HRMN 408 WEEK 2: Compensation Considerations and FLSA

CHAPTER 5

• Minimum Wages

• Overtime

• Alternatives to Overtime

• Exemptions from Overtime

• Settling FLSA Wage Disputes

• Other Wage Regulations

• Child Labor

• Priority of Wages and Benefits in Bankruptcy

• Anti-Trust Considerations

Wage and Hour Requirements

C o p y r i g h t 2 0 1 7 . S o c i e t y F o r H u m a n R e s o u r c e M a n a g e m e n t .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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The SHRM Essential Guide to Employment Law86

Wage and hour requirements are a mix of federal and state law. The principal federal law is the Fair Labor Standards Act (FLSA) enacted in 1938.

In general, and subject to the exemptions discussed later in this chapter, the FLSA applies to all employees of a business or organi- zation (referred to in the law as an enterprise) that meets any of the following descriptions:

• has an annual dollar volume of sales or business of at least $500,000

• is a hospital, a business providing medical or nursing care for residents, or a school or preschool

• is a government agency

In addition to enterprise coverage, the FLSA applies to employ- ees who are engaged in interstate commerce or in the production of goods for interstate commerce, even if they are not employed by an enterprise.

Employees cannot waive their right to the minimum wage and overtime guaranties of the FLSA because, according to the Supreme Court, allowing them to do so “would nullify the purpos- es of the FLSA and thwart the legislative policies it was designed to effectuate.” So a private agreement that an employee will be paid and will accept less than the minimum wage, or will not be paid an overtime premium to which he or she would otherwise be entitled, is unenforceable.

MINIMUM WAGES The FLSA requires every employer to pay each covered employee a minimum wage at this writing of $7.25 per hour. The minimum rate for newly hired employees who are under 20 years of age is currently $4.25 per hour, but that rate is applicable only during the first 90 days of employment. Although an employee need not receive the minimum wage for every hour worked, the employer must average the minimum wage every workweek.

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Wage and Hour Requirements 87

There is a long list of occupations that are exempt from min- imum wage requirements. The exceptions are narrowly drawn, however, and apply only in limited circumstances. Employers should assume that they owe the minimum wage to each of their employees unless they have obtained competent advice to the contrary.

Volunteer Employees Among the potential pitfalls for an employer is the volunteer employee or unpaid intern.

The FLSA allows individuals to volunteer their services, with- out pay, to state or local government agencies and to nonprofit food banks for humanitarian purposes. U.S. Department of Labor (DOL) guidance goes a bit further, expanding humanitarian pur- poses to include individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to nonprofit organizations.

Despite the DOL’s somewhat expanded view of humanitarian purposes, however, an unpaid intern may volunteer at a for-profit, private-sector employer only if each of the following six criteria is satisfied (according to the DOL):

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.

• The internship experience is for the benefit of the intern. • The intern does not displace regular employees, but works under close supervision of existing staff.

• The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded.

• The intern is not necessarily entitled to a job at the conclusion of the internship.

• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

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EXAMPLE: A for-profit architectural firm receives an inquiry for summer employment from a third-year architecture major at a local university. She says that job opportunities are extremely tight and, to gain experience and build her resume, she is will- ing to work for free helping existing employees with drafting and other duties. Since the proposed arrangement would be of direct benefit to the employer and since the student would be performing work for free that the employer normally has to pay for, the FLSA’s minimum wage requirement applies.

In Glatt v. Fox Searchlight Pictures, a 2016 decision by the U.S. Court of Appeals for the 2nd Circuit (headquartered in New York City), the court rejected the DOL’s six-factor test in favor of a prima- ry beneficiary test—whether the intern or the employer is the primary beneficiary of the relationship. Ironically, the court then proceeded to list not six, but seven, factors to be considered in applying the primary beneficiary test, many of which sound similar to the DOL’s list.

Eventually the Supreme Court will need to resolve the question of when an unpaid intern may volunteer services to a for-profit employer. In the meantime, for-profit employers should seek com- petent counsel when considering an unpaid internship program.

Meals and Lodging The FLSA allows employers to credit against their minimum wage obligation the fair value of meals and lodging provided by the employer. The credit for lodging will be allowed only if the follow- ing conditions apply:

• The lodging is regularly provided. • The employee voluntarily accepts the lodging. • The lodging is furnished in compliance with all applicable laws. • The lodging is provided primarily for the benefit of the employ- ee rather than the employer.

• The employer maintains accurate records of the cost of the lodging.

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ALERT! The value of meals and lodging provided in partial satisfaction of the employer’s min-

imum wage obligation is taxable income to employee. Meals and lodging provided for

the employer’s convenience are not taxable to the employee, but they also do not count

against the employer’s minimum wage obligation.

