By Jeffrey D. Pollack
The Fair Labor Standards Act (FLSA) requires employers to pay overtime at one-and-one-half times an employee’s regular hourly rate for all work performed in excess of 40 hours per week. Most people know that the FLSA contains certain exemptions from this requirement. In order to avoid the overtime costs associated with FLSA compliance, employers often treat nonexempt employees as exempt. Inasmuch as failure to pay required overtime can result in liability for the unpaid overtime, an equal amount in liquidated damages, plus attorneys’ fees, misclassification of employees is a growing area for class action litigation.
The FLSA does not contain a “white-collar” exemption per se. In 29 USC section 213(a)(1), the phrase refers to persons “employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of outside [salesperson].” Any person employed in such capacity who meets the salary and duties tests established by the Department of Labor (DOL) is exempt from receiving overtime pay regardless of hours worked.
Contrary to common belief, private employers may not grant compensatory time off in lieu of overtime pay (although a bill pending in Congress would change that). Moreover, courts narrowly construe the exemptions, and the employer bears the burden of proving that an exemption applies.
All employers must understand these rules. In cases of repeated willful violations, the FLSA also allows the imposition of civil penalties and imprisonment.
Employers should review their pay practices to ensure that all employees are properly classified. As part of that process, employers should develop written job descriptions that delineate the duties of each position; the employee’s actual duties—not the job description—will be the controlling factor. Employers must also implement a system to prevent improper deductions that could violate the salary test.
Salary and Duties Tests
The salary test, covered in the Code of Federal Regulations (CFR) section 541.118(a), starts with the rule that an employee must “regularly receive each pay period, on a weekly or less frequent basis, a predetermined amount constituting all or part of [her] compensation, which amount is not subject to reduction because of variations in the quality or quantity of work performed.”
For all practical purposes, the employee must receive at least $250 per week. (The duties tests discussed herein apply only to employees earning at least $250 per week. Those earning between $155 and $250 per week must meet additional requirements).
An employer need not pay the employee for any week in which the employee performs
no work. Subject to certain exceptions, the employee must receive her full salary—without
deduction—for any week in which she performs any work, without regard to the
number of days or hours worked. The employer can make deductions from the weekly
salary for absences of a day or more resulting from the following circumstances:
Private employers cannot make deductions for periods of less than a day under any circumstances, except in cases of intermittent leave taken pursuant to the Family and Medical Leave Act. Several courts and the DOL, however, take the position that absences of less than a day can be charged against an employee’s accrued vacation, sick, or holiday time.
Employers cannot deduct from an employee’s compensation for absences of less than a week caused by jury duty, attendance as a witness, or temporary military leave. They can, however, offset any amount the employee receives as jury or witness fees or military pay for a particular week against the salary due for that week. The employer cannot reduce the compensation for absences occasioned by the employer or operation of the business itself (e.g., due to lack of work).
Understanding the circumstances under which deductions are prohibited is critical, because an employer with “either an actual practice of making [improper] deductions or an employment policy that creates a ‘significant likelihood’ of such deductions” forfeits the exemption [Auer v. Robbins, 519 U.S. 452, 461, 117 S. Ct. 905, 911 (1997)]. Under certain circumstances, however, the employer can take advantage of the “window of correction” specified by CFR section 541.118(a)(6):
“[W]here a deduction … is inadvertent, or is made for reasons other than for lack of work, the exemption will not be … lost if the employer reimburses the employee for such deduction and promises to comply in the future.”
“Inadvertence” and “reasons other than lack of work” are alternative grounds, so employers can correct only those intentional deductions made for reasons other than lack of work. To do so, the employer must reimburse all affected employees for all improper deductions and promise them (and the union representing them, if applicable) future compliance.
The duties test focuses on the employee’s primary duty: what the employee does that is of primary value to the employer. Situations in which an employee performs both exempt and nonexempt duties are evaluated based on several factors. The time spent on each task is important but not controlling. Courts look at all relevant facts, including the “relative importance of the [exempt] duties as compared with other types of duties … and the relationship between [her] salary and the wages paid other employees for the kind of nonexempt work performed.”
The regulations provide the following example illustrating the concept of primary duty:
[I]n some departments, or subdivisions of an establishment, an employee has broad responsibilities similar to those of the owner or manager of the establishment, but generally spends more than 50% of his time in production or sales work. While engaged in such work he supervises other employees, directs the work of warehouse and deliverymen, approves advertising, orders merchandise, handles customer complaints, authorizes payment of bills, or performs other management duties as the day-to-day operations require. He will be considered to have management as his primary duty.
