DOL Investigation Shows Need to Classify Employees Properly

A recent settlement between the US Department of Labor and First Republic Bank aptly illustrates the perils of misclassifying large numbers of employees under the overtime laws. 

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Making Employees Work Extended Overtime Hours May Be Imprudent and Costly, But Could Be Legal

Everyone knows that exempt employees—those who aren’t eligible for overtime pay such as executives and management—can be made to work 24/7/365.

What about nonexempt employees—those who do earn overtime wages? Can you make them work 9, 10, 12, or more hours in a day?
 

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Exempt Managers Spending Major Time on Nonmanagerial Duties May Not Affect Exempt Status

The 4th Circuit U.S. Court of Appeals (MD, VA, W. VA, NC, SC) provided a significant win for employers in today’s multiple-hat-wearing, everybody-rolls-up-their-sleeves-and-pitches-in style of management, by finding that a store manager who spent most of her time on non-managerial duties is nonetheless exempt from the overtime pay requirements.

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EMPLOYEES MAY NEED TO BE PAID FOR DOING MORE THAN THEIR 'MAIN JOB'

If the employee hasn’t started “working” yet, he or she need not be paid for that time, right?

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Class Action Lawsuit Follows New DOL Interpretation of Mortgage Loan Officer Status

We blogged in January 2011 about a 2010 Department of Labor (DOL) interpretation concluding that mortgage loan officers were not exempt employees under the FLSA’s overtime pay regulations. The Mortgage Broker’s Association (MBA) had warned at that time that this interpretation reversing the DOL’s 2006 position finding that mortgage loan officers were exempt employees would cause the sky to fall on lenders.

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Should pharmaceutical sales representatives be paid overtime? It depends on where they're located (for now).

Seven months ago,we reported on a Second Circuit (Connecticut, New York, and Vermont) ruling  that held that pharmaceutical sales representatives are not exempt employees and should be paid overtime for working more than 40 hours in a week.

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Reporters are Not "Creative" Professionals

What do you call a reporter who’s “creative” with the news?

A liar—or at least, that’s the traditional, “old school” view of journalism. Reporters are supposed to gather, verify, and relay facts. Right? So, how can they fit under the “creative professional” exemption to the Fair Labor Standards Act (“FLSA”)? 
 

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Portrait of an Exempt Computer Employee

How can an employer tell which computer employees are exempt from the overtime pay requirements? What does an exempt computer employee look like? They are a rare bird—but occasionally, computer employees may fit into one of the regulation’s exemptions.

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Practice Over Policy - Overtime Wages Are Due For All Hours Worked Even If Workers Disregard Company Policies Or Instructions From Supervisors

Just because an employer or its supervisors tell employees not to work overtime or there is a written policy forbidding employees from working overtime, does not mean that overtime wages do not need to be paid to employees who work overtime hours. Workers who are not otherwise exempt under the overtime laws and who actually work more than 40 hours in a week must be paid overtime – even if they are instructed not to work overtime. 

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Misclassifying Employees As "Managers": The Wrong Way To Save A Dollar

Dollar General, like other discount retailers operating in multiple states, operates on thin margins. While saving a buck is vital for Dollar, misclassifying employees as exempt managerial staff when they have little say in the management of the business and perform mostly manual labor, in order to avoid paying them overtime wages, is the wrong way to do it.

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AT&T Blindsided by Overtime Litigation

AT&T is the latest major corporation to get hit with overtime class action litigation.  In this case, the communications giant got hit from two sides.

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Court Affirms Commissioned Salespeople Entitled to Overtime

One common mistake that employers make is to consider all commissioned salespeople to be exempt employees.  Most companies employ inside salespeople, including those who make telesales or e-mail sales from remote locations.  These inside sales people are generally not exempt.  Only outside salespeople and retail salespeople are exempt.  All other commissioned employees must be paid overtime if they work over 40 hours in a workweek, unless another exemption applies to them.

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How much influence must someone have in the firing process to qualify as exempt from overtime under the executive exemption to the Fair Labor Standards Act rules?

Under the FLSA, employees are paid overtime unless they qualify for one of the exemptions in the Act. One of the most common exemptions is the Executive Exemption.  While called an “executive” exemption, it’s not limited only to inhabitants of the C-suites and their VP-level direct reports. Instead, it may be available to a wide range of managerial or supervisory employees and should likely be called the “managerial exemption.”

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Do Not Judge Employees by Their Titles: Make Sure Employees Actually Are Managers Before Paying Them Like Managers

Most employers know that executives do not get overtime.  Some people are unaware, however, that it takes more than a title to make a manager.  AT&T and its subsidiaries are in the process of finding that out the hard way, as they confront a $1 billion lawsuit brought by “managers” who were not paid overtime.  The suit is being brought by seven named plaintiffs, and also seeks class-action status to bring in another 5,000 employees.

