Wage Hour Laws Provide Traps for the Unwary

The importance of correctly applying the FLSA's overtime exemption rules cannot be overstated. In the past three years, there has been an abundance of collective action lawsuits filed against large and small employers asserting claims that the employer has violated the FLSA by improperly classifying a group of individuals as exempt from overtime. These have resulted in record settlement and verdict amounts against employers. The FLSA authorizes the Secretary of Labor to file lawsuits on behalf of individual employees and also permits individuals to file claims on their own as well as collective actions filed on behalf of similarly situated groups of employees. Depending on the circumstances, a court may permit an individual or collective action to seek and recover overtime for a period of three (3) years prior to the filing of the lawsuit. If the individual or collective action plaintiff is successful in litigating the overtime claims, the employer will be ordered to pay any unpaid overtime and, if the violation is deemed willful, liquidated damages (an amount up to equal the amount of the unpaid overtime. In addition, the employer will have to pay the legal fees incurred by the individual or collective action plaintiffs. Payments in the millions of dollars are not uncommon to settle many of the collective actions suits that recently have been filed.

While a discussion of each of the overtime exemptions contained in the FLSA is beyond the scope of this article, we suggest that you obtain the advice of an experienced labor lawyer and/or carefully review the statute and Department of Labor regulations (as well as overtime laws in the state in which employees are employed) if you have questions regarding a particular employee's exempt status.

The White-Collar Exemptions

The most frequently applied overtime exemption applies to individuals employed in tradition 'white-collar' jobs. Under the statute and regulations, individuals employed in executive, administrative or professional positions are exempt from the FLSA's overtime requirements. In 2004, the Department of Labor issued revised regulations governing this category of exemptions. Under the 2004 regulations, an employee will be exempt from overtime if the employee is paid a minimum weekly gross salary of $455 ($23,660 annually) and can meet one of the 'standard duty' tests enumerated in the regulations.

Prior to the 2004 revisions, an individual who spent more than 20% of his/her time performing non-exempt work could not qualify for the exemption even if the employee's primary duty would have qualified him/her for the exemption. Under the revised regulations, an employee will not lose exempt status even if he/she spends a significant amount of time performing non-exempt; the critical inquiry is whether the employee's primary duty fits within one of the accepted categories for exemption.

Thus, in order to qualify for the executive employee exemption:

• An employee's primary duty must be the management of the enterprise or a customarily recognized department or subdivision;
• The employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent of two full-time employees; and
• The employee must have the authority to hire or fire employees or, at a minimum, have the ability to make recommendations relating to hiring, firing, advancement, promotion and/or compensation which is given particular weight by the employer.
• In order to qualify for the administrative employee exemption:
• The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employee's customers; and
• The employee's primary duty must include the regular exercise of discretion and independent judgment with regard to matters of significance to the employer.

The scope of the administrative exemption regularly has been in dispute, especially in the financial services industry. In an Opinion Letter (an official ruling or interpretation of the application of the FLSA to a particular factual situation), dated Nov. 27, 2006, the Department of Labor found that certain financial advisors and stockbrokers who received a guaranteed draw and commissions were exempt from the overtime provisions of the statute. The job duties of the registered representatives were described as including collective clients' financial information, e.g., assets, income, debts and other liabilities, cash flow and tax status, analyzing the information, comparing and evaluating possible investment options, identifying investment strategies and potential investments based on their knowledge of market conditions as well as their understanding of a client's particular needs.

Under these circumstances, the Wage Hour Administrator of the Department of Labor found that, as their job duties were described, the registered representatives appeared to exercise sufficient discretion and independent judgment to be covered by the administrative exemption and that their primary duty was consistent with the definition of an administrative employee. The Department of Labor did note that 'if a registered representative's primary duty is selling investments to clients, the registered representative will not qualify for an administrative exemption.'

In order to qualify for the professional employee exemption:

• The employee's primary duty must be the performance of work requiring advanced knowledge in a field of science or learning; and
• The employee's advanced knowledge is customarily acquired by a prolonged course of specialized intellectual instruction or through a combination of work experience and advanced educational instruction.

The Computer Employee Exemption

Another category of employees who are exempt from the FLSA's overtime provisions are high-level computer programmers and analysts. This overtime exemption has not been given broad application by courts or the Department of Labor but is available when the employee is performing significant duties. In order to qualify for the computer employee exemption the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. In addition, the employee's primary duty must consist of:

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
• 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;
• The design, documentation, testing, creation or modification of computer programs related machine operating systems; or
• A combination of the duties mentioned above, the performance of which requires the same level of skills.

In October 2006, the Department of Labor issued an Opinion Letter addressing whether help desk personnel/IT support specialists were exempt from the overtime provisions of the FLSA. The Opinion letter addressed both the computer employee exemption as well as the 'white-collar' administrative exemption. The Department of Labor found that the system support specialists duties of analyzing, trouble shooting and resolving problems with the employer's computer applications, networks and hardware did not meet the primary duty test of programming, systems analysis or similarly skilled functions and, thus, the employees were not subject to the computer employee exemption contained in the FLSA and were entitled to overtime payments. Coincidentally, in the same Opinion Letter, the Department of Labor found that the performance of the support specialist duties did not satisfy the administrative exemption requirements of 'discretion and independent judgment'.

