PHCC Educational Foundation
Personnel e.bulletinfor August 2009
Who is Hourly vs.Exempt & Other Common Pitfalls:
The Fair Labor Standards Act
From the PHCC Educational Foundation via third party
It seems that nothing is easythese days. As the economy continues to bump along, initial cost cutting and belt-tightening steps are in place and “next steps” are under discussion. Many experts predict we have several more months at the bottom before a slow recovery. When everyone was focused on just surviving the downhill ride, little time was available for regulatory agencies to get their arms around minor labor law violations. Now that the paralysis has subsided and we are focused on working through the recession, we need to become increasingly careful with our employment actions – recession responsive or otherwise. The Obama administration intends to pour literally millions of dollars into increased labor law enforcement.1 While we often associate enforcement of labor law violations with high profile large employers, there now is funding for enforcement in the small and medium markets as well.
With an eye toward looking at the real practices used to manage through the recession, this article is designed to refresh you on a key employment law, the Fair Labor Standards Act (FLSA), and help you avoid pitfalls of recession management as it relates to the FLSA.
Some Background
The FLSA is a Federal statute, governed by the Wage and Hour Division of the Department of Labor, which regulates overtime and minimum wage for all private employers. The FLSA establishes minimum wage, overtime pay eligibility and rates, what constitutes actual work, recordkeeping requirements, and youth employment standards for all private sector workers. States can establish more generous rules such as a higher minimum wage, so make sure that you review both this document and your State wage and hour regulations.
While minimum wage, recordkeeping and youth employment standards are important aspects of the FLSA (see link above to the Department of Labor for more information on these aspects of the FLSA), it is the overtime pay aspects of the law that most often give rise to violations. Additionally, if challenged and pursued by an employee, overtime pay issues are the most damaging to companies. Individual job classification as either exempt from the act or not exempt from the act is required for all positions in a company. An employee evaluated as "exempt" under the FLSAis not entitled to overtime and minimum wage. An employee determined to be "non-exempt" must be paid overtime and minimum wage. Most of the trouble with the FLSA lies in employer's decision not to pay non-exempt employees for all hours worked and in misclassifying employees as "exempt" who are non-exempt. Failure to pay an employee properly under the FLSA can result in back wages, penalties, fines and – unknown to many – personal liability of the supervisors and managers responsible for determining the employment status of the position.
Determining Employment Classification
While determining employment classification is not particularly relevant to recession recovery planning or actions, it is the most critical underlying activity required to manage legally under the FLSA. Employees in non-exempt positions must be paid at least the federal minimum wage, which increasedin July 2009, and must receive overtime pay for hours worked over 40 per workweek at a rate not less than one and one-half times their regular rate of pay. A workweek is any fixed and regularly recurring period of 168 hours, which is seven consecutive 24-hour periods. The employer can determine the seven-day cycle whether it is Monday through Sunday or Wednesday through Tuesday; the key is it must be consistent. There is no limit on the number of hours employees 16 years or older may work in any workweek. The FLSA does not require a premium rate for work on weekends, holidays or regular days of rest.The test is hours worked, rather than hours paid; soholiday pay (not worked), vacation days and sick days arenot part of the calculation.
So how is exemption determined? Determining employment status is not as easy as you would think. We have included an FLSA evaluation form with this article for you to review as we discuss this process. A first and very important component to remember is that the FLSA evaluation should be completed for each company position and, where tasks within a title vary widely, by employees within the position. The end of the article includes definitions and tips on how to classify your positions using the FLSA evaluation form.
Once you determine the exemption status of all of your employees, implement the required pay procedures. The attached worksheet provides some basic information if you need to change the status of any of your employees. You must pay non-exempt employees an hourly wage of at least the minimum wage for every hour, or portion of an hour that they have worked. For each hour, or portion thereof, that the employee works beyond 40 in any given week, he or she must receive one and one half of his or her basic hourly rate. Exempt employees must be paid a salary – and it is important to pay their wages as salary to secure their exempt status (see below). They are paid the salary for a fixed period of work – a week, two weeks, a month – regardless of whether they work 40 hours or more or less.
These are the basic requirements. Others can be found at the DOL site referenced earlier in this article. But what about those hidden challenges we alluded to at the start of the article? Let’s look at these in light of some of the recession actions we’re undertaking now.
