Hold it, hold it, FLSA Regulations on Hold

I’m not having a very good month.  I have been just flat out wrong twice this month.  The first time was on the 8th.  And now last night.

U.S. District Court Judge Amos Mazzant last night issued a nationwide preliminary injunction blocking the Department of Labor’s new overtime regulations from taking effect on December 1. In order to get a preliminary injunction, a plaintiff must prove certain things–including that the plaintiff has a substantial likelihood of success on the merits. Without getting into all of the legal analysis, here is what matters to most of you.

Judge Mazzant found that the language of the statute was clear and that “The plain meanings of the terms in Section 213(a)(1), as well as Supreme Court precedent, affirms the Court’s conclusion that Congress intended the EAP exemption to depend on an employee’s duties rather than an employee’s salary.” As such the judge found, “With the Final Rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.” But the Court did not stop there. Anticipating that some could argue that the language of the statute was not clear, the Court noted: “The Department has admitted that it cannot create an evaluation “based on salary alone.” Id. at 23. But this significant increase to the salary level creates essentially a de facto salary-only test.” The Court then went on to say that because the DOL had, in the Court’s opinion, exceeded its authority, the Court would not even discuss the automatic updating mechanism contained in the Final Rules.

There are a couple of things for you to remember First, this is a preliminary injunction, so at this point it is just a delay in implementation and not a final decision regarding the legality of the Final Rule. And secondly, the DOL is not likely to let this go unchallenged. In fact they issued the following statement shortly after the judge published his order: “We strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans. The department’s overtime rule is the result of a comprehensive, inclusive rulemaking process, and we remain confident in the legality of all aspects of the rule. We are currently considering all of our legal options.” Also, given the procedural posture of this case, it could be argued that Judge Mazzant’s order only applies to public sector employers, but by our reading, it appears to apply to ALL employers – both public and private sector – who were going to be impacted by the new regulations.

So what should you do now? We see the following options:

If you have not done anything to prepare for these changes, it looks like your procrastination has paid off (at least for now). We would still encourage you to create an implementation plan should this injunction be overturned at some point.

If you have an implementation plan that you were preparing to roll out on December 1, you can: 1) go forward with your plan since it would keep you in compliance with both current and the potential future regulations; or 2) delay your plan pending the outcome of these lawsuits. If you choose Option 2, you should consider sending a message to any and all individuals who would have been impacted by the change. We suggest something like this:

A Federal court in Texas has issued an injunction preventing the new salary rules from going into effect. This has created uncertainty as to what changes, if any, will need to be made in the future. In order to ensure that we follow the law and avoid unnecessary disruption, we are delaying the implementation of our salary changes until we have more clarity on this issue. If you have any questions, you should contact the Human Resources Department.

Now What?

I am not a political pundit and I am certainly not going to use this blog to share my political views, but I think it is safe to say that none of us, no matter which way we voted, saw that coming. But come it did, and on January 20th we are going to have a new President and a new House and a new Senate and they are all controlled by a single party.

So now, we are all asking, what comes next? Now what?

In an effort to stay out of trouble and stick to what I know, I’m going to limit my “now what” to “now what” for those of us that work in labor and employment law and human resources. So what can we expect from Mr. Trump’s Presidency in those areas?

I have no idea. And neither does anyone else, and anyone telling you they do is kidding themselves.

So that’s it, nice talking to you, see you next time . . .

I’m kidding, because we can make some pretty good guesses, at least in some of the bigger areas.

The NLRB: Let’s start with something easy. There is nothing new here. Every time we get a change in party in the White House, we get a sea change in the composition of the Board. That is because the President gets to appoint the members of the NLRB and Republicans tend to appoint more employer-friendly Boards, Democrats tend to lean the other way and at least one member of the Board changes over every year. The NLRB has five members and currently three of those seats are filled – two by Democrats and one by a Republican. With Congress on his side, it is pretty clear President-elect Trump will fill the vacant seats with members that will tend to lean toward management. But again, nothing new there as this happens every time we get a new party in the White House. What is new is that we may, for the first time in a long time, and because we have a Congress and President of the same party, get a full Board. All five seats filled.

The DOL: We are going to have a new Secretary of Labor. What does that mean for the DOL’s pet project, the new FLSA regulations? We don’t know. But before you get all excited, don’t expect not to have to comply with these regulations. Don’t forget, they go into effect December 1, and Mr. Trump won’t be the President on December 1. There is no way Congress can act that fast, and even if they do, President Obama will veto any attempt to stop implementation. But who knows what will really happen next year. Do they get rolled back? Are they phased in or out? I don’t know and neither does anyone else, but don’t forget, every state that had a minimum wage issue on the ballot in this election voted to increase the minimum wage. So, maybe President Trump will leave it up to the states to decide. I just don’t know.

