Fair Labor Standards Act

With summer starting and with it the rise of seasonal workers, I thought it would be a good time to review the fluctuating work week method (FWM) that can be used to determine overtime pay under the Fair Labor Standards Act for employees who are paid on a salary basis and whose hours fluctuate week to week.  While this can be a very useful method of paying overtime to seasonal or other employees whose overtime fluctuates with certain times of the year, it also brings with it confusion.  Many times the confusion surrounding the calculation and application of the FWM exposes employers to potential liability under the Fair Labor Standards Act for failure to pay overtime wages.

What is the Fluctuating Work Week Method?

Under the Fair Labor Standards Act (FLSA), employers are required to pay employees time and a half (150%) of the “regular rate” for all hours over 40 hours per workweek. The U.S. Department of Labor (DOL), the agency that enforces and interprets the FLSA, allows employers to pay employees who receive a fixed salary and work fluctuating hours, overtime at half (50%) the employee’s regular rate.

Which employers use the FWM calculation?

Generally, seasonal employers use the FWM to provide employees a predictable set salary regardless of the amount of hours they work each week (e.g. workers whose hours are influenced by the weather).

When can an employer use the FWM calculation?

In order to use the FWM calculation for overtime, the following conditions must be met:

  1. The employee’s salary must be sufficient to compensate him/her at a rate not less than minimum wage, regardless of how many hours worked, whether few or many.
  2. The employee receives a fixed salary – this does not change even if they work less than 40 hours a week (exception for unpaid leave of absence for entire day or more due to illness).
  3. The employee’s hours fluctuate from week to week.
  4. The employer and employee have a clear mutual understanding that the employee will be paid a salary and overtime at half his/her regular rate, regardless of how many hours worked.
  5. The employee received overtime equal to at least half his/her regular rate of pay for all hours worked over 40 hours.

How to calculate an employee’s regular rate

To calculate an employee’s regular rate of pay, divide the employee’s weekly salary by the total number of hours worked that week.  Overtime is then paid at 0.5 times that regular rate, since the 1.0 of the 1.5x has already been paid via the salary.  The more hours the employee works per week, the less the overtime rate (because it is spread over more hours).

Alternatively, the DOL allows an employer to calculate an employee’s regular rate based on a 40-hour workweek. Thus, an employer may divide the employee’s weekly salary by 40 hours, regardless of how many hours the employee worked that week. The DOL permits this calculation since the regular rate at 40 hours will always be higher than if the employer were to use the employee’s actual hours when the employee has worked overtime.

Should I use the FWM?

With a clear understanding of the conditions and calculations, the FWM can be a great tool for employers to save on costs, and provide year-round salary predictability for non-exempt employees.

On April 12, 2018, the U.S. DOL issued Opinion Letter FLSA2018-19 regarding the compensability of frequent breaks. As the DOL notes, most employers provide employees a 20 minute (or less) paid break in the morning, a 30 minute (or more) unpaid lunch break, and 20 minute paid afternoon break. In this case, several employees had a serious medical condition under the Family Medical Leave Act (FMLA) that required a 15 minute break every hour.  Accordingly, out of an 8 hour day, the employees were only working 6 hours. The question posed by the employer was whether that time needed to be paid since it was less than 20 minutes (and the Supreme Court has held that rest breaks up to 20 minute are ordinarily compensable as they are for the benefit of the employer).

The DOL opined that an employee who uses intermittent FMLA for additional breaks need not be paid for that time outside of the normal 20 minute break provided to all employees (i.e. the morning and afternoon break).  The DOL concluded that neither the Fair Labor Standards Act (FLSA) nor the FMLA requires that the breaks be paid, except that “employees who take FMLA-protected breaks must receive as many compensable rest breaks as their coworkers receive”. This opinion letter is a great reminder to employers of the interplay between the FMLA and FLSA (and often ADA).

The Wage and Hour Division (WHD) launched their new program, the Payroll Audit Independent Determination (PAID) program on Tuesday, April 3, 2018. As I wrote about previously, PAID is the WHD’s 6-month pilot program that allows employers to self-audit their payroll practices. If an employer discovers an overtime or minimum wage violation under the Fair Labor Standards Act (FLSA), PAID allows them to voluntarily report it to the WHD. The goal behind PAID is to encourage resolution of claims promptly without litigation.  The catch to the program is employees are not required to accept the back wages from the employer or release any private right of action against the employer. Thus, an employer could still be subjected to a lawsuit. Additionally, the DOL can reject participation in the program and conduct a full investigation after the employer voluntarily reported a violation. As I said in my last post, participating in the program is more like playing a game of Risk than a get out of jail free card…