Tips Special rules apply to employees who receive tips. Tips may be counted against the minimum wage, but only up to $5.12 per hour at this writing. The employer must pay at least $2.13 in cash wages and, if actual tips combined with cash wages do not equal the mini- mum wage, the employer must make up the difference. (Some state minimum wage laws do not count tips or count tips only up to a lesser dollar amount.)

Tips are subject to withholding and other tax requirements just like regular compensation. (See Chapter 7 for more specific infor- mation regarding tax requirements.)

Breaks Except for nursing mothers (discussed below in this chapter), the FLSA does not require employers to grant rest breaks. Nevertheless, many employers provide brief morning and afternoon breaks to their nonexempt employees. When those rest breaks are no longer than 20 minutes, they must be accounted and paid for as hours worked. However, according to the DOL’s Field Operations Handbook, when an employee extends his or her break past 20 minutes without authorization, the employer need not compensate the employee for the unauthorized extension if the employer has expressly and unam- biguously communicated to its employees that the authorized break may last only a specified length of time and that any extension of the break is against the employer’s rules and will be punished.

State and Local Laws States and local jurisdictions are free to adopt higher minimum

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wages, and some have done so. Some state and local governments have also adopted living wage or prevailing wage laws that require government contractors doing business with those jurisdictions to pay their employees a minimum wage substantially in excess of the federal floor. Aside from the economic debate over the effect of minimum wages, this lack of federal uniformity imposes substantial compliance burdens on multistate employers and encourages them to move their workforces to more business-friendly states.

ALERT! Pay differentials based on gender or on any other prohibited consideration such as race

or national origin are illegal under nondiscrimination laws. (See Chapter 15.)

Penalties Penalties for violating the FLSA and state laws are substantial, including liquidated damages, attorneys’ fees payable to the employ- ee involved, criminal fines, and even prison sentences.

CASE STUDY: MANAGERS’ PERSONAL LIABILITY FOR AN FLSA VIOLATION After Castaways Casino filed for bankruptcy protection, a former employee sued Castaways’ individual managers under the FLSA for unpaid wages. The employee claimed that the managers qualified as his “employer,” which the FLSA defines as “any person acting directly or indirectly in the interest of the employer in relation to an employee.” The federal appeals court for the 9th Circuit ruled that when an individual exercises control over the nature and structure of the employment relationship or economic control over the relationship, that individual is an employer within the meaning of the FLSA.

OVERTIME Overtime requirements under the FLSA give rise to issues of how much to pay and when to pay. The basic rules for nonexempt, pri- vate-sector employees are the following:

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• The maximum number of hours an employee may work in any workweek without receiving overtime compensation is 40.

• Overtime compensation is one and one-half times the employee’s regular hourly rate of pay.

• Overtime compensation must be paid on the next regular payday (or as soon thereafter as practical if the amount due cannot be computed by that payday).

ALERT! The FLSA imposes a time-and-a-half overtime premium on work in excess of 40 hours

in any workweek. Some state laws require overtime for work in excess of eight hours per

day and impose a double-time premium for overtime work. Collective bargaining agree-

ments in union shops may also impose additional overtime requirements.

Calculating Work Time The workweek is a period of 168 hours (24 hours per day times seven days per week). It is up to the employer to establish when the workweek begins and ends, and it need not coincide with pay periods. When the two do not coincide (for example, when the employer’s pay period is semimonthly, or 24 paydays per year), each paycheck includes regular pay for 13, 14, 15, or 16 days and includes overtime pay for one, two, or three workweeks, depend- ing on how many workweeks end during the particular pay period involved. An employer may establish different workweeks for dif- ferent employees, but the employer cannot repeatedly change the workweek to manipulate overtime obligations.

Overtime must be paid at one and one-half times the employ- ee’s regular hourly rate. In general, the regular hourly rate is the hourly rate actually paid the employee for the normal, nonover- time workweek for which the employee is employed. Employers are not required to compensate their employees on an hourly rate basis, however. They may, for example, compensate on piece-rate, salary, commission, or other basis, but in such cases a regular hourly rate must be computed to determine what the overtime

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rate should be. In computing the regular hourly rate, all remu- neration for employment must be included, such as commissions and production bonuses. However, the FLSA specifies that the following items are not included in computing the regular hourly rate:

• gifts, so long as they are not measured by or dependent on hours worked, production, or efficiency

• payments made while the employee is on leave • expense reimbursements • bonuses paid at the sole discretion of the employer and not pur- suant to any previous contract or promise

• profit-sharing payments • employer contributions to employee benefit plans • premium payments for work on weekends and holidays, so long as the premium rate is at least one and one-half times the rate for regular work

As the above list suggests, bonuses that are tied to productivity are included in computing the employee’s regular pay rate for overtime purposes. So if an employer pays a quarterly or year-end productivity bonus to nonexempt employees, the employer must recalculate the employees’ regular pay rate for the period covered by the bonus and pay any additional overtime that may result.

