Getting the new year off to a quick start, the United States Department of Labor issued three Opinion Letters on January 7, 2020. These letters concern the salary basis test and overtime calculations under the Fair Labor Standards Act (FLSA), and government agency eligibility determinations under the Family and Medical Leave Act (FMLA). While the FLSA overtime and FMLA eligibility letters provide straightforward answers to more technical questions, employers would be wise to temper the broad sweep of the FLSA salary basis letter with a caveat or two.
FLSA 2020-2: Prospective Salary Changes and Salary Plus
The FLSA exempts certain executive, administrative, and professional employees from its minimum wage and overtime requirements, so long as certain requirements are met, one of which is that the employees are paid on a salary basis.1 This letter requested guidance on whether an employee who is paid a pre-determined amount for a project, in equal bi-weekly amounts, is paid on a salary basis, and whether changes to the total project amount or additional payments alter that salary basis status.2 This letter appears to expansively broaden the ability of employers to prospectively change the rate of pay for salaried exempt employees while maintaining the employees’ exempt status. This letter is also significant in demonstrating the Department’s embrace of Encino Motorcars, LLC v. Navarro’s3 directive that the minimum wage and overtime exemptions be given a “fair (rather than narrow) interpretation.”4 In Encino, the Supreme Court rejected the principle that FLSA exemptions are to be construed narrowly, which had long guided the interpretation of the exemptions, allowing for a broader application of the exemptions.5
Here, the employee at question is paid a set amount to complete projects at her employer’s customers’ locations, and she can be assigned to work on more than one project at a time. For example, she is assigned to Project 1, a 40-week project for which she will be compensated $80,000, paid in 20 bi-weekly installments of $4,000, regardless of the number of hours worked in any week or the quality of work performed. During the course of Project 1, she is also assigned to Project 2, an 8-week project for which she will be compensated an additional $6,000, paid in 4 bi-weekly installments of $1,500. For those 8 weeks, her bi-weekly compensation will be $5,500 ($4,000 + $1,500). On “unusual occasions,” the employer may renegotiate the total cost of the project with a customer, resulting in a prospective change to the total compensation to be paid to the employee for the project and a corresponding change to her bi-weekly compensation. Presumably, once Project 1 ends and another project is assigned, the employee’s bi-weekly salary will again change to match the total compensation and length of the next assigned project.
The Department determined that the payment for Project 1 satisfies the salary basis requirements, because the bi-weekly payments to the employee “do not vary week to week or month to month based on the number of hours worked,” or the quality of the work performed.6 While this is a literal interpretation of the regulation’s general rule defining “salary basis,”7 the fact that Project 1 was to last 40 weeks appears significant. The Department did not address whether the salary basis requirements would also be met if an employee’s compensation were determined based on projects of much shorter duration, such as a month or two weeks. It also declined to conduct an analysis of whether the project-based compensation scheme would meet the fee-basis requirement, which could have shed light on variations to the example addressed in the letter. As such, employers are cautioned to consult with an attorney if considering when a project-based compensation plan meets the salary basis requirements.
Prospective Changes to the Salary Rate
In keeping with Encino’s “fair reading” mandate, the Department provides an expansive view of when an employer may prospectively change the salary rate for an exempt employee and still comply with the salary basis test. Noting other permissible prospective changes to salary rates, such as changing the length of the workweek8 or reducing pay to account for work shortages9 or business needs, the Department added another: “unusual occasions whereby the customer and company determine that the scope of a project should be changed prospectively, such that the employee’s per-project pay—and, therefore, the amount of the employee’s biweekly payment going forward—may be increased or decreased.” Indeed, the Department has seemingly opened the door for myriad acceptable reasons to change an employee’s salary rate, so long as the changes are not so frequent that the employee’s pay is rarely the same from pay period to pay period or under such circumstances that would suggest the rate of pay is tied to the amount or quality of work performed.
Additional Compensation Needs No Reasonable Relationship
Under the Minimum Guarantee Plus Extra regulation,10 employees may be paid compensation in additional to their regular salary without losing the exemption, so long as the guaranteed weekly salary exceeds the statutory threshold. As such, the Department explains that receiving compensation for Project 2, in addition to the regular salary earned for Project 1, does not alter the determination that the employee is paid on a salary basis.
