The Fair Labor Standards Act (“FLSA”) requires most employers to pay employees 1 ½ times their regular rate of pay for all hours worked in excess of 40 in a workweek unless the employee falls within an exemption. The most common exemptions are the “white collar” exemptions: the administrative, executive and professional exemptions. Application of these exemptions can be challenging for many employers, with misclassification and violation of the “salary basis” rule at the forefront of legal concerns.
Misclassification of employees as exempt from the FLSA overtime requirements
Misclassification of employees as exempt from the requirement to pay overtime frequently results in costly lawsuits to businesses. Not only are improperly classified employees entitled to recover their unpaid overtime for a two-year period, but employers are at risk of having to pay an additional amount equal to the unpaid overtime if the employer failed to act in good faith in understanding its obligations under the FLSA. If the employer’s failure to pay overtime was “willful”, the employer will be responsible for a third year of unpaid overtime compensation. If an improperly classified employee prevails, the employer will be responsible for the employee’s attorney’s fees as well as the employer’s attorney’s fees. All of this to say, the stakes are high.
The term “administrative” exemption is misleading
The administrative exemption provides employers the most trouble, as the name of the exemption leads employers down an incorrect path. It is not enough that the employee has the primary duty of performing office or non-manual work. That work must be related to the management or general business operations of the employer or the employer’s customers. The work must also include the exercise of discretion and independent judgment with respect to matters of significance. The administrative exemption typically applies to a higher-level position who makes decisions for the company, rather than an employee who performs administrative work.
Violation of the ‘Salary Basis’ Rule
For any of the “white-collar” exemptions to apply, the employee must also be paid on a “salary basis”. This means that the employee must be paid a predetermined fixed amount each workweek, without regard to the quantity or quality of the work performed in the workweek. Thus, for example, as a general rule, an employee who works only Monday morning in a given week, must be paid their regular salary for the entire week. There are a few permissible deductions (such as an employee who takes personal days of one day or more), but the permissible deductions are limited. Employees who are paid an hourly rate of pay for each hour worked (whether 20 or 45 hours) are not paid on a “salary basis”, even if their hourly rate and total compensation is high.
These are two of the more troublesome rules for employers. There are others, including permitting “off-the-clock” work (such as permitting nonexempt employees to check work emails and texts unless the work is de minimis) and miscalculating the regular rate of pay (which includes hourly wages, most bonuses, shift differentials, on-call pay and commissions). Consult your legal counsel to discuss handling of these workplace challenges.
This article is authored by attorney Lauren K. Kroeger at Hoeppner Wagner & Evans LLP. Lauren practices in the areas of employment law and litigation.
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