EXAMPLE: A company’s normal workday is 9:00 a.m. to 5:30 p.m. with an hour for lunch. That equates to 37.5 hours of work per workweek. If an hourly employee works 39.5 hours in a particular week, at what rate should he or she be paid for the extra two hours? The company is free to pay overtime at one and one-half times the normal rate after 37.5 hours, but it is not required to do so. The company is in full compliance with the FLSA if it pays only straight time for the two hours, since the FLSA’s overtime obligations kick in only after 40 hours.

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Employers should not overlook the effect of holidays, vaca- tions, and other time off on their overtime obligations. For time to be counted toward overtime, the employee must actually be at work. Even though an employee may be on paid leave, if he or she is not actually working, the time is not included in comput- ing overtime. For that reason, overtime is usually not a problem during periods such as the Christmas week, when many employ- ees take time off.

Wage and hour violations can occur unintentionally. Employers should be alert to the following pitfalls:

• “Would you mind running an errand for me on your lunch hour?” “I’d appreciate your taking the late mail to the post office when you leave today.” “Could you drop off this package on your way in tomorrow?” If these favors take more than a few minutes of an employee’s time, they need to be counted for pay and overtime purposes.

• “Company policy prohibits overtime unless explicitly approved by your supervisor.” If the time actually required to complete the assigned job is more than the standard workday, an offi- cial policy limiting overtime will not excuse the employer from paying time-and-a-half.

• “I need you to carry a beeper.” “In your job, you’re on call 24 hours a day.” “You can’t drink on your off hours, since I may need you in on short notice.” “I want you at home where I can reach you.” Restrictions on off hours can trigger pay and over- time obligations if they substantially limit the employee’s free- dom. The you’re-on-call-24-hours-a-day dictate, without more, is probably not a substantial restriction, nor is the alcohol pro- hibition. But the beeper requirement could be, if the beeper’s range is very limited. The stay-at-home requirement definitely would need to be counted as work time.

• “You can eat lunch at your desk if you like, but that’s unpaid time.” Unless the employee is entirely free from work responsi- bilities during a so-called lunch break, the time is compensable.

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• “The company encourages you to get involved in civic and char- itable activities in the community.” Truly volunteer activities, performed after working hours, are not compensable. Howev- er, activities performed during normal working hours with the approval of the employer are compensable and need to be count- ed for overtime purposes. Even after-hours activities can be com- pensable if they are done at the employer’s specific request or direction, or if the employer coerces or pressures the employee into volunteering.

Portal-to-Portal Act Another risk involves activities immediately before and immediately after regular work periods. The Portal-to-Portal Act (an amendment to the FLSA) makes clear that an employee’s commuting time— time walking, riding, or traveling to and from the actual place of performance of the principal activity or activities that the employee is employed to perform—is not compensable for minimum wage or overtime purposes. Similarly, activities that are preliminary or postliminary to principal activities are not compensable.

On the other hand, an activity is compensable if it is primarily for the employer’s benefit, if there is an express written or oral contract that the employer will pay for the activity, or if it is compensable by custom or practice. Examples of activities that may or may not be compensable, depending on the circumstances, include changing into or out of a work uniform, punching a time clock, waiting in line to punch a time clock, settling up a cash register drawer at the end of a shift, cleaning or repairing tools, showering after working with hazardous or toxic materials, and inspecting a motor vehicle before or after driving a delivery route.

ALTERNATIVES TO OVERTIME Overtime obligations significantly increase an employer’s pay- roll costs. In addition to time-and-a-half, other costs such as pay- roll taxes, workers’ compensation premiums, and retirement plan

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contributions may increase as well. So it is usually in an employer’s interest to avoid overtime when possible. The following alternatives to overtime may be available, depending on the employer’s specific circumstances.

Compensatory Time If an employee who normally works an 8-hour day happens to work 9 or 10 hours on a particular day, he or she may be offered the opportunity (or may even be required) to work fewer hours on another day, so long as it is in the same 168-hour workweek. However, with few exceptions overtime may not be taken as com- pensatory time (or comp time) in another workweek. If overtime is not offset by time off within the same 168-hour workweek, wages at the overtime rate must be paid. This rule applies regardless of the pay periods established by the employer. For example, even though the pay period may be every two weeks, 45 hours of work in week 1 cannot be offset by 35 hours in week 2.

The rule also applies even if the employee is perfectly willing to waive overtime pay and take comp time the following week. Sup- pose an employee wants to take an extended vacation later in the year and offers to build up comp time so that regular paychecks will continue during vacation. The request cannot be honored, since neither the employer nor the employee can agree to an arrangement different from the overtime requirements of federal and state law.

