  Because of the differences in standards of living, businesses in the South and in rural areas will feel the salary level increase most acutely.  However, at $50,440, the proposed salary level exceeds even the highest state thresholds in California and New York.  The salary level will also likely wipe out exempt positions offered on a part-time basis, which are still possible at the current $455/week level.

The salary level increase will likely accomplish the DOL’s goal of using that single test of exempt status without a need to change the duties test.  If there is a silver lining for employers, this is it.  Disputes over whether one of the white collar exemptions applies (the duties test) should be far less frequent.

What’s Next for Employers

In short: Start planning now for the future impact on operations and finances, and consider participating in the public comment period with WHD.

When the DOL finalizes the proposed rule next year, it will not likely provide a long grace period for compliance.  In 2004, the DOL gave employers only 120 days to comply with those new rules, and we expect that the DOL will provide the same or shorter period this time around.  Planning now will help avoid abrupt impacts next year.  Employers should work with wage and hour counsel to complete a preliminary assessment of all positions they currently treat as exempt to determine whether they would be impacted by the proposed changes and whether any potential duties test changes could similarly impact things.  Many employers will need to budget for salary increases and/or increased overtime costs for at least part of 2016.

Beginning with the publication in the Federal Register, the public comment period will extend for 60 days, and represent employers’ only opportunity to provide comments on how the salary level increase will impact them.  The DOL is required to review and respond to all issues raised by the comments.  Most importantly during this period, in addition to comments on the salary level proposal, the WHD also seeks comments on the following questions:

  1. What, if any, changes should be made to the duties tests?
  2. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
  3. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
  4. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?
  5. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

WHD also asks whether it should add “examples of additional occupations to provide guidance in administering” the white collar exemptions.  Because the WHD is using questions here, instead of making a specific proposal about the duties test, this public comment period will likely be the only substantive opportunity for employers to comment on any regulatory changes.  The WHD can (and likely will) use the responses to these questions to implement duties test changes in the Final Rule without any further public comment period.

President Obama is expected to discuss the new FLSA regulations and other economic issues during a Thursday afternoon visit to the University of Wisconsin – La Crosse.

UPDATED: For an updated entry, click here.

Since last spring, we have been following developments in the oft-delayed Fair Labor Standards Act (FLSA) regulations rewrite by the Department of Labor (DOL). The Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) has now completed its review, and the Department of Labor finally released its new Fair Labor Standards Act (FLSA) regulations today. The official DOL notice and the FAQs are posted on the DOL website.

In a blog post on The Huffington Post Monday night, President Obama said that the DOL would release the new regulations this week. He wrote that “too many Americans are working long days for less pay than they deserve,” and that his proposal would help assure that “hard work is rewarded.” Multiple sources indicate that the plan will extend overtime pay to roughly five million workers who are currently excluded under federal law, chiefly by more than doubling the salary threshold for exempt workers.

The new FLSA regulations set the salary threshold for exempt employees at $921 per week, but note that the final rule could increase that to $970 per week ($50,440 per year). Under the current rules implemented in 2004 by the Bush administration, salaried workers must earn only $23,660 per year in order to be eligible for most overtime exemptions. The duties test changes has not yet changed, despite expectations that some change would be included in the proposed regulations.

The president is expected to discuss the new FLSA regulations and other economic issues during a Thursday afternoon visit to the University of Wisconsin – LaCrosse. Details of the proposal were first reported by Bloomberg.

We will continue to provide details throughout the day today and this week as we digest the changes.

clouds33491598.jpgAs we head into the waning days of June, strong storms and persistent flooding have been all over the news lately. Near me, storms earlier this week demolished homes and businesses, dropped a communications tower on a fire department, knocked out power, and generally left businesses and homeowners unable to go about their normal work. In communicating with clients impacted by recent storms across Illinois and Indiana, a few related questions came up regularly: are there rules that we must follow if weather shuts us down or if employees want to help clean up and get us up and running again? Fortunately, the DOL offered some clear advice for employers in this or any other inclement weather situation in a 2005 Opinion Letter.

Non-Exempt Employees

Let’s first look at the rules for non-exempt employees, because they are pretty straightforward. Employers are only required to pay non-exempt employees for the hours that they actually work. This is true whether your office is open and just inaccessible for some staff or if you close due to a natural disaster or inclement weather.

