Emerging by ps94506


									                                                                                                Class Actions,

                                                                                                                                                    EMERGING FLSA TRENDS
                                                                                                Enforcement, and
                                                                                                New Regulations

                                                                                                                                                    JANUARY 2005
                            By Michael A. Alaimo, James B. Thelen, and Jennifer L. Sabourin
THE FAIR LABOR STANDARDS ACT (FLSA),1 enacted in 1938, estab- employees were properly classified as exempt
lishes minimum wage, overtime pay, recordkeeping, and child labor from the overtime provisions of the FLSA.
standards affecting full-time and part-time workers in the private Record-Breaking
sector and in federal, state, and local governments. The FLSA is en- Enforcement Activity

                                                                       In the U.S. Government’s FY2001, the
forced by the United States Department of Labor (DOL) Employ- DOL collected over $110 million in back
ment Standards Administration’s Wage and Hour Division.
                                                                     wages in FLSA enforcement actions covering
                                                                                                    nearly 200,000 workers. In FY2002 and
    Exploding class action litigation and en-     der the FLSA. Employers such as Wal-Mart          FY2003, DOL collected $143 million and
forcement activity, as well as new regulations    (seven times in the last five years); Bed, Bath   $182 million in back wages, jumps of 29
defining the classes of white collar employees    & Beyond; Nortel Networks; the City of            and 27 percent, respectively. The number of
who are exempt from the FLSA’s overtime           Louisville; Safeco Insurance Companies            employees receiving back wages as a result of
pay requirements, make the FLSA one of            (twice); Pep Boys; Electronic Arts, Inc.; Mi-     the DOL’s efforts has similarly increased—

labor and employment law’s current hotbeds        nolta Business Solutions; Countrywide             to 240,000 in FY2002 and nearly 315,000
of legal activity.                                Credit Industries; Conseco Finance Corp.;         in FY2003, 24 and 30 percent increases,

                                                  NBC; Ameriquest Mortgage Co. (three               respectively.2
Increase in Class                                 times); First Union Corp.; Perdue Farms;             At the same time, the number of com-
Action Litigation                                 and the Chicago Transit Authority have been       plaints, cases concluded, and enforcement
    There were over 150 collective action cases   sued for alleged FLSA violations. The major-      hours spent on associated activity have all
filed or decided in the last three years un-      ity of these claims focused on whether the        decreased.3 Since a DOL investigation is

                       typically triggered by a single complaint,                 For the ‘‘salary’’ test, the minimum          least $455 per week)—will qualify as exempt

