Ms. Pohlid

Human Resources, Recruitment & Training

Fair Labor Standards Act: Are your employees exempt from overtime?

By Kathleen Pohlid, Founder and Managing Member, Pohlid, PLLC

True or False: Managers are exempt from overtime. Employers who assume that managerial titles or merely bestowing a title upon an employee makes them exempt are making a mistake that can cost them significantly. The U.S. Department of Labor has stepped up enforcement efforts which will likely scrutinize whether employees are exempt. As this article discusses, the Fair Labor Standards Act places no relevance in a job "title." Therefore, it is important that hotel establishments ensure that employees for whom an exemption is claimed, do in fact qualify for the exemption.

The Fair Labor Standards Act (FLSA) sets forth the minimum federal requirements with respect to the minimum wage and overtime obligations of covered employers to include hotel establishments. The FLSA also sets forth the following employee classifications that are exempt from these requirements: bona fide executive, administrative, professional, outside sales employees, and computer employees. Do not assume that merely giving an employee a job title or classifying them under one of these classifications suffices to avoid overtime pay obligations. It does not.

In order to qualify for an exemption under any of the exempt classifications as set forth by the FLSA, employers bear the burden to establish that the job for which the exemption is claimed satisfies both the salary basis and duties tests. Since the FLSA sets the minimum obligations under federal law, states may impose additional restrictions with respect to overtime exemptions. Therefore, hotel establishments should review the position descriptions for the job positions which they contend an exemption applies to ensure the primary duties and salary satisfy the requirements under both federal and state laws.

In addition to complying with federal and state laws, hotel establishments who send employees to work in California even on a temporary basis should be aware that the California Supreme Court has held that California Labor Code overtime provisions apply to non-resident employees who perform work in California. Although the California Supreme Court decision issued in Sullivan v. Oracle Corporation on June 30, 2011 pertained to a California based business, the decision may also be interpreted to apply to employers not based in California, entitling their non-California resident employees to be paid under California law for work they temporarily perform within the state.

Under federal law, determination of the exempt status of an employee requires assessment as to whether the employee's duties and salary qualify for the exemption or exemptions claimed. Since it is possible for an employee's job position to fall within multiple exemptions, it is important to establish written descriptions setting forth all of the principal duties and to ensure that the employee's work conforms to those duties.

Job titles do not determine the exemptions status. In fact, employers who assign a job title such as "manager" to imply the exemption exists when in fact, the employee's duties do not qualify for the exemption may find their selves in a more precarious situation if such action is construed to be an attempt to willfully violate the FLSA.

In general, the current salary basis test requires the employer to pay a salary of at least $455 per week to the exempt employee, unless the exemption includes any of the following for which different rules apply: computer employee, outside sales, lawyers, doctors, teachers and highly compensated employees. The salary basis test is also satisfied under the administrative or professional exemption if the employee receives $455 per week on a fee basis.

A summary of the exemptions are as follows:

1. Executive Exemption

In order to qualify for this exemption under the FLSA, the employee must be paid on a salary basis of at least $455 per week. The employee's duties must also satisfy each of the following requirements: (1) their primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; (2) they must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and (3) they must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

2. Administrative Exemption

Hotel establishments should be wary of applying this exemption to employees simply because they perform an administrative task. Work that consists of the business production or operation, such as selling retail goods in a store, does not qualify for this exemption. In order to qualify, the employee's duties must be in the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers and the employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Examples of administrative duties may include functional areas of tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network, Internet and database administration, legal and regulatory compliance, and similar activities. Additionally, the employee must be paid a salary of at least $455 per week to qualify for this exemption under federal law.