For clients with employees in the field, keep in mind that merely closing your office might not relieve you of your duty to pay those staff. An employee delayed in the field while on duty due to a severe storm but cannot perform actual work for several hours is likely still considered to be on the clock. Only if the employee is relieved of duties completely would that compensable time end (but beware of travel time issues, of course). Practically, when the issue is limited to only a few hours of time, you’re better off paying the employee than creating a dispute that will undoubtedly cost you more than whatever extra wages you would pay out.

Exempt Employees

Section 541.602(b) of the current FLSA regulations provides a few limited exceptions to the general rule that an exempt employee must be paid on a salary basis without deductions from pay. The regulations allow deductions when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or accident. Thus, if an employee is absent for one or more full days to handle personal affairs, if you make a corresponding deduction from the employee’s salary, it will not affect his or her exempt status. However, another part of the same regulation explains that aside from this situation, if an employee is “ready, willing and able to work, deductions may not be made for time when work is not available.” 29 C.F.R. §541.602(a)

If your office is closed due to inclement weather (or, really, for any other reason), you cannot make deductions from the salaries of your exempt employees. Doing so would affect the employee’s exempt status, since the deduction would not be for personal affairs, sickness, or accident. An employee will not be considered to be paid “on a salary basis” if deductions from the predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. See 29 C.F.R. §541.602(a)

However, this does not mean that you cannot require exempt employees to take vacation or other paid time off during closures or times when employees simply cannot (or choose not) to make it to your office when it is open due to inclement weather. Since employers are not required under the FLSA to provide any vacation time to employees, an employer that does provide vacation or PTO time may require that employees use it on specific days or in specific situations, like inclement weather situations that either close your office or prevent the employee from reaching your otherwise open office. Requiring employees to use leave in these situations does not affect the salary basis as long as the employee still receives the same salary at the end of the pay period.

If your office is open and an employee cannot (or chooses not) to brave the trip to the office due to inclement weather, such as transportation difficulties, road closures, or states of emergency/travel bans, this is considered absent for personal reasons. In that situation, you may deduct from the employee’s salary for any full days during which he or she performs no work for this reason (unless vacation or PTO is used).

Beware, though. Deductions from salary for less than a full day’s absence are not permitted under the regulations. An exempt employee who works from home for even part of the day, or who only is late/leaves early due to inclement weather must receive his or her full, guaranteed salary even if the employee has no accrued vacation or other leave benefits.

Similarly, if your office is closed, the DOL considers your exempt employees’ absences as being occasioned by the closure or your business operation requirements. Therefore, while you can require employees to use accrued leave under your policy, you must pay exempt employees their full, guaranteed salary for any absence(s) occasioned by the closure. When in doubt, pay the full salary.

Volunteer Clean-Up/Recovery Work

Sometimes, storms cause damage to equipment and facilities. Remember that your employees cannot “volunteer” to help you rebuild and repair. Non-exempt employees must be paid for that working time, even if they want to donate that time. Exempt employees must be paid, too, for the same reasons above. You can, but are not required to provide additional compensation if they do.

Good luck dodging the storms and flooding, and stay safe this summer!

Last week, the Department of Labor posted a new blog post from Wage and Hour Division Administrator Dr. David Weil highlighting the DOL’s wage and hour enforcement efforts. Dr. Weil’s statement that the DOL recovered “over $240 million owed to more than 270,000 workers nationwide in fiscal year 2014 alone” sent me digging in the DOL’s Online Enforcement Database and its statistical abstracts. While I object to the DOL including the specific company information in its database, the inclusion of such data provides fair warning to certain industries that the DOL receives more complaints, undertakes more investigations, and conducts more enforcement actions in those industries.

Specifically to Dr. Weil’s post, WHD’s 2014 statistics show that a handful of what the WHD considers “low wage” industries are being targeted for FLSA enforcement actions by the agency. According to the FY2014 numbers:

dol3.PNGShown another way, you can see that these nine industries alone account for nearly 1/3 of all of the back wages collected by DOL in Fiscal Year 2014:

 

Cases

Back Wages Recovered

Employees

Restaurants

5,118

$34,451,990

44,133

Health Care

1,581

$17,703,092

21,029

Guard Services

475

$5,659,936

6,729

Agriculture

1,430

$4,502,976

12,031

Hotels and Motels

1,049

$4,040,376

7,420

Temporary Help

368

$3,915,498

6,009

Janitorial Services

523

$3,902,434

4,425

Garment Manufacturing

239

$3,095,832

1,673

Day Care

1,144

$1,875,156

5,812
       

TOTAL

11,927

$79,147,290

109,261

 

This list of nine industries should remind employers in those sectors that they remain a big target for DOL wage and hour enforcement. The DOL’s focus on low wage industry is nothing new. Some sectors have been on notice for the last few years, as the DOL’s Strategic Plan for Fiscal Years 2011-2016 specifically identified agriculture, janitorial services, and hotels and motels as “high risk” industries, along with the construction industry.

