With the minimum guaranteed salary requirement for the most common Fair Labor Standards Act exemptions being raised from $23,660 to $35,568, effective January 1, 2020, under a final rule issued by the U.S. Department of Labor (DOL), now seems like an opportune time to review some of the FLSA requirements so often unintentionally tripped over by employers. This New Year seems especially ripe for problems since many employers will be making changes as a result of the new requirements. While some employees may receive an increase in salary to meet the new threshold, some, perhaps most, employees impacted by the new rule will now be treated as nonexempt employees. The change is likely to create some confusion for both management and the newly nonexempt employees. Old habits are sometimes hard to break. Newly nonexempt employees once used to some flexibility and discretion in setting their own schedules and completing their work without the obligation of tracking time may find it difficult to break old habits. That, in turn, may create issues for employers. So, here are six New Years’ resolutions to consider making with an eye towards better managing the risk that these changes will create unanticipated FLSA liability in 2020.
Resolution Number 1: I will use the rule change as an opportunity to review the basics.
Remember, the FLSA has three primary requirements (please note that there are child labor limitations and requirements are not considered in this article) for an employer: (1) Pay employees at least the specified federal minimum wage for each hour worked (currently $7.25 per hour); (2) pay employees overtime at a premium rate at least one and one-half times an employee’s “regular rate” of pay for any work over 40 hours in a work week, and (3) keep accurate records of the time worked and wages paid to employees. The requirements sound simple, but application of them to your workforce is not always easy. There are gray areas, some of the rules are not obvious, and people can make mistakes. So, with this resolution we simply want to underscore an employer’s obligation to accurately track all time worked by nonexempt employees, and when the time worked exceeds 40 hours in the work week, the overtime premium must be paid.
Also, take time to make sure your newly nonexempt employees and their managers understand these requirements. Remind them, for example, that a newly nonexempt employee can no longer ignore the differences between compensable and non-compensable time. While an employer can choose to pay a nonexempt employee for non-compensable time, most do not choose to do so. As such, time into work, time out, and even lunch periods now need to be tracked, and time worked must be recorded accurately.
Resolution Number 2: I will check everyone’s exemption status.
While there are various exemptions under the FLSA, the ones most often thought of when discussing the FLSA are known as the “white collar” exemptions; these are the exemptions impacted by the minimum salary rule change. An employee may be considered exempt from the overtime requirements of the FLSA if he falls within any of the three white collar exemptions, i.e., the employee is a bona fide executive, administrative, or professional employee. However, don’t be fooled by the new (or old) rule’s focus on salary. An employee is not considered exempt under these exemptions merely because of a certain title or because he is paid a “salary.” Rather, an employee must be paid a guaranteed minimum at the specified threshold ($684 per week under the new rule), and the employee must also meet the other myriad requirements for the exemption, including the duties tests applicable to each exemption. Review the requirements for each exemption, and make sure all of them are met, not just the salary minimum. If in doubt, discretion suggests treating the employee as nonexempt.
Resolution Number 3: I will remember that deductions from an exempt employee’s salary are limited.
Generally, a salaried exempt employee is entitled to the guaranteed minimum salary each week, regardless of the quantity or quality of his work. With limited exceptions, an employee must receive the employee’s full salary for any work week in which the employee performs any work, regardless of the number of days or hours worked. This is known as being paid on a “salaried basis.” So, asking a salaried exempt employee to “stay home today” and deducting “a day’s pay” accordingly can be treacherous. Although an exempt employee need not be paid for any workweek in which the employee performs absolutely no work, an employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. Remember, under the new rule, an employer may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Additionally, if after the 52-week period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid. Put another way, paying salaried exempt employees for only part of a week can create problems.
Some deductions are permitted, such as when the employee is absent from work for one or more full days for personal reasons other than sickness or disability, or in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness (see 29 CFR § 541.602). The exceptions, however, are very limited. Check your practices, and make sure the salary basis rule is being followed.
Resolution Number 4: I will remember that “comp time” is not a substitute for overtime pay.
For most employees, there can be no such thing as legitimate “comp time,” i.e., paying an employee for overtime work performed in one workweek by providing off time (at time and one-half or any other increment) in a future workweek. Such a practice will not satisfy the overtime premium payment requirement under the FLSA. If time off is given in exchange for extra time worked earlier within the same workweek, there is no problem. Such a practice simply reduces the total hours worked for that work week. Such a practice, however, is not comp time. Rather, it is a time management tool.
Resolution Number 5: I will either avoid or correctly manage auto-deductions for meal periods.
Although it is not illegal to have a practice that automatically deducts an accurately measured 30 to 60-minute period for meals, the practice is fraught with potential problems. Pointedly, the practice relies on an employer’s ability to consistently make sure that every employee gets the break, or if not, that some record is made of the “exception” when an employee does not take the required break. If not managed properly, some employees may not take the break, and they may also fail to notify management of that fact. Since an employer can usually make no good excuse for failing to pay for all hours actually worked, when a mistake is made the employer may be held responsible for that mistake. The difficulty in administration of such a system makes it a system fraught with risk.
Resolution 6: I will remember how to properly account for a nondiscretionary bonus.
This is a resolution inspired by the frequency with which this issue seems to come up: When calculating the “regular rate” for an employee that worked overtime in a workweek, remember that nondiscretionary bonuses are included in the regular rate calculation. The method of calculation can sometimes be perplexing, but suffice it to say that if an employee in some way earned a bonus, the bonus must be accounted for when paying overtime to the employee. Discretionary bonuses need not be included in the calculation, but remember that it can also be confusing when trying to properly distinguish between discretionary and nondiscretionary bonuses. To be truly discretionary under the regulation, a bonus must be discretionary as to both the fact of payment and the amount of the payment. If the employee can say legitimately, “I earned that bonus,” the bonus is not discretionary.
With the January 1 effective date quickly approaching, employers should consider some New Years’ resolutions that may reduce the risk of unintentionally violating the FLSA in 2020. This is an especially good idea if the employer is converting any of its current “salaried exempt” employees to “hourly, nonexempt” employees due to the new DOL rule change. Properly educating converted employees and their managers about changed obligations relating to keeping and recording time worked, and engaging in a refresher on some of the more typical “gotcha” issues that often arise under the FLSA (such as the improper use of “comp time” and forgetting to treat nondiscretionary bonuses as part of the regular rate calculation), should go a long way towards preventing future problems and also making the New Year a little brighter.