                       these statistics indicate that the Department          amount that must be paid as a salary to an        as long as they customarily and regularly per-
                       is using individual complaints to do wall-to-          exempt employee has been raised from $155         form one or more of the exempt duties of an
                       wall investigations; thus employers and their          per week ($8,060 annually) to $455 per            executive, administrative, or professional em-
                       legal counsel must pay closer attention to the         week ($23,660 annually).8 The new amount          ployee as provided in the ‘‘standard duties
                       FLSA and its requirements.                             can be paid bi-weekly, semi-monthly, or           test.’’11 However, the Department made it
                                                                              monthly in the amounts of $910, $985.84,          clear that none of the white collar exemp-
                       Revised ‘‘White Collar’’                               or $1,971.67, respectively. Unless an em-         tions apply to traditional ‘‘blue collar,’’ non-
                       Exemptions                                             ployee is paid the minimum salary amount,         management employees who do manual or
                                                                              he or she cannot qualify for the professional,    production-oriented work, no matter how
                           On April 23, 2004, the DOL issued final
                                                                              administrative, or executive exemptions.9         much money they make.
                       regulations regarding what are commonly
                                                                              Those employees who are paid at least $455            There is no minimum salary requirement
                       called the ‘‘white collar’’ exemptions for exec-
                                                                              weekly, but less than $100,000 annually (see      for the ‘‘outside sales’’ exemption classifica-
                       utive, administrative, professional, outside
                                                                              below) must meet what the Department has          tion, or for teachers, lawyers, and doctors.12
                       sales, and computer employees under the
                                                                              termed a ‘‘standard duties test.’’
                       FLSA.4 Employees who do not fit into these                                                               Executive Exemption13
                                                                                  The impact of this change will be to give
                       exemptions, and who are thus entitled to                                                                     Under the new regulations, a person is
                                                                              overtime rights to any current ‘‘white collar’’
                       ‘‘time-and-a-half ’’ overtime pay under the                                                              employed in an executive capacity where he
                                                                              employee (with certain limited exceptions)
                       FLSA for all hours worked over 40 hours in                                                               (1) is compensated on a salary basis at a rate
                                                                              who is paid more than the existing mini-
                       a work week, are frequently referred to as                                                               of not less than $455 per week (exclusive of
                                                                              mum of $155 per week, but less than $455
                       ‘‘non-exempt.’’                                                                                          board, lodging, or other facilities); (2) has as
                                                                              per week ($23,660 annually). The DOL esti-
                           The new regulations went into effect on                                                              his or her primary duty the management of
                                                                              mates that 6.7 million employees fall into
                       August 23, 2004.5                                                                                        an enterprise in which the employee is em-
                           The new regulations are significant for a          this category nationwide.10
                                                                                                                                ployed or of a customarily recognized depart-
                                                                                  Highly compensated employees—those
                       number of reasons. First, these regulations                                                              ment of subdivision thereof; (3) customarily
                                                                              who earn at least $100,000 annually (and at
                       represent the most significant changes in the                                                            and regularly directs the work of two or more
                       white collar exemption requirements in over                                                              full-time employees; and (4) has the author-
                       50 years. Second, large numbers of employ-                                                               ity to hire or fire other employees or whose

                       ees are potentially affected. The DOL esti-                                                              recommendations as to the hiring, firing, ad-
                       mates that as many as 6.7 million low-paid                    FAST FACTS:                                vancement, promotion, or any other change
                       employees around the country (those earn-                                                                of status of other employees are given par-
                       ing between $8,060–$23,660 annually, or                       New regulations for                        ticular weight. The new rule on executive
                       $155–$455 weekly) will either gain the right              ‘‘white collar’’ exemptions                    employees also adds the requirement that
                       to overtime or have their existing right to                     went into effect                         employees who own at least a bona fide 20-
                       overtime clarified or strengthened.6 Third,                                                              percent equity interest in an enterprise are
                       given the significant changes to the exist-                   on August 23, 2004.                        exempt only if they are ‘‘actively engaged in
                       ing exemptions, the time and cost of coming                                                              its management.’’
                                                                                 An employee’s salary and

                       into compliance could be significant. It is                                                                  The performance of exempt and nonex-
                       not an overstatement, therefore, to say that                actual duties determine                      empt duties work does not disqualify an em-
                       these new regulations could be the most sig-                   his or her status as                      ployee from the executive exemption, if he or

                       nificant change in wage and hour laws in the                                                             she otherwise meets the executive criteria
                       last half-century.
                                                                                   exempt or nonexempt.                         and, in particular, where the management of
                       Summary of the                                                The new rules place                        the enterprise/subdivision continues to be
                                                                                                                                their primary duty. ‘‘Generally, exempt exec-
                       White Collar Exemptions                                      limits on the liability                     utives make the decision regarding when to
                           The job title alone is insufficient to estab-            an employer can face

                                                                                                                                perform nonexempt duties and remain re-
                       lish the exempt status of an employee.7 The
                       critical question is whether the employee’s                    if it has a practice                      sponsible for the success or failure of business
                                                                                                                                operations under their management while
                       salary and actual duties meet the require-                    of making improper