These nine industries account for 1/3 of the total that DOL recovered, but we don’t know from the numbers what DOL sought but was unable to collect. Certainly, the DOL is targeting other industries, too. If you’re not on the list of nine industries above, you’re still not out of the woods.

So, what can you do to reduce your risk, whether you are in the group of industries or not? Remember that you cannot claim ignorance of the law. You must educate yourself and watch for common mistakes like these that are likely to attract the attention of the DOL or plaintiffs’’ lawyers:

  1. Treating employees as independent contractors
  2. Splitting work among “teams” of employees (a particular issue in the janitorial and agricultural industries)
  3. Poor recordkeeping
  4. Untracked, uncompensated off the clock work
  5. Travel time
  6. Treating non-exempt employees as exempt

What can you do if your company might have some or all of these issues?

The good news is that recognizing a problem (or a potential problem) puts you far ahead of the game in avoiding a worst-case scenario—a DOL investigation or lawsuit. The key here is to be proactive and get some guidance early before a claim is filed. If you address the problem promptly, and correctly, you can avoid more painful and expensive problems that put you in the DOL’s database down the road.

The DOL’s Wage and Hour Division expanded its already busy agenda, announcing upcoming guidance on the Fair Labor Standards Act’s definition of “independent contractor.” WHD Administrator David Weil, speaking at New York University School of Law’s 68th Annual Conference on Labor, disclosed during his keynote address that his office would soon issue an “Administrator’s Interpretation” that he indicated would “clarify” who qualifies as an independent contractor under the FLSA by providing a “very clear set of criteria.”

Administrator’s Interpretations have been few and far between since the DOL first began using them in 2010, and this is one of the few times that the Wage and Hour Division will have used them to announce a potentially significant shift in the law. Dr. Weil explained that the DOL planned to expand on the “economic realities” test used by many courts to distinguish between employees and independent contractors. As those of you who follow this blog know, independent contractor definitions impact not just what you traditionally think of as contractors, but also volunteers, franchisees, state law definitions of “employees,” and even the use of homeless people as wireless hotspots.
Unlike the new FLSA regulations—which we expect as early as this week—and the DOL’s request for information on employee use of smartphones, which the DOL plans to publish in August 2015, the DOL has not yet announced a deadline for this new Administrator’s Interpretation, and is not bound by any notice-and-comment procedure prior to release. As soon as the Interpretation is released or we hear more information, we’ll pass it along.

Administrator’s Interpretations have been few and far between since the DOL first began using them in 2010, and this is one of the few times that the Wage and Hour Division will have used them to announce a potentially significant shift in the law. Dr. Weil explained that the DOL planned to expand on the “economic realities” test used by many courts to distinguish between employees and independent contractors. As those of you who follow this blog know, independent contractor definitions impact not just what you traditionally think of as contractors, but also volunteers, franchisees, state law definitions of “employees,” and even the use of homeless people as wireless hotspots.

Unlike the new FLSA regulations—which we expect as early as this week—and the DOL’s request for information on employee use of smartphones, which the DOL plans to publish in August 2015, the DOL has not yet announced a deadline for this new Administrator’s Interpretation, and is not bound by any notice-and-comment procedure prior to release. As soon as the Interpretation is released or we hear more information, we’ll pass it along.

 

Supreme Court building.JPGLast week, the Supreme Court granted a writ of certiorari to Tyson Foods in an appeal of a class and collective action filed under the FLSA and a similar Iowa state law. Hourly workers at Tyson’s Storm Lake, Iowa pork processing plant filed a lawsuit claiming unpaid overtime for time spent donning and doffing personal protective equipment and walking to and from their assigned work stations.

The district court certified an FLSA collective action a class action pursuant to Federal Rule of Civil Procedure 23, concluding that the class of workers had presented common questions about whether those activities were “compensable work” under the FLSA, state law, and applicable case law. However, at trial, the plaintiffs did not present common questions of fact, but instead presented statistical evidence that estimated the “average” time a worker would spend donning, doffing, and walking. A jury brought back a verdict for $2,892,378.70. Liquidated damages raised the judgment to $5,785,757.40.

