Fair Labor Standards Act

In another of the six opinion letters issued by the U.S. Department of Labor on August 28, 2018, the DOL clarified in FLSA2018-21, that an employer that sells technology to merchants that allow them to accept credit card payments from mobile devices is indeed, a “retail or service establishment,” for purposes of the Fair Labor Standards Act exemption. While this seems to apply to a pretty limited amount of employers (for which the rest of you are wondering why you care about this and are still reading this post), the opinion letter provides guidance applicable to all.

First, the DOL references the recent U.S. Supreme Court Encino Motorcars case, noting that exemptions under the FLSA should be fairly – not narrowly – interpreted. Thus, the DOL recognizes that it “must apply a ‘fair reading’ standard to all exemptions to the FLSA – including the Section 7(i) exemption”. In doing so, the DOL opines that just because the employer sells its product to commercial entities does not mean it does not qualify for the retail and service establishment exemption. Further, the DOL notes that courts have confirmed that case law does not require a physical location accessed by the public, that a business is open to the public if they receive orders on the phone, for example.

Additionally, the DOL noted that the sales of the product (a credit card reading platform) are indeed retail sales – not wholesale, because the employer does not sell large quantities of the platform to individuals, but instead tailors the product to their customers who then use it for their clients. That being said, the DOL does caution that, while it has “considerable discretion”, the courts have final say with respect to whether sales are recognized as “retail” in a particular industry.

The result? The FLSA’s retail or service establishment exemption applies (and thus, no overtime is due) to employees of an employer that sells customer technology to commercial clients, so long as the employee’s regular rate of pay exceeds 1.5 times minimum wage in the workweeks they work overtime and commissions constitute more than half of their earnings (in other words, usually commissioned inside sales representatives).

The U.S. Department of Labor (DOL) has not forgotten about the proposed overtime regulation overhaul, though it’s been a bit sleepy on this issue this past year since its July 26 2017 Request for Information. On August 28, 2018, the DOL announced it will hold five “listening sessions” (none in Minnesota- the closest being Kansas City, MO). These sessions are open to the public and scheduled between September 7 and 24, 2018. Notably for those of us in Minnesota who are nowhere close to attending one, the DOL is asking for input on the following questions:

  1.  What is the appropriate salary level (or range of salary levels) above which the overtime exemptions for bona fide executive, administrative, or professional employees may apply?  Why?
  2. What benefits and costs to employees and employers might accompany an increased salary level? How would an increased salary level affect real wages (e.g. increasing overtime pay for employees who current salaries are  below a new level but above the current threshold)? Could an increased salary level reduce litigation costs by reducing the number of employees whose exemption status is unclear? Could this additional certainty produce other benefits for employees and employers?
  3. What is the best methodology to determine an updated salary level? Should the update derive from wage growth, cost-of-living increases, actual wages paid to employees, or some other measure?
  4. Should the Department more regularly update the standard salary level and the total-annual-compensation level for highly compensated employees? If so, how should these updates be made? How frequently should updates occur? What benefits, if any, could result from more frequent updates?

Realistically, this indicates it is going to be a long while yet before we see any changes to the overtime regulations, I do believe.

On August 28, 2018, the U.S. Department of Labor (DOL) issued 6 new opinion letters, 2 related to the FMLA which has not occurred since 2009. While I’ll write about them separately, this is exciting news! The letters provide employers with compliance assistance related to the administration of the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA). As I tell employers all the time, while their situation may be unique to them, you’d be surprised how frequently we address the same facts/issues (granted, the actual facts are not identical, but you get my drift) and thus we’re able to take our knowledge of how past situations worked out, and use them to handle the current situation. Similarly, the DOL’s opinion letters provide employers with guidance based on similar issues/facts and can be a great tool for employers when handling certain situations.

  1. Compensabilty of voluntarily attending benefit fairs and wellness activities (FLSA2018-20)
  2. Commissioned sales employee overtime exemption related to internet sales (FLSA2018-21)
  3. Volunteer status of nonprofit members when acting as credentialing examination graders (FLSA2018-22)
  4. Movie theater overtime exemption when dining services offered (FLSA2018-23)
  5. “No-fault” attendance policies and roll-off of attendance points related to FMLA (FMLA2018-1-A)
  6. Organ donors’ eligibility for FMLA (FMLA2018-2-A)

Check out my subsequent blogs for more information about the above.

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?