Important Issues and Recent Developments in Wage and Hour Law

Overtime

One frequently litigated FLSA issue, both individually and on a class-wide basis, involves employees who claim their employer misclassified them under an exemption to the FLSA's overtime provisions. These exemption claims are among the most dangerous wage-and-hour issues because they generally involve multiple employees in a single job class or category. Thus, a single erroneous misclassification decision might result in exposure to many employees at the same time. It is, therefore, critical for employers to carefully consider a decision to treat an employee as exempt and ineligible for overtime. Both plaintiffs' attorneys and DOL investigators focus first on whether an employer is using salary-based payments properly, and they show little mercy for employers who mistakenly believe “salary” equals “exempt.”

Exemptions

Although the test is currently under attack, under existing law employees with salaries of $23,660 or more ($455 guaranteed per week) are exempt from receiving overtime pay, but only if their job duties fall under certain overtime exemptions. The exemptions most commonly applicable are the “executive,” “administrative” or “professional” exemptions. They are discussed in more detail below, but the exemptions generally require an employee to exercise managerial or supervisory responsibilities, independent judgment and discretion, or advanced knowledge and training. But even if these job duties and responsibilities exist, any employee who makes less than $23,660 per year is automatically eligible for overtime under the FLSA, no matter what duties the employee performs.

The “executive” exemption is frequently used for positions such as general and assistant managers in locations situated in a geographic location away from the administrative or home office. An employee may be treated as exempt from the overtime provisions under the executive exemption if: 1) the employee is compensated on a salary basis at a rate not less than $455 per week; 2) the employee's primary duty is managing the business, or managing a customarily recognized department or subdivision of the business; 3) the employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and 4) the employee has the authority to hire or fire other employees, or the employee's recommendations as to the hiring, firing, and other changes in status are at least legitimately considered.

The “administrative” exemption often applies to home office employees who have broad duties related to franchise operations, financial obligations and human resources management. These employees must satisfy the following criteria: 1) the employee must be compensated on a salary at a rate not less than $455 per week; 2) 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 employer's customers; and 3) the employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Although not nearly as common in franchising operations, to qualify for the “professional” exemption, the employee must meet each element in the following test: 1) the employee must be compensated on a salary at a rate not less than $455 per week; 2) the employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; 3) the advanced knowledge must be in a field of science or learning; and 4) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

The tests for these exemptions are broad and vague and often depend heavily on the facts and circumstances in each unique situation. But to add even more unpredictability to an environment that was already challenging enough, on March 13, 2014, President Obama directed the Department of Labor to revise its regulations governing whether employees are eligible for overtime pay under these exemptions. Although the Obama administration has not identified the specific changes to the overtime exemptions it is seeking, it is widely assumed the proposed changes will, at a minimum, increase the salary requirement from the current $23,660 to a level between $35,000 and $50,000 per year.

Though any new overtime regulations will likely not go into effect in 2014, once the revised regulations are implemented, employees receiving a salary that falls under the minimum threshold will become entitled to receive overtime pay, even if those employees meet all the other criteria for a particular exemption described above. For an employee making $40,000 per year and working 60 hours per week, this would mean a nearly $20,000 increase in pay with no parallel increase in production. President Obama has also requested funding for hundreds of additional DOL investigators and has directed the Department to seek information from employers to bolster efforts to revise the regulations.

For this reason, employers are likely to see more DOL wage and hour compliance audits in the coming months and should strongly consider auditing the pay and duties of their salaried employees with an attorney to ensure employees are properly classified.

The Minimum Wage

Overtime is not the only area where changes are anticipated in coming months. Fast food workers in major American cities organized widespread grassroots protests last summer that demanded an increase in the minimum wage to as high as $15 an hour. Largely in response to that momentum, President Obama signed an Executive Order on Feb. 12, 2014 that raised the minimum wage from $7.25 to $10.10 per hour for workers employed on new federal contracts. See, “Executive Order ' Minimum Wage for Contractors.” Although this change currently affects only a small percentage of the more than two million federal contractors, the administration has made clear that it intends for the increase to generate momentum for sweeping changes to the minimum wage that will be applicable to all workers. History suggests wage rate changes often begin in exactly that way.

An important and heavily litigated issue that is common in industries in which workers are employed at or near the minimum wage involves employees working off-the-clock or otherwise not being properly paid for all hours worked:

Under the FLSA, all time that an employee is “suffered or permitted” to work is considered “hours worked” that must be compensated either at the minimum wage or higher, and at one and a half times the employee's regular pay rate for any hours worked over 40 in a work week. FLSA violations sometimes occur:?When uninformed or unethical managers require employees to work off-the-clock to keep the employee's hours worked below 40 to avoid paying overtime and keep labor costs down;

When employees voluntarily, but unlawfully, choose to work outside of their scheduled shift to complete a task or help out other employees; or

When employees eat at their desks or work stations and continue performing work duties during unpaid lunch breaks, even though the FLSA requires an employee to be completely relieved from duty during an unpaid break.