3. Professional Exemption

The professional exemption includes two categories: the learned professional and the creative professional. Except for lawyers, doctors, and teachers for which there is no minimum salary or fee basis, all other employees under this exemption must be paid on a salary or fee basis of $455 per week. The learned professional must have as their primary duty work which requires advanced knowledge that is predominately intellectual and requires consistent exercise of discretion and judgment. The advanced knowledge must be in a field of science or learning and must be customarily acquired by prolonged course of specialized intellectual instruction. The creative professional must have as their primary duty work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The mere fact that an employee's job requires advanced knowledge is not sufficient to satisfy the learned exemption. Employers who rely upon this exemption should ensure that the job description requirements specify, as a prerequisite, a prolonged course of specialized intellectual instruction, that such instruction relate to the job responsibilities, and that the instruction involve prolonged study beyond the undergraduate level.

4. Computer Employee Exemption

As with other exemptions, the Computer Employee Exemption sets forth detailed requirements with respect to the employee's duties. The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field and their duties must involve any of the following: (1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) Any combination of the foregoing. Additionally, the employee must be paid either on a salary or fee basis of at least $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour.

5. Outside Sales Exemption

There is no salary basis test for outside sales exempt employees. To qualify for the outside sales employee exemption, the employee must satisfy two criteria: (1) Their primary duty must be making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) They must be customarily and regularly engaged away from the employer's place or places of business. A retail sales exception may apply if the employee is employed in a retail or service establishment. To qualify for this exception, the sales person's regular rate must be in excess of one and a half of the minimum wage and more than half of the employee's compensation (not less than one month) must represent commission on goods and services sold.

6. Highly Compensated Employees

In order to qualify for this exemption, the employee must be performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis). Additionally, their duties must customarily and regularly include at least one of the duties of an exempt executive, administrative or professional employee. Employees whose primary duties involve manual labor are not covered under this exemption regardless of the amount of their annual compensation.

Loss of Exemption

Employers should be aware that even if the criteria is met for an exemption, the exemption can be lost if impermissible deductions are made from the employee's salary. Deductions cannot be made from an exempt employee's pay for absences caused by the employer or by the operating requirements of the business. If the exempt employee is ready, willing and able to work, an employer cannot deduct pay because work is not available. The Department of Labor (DOL) regulations at 29 C.F.R. 541.602 set forth the limited circumstances in which deductions which may be made without compromising the exemption.

The DOL regulations also set forth a safe harbor rule at 29 C.F.R. 541.603(d) which, if satisfied, will preclude the employer from losing the exemption "unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints." In order to qualify for the safe harbor, the employer must have a clearly communicated policy prohibiting improper pay deductions including an employee complaint mechanism to address pay discrepancy issues. The employer must also reimburse employees for any improper deductions and make a good faith effort to comply with the law in the future.

Since DOL is stepping up enforcement of the FLSA and increasing its resources to investigate employer pay practices, it is important that hotel establishments conduct a review to ensure the qualifications are met for the exemptions under both federal and state law. Such a review should include establishing and documenting position descriptions to set forth the principal duties for each exempt position, ensuring those duties qualify for the exemptions claimed, ensuring that employee's work conforms to the position description, establishing procedures to protect against impermissible deductions, and establishing a clearly communicated policy to prohibit improper deductions and ensure employees are properly paid for all hours worked.

Kathleen Pohlid is the founder and managing member of the law firm of Pohlid, PLLC in the Nashville, Tennessee area. She advises business clients in matters including employment, occupational safety and health, Americans with Disabilities Act (accommodation & discrimination) and regulatory compliance. Her goal is to enable clients to comply with the myriad of state and federal laws to succeed in their business, mindful of the challenges facing businesses and the importance of cost effectiveness. She has advised and represented businesses in a variety of industries including restaurants, hotels, and other entities in the tourism and hospitality industries. She has over 20 years of combined federal government and private sector experience in employment law and litigation. She holds an AV® rating from Martindale-Hubbell (highest for professional competency and ethics), a B.S. degree from the U.S. Naval Academy and a J.D. from Samford University. Ms. Pohlid can be contacted at 615-369-0810 or kpohlid@pohlid.com Please visit http://www.pohlid.com for more information. Extended Bio...

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