Some Simple Steps to Avoid FLSA Pitfalls

Unfortunately, intent to violate the FLSA is not a requirement to establish liability. Therefore, even an innocent failure to pay overtime when due can lead to significant economic exposure for an employer. As a result, it is incumbent upon employers to be aware of their obligations under the statute (as well as applicable state overtime laws) and to be in compliance with those obligations. As a practical suggestion for reducing the likelihood that a successful claim for unpaid overtime can be asserted, a company should conduct a self-audit of it's pay practices. This should include a determination of whether:

• The Company is maintaining timekeeping and payroll records for all employees (both exempt and non-exempt);
• The Company maintains any policy relating to treatment of time off for exempt employees so as not to run afoul of the FLSA's salary basis requirements (making improper deductions from the pay of exempt employees can lead to a determination that they are, in fact, non-exempt and entitled to overtime; and
• The Company is misclassifying employees as exempt even though they do not perform the primary duties required for an exemption under the FLSA.

Be vigilant about managing the workforce. Because the FLSA requires that employees be paid for all hours they are 'suffered or permitted' to work, you must be sure that employees are only working the hours that you want them to work. Managers and supervisors should be instructed to monitor the work hours of other employees and consistently ensure that unauthorized hours are not being worked. You must pay employees for hours they work even if it is not authorized; instead, you must manage your workforce to prevent employees from working hours that you do not want them to be working.

Mark Blondman and Brooke Iley are partners in the Employment, Benefits and Labor practice at Blank Rome LLP in Washington, DC. Blondman may be reached at [email protected] or 202-772-5800, Iley can be contacted at 202-772-5816 or [email protected].

It has often been said that the most frequently violated federal employment-related statute is the Fair Labor Standards Act ('FLSA'), 29 U.S.C. ” 201-19 (Supp. 2006). This law, enacted in 1938, regulates, among other things, the payment of overtime to employees who work for employers. Our experience indicates that most, if not all, employers do not intend to violate the provisions contained in the FLSA but, instead, do so out of ignorance of its requirements. This article highlights some of the key provisions of the FLSA, makes reference to recent pronouncements by the United States Department of Labor (the federal agency principally responsible for interpretation of the statute) and presents advice on how to avoid the pitfalls inherent in the FLSA.

Collective Action Lawsuits

As a general rule, the FLSA mandates that all employees must receive payment of time and one-half their regular hourly rate for all hours worked over forty (40) in a work week. However, the statute recognizes that individuals working in certain job categories who perform defined duties are exempt from the overtime provisions ' in other words, are not entitled to extra pay for hours worked in excess of forty (40). Whether an employee is exempt from the overtime provisions of the FLSA depends entirely on whether the employee's actual job meets the statutory and regulatory requirements for the exemption (as well as, in many cases, whether the individual is paid on a salaried ' as opposed to hourly ' basis).

The importance of correctly applying the FLSA's overtime exemption rules cannot be overstated. In the past three years, there has been an abundance of collective action lawsuits filed against large and small employers asserting claims that the employer has violated the FLSA by improperly classifying a group of individuals as exempt from overtime. These have resulted in record settlement and verdict amounts against employers. The FLSA authorizes the Secretary of Labor to file lawsuits on behalf of individual employees and also permits individuals to file claims on their own as well as collective actions filed on behalf of similarly situated groups of employees. Depending on the circumstances, a court may permit an individual or collective action to seek and recover overtime for a period of three (3) years prior to the filing of the lawsuit. If the individual or collective action plaintiff is successful in litigating the overtime claims, the employer will be ordered to pay any unpaid overtime and, if the violation is deemed willful, liquidated damages (an amount up to equal the amount of the unpaid overtime. In addition, the employer will have to pay the legal fees incurred by the individual or collective action plaintiffs. Payments in the millions of dollars are not uncommon to settle many of the collective actions suits that recently have been filed.

While a discussion of each of the overtime exemptions contained in the FLSA is beyond the scope of this article, we suggest that you obtain the advice of an experienced labor lawyer and/or carefully review the statute and Department of Labor regulations (as well as overtime laws in the state in which employees are employed) if you have questions regarding a particular employee's exempt status.

The White-Collar Exemptions

The most frequently applied overtime exemption applies to individuals employed in tradition 'white-collar' jobs. Under the statute and regulations, individuals employed in executive, administrative or professional positions are exempt from the FLSA's overtime requirements. In 2004, the Department of Labor issued revised regulations governing this category of exemptions. Under the 2004 regulations, an employee will be exempt from overtime if the employee is paid a minimum weekly gross salary of $455 ($23,660 annually) and can meet one of the 'standard duty' tests enumerated in the regulations.