On a number of occasions, Congress has considered amending the FLSA to permit comp time in the private sector. (Comp time has long been allowed for federal government employees.) Organized labor has generally opposed any such change, however, and the pro- posed amendments have all died without passage.

Time-Off Plan There is one exception to the rule that comp time in workweek 2 does not satisfy the employer’s obligation for overtime in work- week 1—the so-called time-off plan. Suppose an employer pays

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every other week. If a nonexempt salaried employee works over- time in workweek 1, the employer can give the employee time off in workweek 2 at the rate of 1.5 hours for each hour of over- time worked in workweek 1. By paying the employee the regular salary for both workweeks, the employer fully satisfies its overtime obligation.

EXAMPLE: Suppose an employee normally works 40 hours per workweek and is paid a biweekly salary of $800 ($400 per week or $10 per hour). If the employee works 50 hours in workweek 1, the employee can take (or be ordered to take) 15 hours off in workweek 2, since 1.5 times the 10 hours of overtime worked in workweek 1 equals 15 hours. In this example, the employee has worked a total of 75 hours over both workweeks, but will be paid his or her regular biweekly salary of $800. In effect, the employer satisfies its overtime obligation by paying comp time at a premium rate instead of paying a cash premium.

A time-off plan for salaried employees works only if the employer’s pay period is longer than one workweek and if overtime occurs in the first workweek. In the above example, if the overtime occurred in workweek 2, the employer would have to pay the overtime pre- mium in cash.

Belo Plan Belo plans (from a Supreme Court case of that name) are available only for employees whose duties necessitate irregular hours because of the nature of the work. Examples might include on-call service workers and emergency repair crews. Under a Belo plan, the employer enters into a contract with the employee that guarantees the employee a fixed salary regardless of the number of hours worked. The contract specifies a regular hourly rate for the normal 40 hours and 1.5 times that regular hourly rate for guaranteed overtime (so long as total time covered by the plan is no more than 60 hours per workweek).

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EXAMPLE: A power company employee’s job is to restore electrical service following outages caused by storms, traffic accidents, construction mishaps, and the like. The amount of work needed is unpredictable, typically varying anywhere from 30 to 50 hours per workweek, so the employer enters into a contract guaranteeing the employee a fixed weekly salary of $550, representing 40 hours at $10 per hour and 10 hours at a $15 overtime rate. In other words, the contract guarantees the employee 10 hours of overtime each week. Then, regardless of the number of hours worked (up to the agreed total of 50 hours in this example), the employer has no additional over- time obligation. Of course, if the employee works fewer than 50 hours, he or she still gets paid $550.

In the above example, any time worked in excess of 50 hours would have to be compensated at $15 per hour. While the parties could have agreed to guarantee more than 10 hours of overtime, their agreement could not go beyond 20 hours of overtime under a Belo plan.

Half-Time Plan Belo plans are available only when the inherent nature of the work necessitates irregular hours and when the number of hours per workweek vary both above and below a normal 40-hour workweek. In contrast, under a half-time plan (sometimes called a fluctuating workweek plan), the fluctuation can be subject to the employer’s control, and hours worked can routinely exceed 40.

Under a fluctuating workweek plan, the employer and employ- ee agree that the employee will be paid a fixed salary covering all time worked in the workweek. This should be a written agreement by which the employee clearly acknowledges that the fixed salary covers the straight-time component of all hours worked even if they exceed 40. For any given workweek, the employee’s regular hourly rate is computed by dividing the fixed salary by the number

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of hours actually worked in that workweek. If the number of hours worked exceeds 40, the employer pays the employee half (not one and one-half) of his or her regular hourly rate for the hours exceeding 40. The reason the employer pays only half-time for the overtime is that the straight-time component is already covered by the fixed salary.

EXAMPLE: Employer and employee agree to a fixed salary of $400 per week. If, in a particular workweek, the employ- ee works 50 hours, then the employee’s regular hourly rate for that workweek is $8 ($400 / 50). Therefore, the employ- er’s overtime obligation for that workweek is $40 (.5 x $8 x 10 hours), and total compensation due the employee for that workweek is $440. Now suppose the employee works 55 hours. His or her regular hourly rate would then be approximately $7.27 ($400 / 55), and the total compensation due would be $454.53 ($400 + (.5 x $7.27 x 15 hours)).

As the above example shows, as overtime increases, both the reg- ular hourly rate and the overtime rate decrease. If the employee worked 80 hours in a particular workweek, his or her regular hourly rate would then drop to $5.00 per hour, which is below the mini- mum wage and which would therefore violate federal law. The fixed salary under a half-time plan must be high enough to guarantee at least the minimum wage.