The EEOC: The current Chair of the EEOC is Jenny Yang. Chairperson Yang’s term expires in 2017. President Trump will then appoint a successor. The Chairperson of the EEOC sets the EEOC’s enforcement agenda, which in recent years has focused on pay equity, sexual orientation and transgender issues. With a new and more conservative Chair, and with the impending departure of the EEOC’s General Counsel who announced that he would be leaving the EEOC in December, it is likely that the EEOC’s enforcement focus will change dramatically. And the first place we might see that is in the EEOC’s new requirement regarding the EEO-1 form. As you know, last February the EEOC issued proposed regulations that would require employers to report certain pay data on the EEO-1 beginning in March of 2018. I would not bet on that happening now. But again, we are just going to have to wait and see. And what else might change? For example, at least for the last couple of years, the EEOC has been pretty aggressive in bringing complaints against employers for what it calls systemic violations. In short, the current EEOC likes the big splashy case. Will that trend continue, or will the EEOC be less aggressive in its enforcement and focus more on specific individual complaints?

And just to show you exactly how much we don’t really know about what President Trump will do, I’m going to leave you with this . . . what about paid leave? As you know, there has been a bunch of noise out of Congress lately about making at least some of the FMLA paid. I know what you are saying, “not anymore.” But not so fast. During his campaign Mr. Trump actually supported paid leave, at least for working mothers. Here is a quote: “We need working mothers to be fairly compensated for their work, and to have access to affordable, quality child care for their kids.” This initiative is championed by Mr. Trump’s oldest daughter, Ivanka Trump. You can read the full story in the Washington Post.

So there you go. Helpful, right? OK, not so much, but stay tuned. Time will tell.

Everything is bigger in Texas . . . . Even when it is in Ohio.

You have heard the old saying “Everything is bigger in Texas,” right? Seems that’s true for settlement amounts, even when they aren’t really in Texas. Yesterday, the EEOC issued a press release announcing that the owners and operators of a Texas Roadhouse Restaurant in Columbus, Ohio, had agreed to pay $1.4 million to settle a class-action sexual harassment suit filed by the Equal Employment Opportunity Commission (EEOC) against the owners and the management company of this particular restaurant. The settlement also included mandatory reporting and training among other affirmative relief for the victims.

“So what,” you say? I mean really, apart from the fact that $1.4 million is a lot of money, what’s the news, why should you care? Well, let me tell you. First, occasionally I get the impression that we think this sort of thing surely doesn’t happen anymore. After all, we are grown and are more sophisticated (can you read the sarcasm dripping from my fingers?) and surely we are beyond such behavior. If the facts the EEOC alleges are true, you can see that is not the case. And second, if you look at the facts the EEOC alleges, you get a really nice example of why you should take allegations of harassment seriously and make sure you investigate them fully.

Here is what the EEOC alleged in its complaint:

According to EEOC’s lawsuit, the manager of the restaurant . . . harassed women and teen girls working in server, hostess and other front-of-the-house positions. In the suit, EEOC identified 12 victims of his abuse who suffered unwelcome touching, humiliating remarks about their and other females’ bodies and sexuality, and pressure for sexual favors in exchange for employment benefits or as a condition of avoiding adverse employment action. EEOC charged that the harassment began in 2007, continued for over three and a half years until the manager was fired in May 2011, and was coupled with retaliation against employees who opposed the abuse.

Although the companies’ owners and individuals with high-level authority received multiple complaints about the manager’s abusive conduct throughout his employment, they failed to take prompt, effective action to put a stop to the abuse, EEOC said. [The manager] was not fired until May 2011, when he was seen on a surveillance video touching a 17-year-old female employee in his office at the restaurant during work hours, the agency charged.

Get the picture? Not your run-of-the-mill he said, she said hostile environment case—twelve victims, multiple complaints over three and a half years. And the company apparently did nothing about it. In fact, the EEOC thought the conduct was so bad the company had to agree as part of the settlement never to hire the manager back.

So what is the lesson, I mean besides not hiring people like this? The lesson is to take these kinds of allegations seriously, especially if you happen to be in a business that hires kids. When somebody complains, you need to investigate, and by investigate I don’t mean talk to one or two people, I mean investigate.

But before you even get to that point, you need to make sure you are creating a culture where people feel free to approach you when they have an issue—an atmosphere that encourages people to speak up. And that goes way beyond just complaining.. It means creating a work environment that encourages questions and maybe even dissent. It won’t just help when something like this comes up; it might make your workplace a better place to work.

