The Fair Labor Standards Act (FLSA) was enacted in 1938 to ensure “maintenance of a minimum standard of living for all workers.” It establishes a minimum wage, requirements for overtime pay, child labor laws, and record keeping requirements. The FLSA has been amended no fewer than 14 times, but the essence of the law remained unchanged for 69 years.
On August 23, 2004, the federal government enacted revisions to the FLSA. The revisions specifically targeted overtime regulations. All enterprises engaged in interstate commerce or the production of goods for interstate commerce, all hospitals, schools, and public agencies, regardless of size, must comply with these revisions Those that are exempt include: small businesses that are not engaged in interstate commerce and have an annual gross volume under $500,000.
The FLSA does not preempt state or local wage and hour provisions imposing more stringent requirements than the FLSA’s. When the FLSA and a state or local law applies to the same situation, the company must follow the standard that favors the employee more. In the collective bargaining environment, labor contracts, which impose more stringent requirements, must be followed.
The Department of Labor (DOL), Wage and Hour Division is responsible for governing the FLSA. Most recent estimates show that as many as 70% of employers are not in compliance with the most recent FLSA revisions. They claim that collective claims have increased to 77% during the first half of the decade and that these numbers surpass Equal Employment Opportunity (EEO) litigation under Title VII of the Civil Rights Act of 1964. Verdicts have yielded in the hundreds of millions of dollars for employees who were misclassified as exempt and due overtime pay. (Sources: Trial Magazine and HR Magazine)
So, what can your company do to avoid potential litigation under the FLSA? The answer is not as easy as it may seem and requires looking at each individual employee and job classification in your organization as well as current pay/payroll practices. Conducting an FLSA audit of your organization is in high order to remain compliant and avoid litigation. It also ensures that your company is treating employees fairly and keeps you abreast of legal complexities and changes. However, an audit is only beneficial if management is committed to fixing the errors that the audit uncovers. If management doesn’t want to commit to taking corrective action, if problems do surface during the audit, your company may be worse off than if they had never conducted the audit at all! Remember, all it takes is one employee complaint, justified or not, to launch an investigation of your company by the DOL.
To conduct a sound audit, first check your company’s job descriptions. Make sure that positions that are classified as exempt, really fall within the administrative, executive, learned or creative professional, computer, or outside sales exemptions. Keep in mind that just because a title makes reference to one of the above classifications, i.e. Administrative Assistant, Executive Vice President, Inside Sales Professional, etc., that it doesn’t mean that the position is automatically exempt. Secondly, check what employees do, because jobs change over time while the paperwork never seems to catch up. Modify the job descriptions until they line up with the actual work. Thirdly, review your company’s overtime calculations. If the company owes employees money, pay up immediately. It’s likely to be a bargain compared to the cost of a settlement. As mentioned above, see if state and local wage and hour laws differ from the federal FLSA guidelines and make sure that your company follows the tougher standard. Lastly, be sure to have the latest versions of FLSA-mandated posters hanging in plain sight. They are likely to be the first thing an inspector will look for during a DOL audit.
While this all sounds easy, we must look deeper into the organization when conducting an FLSA audit. First, we must determine if every employee meets the “salary basis test.” You must ask yourself the following questions: Does the employee earn at least $455 per week paid on a salary basis? Is the employee a computer professional who earns $27.63 or more per hour? (An administrative, professional, or computer employee may be paid on a fee basis and still pass the salary test. There is no threshold for outside sales employees.) If they pass this first test then we must move forward to perform the “duties test.” Is the employee’s primary duty, executive, administrative, learned or creative professional, computer or outside sales? Each of these classifications has individual requirements within that must be met, in order for an employee to be considered exempt from overtime regulations. There is one exception to the above, highly compensated employees who earn at least $100,000 annually are exempt if they customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee; earn at least $455 per week paid on a salary basis or fee basis; and have the primary duty of performing office or non-manual work.
What positions are the most vulnerable in your company? Currently the DOL is focusing on the following: jobs in the lowest exempt pay band in the corporate structure, administrative exemptions and whether those positions truly meet the requirements of exercising independent judgment with respect to matters of significance, executive employees who are not supervising sufficient employees or a discrete group, and learned and creative professional employees whose work is predominantly intellectual in character and requires consistent exercise of discretion and judgment about basic business decisions.
How is your company able to prevent claims? Confront the issue early, conduct regular audits of your job descriptions, pay practices and policies, educate yourself and your staff on the FLSA, offer a toll-free number for employee questions and complaints and have a formalized process in place for investigating those complaints, and review company policies on overtime work and implement payroll integrity policies for actions such as falsifying time records and working off the clock.
Remember that if you can prove to the DOL that the company has made a sincere effort to comply with the law, your company may avoid significant additional liability on top of whatever back wages it may owe. (Back wages may go back up to three years and liquated damages may be amounts equal to the back pay owed, not to mention attorney’s fees.) Keep in mind that juries tend to feel sympathy around the subject of paychecks so often side in favor of employees. So, conduct your FLSA audit now to hopefully prevent any future litigation.
Written By: Kristen Shingleton, M.B.A., CCP
President, New Focus HR LLC