EXEMPTIONS FROM OVERTIME Overtime requirements are subject to a long list of exemptions under both federal and state law. Although the federal and state exemptions often overlap, they are not identical. An employee (or position) covered by one of these exemptions is referred to as exempt and is not entitled to time-and-a-half for overtime. In contrast, an employee (or position) not covered by any exemption is referred to as nonexempt and is entitled to overtime.

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QUICK TIP Even though an employee is exempt from minimum wage or overtime requirements,

the employer must still comply with the FLSA’s equal pay provisions, which prohibit

gender-based wage discrimination. (See Chapter 14 for more information.)

White-Collar Exemptions Probably the most significant exemptions for most business- es are for salaried employees employed in a bona fide execu- tive, administrative, or professional capacity. These exemptions, together with the exemption for outside salespersons, are some- times called the white-collar exemptions. For an employee to qualify as exempt in one of these categories, his or her position must meet one of the duties tests specified in DOL regulations and described below. In most cases, a salary test applies as well, requiring that the employee be paid on a salary basis of at least $455 per week.

ALERT! In May 2016, the DOL (then under President Obama) issued final regulations raising the

$455-per-week salary basis requirement to $913 per week, effective December 1, 2016.

A Texas federal court temporarily enjoined enforcement of the new regulation. In

August 2017 the same court issued a final ruling that the new regulation is invalid.

As a result, the existing $455-per-week salary requirement continues in effect. The

current administration has solicited public comment on the matter but, as of this

writing, has not proposed any changes to the existing regulation.

An executive is an employee whose primary duty is management of the enterprise in which he or she is employed (or a customar- ily recognized department or subdivision thereof). An executive customarily and regularly directs the work of two or more other employees and has the authority to hire or fire other employees (or whose suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight).

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A business owner falls under the executive exemption if he or she owns at least a 20 percent bona fide equity interest in the enterprise in which he or she is employed and qualifies as an executive for over- time exemption purposes, even if he or she does not satisfy the salary test of $455 per week.

An administrator is an employee whose primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. His or her primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

A professional is an employee whose primary duty is the perfor- mance of work requiring either of the following:

• knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intel- lectual instruction, such as an accountant, nurse, medical technol- ogist, dental hygienist, or chef (a learned professional)

• invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor (a creative professional)

Employees who are licensed to practice law or medicine qualify as exempt professionals whether or not they meet the $455-per- week salary requirements. (For these purposes, medical practitioners include not only physicians but also osteopaths, podiatrists, dentists, optometrists, and veterinarians.) Teachers also qualify as exempt professionals whether or not they meet the $455-per-week salary requirement.

Computer programmers and others with highly specialized knowl- edge of computers qualify as professionals so long as they are paid either on a salary basis of at least $455 per week or on an hourly basis of at least $27.63 per hour.

Highly compensated employees—employees who earn at least $100,000 per year—are exempt so long as at least some of their duties (but not necessarily their primary duties) are executive,

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administrative, or professional. In addition to the $100,000-per- year requirement, they must also be compensated on a salary basis of at least $455 per week. (The $100,000 amount was raised to $134,004 under DOL regulations due to be effective December 1, 2016, but a Texas federal court has since ruled the new regulations invalid.)

Executives, administrators, and professionals will not lose their exemption by being temporarily assigned to nonexempt work, even for assignments lasting several weeks, so long as their prima- ry duties fall within the definitions of executive, administrative, or professional.

An outside salesperson is an employee whose primary duty is making sales or obtaining orders and who is customarily and regu- larly engaged away from the employer’s place of business (in other words, out in the field at the customers’ places of business or homes). A person who works from his or her own home does not qualify as an outside salesperson. Since outside salespersons are typically paid by commission, the salary basis requirement does not apply.

DOL regulations say that the determination of an employee’s pri- mary duty

must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. Factors to consider when determining the primary duty of an employee include, but are not limited to, the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.

Salary Basis As previously stated, for an executive, administrator, or professional to be exempt, he or she must generally be paid on a salary basis of at

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least $455 per week. DOL regulations provide that an employee will be considered as paid on a salary basis if he or she “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all, or part, of his or her compensation, which amount is not subject to reduction because of variations in the qual- ity or quantity of the work performed.”

Under this definition, an employee must generally be paid a full week’s compensation for any workweek in which he or she performs any work, without regard to the number of days or hours worked. In other words, so long as the employee is ready, willing, and able to work a full workweek, the employer cannot reduce the compensa- tion for the week just because the employer does not have any work available.

An employee will not qualify as salaried under DOL regulations if the employer docks wages for jury duty, temporary military leave, or attendance as a witness in court lasting less than a full work- week. However, the employer may reduce an employee’s salary by the amount the employee is paid as a juror or witness or for military service.