                                                                                                                                performing the nonexempt work.’’
                       ments of the regulations. As under the ‘‘old’’                  deductions from
                       white collar rules, there is still a ‘‘duties’’ test                                                     Administrative Exemption14
                       and a ‘‘salary’’ test to determine whether an                       an exempt                                A person is employed in an administrative
                       exemption applies under the new regulations,                   employee’s salary.                        capacity where the employee (1) is compen-
                       although those tests have been modified.                                                                 sated on a salary or fee basis of not less than

$455 per week (exclusive of board, lodging,
                                                      As under the ‘‘old’’ white collar rules,

                                                                                                                                                           EMERGING FLSA TRENDS
or other facilities); (2) has as his or her pri-
mary duty the performance of office or non-           there is still a ‘‘duties’’ test and a ‘‘salary’’
manual work directly related to the manage-
ment or general business operations of the            test to determine whether an exemption
employer or the employer’s customers; and
(3) exercises discretion and independent judg-
                                                      applies under the new regulations, although
ment with regard to matters of significance           those tests have been modified.
when carrying out his or her primary duty.
    The new regulations define ‘‘directly re-
lated to management or general business               professionals, on the other hand, must per-       plies to all employees. These suspensions
operations’’ as work that is directly related to      form work pertaining to such fields as music,     must be imposed pursuant to a written pol-
assisting in the running or servicing of the          writing, acting, and the graphic arts, as op-     icy applicable to all employees.17
business as opposed to working on a manu-             posed to work that merely requires intel-             There is a ‘‘safe harbor’’ in the new rules
facturing production line or selling a product        ligence, diligence, and accuracy. The crea-       for employers who make improper deduc-
in a retail or service establishment. Employees       tive professional exemption does not apply        tions from an exempt employee’s salary. An
exercise ‘‘discretion and independent judg-           to work that can be produced by a person          employer will not lose any exemptions if
ment’’ when they are involved in comparing            with general manual or intellectual ability       (1) it has a clearly communicated policy that
and evaluating possible courses of conduct,           and training.                                     prohibits improper deductions; (2) it has a
and acting or making a decision after the var-                                                          compliant mechanism that employees can
                                                      Outside Sales Exemption16
ious possibilities have been considered. The                                                            use to report improper deductions; (3) it re-
                                                          The new rule clarifies that a sales person
employee must also have the authority to                                                                imburses any employees for any improper
                                                      is only exempt if he or she has the primary
make an independent choice, free from im-                                                               deductions; and (4) it makes a good faith
                                                      duty of making sales and is regularly engaged
mediate direction or supervision. Such deci-                                                            commitment to comply in the future.18
                                                      away from the employer’s place of business
sions can include recommendations for ac-                                                                   Finally, the new rules place limits on the
                                                      when making sales (or performing incidental
tion, rather than the actual taking of action.                                                          liability an employer can face if it has a prac-
                                                      or promotional work to further the sales ef-
                                                                                                        tice of making improper deductions from an
                                                      fort). The sales must be made at the cus-
                                                                                                        exempt employee’s salary. Employers who are

                                                                                                                                                           JANUARY 2005
Professional Exemption15
                                                      tomer’s home or place of business; sales made
    A person is employed in a professional                                                              found to have a practice of making improper
                                                      by mail, telephone, or the internet do not
capacity where he or she (1) is compensated                                                             deductions will lose the overtime exemp-
                                                      qualify. Any sales work performed at a fixed
on a salary basis at a rate not less than $455                                                          tion for (1) the time period during which im-
                                                      location, whether home or office, does not
per week (exclusive of board, lodging, or other                                                         proper deductions were made and (2) as to
                                                      qualify because it is considered to be sales
facilities); and (2) has as his or her primary                                                          those employees in the same job classification
                                                      work at the employer’s place of business.
duty the performance of work either (a) re-                                                             who work for the same manager(s) who was
                                                      There is no salary requirement applicable to
quiring knowledge of an advanced type in a                                                              (were) responsible for the improper deduc-
                                                      the outside sales exemption.
field of science or learning customarily ac-                                                            tions. Isolated or inadvertent improper de-
                                                          Drivers who deliver products but also en-
quired by a prolonged course of specialized in-                                                         ductions will not cause the loss of any over-