The Pitfalls – Particularly Now
Deductions Upon Termination – Many of us have employees agree at the start of their employment that when their employment ends, they will return company property such as tools, cell phone or pagers, uniforms and computers. Some companies, as caring employers, advance leave or pay and might even give the employee a loan. If an employee leaves with company property, fails to repay an advance or otherwise departs with a debt, you may not reduce their final paycheck below minimum wage or eliminate the overtime bump. If you anticipate reducing employee wages when he or she leaves, work with your attorney to draft a written agreement giving you permission to do so and, even then, seek advice before reducing wages below minimum wage.
Paying for “That Little Bit Extra” – We’d all like our team to work harder and give more where they can. Do not make the mistake of thinking that this simple request gets you out of paying a non-exempt employee for every minute they work. You may need to pay non-exempt employees if they work "off the clock," even if you did not ask them to work and they are doing so to do their best to help during hard times. They must also be paid if they work on breaks, over lunch, or in violation of a policy that prohibits them from working overtime without pre-approval. You may discipline them, but you still must pay.
Using Compensatory Time Instead of Paid Hours – There is a legitimate a provision in the FLSA allowing for time off in lieu of overtime hours. If you think that the general provisions of the FLSA are complex, wait until you try to figure out compensatory time! In reality, the comp time provision of the FLSA are so complex it is best to operate as if it doesnot exist. It truly is only viable in a few, very narrow situations. If your employee works 45 hours in one 7-day workweek, you have to give him or her 7.5 hours comp time off the following week to account for the overtime premium. There are strict limits to when the comp time can be taken before it must be paid in lieu of time off, recording keeping requirements, etc. Keep it simple and keep in compliance; pay overtime and avoid comp time.
Labeling a Position as Salaried to Maximize Available Working Hours – It would be nice to think that using the term “salaried” was all that was necessary to make someone exempt and therefore able to work all the hours you need without overtime. Avoid this temptation! The category determinations reviewed above are the only ones accepted for identifying whether overtime pay is required. Technically, a non-exempt employee can be “salaried” but it does not eliminate the need to track hours or pay overtime at time and a half. Confused? You are not alone. We strongly recommend using hourly (language and pay rates) for non-exempt employees. In fact, review all your documents—likeoffer letters, job descriptions, employee policies and handbooks—for the words salaried and hourly. Change them to exempt and non-exempt and consistently use the FLSA classification.
Delaying Pay or Lengthening the pay Cycle - As tempting as it is to hold paychecks or defer payday for a week or two until cash flow is better, you may accidentally violate the law. Most states regulate how often you must pay your employees. State laws also specify the how long after the end of the pay period you can wait before paying your employees. In some states, you are required to notify your employees in advance of even regularly scheduled pay dates. Finally, state laws might regulate how to handle pay for employees who are absent on a regular payday or if the payday is a holiday. It is essential to know your state’s laws.
Cutting Corners in Other Areas – We are all cutting back. Don’t be lulled into making a mistake and thinking that some money can be saved by, for example, not paying someone for the time you require them to attend training or moving training time out of the normal working day. If you require the training, for example, to keep a certification, then the non-exempt employee is paid. Even if the training takes place during off hours, the hours must be included in the employee's total "hours worked" for that 7 day work week period. If the employee attends training to further his or her personal goals (i.e. to receive a promotion or further a lifelong dream of becoming a pastry chef) then the employer need not pay.
Reducing Working Hours or Working Variable Hours – Make sure that if you reduce hours for your exempt employees, or have these employees work variable hours to respond to work demands, that you do so in a way that does not jeopardize their exempt status. One of the key tenets of maintaining exemption status is to maintain a fixed salary. So if you must reduce hours, do so by proportionately reducing salary and changing the employee’s status from full-time to part-time. And, if you need hours to be flexible, try reducing the employee’s overall hours and related salary to a levelthat allows the variable hoursandcompensates them for close to the real average of actual hours. Paying an exempt employee based on the hours they actually work by definition changes their status to non-exempt.