If an employee fails to report to work for a day or more for per- sonal reasons (other than sickness or accident), the employer may dock his or her salary for each full day (but not for a partial day) the employee is absent without affecting the employee’s exempt status. (Deductions for absences of a day or more relating to sickness or accident are also permitted if the employer has a plan, policy, or practice of providing alternative compensation under those circum- stances.) But if the employee is absent for less than a day, no deduc- tion is allowed. In short, if an employer treats exempt employees as if they were hourly instead of salaried, they will cease being exempt.

DOL regulations provide a few additional exceptions to the general rule that an exempt employee must be paid a full week’s compensation for any week in which he or she performs any work. When a new employee works less than a full week on initial hire or a departing employee works less than a full week on termination, he

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or she need to be paid only for the days actually worked. In addition, an employer may penalize employees by making deductions from pay in good faith for infractions of safety rules of major significance (such as smoking in an explosives plant) and may suspend employees without pay for one or more full days for infractions of written, gen- erally applicable workplace conduct rules (such as rules prohibiting sexual harassment).

The DOL’s definition of salary basis says that all or part of an employee’s compensation must be predetermined. This means that an employee will be considered salaried even if some portion of his or her compensation is paid in the form of commissions or bonuses that vary depending on productivity or other factors. However, the predetermined amount must satisfy the minimum salary require- ments—$455 per week as of this writing—for most white-collar exemptions.

ALERT! Some employers mistakenly think that all salaried employees are automatically exempt.

To the contrary, while being salaried is one of the requirements for most white-collar

exemptions, the employee must also satisfy the duties test—that is, qualify as an exec-

utive, administrator, or professional as defined in DOL regulations.

Although the FLSA does not regulate an employer’s vacation policies, those policies can sometimes trigger FLSA concerns. Say, for example, that an employer advances four hours of paid vacation time to an exempt employee who has used all his or her accrued leave. If the employee quits before earning back the four hours, and the employer then deducts the four hours from the employee’s final pay, the employer has in effect docked the employee for a partial day of personal leave, contrary to the salary basis requirement.

Improper Deductions Improper deductions from an otherwise exempt employee’s salary will convert that employee, and other employees in the same job

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classification who work under the manager who made the improper deduction, to nonexempt status. Any overtime worked while the improper deductions were being made will then have to be paid at time-and-a-half.

Under the window of correction rule, isolated or inadvertent deductions will not cause loss of exemption. However, the employ- er must have a policy in place that prohibits improper pay deduc- tions and includes a mechanism for employees to complain about a deduction. (See Figure 5.1 for an example of such a policy.) Once an improper deduction is brought to the employer’s attention, the employer must reimburse the employee and must make a commit- ment to comply in the future.

FIGURE 5.1: WINDOW-OF-CORRECTION POLICY

The following policy will help ensure that inadvertent deductions from a salaried exempt employee do not convert the employee to nonexempt:

The company prohibits deductions from the compensation of exempt employees that could result in loss of exempt status. Any exempt employee who believes an improper deduction has been made from his or her compensation is encouraged to submit a complaint, preferably in writing, to the company’s payroll officer. The company will promptly investigate the complaint. If the company determines that the deduction was improper, the company will promptly refund the deduction to the employee. The company commits itself to compliance with applicable wage and hour laws, including those governing exemptions from overtime pay.

Other Exemptions Other exemptions may be significant for some employers. Unlike executives, administrators, and professionals, a few exemptions do not require payment of a fixed salary. In addition to outside sales- persons, these include drivers, drivers’ helpers, loaders, and mechanics for motor carriers whose duties affect safe operation of commercial motor vehicles in interstate commerce and who are subject to regu- lation by the U.S. Department of Transportation.

Employees of a seasonal establishment that is an amusement or rec- reational establishment, organized camp, or religious or nonprofit

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educational conference center are exempt in either of the following situations:

• the establishment does not operate for more than seven months in any calendar year

• during the preceding calendar year, the establishment’s average receipts for any six months of such year were not more than 33 and one-third of its average receipts for the other six months of such year

Even if an employee is not entitled to premium overtime pay under the FLSA, he or she may be entitled to premium pay under state law. While state law is similar to the FLSA, states often have dif- ferent exemptions from overtime. Different exemptions also apply to work performed under government contracts. (See Chapter 22 for more on government contractors.)

SETTLING FLSA WAGE DISPUTES When an employer underpays an employee in violation of the FLSA, the employee may recover not only the balance of wages owed but also additional liquidated damages equal to the unpaid amount, and the attorneys’ fees incurred in pursuing the claim. In cases of underpayment, the employer and employee generally cannot enter a binding settlement agreement in which the employer agrees to pay something less than the full amount due.