Tyson appealed the verdict to the Eighth Circuit, arguing that a statistical analysis was invalid, since each employee’s routine varied. Some employees in the class admittedly had no damages whatsoever. Citing Wal-Mart v. Dukes, Tyson argued that without commonality, the plaintiffs’ claims amounted to an impermissible “trial by formula,” and that the statistical modeling ignored each individual plaintiff’s damages in violation of the Supreme Court’s requirements outlined in its 2013 Comcast v. Behrend decision. Tyson also argued that awarding damages to a class that included members with no damages was inappropriate in any event.

Over a dissent, the Eighth Circuit, in an opinion written by Judge Benton, rejected these arguments, holding that Behrend would only apply when individual damages calculations actually “overwhelm questions common to the class.” The majority held that the plaintiffs could prove damages by inference and then apply those to individual class members, even if some of those individuals had no damages at all. Doing so, reasoned the court, went to the ultimate resolution of the questions on their merits, not whether the questions themselves were common among class members.

In his dissent, Judge Beam argued that the majority had accepted, but ignored, the principle that “class certification is improper when a ‘windfall’ is conferred on some class members” based on an erroneous reliance on jury instructions given at trial. At its core, Judge Beam rejected the notion that a class action could present undifferentiated evidence, “including significant numbers of the putative classes suffering no injury and members of the entire classes suffering wide variations in damages, ultimately resulting in a single-sum class-wide verdict from which each purported class member, damaged or not, will receive a pro-rata portion of the jury’s one-figure verdict.”

Citing circuit splits on these issues, Tyson filed a petition for a writ of certiorari in March. The certiorari petition raises these two questions:

  1. Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and
  2. Whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the FLSA, when the class contains hundreds of members who were not injured and have no legal right to any damages.

Possible Outcome

Without the benefit of full briefing on the issues, and without hearing oral argument, this seems to be a case that should fall in favor of the employer. Both Dukes and Behrend can be read to preclude the use of class or collective actions and statistical averages in a case like Tyson. Most importantly, in my estimation, to hold otherwise would allow hundreds of class members who worked no overtime at all and thus entitled to no recovery, to receive an “average” amount of damages anyway. This fact, coupled with undisputed evidence that individual workers’ overtime amounts varied substantially, suggests a reversal is in order. The makeup of the Supreme Court has not changed since Dukes or Behrend, and this case does not seem to present particularly novel or different issues.

To me, the significant issue to follow here is the scope of the Court’s eventual decision. Because of the unusual inclusion of class members with no damages and the “average” calculation formula, the Court could limit its decision to the very unique facts of this case. If so, the management-side wage and hour attorneys’ excitement will be for naught. For businesses who routinely face the dilemma of settling early or “winning” by spending much more to defeat unnecessary class certification motions, though, I am hopeful that the Court will use the opportunity to limit class and collective actions cases like these, or at least the use of statistical averaging like this. It seems as good an opportunity as any we have had in the FLSA world in recent years.

In our last post, we discussed the calculation of the “regular rate” and some of the complexities of determining what constitutes “remuneration” under the Fair Labor Standards Act (FLSA). Commission is one of the additional forms of compensation that you must include in a non-exempt employee’s regular rate. Such a calculation is relatively straightforward if all remuneration is paid in the same week as it was earned. What can make this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. We’ve discussed how to do this calculation for bonuses before, but let’s take a look at commissions, which can and often do require a slightly different calculation, or at least some additional planning.

Let’s start with a simple example. Assume that your employee, Emma, earns $500 in hourly earnings this week, plus an additional $500 in commissions. She earns this compensation for working 50 hours in a single workweek. The formula is as follows:

  • Regular rate = $1,000 (wages + commission) / 50 hours = $20/hour
  • Total compensation = earnings from hourly wages and commissions + overtime
  • Overtime = 10 hours at one-half the regular rate of pay
  • Emma’s total pay = $1,000 + (10 hours x 0.5 x $20/hour) = $1,100

Now, let’s change it up. Emma still earns a total of $1,000 during the first week of June, as she makes the sale that leads to her commission during the same week. However, assume you paid Emma the $500 commission after the month ended on the next payroll cycle in the first week of July, a week when she worked fewer than 40 hours. Do you owe Emma any overtime? You might!