Requiring Furloughs – Followed closely on the advice in the paragraph just preceding this one, be extremely cautious with how you manage furloughs. The Department of Labor has recently opined that employers who require involuntary furloughs by exempt employees when they are otherwise fit and willing to work, and when that time is taken in increments of less than one pay period, may inadvertently impact the classification of the employee, changing them from exempt to non-exempt. This in turn may impact others holding the same title, and may require payment of overtime in the future. In certain cases, it may also cause the employee in question to fall below the federal minimum wage requirement.4
Final Thoughts
These are just a few of the many challenges that the Fair Labor Standards Act can present, compounded now by the many and difficult workplace challenges employers are facing. As always, whenever in doubt, contact a qualified Human Resources professional or employment attorney. With the increased scrutiny of all employment activities, this is one area of employment law where the cost of violations, coupled with the likelihood of mistakes, warrants the extra caution.
This content was provided by a third party via the PHCC Educational Foundation. Please consult your HR professional or attorney for further advice, as laws differ in each state. Employment laws continue to evolve; the informationpresented isas of July 2009.
The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace.
If you found this article helpful, please consider supporting the Foundation bymaking a contribution at
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Changing FLSA Classification
The Fair Labor Standards Act (FLSA) provides minimum wage, overtime pay, record keeping, work hours/breaks, and child labor standards. Some positions, depending on their duties and responsibilities and the salary paid, are exempt from the requirements of this Act. In order to be exempt, an audit must first establish that the position is classified as Executive, Administrative, Computer Professional, Professional or Outside Sales.
Positions that cannot be classified in one of these categories are considered to be nonexempt (often called ‘Hourly’). Only nonexempt positions are covered by the provisions of the FLSA.
The following is a list of considerations in reclassifying employees from exempt under the Fair Labor Standards Act to nonexempt.
- Evaluate if all employees in the job are in fact the same. Often, some incumbentshave more responsibility than others. It may be appropriate to revisit the job descriptions and make levels within the position, one possibly being exempt and the balance nonexempt. Complete a separate test on the new position to properly classify.
- Analyze the historical time reporting data to gauge if incumbents have been working more than 40 hours in a workweek. If the typical employee is working 40 hours, a simple conversion to an hourly rate may be appropriate.
- If the employees are typically working more than 40 hours, and the salary covered all required hours including those in excess of 40 hours, an adjustment to base salary may be warranted. Run scenarios based on the data assuming the first 40 hours at a new base hourly rate and the average overtime hours at one and one half times the new base rate. It will be important to demonstrate to employees the new pay based on an hourly rate and overtime will be comparable to their currentsalary.
- Regardless of which of the above applies, document the new hourly rate and FLSA classification and ideally have the employee sign the document. Place a copy in the personnel file.
- Design a time recording system that meets the FLSA requirements. Include the tracking tool and instructions for both the employee and the approving supervisor.
- Learn the recordkeeping requirements of the FLSA and establish a compliant process.
- Train managers on how to supervise nonexempt employees. Manager now must adhere to the timekeeping system and if overtime is not typical or expected, they have to manage to a 40 hour work week. This can be challenging in environments that previously allowed employees to intertwine personal activities such as checking personal email accounts and internet shopping during traditional work hours.
- If overtime is to be managed, create a policy on how and when employees get overtime approved. Regardless of approval, all hours worked must be paid.
- Lunch breaks should be distinct from work hours. If a nonexempt employee works during lunch, it is paid work time under the FLSA and is often the source of unplanned overtime.
- Managers need to track hours and require employees to use leave for all time not worked. For example, a nonexempt employee that leaves 2 hours early for a doctor’s appointment will need to use 2 hours of sick leave to receive pay for a full 8 hour day.
- Consider using flextime to promote a similar environment to exempt classification. If your work and culture allow, employees can work additional hours over the course of a workweek. For example, if an employee arrives 2 hours late due to a doctor’s appointment, if they work 2 additional hours that day or any other day within the work week, they do not need to use sick leave. Similarly, if an employee has to stay late to complete a project, and work flow allows them to leave early or arrive late on another day that week, overtime can be avoided.
There are 2 cautions: 1) be sure employees work with their managers on using flextime so work isn’t impacted; 2) each work week must balance to 40 hours; if not, it is advisable to pay for actual hours worked regardless of whether it is under 40 hours or requires overtime pay. If you carry hours forward to the next pay period, the employee must be compensated at the equivalent of one and one half the hours.