A 1945 Supreme Court decision invalidated a settlement agree- ment between an employer and an employee that did not provide for payment of liquidated damages to the employee. The court reasoned that the FLSA affords statutory rights that simply cannot be waived. A year later the court ruled that even when there was a bona fide dispute between the parties as to the employer’s over- time obligation, a settlement agreement would not be enforceable. However, in that case the dispute involved a legal issue of wheth- er the employer was engaged in interstate commerce and, there-

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fore, whether the FLSA applied. The court left open the question whether a bona fide dispute over a factual issue, such as how many hours of overtime the employee actually worked, might support a settlement agreement in which an employee agrees to compromise his or her FLSA claim.

The question left open by the court in 1946 remains unanswered today. So, as a practical matter, an employer should not enter into a private settlement of a wage and hour dispute under the FLSA, because the employee’s release of his or her claims in exchange for a cash payment is likely to be invalid and unenforceable. To resolve such disputes, the employer should request the DOL to participate in and supervise a settlement or, alternatively, file a law suit in court and ask the court to approve a proposed settlement.

OTHER WAGE REGULATIONS The states regulate many other aspects of wage and hour require- ments. Typical requirements are that employers do the following:

• establish regular pay periods • pay hourly workers at least twice a month and pay salaried employ- ees at least monthly

• pay in U.S. currency • pay terminated employees within a specified time period after termination

If bonuses and commissions are part of an employee’s regular compensation package, they must be paid just like other wages.

ALERT! Most states prohibit employers from including Social Security numbers on employee

paychecks.

Direct Deposit As an alternative to issuing paper paychecks, direct deposit of employ- ee compensation into their bank accounts is a great convenience

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to employer and employee alike. Recognizing that some employees may not have, or qualify for, a bank account, many states require individual employee consent before paying via direct deposit.

Payroll Cards Payroll cards are another alternative to paper checks. A payroll card is a reloadable, prepaid card that can be used for purchases and at participating ATMs, much like a debit card. Under a payroll card program, funds are delivered electronically and are quickly available to employees. This avoids the delay of depositing a paper check and waiting for it to clear or cashing a paper check at a check-cashing store and paying the associated fee. But like a debit card, the payroll card can be lost or stolen.

Payroll cards are also subject to Regulation E of the Consum- er Financial Protection Bureau. Under that regulation, card issuers (employers) must disclose any fees associated with use of the card, any liability limitations to which the card is subject, and the types of transactions that may be made with the card. Further, employers must make account history available and must respond to reports of errors regarding the cards. Cards may also be subject to regulation under state law.

Deductions All employers are required to deduct taxes and related items from employee paychecks and amounts subject to garnishment. (Chapters 6 and 7 give more details regarding deductions from an employee’s paycheck.) Employers may deduct other amounts agreed to by the employee, such as voluntary contributions to a retirement plan and the employee’s contributory portion of health insurance premiums. Employers are generally prohibited from deducting amounts on account of workers’ compensation bene- fits, unemployment insurance, or other amounts claimed due from the employee, like reimbursement for breakage or for mistakes on customer accounts.

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Record-Keeping Requirements Federal and state laws also impose certain record-keeping requirements. In general, employers must keep records for at least three years showing the name, address, Social Security number, and occupation of each employee; the employee’s rate of pay; the amount actually paid each pay period; and, for non- exempt employees, the hours worked each day and each work- week. The records are subject to onsite inspection by wage and hour officials.

Nursing Mothers Although the FLSA does not generally impose leave or break- time requirements, it does require employers with 50 or more employees to provide reasonable break times for a nursing mother to express breast milk for up to one year after the child’s birth. In addition, the employer must provide a place, other than a bath- room, that is shielded from view and free from intrusion from co-workers and the public. The break time is not compensable unless the employee uses a paid break period to express milk. Employers with fewer than 50 employees are also subject to these requirements unless the requirements would impose an undue hardship.

ALERT! The Patient Protection and Affordable Care Act (PPACA), discussed in Chapter 10, added

a provision to the FLSA prohibiting employers from discriminating against an employee

because he or she received a premium tax credit under the PPACA.

Scheduling Protection Laws A number of local jurisdictions have adopted, or are considering, ordinances that prohibit on-call scheduling—calling an employee to work a shift on only a few hours’ advance notice. Particularly in the retail industries, this practice can be extremely disruptive to, say, a single parent with child-care responsibilities who must

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Wage and Hour Requirements 109

on short notice make costly coverage arrangements or risk losing his or her job. As of this writing, San Francisco and Seattle have laws requiring more reasonable notice, and New York City and Washington, D.C., are considering similar laws. State attorneys general have also co-signed letters to major retailers asking them to halt the practice.

CHILD LABOR Both federal and state laws regulate child labor. On the federal side, the FLSA prohibits oppressive child labor, which is defined as employment of any child who is under the age of 16, regardless of the occupation, and employment of a child who is between the ages of 16 and 18 in mining, manufacturing, or any other indus- try the secretary of labor finds particularly hazardous.