For this reason, employers should maintain and enforce clear and well-published policies that instruct employees to accurately record all hours worked, ensure employees have a way to verify and acknowledge that they received payment for all hours worked each pay period, and provide multiple avenues for employees to report to upper management any discrepancies in their pay or hours worked so that any errors can be promptly investigated and corrected.

Collective Action

Finally, perhaps the most significant development is that collective actions under the FLSA remain as prevalent as ever. These actions are generally filed by a single employee or small groups of aggrieved workers claiming that their employer improperly classified them as exempt and failed to pay them overtime or seeking back pay for uncompensated off-the-clock work. These workers frequently seek to represent poorly defined classes of thousands of employees, sometimes as broad as “all employees paid on an hourly basis,” and often seek seven figure damage awards.

Although in the typical case each individual's claim for unpaid overtime and/or minimum wages is generally small, when large groups of employees join together in nationwide class actions the resulting damages and attorney fees can be enormous and have led employers to agree to huge settlements of overtime claims in recent years. Defeating collective action certification typically requires a showing that individuals in the proposed class are not similarly situated to each other in terms of job duties and/or working conditions and that the court will be required to make an individualized inquiry into whether each employee is entitled to recover under the FLSA.

Conclusion

The FLSA is among the oldest and most entrenched laws in the employment context, but it remains the most difficult to comprehend and manage. Even after seven decades, many employers struggle to comply with it, and find themselves in expensive and time-consuming litigation. As with most litigation, even the winners feel like they've lost. Thus, the secret is to stay informed of recent changes in the political and legal landscape and frequently-litigated wage and hour issues.

Franchisors and franchisees who combine knowledge and diligence are best equipped to remain compliant with the FLSA's expansive and fluid regulations and avoid potentially crippling wage and hour claims.

Amy K. Jordan is a partner in the Labor and Employment practice group at Burr & Forman LLP in Birmingham, AL. She regularly defends franchisors and franchisees in wage and hour litigation and provides counseling to help them develop employment policies and procedures to govern their businesses effectively. She may be reached at [email protected] or 205-458-5358.

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Although it was enacted over 75 years ago, the Fair Labor Standards Act (FLSA) still serves the two primary purposes it had when it was enacted: It requires employers to pay employees a minimum wage, and it requires employers to pay employees whose job duties do not place them within any exemption from overtime compensation at a rate of one-and-a-half times their regular rate of pay for hours worked over 40 in a single workweek. Of course, like most federal employment laws, exceptions, clarifications and confusion abound.

Few employers truly understand the FLSA's technical requirements, and even fewer grasp the broad exposure these comprehensive regulations create. Indeed, the Department of Labor (DOL) estimates that only 20%-40% of employers are in complete compliance. FLSA violations can be costly, and wage and hour litigation has rapidly expanded in recent years and continues to build momentum.

This article examines important legal and political developments affecting the FLSA and how they develop into the most commonly litigated employment claims in American federal courts.

Overtime

One frequently litigated FLSA issue, both individually and on a class-wide basis, involves employees who claim their employer misclassified them under an exemption to the FLSA's overtime provisions. These exemption claims are among the most dangerous wage-and-hour issues because they generally involve multiple employees in a single job class or category. Thus, a single erroneous misclassification decision might result in exposure to many employees at the same time. It is, therefore, critical for employers to carefully consider a decision to treat an employee as exempt and ineligible for overtime. Both plaintiffs' attorneys and DOL investigators focus first on whether an employer is using salary-based payments properly, and they show little mercy for employers who mistakenly believe “salary” equals “exempt.”

Exemptions

Although the test is currently under attack, under existing law employees with salaries of $23,660 or more ($455 guaranteed per week) are exempt from receiving overtime pay, but only if their job duties fall under certain overtime exemptions. The exemptions most commonly applicable are the “executive,” “administrative” or “professional” exemptions. They are discussed in more detail below, but the exemptions generally require an employee to exercise managerial or supervisory responsibilities, independent judgment and discretion, or advanced knowledge and training. But even if these job duties and responsibilities exist, any employee who makes less than $23,660 per year is automatically eligible for overtime under the FLSA, no matter what duties the employee performs.

The “executive” exemption is frequently used for positions such as general and assistant managers in locations situated in a geographic location away from the administrative or home office. An employee may be treated as exempt from the overtime provisions under the executive exemption if: 1) the employee is compensated on a salary basis at a rate not less than $455 per week; 2) the employee's primary duty is managing the business, or managing a customarily recognized department or subdivision of the business; 3) the employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and 4) the employee has the authority to hire or fire other employees, or the employee's recommendations as to the hiring, firing, and other changes in status are at least legitimately considered.