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Paying Exempt Employees Who Serve Jury Duty

Employers are often unaware of the requirements under Federal law regarding paying exempt employees who serve jury duty. Failing to comply with these requirements can expose employees to significant risks. The main principle is simple enough: 

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Just Because an Employee is Exempt Doesn't Mean They Can't Be Paid Extra

Sometimes employees who are exempt from the overtime pay regulation need to work more hours, especially during busy seasons. Or perhaps you need more staff, but less than justifies hiring another person. Or perhaps you want to motivate exempt staff by offering them the opportunity to earn a commission or production bonus.

Can you pay an exempt employee more compensation for taking on extra responsibilities, working extra hours or shifts, or producing above-and-beyond the call?
 

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Perils of Having Employees Work Through Lunch

It’s tempting to have employees work through lunch—there’s always more to be done, business doesn’t necessarily come to a stop at lunchtime, and anyway, management often works through lunch without additional compensation. So, why not other staff?

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Employees Are Exempt or Non-Exempt - Not Both

Since “exempt” employees are not covered by the overtime pay regulations, they do not have the possibility of collecting overtime wages to earn additional money. Many, however, would be happy to take on an extra job for their employer in exchange for more pay. With businesses reluctant to expand payrolls or fill vacant positions during this time of economic uncertainty, it would seem like a win-win situation: the company gets a job done by a proven employee who already knows the organization; the employee gets extra pay.

It is win-win…if it is handled correctly.

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Big Costs For Misclassifying Technical Support Workers

$27.5 million settlement with Siebel Systems. $65 million settlement with IBM. $24 million settlement with Computer Sciences Corporation. Allegations in a recently certified class action against Wells Fargo with up to 3,000 possible class members. These are significant numbers. They come out of settlements and claims against major companies for misclassification of technical support workers.

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New York Increasing Transparency of Overtime Pay

A change to Section 195 of New York State’s labor law goes into effect on October 26th, 2009.  Section 195 contains notice and record-keeping requirements related to the payment of wages.   It always required that new employees be notified upon hiring of their rate of pay.  However, new language added to Section 195 states that an employer shall:

  1. notify his or her employees, in writing at the time of hiring of the rate of pay . . . and obtain a written acknowledgement from each employee of receipt of this notice . . .[and for] all employees who are eligible for overtime compensation . . . the notice must state the regular hourly rate and overtime rate of pay

The requirement is straightforward enough—written notice, written acknowledgement.  It will require changes to offer letters and hiring documentation, and incrementally increase the record-keeping burden on businesses.  That said, on its face, it is a rather innocuous change, not substantively altering employee rights or benefits, or employer obligations.

The question then is, “Why? What is the reason for this new language?” According to the Purpose section of the bill that became this new law:   “The bill would allow workers to determine whether their paychecks properly reflect the hourly wage rates their employers agreed to at the time of hiring, including the proper overtime rate.”  As elaborated by the bill’s Statement in Support, there’s concern that workers may have difficulty calculating their overtime rate from their paychecks. (Of course, if an employee knows the hourly rate—which employers were already required to divulge—it is not too difficult to determine the overtime rate.)

However, the most significant legislative language—and the best clue to what this new requirement is really about—can also be found in the Statement in Support:  “This new requirement will allow both the employee and the commissioner of Labor to compute the overtime rate to which the employee is entitled.” [Emphasis added]

If the documentation is for the Commissioner’s benefit as well, employers should expect that the Commissioner will in fact make use of it.  We expect that use to be holding employers’ metaphorical feet to the fire to make sure that they are properly paying overtime wages—and properly classifying those who are entitled to overtime pay.  If you look at the constellation of changes together—

  • provide written notice, including explicit notice of the fact that an employee is eligible for overtime pay and what the overtime rate is;
  • obtain written acknowledgement of receipt from the employee, which will help make sure that the employee reads and processes the information;  and
  • create a single, easily reviewed document of what employees should be paid,

—the net effect will likely be to increase the number of claims for not paying overtime properly and to facilitate enforcement of the wage rules by the NYS Department of Labor.  Since employees will be more cognizant of when they potentially should receive overtime, they are apt to bring more complaints and when they do, there will be unequivocal documentation of the overtime rate they are supposed to receive (or of the fact that the employer improperly failed to designate the employee as entitled to overtime pay).

This new rule seems motivated by a perception or fear that employers are not honoring their wage and hour obligations. (Given the state of the economy, it is probably not unreasonable to think that some cash-strapped companies might improperly seek to avoid paying overtime wages.)

