The federal Fair Labor Standards Act (FLSA) imposes minimum wage, overtime pay, recordkeeping, equal pay, and child labor requirements on most employers.  Litigation under the FLSA has grown dramatically in recent years – especially class actions, which the FLSA calls “collective actions.”  Given this trend, employers should take affirmative steps to strengthen the "good faith" defense to potential FLSA claims.

One crucial step is to examine your organization’s exempt classifications, payroll practices, complaint mechanisms and training programs to make sure they are up to par.  An employer’s reliance on U.S. Department of Labor (DOL) opinion letters may demonstrate good faith, as does reliance on the opinions of qualified experts (such as compensation consultants or legal counsel).  “Process” matters a great deal in employment law and an organization that reacts responsibly to workplace complaints may minimize potential liability.  Employers should also carefully investigate state wage and hour laws because many states, particularly California, have wage and exemption requirements that are more favorable to employees than FLSA rules and would therefore take priority.

The FLSA “White Collar” Exemptions.  Generally speaking, employees must be compensated for all hours worked over 40 in a workweek at an overtime rate of one and one-half times their “regular” rate of pay.  Certain categories of workers are exempt from these overtime provisions, but these exemptions are narrowly construed and the employer must prove that overtime pay was properly denied.  The most common exemptions -- the so-called “white collar” exemptions -- apply to executive, administrative, and professional employees.  Assuming these employees receive a salary of at least $455 per week and meet the regulatory definitions for “duties” and “salary basis,” they do not have to be paid overtime for hours worked over 40 in a week because their salary is intended to cover all of their working time. 

If an employee is misclassified as exempt, though, the employer may be liable for substantial back pay for unpaid overtime, liquidated damages (i.e. double back pay), damages for “willful” violations, and civil penalties, and may be subject to injunctions and other relief.  Managers or supervisors may be individually liable.  Additionally, if an employer maintains a policy that results in impermissible salary dockings, or otherwise treats employees in a manner iconsistent with salaried exempt status, scores of employees can be found to be non-exempt and entitled to unpaid overtime and other damages.  To reduce the risk of such unpleasant surprises, the DOL added a “safe harbor” provision to the 2004 revisions to FLSA regulations, allowing employers to preserve the overtime pay exemption by implementing a “clearly communicated policy” prohibiting improper salary docking and including a written complaint mechanism that employees could invoke.

Tips For Auditing FLSA Classification Practices.  In assessing your organization’s FLSA compliance, the following initial inquiries may be useful:

• Is someone within your organization responsible for monitoring DOL opinion letters and legal developments regarding wage and hour issues?

• Who initially determines whether a position is classified as exempt or non-exempt?  Is there an internal process with higher level review?

• Do you train managers concerning FLSA requirements, particularly the salary basis rule and internal complaint mechanisms?

• Do you require employees to adhere to a regular schedule?  Is that expectation in writing?

• Do you keep a record of time worked by employees, exempt and nonexempt, through timesheets or “electronic touches,” such as gate or hand swipes?

In auditing whether employees perform exempt-type duties and are properly classified as exempt from overtime pay, you should consider the following:

• Are job descriptions, profiles, and employee self-evaluations reviewed?  Do they accurately reflect the primary duties of the position?

• Do annual performance evaluations reflect exempt work?  Do employees sign their evaluations to acknowledge the job duties expected of them?

•  Are managers questioned to ensure that the job duties actually performed by employees meet the FLSA requirements to be exempt?  Are the employees whose duties are at issue (or an appropriate sample) interviewed?

In determining whether safeguards exist to protect the FLSA “salary basis” requirement for exempt white collar employees, the following inquiries may be helpful: 

• Does your organization have a written policy prohibiting improper salary deductions (such as deductions for partial-day absences that are not otherwise unpaid FMLA leave)?

•  Does your automated payroll system have electronic alerts to prevent impermissible salary docking?

• Do you have a written “safe harbor” policy?  Does it call for investigating pay complaints and timely reimbursing employees for any improper deductions?

• Do you have an automated system for requesting time off (paid or unpaid)?  What are the review levels?  Are there rules governing unpaid time off and, if so, is the unpaid time off limited to full day increments?

• Are employee pay stubs or earnings statements understandable as to how compensation is calculated?  For salaried exempt employees, do they reflect a predetermined salary that is regularly paid? 

“Regular Rate of Pay” Issues.  Another issue that is expected to be litigated with increasing frequency is whether an employer has correctly determined an employee’s “regular rate of pay” used in the overtime calculation.  For example, DOL regulations require attendance bonuses and non-discretionary bonuses that induce employees to work more steadily or efficiently to be included in determining the employee’s regular rate of pay before overtime pay is calculated.  In fact, all compensation that constitutes “remuneration for employment” must be included unless it falls within a specific statutory exception.  A recent settlement between a major retailer and the DOL of allegations that the retailer had failed to include certain non-discretionary payments before computing overtime has increased interest in the “regular rate” issue, and DOL has hinted that it may pursue future cases of this type.

Auditing Other Areas for Compliance.  In addition to FLSA issues, other Human Resource topics that may warrant review include:  independent contractor classification, FMLA practices, internal complaint and investigation procedures, disparate impact problems, and record retention issues (now receiving heightened attention as a result of the new federal rules on “e-discovery” in litigation). 

Given the complexities of today’s employment rules, and the desirability of maintaining confidentiality through the attorney-client privilege, careful planning with the advice of experts and legal counsel is recommended before undertaking any compliance audit.  KOHP specialists are available to help design, implement, and monitor these audits.

Margaret Carroll Alli

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