                                                      gage in making sales qualify as exempt as
tellectual instruction (learned professionals),                                                         time exemptions.19
                                                      long as their primary duty is making sales.
or (b) requiring invention, imagination, origi-                                                             The rules also clarify, to some extent, the
                                                      Further, there is no longer a 20-percent limi-

nality, or talent in a recognized field of artistic                                                     circumstances under which an exempt em-
                                                      tation on non-exempt duties for the outside
or creative endeavor (creative professionals).                                                          ployee may receive extra compensation or be
                                                      sales exemption as long as making outside
    For learned professionals, the primary duty                                                         paid on an hourly, shift, or daily basis with-
                                                      sales is the employee’s primary duty.
has three elements: (1) the employee must                                                               out affecting his exempt status. An employer
perform work requiring advanced knowl-                Salary Considerations                             may provide an exempt employee with addi-
edge; (2) that advanced knowledge must be             under the New Regulations                         tional compensation without losing the ex-
in a field of science or learning, and (3) that          Under the new rules, unpaid disciplinary       emption or violating the salary basis require-

advanced knowledge must customarily be                suspensions of one or more full days may be       ment, if the ‘‘employment arrangement’’ also
acquired by a prolonged course of special-            imposed on a salaried employee who violates       includes a guarantee of at least the required

ized intellectual instruction. In order for the       written workplace conduct rules that apply        minimum weekly salary amount. Such addi-
work to be considered as requiring ‘‘advanced         to all employees. An example: an employer         tional compensation can include: (1) amounts
knowledge,’’ it must be predominantly intel-          could suspend an exempt employee without          paid on a commission basis; (2) a percentage
lectual in character and include the consistent       pay for three full days for violating a written   of sales or profits; and (3) amounts based on
exercise of discretion and judgment. Creative         workplace sexual harassment policy that ap-       hours worked for work beyond the normal

                       workweek and ‘‘may be paid on any basis                deduction; and allow for recommenda-           Michael A. Alaimo is a principal practicing labor

                       (e.g., flat sum, bonus payment, straight-time          tion concerning other possible prophylac-      and employment law at Miller, Canfield, Paddock,
                       hourly amount, time and one-half, or any               tic measures.                                  and Stone, PLC. Previously an attorney with the So-
                       other basis), and may include paid time off.’’20                                                      licitor of Labor’s Office, U.S. Department of Labor,
                                                                           6. Ensure that any policy providing for dis-      he has been counseling clients regarding wage and
                       Suggested Steps for Compliance                         ciplinary suspensions (1) specifies the        hour matters for more than 15 years. He is a mem-
                       with New Exemption Regulations                         particular offenses, (2) provides for sus-     ber of the American Bar Association’s Employee Ben-
                          The DOL has stated that it will ‘‘vigor-            pensions in full day increments only, and      efits Committee and Co-chairperson of the Subcom-
                       ously enforce’’ the new regulations starting           (3) pertain to acts of workplace miscon-       mittee on Jointly Administered Plans.
                       on their effective date, August 23, 2004. It           duct only.                                     James B. Thelen is an associate with Miller, Can-
                       would be wise, therefore, for all lawyers to        7. Consider consulting with company pay-          field, Paddock, and Stone, PLC. Previously, he
                       advise their clients to take a look at their cur-      roll department or (if performed by an         served as Assistant Vice President for Legislative Af-
                       rent pay practices to ensure compliance with           outside company) vendor regarding how          fairs and Assistant General Counsel at Western
                       the new regulations. Counsel specializing in           to avoid possible inadvertent deductions       Michigan University. Mr. Thelen practices labor
                       employment law who are familiar with the                                                              and employment law with a concentration in em-
                                                                              as well other prohibited deductions.
                       new regulations should be contacted in this                                                           ployment counseling, discrimination and harassment
                                                                           8. Consider publishing the following poli-        issues, labor arbitration, state and federal unfair
                       process. At a minimum, the following steps
                                                                              cies, if you have not already done so:         labor practices, and union activities, including
                       are suggested:
                                                                                                                             union avoidance and collective bargaining.
                                                                              A. All nonexempt employees are required
                       1. Audit all current jobs that are being treated
                                                                                 to report time worked accurately.           Jennifer L. Sabourin is an associate with Miller,
                          as exempt to determine if they meet ap-
                                                                                                                             Canfield, Paddock, and Stone, PLC practicing in
                          propriate duties test.                              B. All nonexempt employees will be paid
                                                                                                                             the area of labor and employment law. She is a
                                                                                 for all time worked.
                       2. Consult with counsel concerning ques-                                                              member of the American Bar Association, State
                          tionable exempt status.                             C. All overtime must be preapproved.           Bar of Michigan, Dearborn Bar Association (Presi-
                                                                                                                             dent, 2003–2004) and serves on the board of di-
                       3. Draft and publish company policy pro-            9. Establish an internal process for answer-
                                                                                                                             rectors of the Michigan Migrant Legal Assistance
                          hibiting unlawful deductions.                       ing questions regarding FLSA.
                                                                                                                             Project, and the alumni affiliate board of the Uni-
                       4. Draft and publish company complaint              Conclusion                                        versity of Michigan–Dearborn’s College of Arts,
                          procedure under which employees can ad-                                                            Sciences, and Letters.