The bottom line for employers is that they need to be more careful than ever to properly classify their employees with regard to their eligibility for overtime pay and to properly pay overtime wages. Employers should expect that there will be more enforcement actions taken in response to overtime pay violations or complaints, and that employees themselves will be more conscious of their right to overtime pay and more proactive in demanding it.  It is likely that an employer’s failure to specify an overtime rate on a hiring document will be used (in conjunction with a failure to pay overtime wages) as an employer’s knowing intention to violate the wage laws, leading to increased fines and penalties. 

New York seems to be in the forefront of increasing overtime enforcement through such documentation. Many other states, such as nearby Delaware, have wage notice requirements like NY’s previous one limited to notifying employees of their base rate of pay.  The new requirements for explicitly listing the overtime rate and obtaining written acknowledgement of receipt from employees do not seem to have yet percolated generally through the states.

 

Determining Administrative Exemption: Management v. Production

The administrative exemption to the overtime pay requirements can be tricky to apply and employers would be wise to review such classifications carefully. Companies often, to their detriment, misclassify non-supervisory administrative employees under this exemption without realizing that the performance of administrative-type duties, even if important or indispensible to the company, is not enough to exempt those employees from being paid overtime wages. A Charles Town, West Virginia horse racing facility found this out the hard way. 

Three former Racing Officials sued the race track, claiming that they routinely worked over forty hours in a workweek without proper overtime pay compensation. The track claimed that the employees were administratively exempt because they ensured that the race track complied with various regulations, ensured proper race outcome determinations, and had other indispensible duties. The track asserted that the Officials’ duties included “quality control, safety and health, public relations, and legal and regulatory compliance,” which the overtime pay regulations identified as administratively exempt duties that were “directly related to the management or general business operations of the employer.” 

The Fourth Circuit Court of Appeals disagreed with the race track. Their opinion provides guidance to other employers who fail to pay overtime wages to employees whose non-supervisory jobs are “indispensible” to the company and fall within potential exempt duties as noted in the list, above. The Court made clear that the job’s “importance” is irrelevant. Rather, to determine whether the employees were, indeed, related to the company’s “management or general business operations,” the test is not just whether the listed functions are performed, but whether the employees were actually part of the company’s management, or were part of the production staff that helped the company deliver the product or service it offered to the public. Since the Court found that the Racing Officials had production-side roles and were akin to production workers who made sure that the races the track “produced” occurred, the Racing Officials did not satisfy the requirements of the administrative exemption. 

The overall federal exemption has three parts: 

  • That the employee is paid a weekly salary of at least $455.00/week (note that state law  may require a higher salary threshold);
  • The employee performs office or non-manual work, which is directly related to management or general business operations of the employer or the employer's customers; and
  • The employee’s primary duty involves the exercise of independent judgment and discretion about matters of significance. 

An employee must meet all three to be exempt from the overtime pay requirements. Having a job with independent judgment and discretion is not enough, as this race track learned, if those important functions are not related to the business’s general operations. Given the Department of Labor’s new enforcement environment and its beefing up enforcement of the various regulations under its jurisdiction, employers would be wise to reevaluate their employees who are currently classified as administratively exempt to ensure they satisfy all requirements so as to avoid potential fines and penalties due to misclassification.

New Overtime Suit Involving Outside Sales Exemption

UPS is the latest large employer to be named in a potentially massive class action overtime lawsuit.  The Company’s account managers claim that they were misclassified as exempt outside salespersons or administrative employees, even though they purportedly do not have the authority to enter into sales contracts, nor do they have managerial responsibilities.  The employee who filed the suit claims to have regularly worked sixty-hour workweeks and received only a straight salary.  The suit could eventually include hundreds, if not thousands of account managers who, according to the lawsuit, were mainly responsible for going to local businesses and delivering a pre-scripted promotional message for UPS.

Regardless of the UPS suit’s ultimate disposition, it illustrates the importance of correctly applying the outside sales exemption, particularly as the exemption pertains to employees who engage in promotional work.  Not all “salespersons” are exempt under the Fair Labor Standards Act.  Rather, only “outside salespersons” are exempt.  To qualify for the outside sales exemption, the employee’s primary duty must be making sales (as defined by the statute) and the employee must “customarily and regularly” be engaged away from the employer’s place of business. 

Ordinarily, an outside sales employee will be making sales at a customer’s place of business or at the customer’s home.  Online or telephone sales do not constitute outside sales unless they are incidental to in-person sales calls made by the salesperson to the customer.  There is no requirement that an outside salesperson constantly be away from the office.  For example, if the salesperson returns to the office to prepare sales-related paperwork, that activity by itself usually does not compromise the outside salesperson’s exempt status. 

