One of the oldest federal laws protecting employees’ rights, the Fair Labor Standards Act of 1938 (FLSA), might very well be the least understood and most commonly misapplied law in today’s white collar, high-tech workplace. Unless exempted, an employee must receive overtime pay for hours worked in excess of 40 hours in a workweek at a rate not less than time and one-half the employee’s regular rate of pay. It sounds simple. However, the number of collective actions filed by employees seeking damages for unpaid overtime, liquidated damages and attorney fees has risen dramatically, and they are testimony to the lack of understanding or inattention to the FLSA’s basic requirements. Banking institutions are not immune from these suits. Understanding five basic FLSA principles – exemptions, salary basis, workweek, hours of work and the regular rate – can help protect you from liability.
Exemptions
The FLSA provides an exemption from overtime requirements for any employee employed in a bona fide executive, administrative or professional capacity, as well as skilled computer employees. There is a special exemption test available for highly compensated employees with total annual compensation of at least $100,000. An exempt employee (other than skilled computer employees) must be compensated on a “salary basis.” The exempt status of any particular employee must be determined on the basis of whether the employee’s salary and primary duties meet the requirements of the regulations for the particular exemption. An in-depth analysis of each exemption is beyond the scope of this article. But, suffice it to say, the most commonly used, misapplied and litigated exemption is the “administrative” exemption. Because the FLSA is a “remedial statute,” it is employee friendly and exceptions (exemptions) are construed against the employer.
Salary Basis
An employee will be considered to be paid on a salary basis if the employee regularly receives a predetermined amount of compensation at a rate of not less than $455 per week (or its equivalent for the employee’s payment period), which is not subject to reductions because of variations in the quality or quantity of work performed for any week in which the employee performs any work, without regard to the number of days or hours worked. Limited salary reduction exceptions are available for absences of one or more full days for personal reasons, certain sickness or disability, infractions of major safety rules, unpaid disciplinary suspensions and unpaid leave under the Family and Medical Leave Act. Inadvertent or isolated improper deductions will not result in loss of exempt status. In contrast, an actual practice of improper deductions can result in loss of the exemption for all of the employees in the same job classification working for the same manager(s) responsible for the improper deductions. The regulations contain a “safe harbor” against loss of an exemption if an employer has a clearly communicated complaint policy in place to address and remedy improper pay deductions.
Workweek
An employee’s workweek is a fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods. The workweek may begin on any day and at any hour of the day. The workweek may be changed if the change is intended to be permanent. Because the FLSA has established a single workweek as the standard, an employee’s hours of work can not be averaged over two or more work weeks for purposes of calculating overtime liability, regardless of the payment cycle.
Hours of Work
Non-exempt employees must be paid for all time spent in physical or mental exertion controlled or required by an employer and pursued necessarily and primarily for the benefit of the employer’s business, whether requested or not. Work “suffered or permitted” is work time for which non-exempt employees must be compensated. Rest periods, meal periods, training and travel time can be traps for the unwary. For example, employers are not required to provide rest periods; however, rest periods of short duration (5-20 minutes) must be counted as hours worked. A meal period of 30 minutes or more is not work time if the employee is completely relieved from performing duties. An employee who elects to eat at her desk is not working; however, if the employee answers a business call during the meal period, that is compensable work time. In contrast, an employee who is required to eat at her desk in order to be available to respond to customers’ calls (whether or not a call is fielded) is working and is entitled to compensation for the lunch period. An employee who reports to work early or stays late and performs work must be compensated for the time. Off-the-premises work, such as checking a company-issued blackberry, is work time. If an employer knows or has reason to believe an employee is working, the time is work time. Paid sick leave, vacation leave, PTO and holidays are not hours worked.
Regular Rate
Overtime work must be paid at not less than one and one-half times the employee’s “regular rate.” This is a rate per hour and is determined by dividing the employee’s total remuneration (except for statutory exclusions) in a workweek by the total number of hours actually worked in the workweek. The regular rate may be different from the employee’s hourly rate if the employee receives additional payments (such as a shift differential, weekend differential or a non-discretionary bonus). Truly discretionary bonuses and expense reimbursements are examples of statutory exclusions that are not included in calculating the regular rate.
Subsequent articles in future issues of the Ohio Banking Law Newsletter will provide a more in-depth discussion of these basic principles, such as the primary duty tests for each of the exemptions and legal (and illegal) salary reductions.