The Equal Pay Act (EPA) requires that all individuals are paid equally for performing the same job, regardless of gender. But what does that mean exactly? When are jobs equal? On March 21, 2018, in Berghoff v Patterson Dental Holdings, the Honorable Judge Frank ruled that jobs of males and females “need not be identical to be considered equal under the EPA”, and that “job titles and classifications are not dispositive.” (D. Minn., March 21, 2018, Case No. 16-2472). Judge Frank noted there are only four exceptions to the EPA: “(1) a seniority system; (2) a merit system; and (3) a system that measures quantity or quality of production; or (4) that the pay differential was based on a factor other than gender.” In this case, the employer argued that the Plaintiff’s compensation was lower not because she was female, but because the product she marketed for the company generated less revenue than her male counterparts (who marketed products that brought in higher revenue for the company). While the jobs being compared were “essentially [all] marketing positions”, and the revenue generated by each of the respective products being marketed is relevant, the Court held that fact issues “surrounding the economic analysis on that point” precluded summary judgment. In sum, because there was a dispute regarding the use of revenue streams to show that the Plaintiff’s job involved less responsibility, the lawsuit goes on. However, Judge Frank similarly hinted that Plaintiff’s claim appeared weak and that “settlement would serve the interests of all parties.”

Take away for employers? Especially as your company grows, restructures, or changes compensation and commission plans, take a look at similar positions and ensure that there is no apparent pay disparity based on gender (or anything other than the four exceptions noted above).

On March 6, 2018, the U.S. Department of Labor announced a new nationwide pilot program called “PAID” – Payroll Audit Independent Determination. For an initial 6 month trial period, employers can self-audit their wage and hour practices.  If violations are found, an employer can voluntarily report it to the DOL’s Wage and Hour Division (WHD), in hopes of resolving the potential violations without liquidated damages penalties (usually an amount equal to the back wages due) and with a release of claims (as to the violations only).

Why? The DOL is hopeful that employers who discover violations will come forward and pay the employee 100% due promptly, in exchange for a settlement waiver and no liquidated damages, lawsuit, attorneys’ fees, etc. In turn, employees are paid faster than in a lawsuit or DOL investigation, and 100% of what is allegedly due.

Who is eligible? All employers subject to the FLSA. The program cannot be used for any pending investigation, arbitration, lawsuit, or threatened lawsuit (with an attorney involved). Also repeat offenders are ineligible.

What’s the catch? The DOL notes that it is an employee’s right to not accept the back wages, and not release any private right of action against the employer (and they cannot be retaliated against for such refusal). Further, unlike a typical litigation settlement release, the release must be narrowly tailored to only the identified violations (i.e. overtime, minimum wage, off-the-clock, misclassification, recordkeeping (for every violation)), and time period for which the back wages are paid. The WHD can still conduct future investigations of the employer, and employers cannot use the program to repeatedly resolve the same violations. So, in reality, an employer could notify 100 employees that they were paid incorrectly, and 90 accept and 10 reject and file a lawsuit seeking liquidated damages and attorneys’ fees (since they were just told by the employer that they “stole” their wages).

That being said, an employer could, as always, pay the employee the alleged back wages due in a supplemental check, and thus cut off their alleged damages as to that portion (which makes it a lot less attractive as a case to a plaintiff’s attorney), but they will not get a release. Sure, the employee cannot be forced to cash the check, but that would be a remote occurrence. Of course, the employee could still sue, stating they are entitled to interest or liquidated damages, etc., but such suit would likely not sit as well before a court without additional claims (i.e. you were paid what you were due, why are you taking up our limited judicial resources…).

How does the process work? Employers wanting to participate must review the program information and compliance assistance materials that will be available on the PAID website.  The employer then conducts the audit and identifies the potential violations, affected employees, time frame, and back wages. Next, the employer contacts WHD to discuss the issues, and the WHD determines if it will allow the employer to participate in the program. If allowed, the employer must then submit information such as the backup calculations, scope of violations for release, certification that this is all in good faith and the materials have been reviewed, and that practices will be adjusted to avoid the same violation in the future. The WHD finally issues a summary of unpaid wages (this is likely the same form they use today except no liquidated damages will be assessed).  KEY – once this process has been completed, the employer must issue the back wages by the end of the next full pay period.  Thus, employers should be careful to not begin/end the process until ready and able to pay.

In reality…while some are calling it a “get out of jail free card” for employers, I really don’t see it. An employer who discovers an error after a good faith internal investigation can chose to report itself to the DOL. Now, they are on the DOL’s radar with an admission that they believe they have paid their employees in error. The DOL can reject participation in the program and conduct a full investigation. If the DOL allows participation, all affected employees will be notified of the error (who may not have otherwise known), and can chose to opt-out and file a private lawsuit against the employer that just came clean. Further, neither relieves the employer of a future DOL investigation. Get out of jail free card? I think not. More like playing a game of Risk.

I suspect you have all heard by now, but on September 5, 2017, Judge Mazzant of the Eastern District of Texas declared the proposed overtime overhaul regulations to be invalid. As a result, the minimum salary levels remain as before the revisions -$23,600 annually, or $455 per week. For highly compensated employees, the amount will remain at $100,000 annually.

I know what you’re thinking – I did all that work and preparation for nothing!?  Fear not!  With a few exceptions, this was actually a good exercise for many employers who, upon doing an internal audit, discovered that based on the duties test, some employees were likely misclassified. Remember, you can never err by paying overtime, only by not paying overtime if the employee is entitled to it. Accordingly, I’d caution advisers to hesitate before reverting an employee back to exempt (no matter how bad they want it to) without really performing an exempt analysis of the position.