According to the UPS suit, the Company’s account managers were mainly performing promotional work as opposed to sales.  Promotional work can constitute exempt sales work if the promotional activity is incidental to, or done in conjunction with, the employee’s outside sales work.  However, promotional work done in advance of sales made by someone else is not considered exempt outside sales work.  As with many suits that center around the outside sales exemption, the UPS suit’s success will likely depend on whether account managers made sales or just laid the groundwork for other people’s sales.        

Think Twice Before Relying on the Highly Compensated Exemption

When the Fair Labor Standards Act (“FLSA”) regulations were amended in 2004, one of the “victories” for employers was the newly created highly compensated worker exemption. Under this exemption, an employee whose duties are not sufficient to make him/her ineligible for overtime pay under one of the traditional white collar exemptions (executive, administrative or professional) can still be exempt if he/she is a “highly compensated” worker.

The requirements for the “highly compensated” exemption are:

                 “1.        The employee earns total annual compensation of $100,000 or more, which includes at least $455.00 per week on a salary basis;

2.              The employee’s primary duty includes performing office or non-manual work; and

3.              The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.”  

In short, even if an employee’s primary duties do not qualify him or her for one of the white collars exemptions from the FLSA’s overtime requirements, the employee can still be exempt (and ineligible for overtime pay), as long as he or she earns  over $100,000.00 per year and regularly performs any job function which is an exempt duty performed by an executive, professional or administrative employee.

The problem is that many states have failed to fully adopt this exemption. For example, Hawaii does not recognize the highly compensated employee exemption. Rather it has its own version, which excludes employees that receive a guaranteed weekly minimum salary of $2,000.00. The effect of this is that, while an employee who receives a significant amount of his or her compensation in the form of commissions or bonuses may be exempt under the FLSA, the same employee may be entitled to overtime under Hawaii’s law if he or she does not have a weekly salary of at least $2,000.00.

Other states, such as Pennsylvania, refuse to recognize the highly paid exemption altogether. This poses continuing problems for employers that innocently rely on this exemption and do not check to see if it is valid under state law. The overtime claim of even one employee who is making six figures a year can be staggering. Make sure to check your local laws before assuming that your highly compensated employees are not entitled to overtime.

Illegal Deductions from Salary Sink Gristedes Exemption Claims

You can’t have it both ways – that was the opinion of a federal district court judge who recently awarded summary judgment to the more than 400 former and current department heads and co-managers who filed suit against New York supermarket chain Gristedes for unpaid overtime (Torres et al. v. Gristedes Operating Corp, 2008 WL 4054417). As noted by the New York Times,  most partial day deductions from pay invalidate an argument that employees are paid on a salary basis. This was Gristedes downfall. 

Under the FLSA (as well as New York State law), only salaried white collar positions may be “exempt,” and thus ineligible for overtime pay under most of the specific exemptions defined by these laws. The FLSA requires that salaried exempt employees be paid “the full salary for any week in which the employee performs any work without regard to the number of days and hours worked” [29 C.F.R. § 541.602(a)], with limited exceptions. While Gristedes considered its department heads and co-managers “exempt” and failed to compensate them at time and one-half for hours worked in excess of 40 in a workweek, it also made improper deductions from their “salaries” in at least 7.5% of pay periods over 10 years, according to the testimony of Gristedes own expert witness. When the court granted summary judgment to plaintiffs on this count, all of Gristedes other justifications for classifying these employees as exempt became irrelevant.

To maintain “salary basis” for exempt employees, employers must:

  • Remember that salary cannot be reduced for variations in the quality or quantity of work
  • Make deductions from pay only for the following reasons: 
     
    • absence from work for one or more full days due to sickness or disability in accordance with a Company plan or policy
    • absence from work for one or more full days for personal reasons other than sickness or disability, beyond any such absences that are permitted under the Company policy
    •  to off-set amounts employees receive as jury or witness fees or military differential pay
    • for unpaid disciplinary suspensions of one (1) or more full days, imposed in good faith for workplace conduct rule infractions
    •  for a penalty imposed in good faith for infractions of safety rules of major significance
    • for days not worked in the first and last weeks of employment 
  •  Publish and distribute a policy (perhaps within an employee handbook) explaining the bases on which deductions from salary will be made, and providing employees with a complaint mechanism for resolving payroll error.

Gristedes argued in this case that its approach to paying the plaintiffs was consistent with “industry practice.” If so, we can expect to see a lot more overtime claims against grocers in the near future.