The regulations have separate duties tests for executives, administrative personnel, professionals, outside salespersons, and computer programmers:
Executive. The employee’s primary duty is management of the enterprise in which employed (or a customarily recognized department or subdivision thereof) and the employee customarily and regularly directs the work of two or more full-time employees (or the equivalent). According to CFR section 541.104(a), “a customarily recognized department or subdivision is intended to distinguish between a mere collection of men ... and a unit with permanent status and function.”
Administrative personnel. The employee’s primary duty requires the exercise of discretion and independent judgment, which consists of performing either office or nonmanual work directly related to management policies or general business operations of the employer or its customers. Or, the employee functions in the administration of a school system or educational establishment or institution (or of a department or subdivision thereof) in work directly related to the academic institution or training carried on therein. According to CFR section 541.207, the “exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered … [It] implies that the person has the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance.” It “does not necessarily imply that the decisions … must have a finality that goes with unlimited authority and a complete absence of review.”
Professional. The employee’s primary duty consists of either work requiring knowledge of an advanced type in a field of science or learning or work as a teacher in the activity of imparting knowledge, which includes work requiring the consistent exercise of discretion and judgment, or consists of the performance of work requiring invention, imagination, or talent in a recognized field of artistic endeavor.
According to CFR section 541.301, the requirement that the knowledge be of an advanced type means that, “generally speaking, it must be knowledge which cannot be attained at the high school level.” The requirement that it be in a field of science or learning “serves to distinguish the professions from the mechanical arts where in some instances the knowledge is of a fairly advanced type, but not in a field of science or learning.”
CFR section 541.308 states that “some employers erroneously believe that anyone employed in the field of accountancy, engineering, or other professional fields will qualify for exemption as a professional employee by virtue of such employment. While there are many exempt employees in these fields, the exemption of [an] individual depends upon [her] duties and other qualifications.” The exemption does not apply to “all employees of professional employers, or all employees in industries having large numbers of professional members, or all employees in any particular occupation. Nor does it exempt those learning such a profession. Moreover, it does not exempt persons with professional training working in professional fields but performing subprofessional or routine work.”
Outside salesperson. According to CFR section 541.500, this employee is someone “employed for the purpose of and who is customarily and regularly engaged away from [the] employer’s place of business in: 1) making sales within the meaning of section 3(k) of the Act; or 2) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (B) whose hours of work of a nature other than that described above do not exceed 20% of the hours worked in the workweek by nonexempt employees of the employer.… Work performed incidental to and in conjunction with the employee’s own outside sales, including incidental deliveries and collections, shall not be regarded as nonexempt work.”
CFR section 541.502(b) explains further: “Characteristically the outside [salesperson] is one who makes sales at [her] customer’s place of business.… Thus any fixed site, whether home or office, used by a [salesperson] as a headquarters or for telephone solicitation of sales must be construed as one of [the] employer’s places of business even though the employer is not in any formal sense the owner or tenant of the property.”
Computer programmer. In 1990, Congress amended the FLSA to
provide an exemption for “computer systems analysts, computer programmers,
software engineers, or other similarly skilled workers in the computer software
field.” Unlike the other white-collar exemptions, however, computer programmers
need not satisfy the salary test to be exempt. Rather, they need only receive
at least $27.63 per hour and have the following primary duties:
According to CFR section 541.303, the exemption applies only to highly skilled employees that have achieved a level of proficiency in the theoretical and practical application of a body of highly specialized knowledge in computer systems analysis, programming, and software engineering. It does not apply to trainees or employees in entry-level positions learning to become proficient in these areas, employees in computer-related occupations that have not attained a level of skill and expertise that allows them to work independently and generally without close supervision, or to employees whose “work is highly dependent upon, or facilitated by, the use of computers and computer software programs (e.g., engineers, drafters, and others skilled in computer-aided design software like CAD/CAM, but who are not in computer systems analysis and programming occupations).”
An employee whose primary duty does not satisfy one of these tests is not exempt from the FLSA’s overtime requirements, even if the salary test is met.
Robert H. Colson, PhD, CPA
The CPA Journal
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
©2009 The New York State Society of CPAs. Legal Notices
Visit the new cpajournal.com.