Excluded from the definition are the following: • employment in a family business, so long as the employment is not in mining, manufacturing, or other particularly hazardous industries

• agricultural employment (with parental consent if the child is under 14 and only when school is not in session if the child is under 16)

• employment as an actor or performer in movies, the theater, and radio and television productions

• delivering newspapers to consumers • making wreaths at home and harvesting forest products to be used in wreath-making

QUICK TIP Specific work, such as serving alcoholic beverages or driving commercial vehicles,

may be subject to additional age restrictions under state law. For a child working in

the entertainment industry, some states require that a portion of his or her pay be

set aside for the child’s later benefit.

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State regulation of child labor differs from jurisdiction to jurisdic- tion. The definition of minor may vary, for example. Each state also has its own list of exclusions reflective of prominent local industries or regional customs.

Minors need a work permit, typically issued through the school system, before being able to work. Employers must keep permits on file and available for inspection. Even when a minor is properly permitted to work, additional restrictions may apply, such as when and how many hours a minor may work. These time restrictions vary depending on whether school is in session.

The illegal employment of minors exposes the employer to sub- stantial criminal and civil penalties.

PRIORITY OF WAGES AND BENEFITS IN BANKRUPTCY At any given time, an employer usually owes wages to employees. Depending on the frequency of pay periods and the lag between the end of a pay period and the date checks are issued, nonex- empt employees could be owed as little as a few days’ pay or as much as a few weeks’ pay. Exempt employees and employees who are due commissions may be owed substantially more. Similarly, at any particular time employers with pension or other benefit plans usually have an unfunded obligation to those plans.

When an employer’s assets are being administered in bankruptcy court, the U.S. Bankruptcy Code specifies an order of priority for payment of claims against the employer. High on the priority list are amounts due to employees and to employee benefit plans. Under the Bankruptcy Code, the items that come before claims of the employer’s other unsecured creditors include wages, salaries, and commissions (including vacation, severance, and sick leave pay) earned during the 180-day period before the filing of the bankruptcy petition, capped at $12,850 per employee as of this writing, and contributions due to employee benefit plans arising from services rendered during the 180- day period before the filing of the bankruptcy petition, also capped at $12,850 per employee as of this writing.

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In a 2017 case called Czyzewski v. Jevic Holding Corp., the Supreme Court confirmed that bankruptcy courts cannot dis- regard the priority of wages and benefits without the consent of the employees involved, regardless of how the bankruptcy court disposes of the case.

ANTI-TRUST CONSIDERATIONS Federal anti-trust laws generally prohibit contracts, combina- tions, and conspiracies in restraint of trade. It would be illegal, for example, for a group of service station operators in a par- ticular region to fix prices by reaching agreement among them- selves not to sell gasoline below $3.40 a gallon.

Likewise, employers may not engage in wage-fixing agree- ments. Suppose a particular industry faces a labor shortage so that employers in that industry are unable to attract all the employees they need. Rather than engage in a bidding war (that the employers perceive as just running up everyone’s labor costs without solving the problem), they decide to impose a cap on wages by mutual agreement. This is illegal.

It is perfectly legal for employees, whether unionized or not, to conspire among themselves in an effort to better their wages, benefits, and working conditions. However, they lose this ability when they conspire with employers outside the scope of legitimate employee objectives. The Supreme Court ruled, for example, that an agreement between a coal min- er’s union and one set of mine owners—that the union would insist on specified wage standards in its negotiations with other mine owners—violated the anti-trust laws. (Chapter 24 covers unions and labor relations.)

Predatory Hiring Wholly apart from contracts, combinations, and conspiracies, an employer might well have liability under the anti-trust laws if, without regard to its own business needs, it targets a com-

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petitor’s employees (called predatory hiring) to harm the com- petitor’s business. The risks here can be reduced if the new employer can demonstrate a genuine business need for the employees and if it can show that a particular competitor was not targeted, but that qualified employees were sought from a range of sources.

No-Poaching Agreements Some years ago, a number of high-tech Silicon Valley companies entered into no-poaching agreements with each other, agreeing not to cold-call the other’s employees. The U.S. Department of Justice (DOJ) filed civil enforcement actions against the companies, result- ing in consent judgments.

More recently, in October 2016 the DOJ and the Federal Trade Commission—the two federal agencies charged with enforcing fed- eral anti-trust laws—issued their Antitrust Guidance for Human Resource Professionals in which they make clear that such no-poach- ing agreements, as well as other agreements among competitors to fix wages or other terms of compensation, are illegal and will result in criminal prosecutions and civil suits. The guidance cautions that companies should take care not to communicate their labor policies to other companies competing for the same types of employees, nor ask other companies to go along with those labor policies.

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