So, now what happens?  The U.S. Department of Labor has moved to withdraw its Fifth Circuit Court of Appeals case, and will not appeal the Order. Instead, it has noted its intention to revisit this entire issue, and is seeking public comments on changes to consider making in the future. For employers, continue to evaluate positions as you have been before the revisions, although it wouldn’t hurt to look especially carefully at positions whose annual salary is less than $47,476.

On July 26, 2017, the Department of Labor asked the public for comments concerning revisions to the overtime rules.  Only a week later, the DOL has received over 12,000 comments. However, it appears a move is underway whereby individuals are cutting and pasting the same statement literally thousands of times. It appears an individual posted the 70th comment on July  31, 2017 (WHD-2017-0002-2990), stating that President Ford set the salary threshold in 1975 at what would be $58,000 today, and thus, the DOL should keep the $47,476 in tact (or greater). From what I can tell, the remainder 11,930 submissions so far have simply cut and pasted this comment. This makes it incredibly difficult to find and review different positions and share them here. Perhaps the DOL could institute an “Agree” or “Disagree” feature in the future?

 

The United States Department of Labor officially published its Request for Information (RFI 1235-AA20); Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, today. In doing so, the DOL expressly acknowledged many employer’s concerns that the previously-set salary threshold of $913 per week was too high, it inappropriately excluded too many workers from the exemption who otherwise would pass the standard duties test, and it adversely impacted low-wage regions and industries. Accordingly, the RFI is intended to gather additional data regarding how the December 1, 2016 regulations affected employers and employees, and how the regulations could better be updated moving forward.

The RFI can be found at regulations.gov, where comments may be electronically submitted with a single click. Given the pending litigation in the District of Texas and the 5th Circuit Court of Appeals, the DOL is merely asking for public comment at this time, versus publishing a formal Notice of Proposed Rulemaking. The DOL acknowledges that the RFI is issued consistent with President Trump’s February 24, 2017 Executive Order 13777, “Enforcing the Regulatory Reform Agenda” which tasks federal agencies to identify regulations for repeal, replacement, or modification which meet certain requirements, such as hindering job growth.

The DOL is asking employers to weigh in on eleven (11) questions (summarized below):

  1. Should the DOL simply update the 2004 salary level ($455/wk) for inflation?
  2. Should multiple salary levels be created, and if so, how (size of employer, region, etc.)?
  3. Should there be different salary levels for executive, administrative and processional (as it was prior to 2004)?
  4. Should the DOL return to using the long and short test salary levels (and would the duties test need to change if so)?
  5. Does the 2016 salary threshold ($913/wk) in effect negate the duties test?  And if so, at what threshold does it not negate the duties test?
  6. What actions did employers take to prepare for the December 1, 2016 regulation (i.e., increase salaries, change hours, reduce pay, etc.)?
  7. Would it be preferable to base exemptions on duties only (no salary threshold)?
  8. Does the $913/wk threshold exclude occupations traditionally covered as exempt?
  9. Is the 10% non-discretionary bonus and incentive payment credit towards satisfying the salary threshold appropriate?
  10. Should the highly compensated thresholds have multiple levels, and if yes, how (i.e. size of employer, region, etc.)?
  11. Should the salary levels be automatically updated periodically, and if so, how/when?

The public has until September 25, 2017, to submit comments. Following the close of the comment period, employers can expect more waiting, as usual.  It appears from the RFI that the DOL will not be issuing a Notice of Proposed Rulemaking while the cases are ongoing, so as is the norm, we will continue to wait.

The United States Department of Labor announced today that, as indicated in the 5th Circuit Appeal recently, it will be publishing a new Request for Information (RFI) concerning the overtime regulations (technically, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees”) tomorrow. The July 26, 2017 RFI will seek public comments regarding the salary level test (recall the DOL told the 5th Circuit that it was dropping the $913/wk overtime threshold), the duties test, varying cost-of-living (i.e. the fact that one salary threshold may be inappropriate nationwide), inclusion of non-discretionary bonuses and incentive payments, highly compensated employee salary test, and automatic updating of such salary levels.

The RFI will be open for 60 days during which the public may submit comments.

The United States Department of Labor (DOL) recently announced its decision to once again issue Opinion Letters, Ruling Letters, Administrator Interpretations and Field Assistance Bulletins.  They will be published on the DOL website here, along with past opinions (pre-2009).  Interpretations by the DOL Administrator that interpret the Fair Labor Standards Act (FLSA), Davis-Bacon Act (DBA) or Walsh-Healey Public Contracts Act (PCA), are considered “official rulings”, and thus, provide employers with a good faith reliance defense when so relying. This guidance is very helpful when employers are trying to understand how to interpret the FLSA, DBA or PCA with various facts.

Often, numerous employers have the same questions of interpretation, and thus, opinion letters are very helpful when such common questions arise. The last opinion letters were published in January 2009, and withdrawn by the Obama Administration when the letters were literally not put in the mail in time before the administration changed. If you’d like to receive a notice when new rulings and interpretations come out, you can do so here.