Subpart (b) of this regulation states that employees may be paid on an hourly, daily, or shift basis, so long as they are guaranteed a minimum salary that meets the statutory threshold and has a “reasonable relationship” to the amount of compensation they actually earn. To wit, a minimum guaranteed salary of $684 per week for an employee who works 40 hours per week at a rate of $75/hr would meet the statutory threshold, but not the reasonable relationship standard. However, the Department reiterates that the reasonable relationship requirement does not come into play when an employee is paid on a salary basis rather than hourly, daily, or per shift. So, an employee who is paid on a salary basis for Project 1 can be paid a weekly lump sum (or hourly, daily, etc.) for additional work performed on Project 2, without losing the exemption.
FLSA 2020-1: Calculating Overtime Pay for Non-Discretionary Lump Sum Bonuses
Non-exempt employees must be paid overtime at a rate of 1.5 times the regular rate for hours worked over 40 in a week, and compensation received from a non-discretionary bonus must be included in the regular rate of pay.11 In this letter, the Department provides straightforward guidance on how to calculate the regular rate when a lump sum non-discretionary bonus is paid for work conducted over several weeks.
In this scenario, the employer pays a lump sum of $3,000 for the completion of a 10-week training course and the promise to complete an additional 8 weeks of training. Employees receive the bonus if they complete the 10-week course, regardless of whether they do any additional training. During the 10-week course, employees work overtime in two weeks only. The employer wants to know how to determine the regular rate of pay.
The Department first explained that the bonus must be allocated among the 10 weeks of required training only. Because payment of the bonus is dependent upon completion of those 10 weeks of training, not on competing any of the additional 8 weeks, it was clear that the bonus was meant to induce the employees to complete the 10 required weeks of training.
The Department then explained that because there was no indicator that the bonus was earned in any particular week, the bonus may be allocated equally to each of the 10 weeks.12 Notably, the Department indicated that is has revised Field Operations Handbook 32c03(c) to reflect the Department’s position that equal weekly allocations is the proper method when bonus earnings cannot be identified with particular workweeks. Equal allocation appears to be the preferred method, unless additional factors would make it inappropriate to allocate a lump sum bonus equally to all work weeks, in which case the bonus should be allocated equally to each hour worked during the bonus period.13
The FLSA regulations allow allocation of bonus earnings equally over all hours worked during a bonus period. The calculation of additional overtime due on bonuses under this method divides the amount of the bonus by all hours worked during the bonus period multiplied by 0.5 and then multiplied by the number of overtime hours worked during the bonus period. This is the calculation most commonly used when the DOL calculates back wages for an employer’s failure to include a non-discretionary bonus in the regular rate.
FMLA 2020-1-A: Determining FMLA Eligibility
Protected FMLA leave is available to eligible employees, including public employees, if, among other factors, they work for a covered employer at a location where the employer has 50 or more employees within 75 miles. 29 U.S.C. § 2611(2)(B)(ii). In this letter, the Department was asked whether a public health district in Ohio is considered the same public agency as the County in which it is located for purposes of determining FMLA eligibility. If the two entities are the same public agency, then their employees may be combined when determining whether they employ 50 employees within 75 miles, a factor in determining FMLA eligibility.
The regulations explain, “[w]hether two agencies of the same State or local government constitute the same public agency can only be determined on a case-by-case basis.”14 Relying on FLSA Opinion Letters,15 the Department has set forth a set of useful factors to use in making that case-by-case determination. The sole factor prior to 2008—how the U.S. Census Bureau’s Census of Government’s classified the agencies—is now but a single factor in the analysis. Additional “factors to consider include: (1) whether the two agencies have separate payroll systems; (2) whether they have different retirement systems; (3) whether they have separate budgets and funding authorities; (4) whether each has the authority to sue and be sued in its own name; (5) whether they have separate hiring and other employment practices; (6) whether one employer controls the appointment of officers of the other agency; and (7) how state law treats the relationship between the two agencies.”16 The use of the word “include” suggests that these factors are not the only factors that may be considered in this analysis, but are demonstrative examples.
What this Means for Public Agency Employers
As the regulations explain, the determination of whether two public agencies constitute the same public agency for FMLA purposes can only be determined on a case-by-case basis.17 As such, public employers should closely examine their relationships with other agencies of the same state or local governments. They should review the above factors, as well as any other indicators that would tend to suggest that the two agencies are so highly integrated in their operations or their relationships to employees to suggest they are actually the same agency for purposes of the FMLA.