Under these circumstances, Emma would correctly argue that you must apportion the commission back to the workweek during which she earned it. Not knowing the amount of the apportioned commission during the first week of June when Emma’s wages were due, you paid her hourly wages of $550 for 50 hours of work ($10.00 x 50 hours + $5.00 x 10 hours).

However, when her commission is paid in July, you must go back and include the additional $500 earned and apportion it for the overtime she worked that first week of June. This means that you must pay Emma additional overtime compensation. You can go back and completely recalculate her regular rate using the formula above, or you can use a quicker mathematical shortcut. Using this easier way to determine the overtime owed, you calculate the increase in regular rate by dividing the commission payment ($500 in our example) by the total hours worked during that week (50 hours). In our example, this increases Emma’s regular rate by $10/hour for that workweek. Accordingly, her recalculated regular rate is now $20 for that overtime workweek—the same number you would get using the formula above. Since Emma worked 10 hours of overtime in the first week of June in our example, she would be due an additional $50 ($10 increase in regular rate x 0.5 x 10 overtime hours). Again, this is the same number you get by completely recalculating her earnings using the formula above. As long as you know the amount of the additional payment and the number of hours worked in the relevant week, you do not need to know what the original pay rate was at the time. Anytime your employee earns money later that can be apportioned to an earlier period, you must go back and run this calculation. You cannot simply apply the commission to the first week in July when you pay it, without doing more.

Strategies for More Complex Commission Events

What if Emma makes the sale in June, but the customer does not actually pay until July? What if the customer purchases and pays in the first week of June, but returns the product a few weeks later for a full refund? You could find yourself running adjustments in two directions and even going back and recalculating your calculations…unless your policy or commission plan make it clear when wages are “earned.” Specify exactly when commissions are considered “earned” by the employee: when a customer pays, when a product is delivered, when a return period expires, by a certain date (end of a following month, or simply the date on which you pay commissions), or at some other reasonable and equitable time. Developing a policy that more carefully controls when and how employees earn commissions can help you avoid confusing and unnecessary look-back calculations.

Of course, aside from the business and employee relations aspects of your decision, various state laws will impact what you can lawfully do with commission plans. Most state laws, like the FLSA, include commissions among the definition of “wages” subject to the statutory requirements. Some of these state and local laws specify when commissions must be paid and what, if any, obligation exists to pay commissions on termination, among other topics. When including commission or bonus clauses in employment agreements, policies, or commission plans, start with a logical business justification, consider employee relations/ expectations aspects, and then tweak the plan if necessary to ensure fewer calculation headaches and that you have complied with necessary state and local wage payments laws.

No matter if you are new to the wage and hour world and this blog, you still probably know that employers need to pay their non-exempt employees an overtime premium for all hours worked in a workweek beyond 40, pursuant to the Fair Labor Standards Act (FLSA) and applicable state law. Whatever overtime rate you implement—whether time-and-a-half or a half-time premium—the overtime rate is always based on the employee’s “regular rate.” In past posts, we have looked at special problems that calculating the regular rate raises for employers who pay non-exempt workers a salary, particularly if the employees also earn commissions or bonuses. Even if compensation paid does not fall into one of these “special” problem buckets, the regular rate calculations for non-exempt employees can prove tricky at times.

On its face, the “regular rate” calculation would seem straightforward: the employee’s hourly wage or salary. However, the FLSA defines the regular rate more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain payments excluded by statute. Recently, a blog reader in the telecommunications industry asked whether the “regular rate” would include in-kind remuneration like free Internet access, meals, or other non-cash payments to employees given in lieu of commissions or even as fringe benefits. The answer is that it could, depending on the situation. Under the FLSA, remuneration that employers must add to the regular rate includes non-cash wages in the form of goods, boarding, or lodging; and non-overtime premium payments—such as shift differentials and hazard premiums and non-discretionary bonuses, commissions, and other incentive payments—based on hours worked, production, or efficiency.

Not every payment to an employee falls into the FLSA’s regular rate calculation, though. The FLSA specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on the employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances. The difference between a “discretionary” and “non-discretionary” bonus is worth its own series of posts, for example, and have tackled some of those issues in prior posts as noted above. State laws differ, too, on what can be excluded from the regular rate. Accordingly, remember that this post is just a starting point. Your specific situation may vary, so if you are not sure whether to include a particular form of compensation or employee benefit in your calculations of the regular rate for employees, you should reach out to employment counsel to avoid an expensive mistake.