The “administrative” exemption often applies to home office employees who have broad duties related to franchise operations, financial obligations and human resources management. These employees must satisfy the following criteria: 1) the employee must be compensated on a salary at a rate not less than $455 per week; 2) 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 employer's customers; and 3) the employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Although not nearly as common in franchising operations, to qualify for the “professional” exemption, the employee must meet each element in the following test: 1) the employee must be compensated on a salary at a rate not less than $455 per week; 2) the employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; 3) the advanced knowledge must be in a field of science or learning; and 4) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

The tests for these exemptions are broad and vague and often depend heavily on the facts and circumstances in each unique situation. But to add even more unpredictability to an environment that was already challenging enough, on March 13, 2014, President Obama directed the Department of Labor to revise its regulations governing whether employees are eligible for overtime pay under these exemptions. Although the Obama administration has not identified the specific changes to the overtime exemptions it is seeking, it is widely assumed the proposed changes will, at a minimum, increase the salary requirement from the current $23,660 to a level between $35,000 and $50,000 per year.

Though any new overtime regulations will likely not go into effect in 2014, once the revised regulations are implemented, employees receiving a salary that falls under the minimum threshold will become entitled to receive overtime pay, even if those employees meet all the other criteria for a particular exemption described above. For an employee making $40,000 per year and working 60 hours per week, this would mean a nearly $20,000 increase in pay with no parallel increase in production. President Obama has also requested funding for hundreds of additional DOL investigators and has directed the Department to seek information from employers to bolster efforts to revise the regulations.

For this reason, employers are likely to see more DOL wage and hour compliance audits in the coming months and should strongly consider auditing the pay and duties of their salaried employees with an attorney to ensure employees are properly classified.

The Minimum Wage

Overtime is not the only area where changes are anticipated in coming months. Fast food workers in major American cities organized widespread grassroots protests last summer that demanded an increase in the minimum wage to as high as $15 an hour. Largely in response to that momentum, President Obama signed an Executive Order on Feb. 12, 2014 that raised the minimum wage from $7.25 to $10.10 per hour for workers employed on new federal contracts. See, “Executive Order ' Minimum Wage for Contractors.” Although this change currently affects only a small percentage of the more than two million federal contractors, the administration has made clear that it intends for the increase to generate momentum for sweeping changes to the minimum wage that will be applicable to all workers. History suggests wage rate changes often begin in exactly that way.

An important and heavily litigated issue that is common in industries in which workers are employed at or near the minimum wage involves employees working off-the-clock or otherwise not being properly paid for all hours worked:

Under the FLSA, all time that an employee is “suffered or permitted” to work is considered “hours worked” that must be compensated either at the minimum wage or higher, and at one and a half times the employee's regular pay rate for any hours worked over 40 in a work week. FLSA violations sometimes occur:?When uninformed or unethical managers require employees to work off-the-clock to keep the employee's hours worked below 40 to avoid paying overtime and keep labor costs down;

When employees voluntarily, but unlawfully, choose to work outside of their scheduled shift to complete a task or help out other employees; or

When employees eat at their desks or work stations and continue performing work duties during unpaid lunch breaks, even though the FLSA requires an employee to be completely relieved from duty during an unpaid break.

For this reason, employers should maintain and enforce clear and well-published policies that instruct employees to accurately record all hours worked, ensure employees have a way to verify and acknowledge that they received payment for all hours worked each pay period, and provide multiple avenues for employees to report to upper management any discrepancies in their pay or hours worked so that any errors can be promptly investigated and corrected.

Collective Action

Finally, perhaps the most significant development is that collective actions under the FLSA remain as prevalent as ever. These actions are generally filed by a single employee or small groups of aggrieved workers claiming that their employer improperly classified them as exempt and failed to pay them overtime or seeking back pay for uncompensated off-the-clock work. These workers frequently seek to represent poorly defined classes of thousands of employees, sometimes as broad as “all employees paid on an hourly basis,” and often seek seven figure damage awards.

Although in the typical case each individual's claim for unpaid overtime and/or minimum wages is generally small, when large groups of employees join together in nationwide class actions the resulting damages and attorney fees can be enormous and have led employers to agree to huge settlements of overtime claims in recent years. Defeating collective action certification typically requires a showing that individuals in the proposed class are not similarly situated to each other in terms of job duties and/or working conditions and that the court will be required to make an individualized inquiry into whether each employee is entitled to recover under the FLSA.

Conclusion

The FLSA is among the oldest and most entrenched laws in the employment context, but it remains the most difficult to comprehend and manage. Even after seven decades, many employers struggle to comply with it, and find themselves in expensive and time-consuming litigation. As with most litigation, even the winners feel like they've lost. Thus, the secret is to stay informed of recent changes in the political and legal landscape and frequently-litigated wage and hour issues.

Franchisors and franchisees who combine knowledge and diligence are best equipped to remain compliant with the FLSA's expansive and fluid regulations and avoid potentially crippling wage and hour claims.

Amy K. Jordan is a partner in the Labor and Employment practice group at Burr & Forman LLP in Birmingham, AL. She regularly defends franchisors and franchisees in wage and hour litigation and provides counseling to help them develop employment policies and procedures to govern their businesses effectively. She may be reached at [email protected] or 205-458-5358.

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