Prior to the 2004 revisions, an individual who spent more than 20% of his/her time performing non-exempt work could not qualify for the exemption even if the employee's primary duty would have qualified him/her for the exemption. Under the revised regulations, an employee will not lose exempt status even if he/she spends a significant amount of time performing non-exempt; the critical inquiry is whether the employee's primary duty fits within one of the accepted categories for exemption.

Thus, in order to qualify for the executive employee exemption:

• An employee's primary duty must be the management of the enterprise or a customarily recognized department or subdivision;
• The employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent of two full-time employees; and
• The employee must have the authority to hire or fire employees or, at a minimum, have the ability to make recommendations relating to hiring, firing, advancement, promotion and/or compensation which is given particular weight by the employer.
• In order to qualify for the administrative employee exemption:
• The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employee's customers; and
• The employee's primary duty must include the regular exercise of discretion and independent judgment with regard to matters of significance to the employer.

The scope of the administrative exemption regularly has been in dispute, especially in the financial services industry. In an Opinion Letter (an official ruling or interpretation of the application of the FLSA to a particular factual situation), dated Nov. 27, 2006, the Department of Labor found that certain financial advisors and stockbrokers who received a guaranteed draw and commissions were exempt from the overtime provisions of the statute. The job duties of the registered representatives were described as including collective clients' financial information, e.g., assets, income, debts and other liabilities, cash flow and tax status, analyzing the information, comparing and evaluating possible investment options, identifying investment strategies and potential investments based on their knowledge of market conditions as well as their understanding of a client's particular needs.

Under these circumstances, the Wage Hour Administrator of the Department of Labor found that, as their job duties were described, the registered representatives appeared to exercise sufficient discretion and independent judgment to be covered by the administrative exemption and that their primary duty was consistent with the definition of an administrative employee. The Department of Labor did note that 'if a registered representative's primary duty is selling investments to clients, the registered representative will not qualify for an administrative exemption.'

In order to qualify for the professional employee exemption:

• The employee's primary duty must be the performance of work requiring advanced knowledge in a field of science or learning; and
• The employee's advanced knowledge is customarily acquired by a prolonged course of specialized intellectual instruction or through a combination of work experience and advanced educational instruction.

The Computer Employee Exemption

Another category of employees who are exempt from the FLSA's overtime provisions are high-level computer programmers and analysts. This overtime exemption has not been given broad application by courts or the Department of Labor but is available when the employee is performing significant duties. In order to qualify for the computer employee exemption the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. In addition, the employee's primary duty must consist of:

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
• 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;
• The design, documentation, testing, creation or modification of computer programs related machine operating systems; or
• A combination of the duties mentioned above, the performance of which requires the same level of skills.

In October 2006, the Department of Labor issued an Opinion Letter addressing whether help desk personnel/IT support specialists were exempt from the overtime provisions of the FLSA. The Opinion letter addressed both the computer employee exemption as well as the 'white-collar' administrative exemption. The Department of Labor found that the system support specialists duties of analyzing, trouble shooting and resolving problems with the employer's computer applications, networks and hardware did not meet the primary duty test of programming, systems analysis or similarly skilled functions and, thus, the employees were not subject to the computer employee exemption contained in the FLSA and were entitled to overtime payments. Coincidentally, in the same Opinion Letter, the Department of Labor found that the performance of the support specialist duties did not satisfy the administrative exemption requirements of 'discretion and independent judgment'.

Some Simple Steps to Avoid FLSA Pitfalls

Unfortunately, intent to violate the FLSA is not a requirement to establish liability. Therefore, even an innocent failure to pay overtime when due can lead to significant economic exposure for an employer. As a result, it is incumbent upon employers to be aware of their obligations under the statute (as well as applicable state overtime laws) and to be in compliance with those obligations. As a practical suggestion for reducing the likelihood that a successful claim for unpaid overtime can be asserted, a company should conduct a self-audit of it's pay practices. This should include a determination of whether:

• The Company is maintaining timekeeping and payroll records for all employees (both exempt and non-exempt);
• The Company maintains any policy relating to treatment of time off for exempt employees so as not to run afoul of the FLSA's salary basis requirements (making improper deductions from the pay of exempt employees can lead to a determination that they are, in fact, non-exempt and entitled to overtime; and
• The Company is misclassifying employees as exempt even though they do not perform the primary duties required for an exemption under the FLSA.

Be vigilant about managing the workforce. Because the FLSA requires that employees be paid for all hours they are 'suffered or permitted' to work, you must be sure that employees are only working the hours that you want them to work. Managers and supervisors should be instructed to monitor the work hours of other employees and consistently ensure that unauthorized hours are not being worked. You must pay employees for hours they work even if it is not authorized; instead, you must manage your workforce to prevent employees from working hours that you do not want them to be working.

Mark Blondman and Brooke Iley are partners in the Employment, Benefits and Labor practice at Blank Rome LLP in Washington, DC. Blondman may be reached at [email protected] or 202-772-5800, Iley can be contacted at 202-772-5816 or [email protected].