Once you have done the hard work of determining what to include and exclude, the calculation of the regular rate is relatively straightforward, with one caveat. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that workweek. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation paid the employee for all 50 hours of work, and not just 40, you would owe the employee another $5.00/hour for the 10 overtime hours, or another $50. If the compensation only covers 40 hours, you would owe the full time and a half overtime premium, of course.

Simple? Sure, this part can be easier than determining what goes into the regular rate. What makes this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. Commission plans, bonus rules, and pay policies that you have established may also impact the calculation of when subsequent remuneration was actually “earned.” We’ve discussed how to do this calculation for bonuses before. We’ll cover how this look-back calculation works with commissions in our next post.

 

On its face, the “regular rate” calculation would seem straightforward: the employee’s hourly wage or salary. However, the FLSA defines the regular rate more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain payments excluded by statute. Recently, a blog reader in the telecommunications industry asked whether the “regular rate” would include in-kind remuneration like free Internet access, meals, or other non-cash payments to employees given in lieu of commissions or even as fringe benefits. The answer is that it could, depending on the situation. Under the FLSA, remuneration that employers must add to the regular rate includes non-cash wages in the form of goods, boarding, or lodging; and non-overtime premium payments—such as shift differentials and hazard premiums and non-discretionary bonuses, commissions, and other incentive payments—based on hours worked, production, or efficiency.
Not every payment to an employee falls into the FLSA’s regular rate calculation, though. The FLSA specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on the employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances. The difference between a “discretionary” and “non-discretionary” bonus is worth its own series of posts, for example, and have tackled some of those issues in prior posts as noted above. State laws differ, too, on what can be excluded from the regular rate. Accordingly, remember that this post is just a starting point. Your specific situation may vary, so if you are not sure whether to include a particular form of compensation or employee benefit in your calculations of the regular rate for employees, you should reach out to employment counsel to avoid an expensive mistake.
Once you have done the hard work of determining what to include and exclude, the calculation of the regular rate is relatively straightforward, with one caveat. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that workweek. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation paid the employee for all 50 hours of work, and not just 40, you would owe the employee another $5.00/hour for the 10 overtime hours, or another $50. If the compensation only covers 40 hours, you would owe the full time and a half overtime premium, of course.
Simple? Sure, this part can be easier than determining what goes into the regular rate. What makes this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. Commission plans, bonus rules, and pay policies that you have established may also impact the calculation of when subsequent remuneration was actually “earned.” We’ve discussed how to do this calculation for bonuses before. We’ll cover how this look-back calculation works with commissions in our next post.

 

iStock_cell phone XSmall.jpgThe Obama Administration used the occasion of Memorial Day weekend to release its required Semiannual Regulatory Agenda. The Agenda, which is not binding on the DOL, lists a number of items including two specifically related to the Fair Labor Standards Act (FLSA). One of them is the “white collar” overtime exemption rules that we have been telling you about recently. As we noted, these rules are expected in proposed form sometime in June. The other item is new to the Agenda: employee use of smartphones and other electronic devices after regular work hours.

The second Wage & Hour Division (WHD) entry is a new request for information (RFI). This RFI seeks information regarding “the use of technology, including portable electronic devices, by employees away from the workplace and outside of scheduled work hours.” The Agenda does not identify any potential rulemaking at this time, listing this item in the “pre-rule” stage. This means that for now WHD will simply seek information from the public on how the proliferation of portable electronic devices impact hours worked—and tracked—by employers and employees and other related FLSA issues. The DOL expects to publish this RFI in the Federal Register sometime in August 2015.

In past Agendas, we have also tracked the longstanding “Right to Know Under the Fair Labor Standards Act” item. According to the DOL, this proposed regulation would “enhance the transparency and disclosure to workers of their status as the employer’s employee or some other status such as independent contractor, and if an employee, how their pay is computed.” In 2010, the DOL announced that it would propose a rule on this same topic in April 2011, but so far has not done so. This item appeared on subsequent Agendas, most recently last fall as a “long term” item. However, the current Agenda completely omits this item. While this indicates that the DOL has abandoned this initiative, nothing would preclude its resurrection in future Agendas.

Finally, the Agenda also references a possible December 2015 release of the so-called “persuader rules” that are of particular note to labor law practitioners and employers who face union organizing activity. These oft-delayed rules were slated for a July release in the last Agenda.

As soon as the DOL releases more information about any of the above initiatives, we will pass it along.