                                                                              Whether working with employees or em-
                          vise the company whenever they believe           ployers, practitioners would be well advised
                          they have not received their full salary.                                                          Footnotes
                                                                           to understand the complexities of the FLSA         1. 29 USC 206 et seq.
                       5. Develop internal mechanism for handling          and its implementing regulations. Given the        2. See http://www.dol.gov/esa/whd/statistics/
                          such complaints: identify the person(s)          DOL’s aggressive enforcement and the prolif-          200318.htm and http://www.dol.gov/esa/whd/
                          responsible for receiving and investigat-        eration of private FLSA class action lawsuits,     3. See id.
                          ing complaints; provide for reimburse-           the results of failing to take pro-active meas-    4. Defining and Delimiting the Exemptions for Ex-
                          ment in the event there was an improper          ures to ensure compliance could be costly. ♦          ecutive, Administrative, Professional, Outside
                                                                                                                                 Sales and Computer Employees, 69 Fed. Reg.
                                                                                                                                 22122, 22260 (April 23, 2004) (to be codified at

                                                                                                                                 29 CFR Part 541).
                                                                                                                              5. See id., 69 Fed. Reg. at 22122.
                                                                                                                              6. See http://www.dol.gov/esa/regs/compliance/whd/

                                                                                                                              7. 29 CFR 541.2.
                                                                                                                              8. See, e.g., 29 CFR 541.100(a)(1).
                                                                                                                              9. The computer employee’s exemption has an alter-
                                                                                                                                 native to the payment of the $455 weekly salary,
                                                                                                                                 the option of paying the employee $27.63 an
                                                                                                                                 hour. The outside sales exemption has no salary

                                                                                                                             10. See supra, note 6.
                                                                                                                             11. See 29 CFR 541.601.
                                                                                                                             12. See 29 CFR 541.303(d), 541.304(d), 541.500(c).
                                                                                                                             13. See generally 29 CFR 541 Subpart B.

                                                                                                                             14. See generally 29 CFR 541 Subpart C.
                                                                                                                             15. See generally 29 CFR 541 Subpart D.
                                                                                                                             16. See generally 29 CFR 541 Subpart F.
                                                                                                                             17. 29 CFR 541.602(b)(5).
                                                                                                                             18. 29 CFR 541.603(d).
                                                                                                                             19. 29 CFR 541.603(b–c).
                                                                                                                             20. 29 CFR 541.604.


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