If you want to read the entire EEOC press release, you can find it here. If you need help with training or investigation, give us a call.

Leave it to the DOL to publish the regulations when I’m out – the Final Overtime Regs are here.

Well, leave it to the Department of Labor. They wait until I’m out of the office to issue new Regulations. That’s right, yesterday afternoon, the Department of Labor announced that the long awaited final Regulations under the FLSA will be issued today. I’m not going to read them today because I’m going to a baseball game. So let me give you the highlights that the DOL provided yesterday.

We all knew the salary level test was going up. The big question was how much. Would it be the 40th percentile/$970 per week that was in the proposed regulations or something else? How about a little of both. The Department of Labor stuck to its 40th percentile measure, but to throw a small bone to employers the final Regulations set the 40th percentile based on earnings of full-time salaried workers in the lowest wage census region instead of the 40th percentile of full-time salaried workers in the US. And that means . . . . drum roll please . . . the new salary level test is $913 per workweek. Annualized that’s $47, 476 per year.

The highly compensated test remains the same as in the proposed Regulations. It’s set at 90th percentile of full-time salaried workers in the country and comes out to $134,004 annually.

There is also an automatic updating provision in the Regulations. Beginning on January 1, 2020. the salary level tests will be reset every three years. The final Regulations also allow employers to include non-discretionary bonuses and other incentive payments including commissions to satisfy up to 10% of the salary level as long as the bonuses and incentive payments are paid at least quarterly.

The new Regulations go into effect December 1, 2016. So if you haven’t started thinking about what you’re going to do already, now is the time to do it.

You can find the DOL Fact Sheet here and the Q & A here. Or you can give us a call.

Outside Sales . . . and that’s the end!

The last exemption we are going to discuss is for Outside Sales Employees. And this one is going to be short too. An Outside Salesperson is an employee whose primary duty is:

(a) The term ‘employee employed in the capacity of outside salesman’ in section 13(a)(1) of the Act shall mean any employee:

(1) Whose primary duty is:

(i) making sales within the meaning of section 3(k) of the Act, or

(ii) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

(2) Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.

(b) The term ‘primary duty’ is defined at §541.700. In determining the primary duty of an outside sales employee, work performed incidental to and in conjunction with the employee’s own outside sales or solicitations, including incidental deliveries and collections, shall be regarded as exempt outside sales work. Other work that furthers the employee’s sales efforts also shall be regarded as exempt work including, for example, writing sales reports, updating or revising the employee’s sales or display catalogue, planning itineraries and attending sales conferences.

29 CFR §541.500.

So, what does an outside salesperson do to get the exemption? Well to start with they have to “make sales or obtain orders.”

Sales within the meaning of section 3(k) of the Act include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. Section 3(k) of the Act states that ‘sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.

29 CFR §541.50.

But not just tangible property:

. . . ‘services’ extends the outside sales exemption to employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order. Id.

Wow, outside sales people have to make sales. That’s a shock. Usually no problem there. But where people get caught up and make mistakes is with the word “outside.” Outside means that the sales person is making sales at “the customer’s place of business.”

Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. Thus, any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even though the employer is not in any formal sense the owner or tenant of the property.

29 CFR §541.502.

So if you have a salesperson who works from a home office and does not call on customers to make sales or solicit orders, that employee is not an Outside Salesperson.

Well, that’s it. No more FLSA . . . at least until the new regulations are published.  Can you see me dropping the  mic and walking off?

Computer Professionals – Calculating the Exemption

This one is going to be short and sweet. Well, maybe not sweet, but certainly short. First, some computer employees, like Software Engineers, for example, may qualify for the Professional Exemption. To put some definition around when they do, the Regs give us this general rule:

(b) The section 13(a)(1) exemption applies to any computer employee compensated on a salary or fee basis at a rate of not less than . . . (remember, I‘m taking out the Salary Level Test because it is about to change). In addition, under either section 13(a)(1) or section 13(a)(17) of the Act, the exemptions apply only to computer employees whose primary duty consists of:

(1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

(2) 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;

(3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

(4) A combination of the aforementioned duties, the performance of which requires the same level of skills.

29 CFR §541.400.

The first thing you need to know is this. These are people who write code, design systems, or do systems analysis at very high levels. This is not your help desk guy. Your help desk guy is not exempt, and if you are paying him that way, you need to fix that. The second thing you need to know is this exemption only applies to these very highly skilled and trained computer professionals, not to other skilled people who do other work that is dependent on computers.  29 CFR §541.401.

And that, is that

Professional Employees . . . Hey, that’s Me!

This is the last of the big three, the Professional Exemption. And this one is a bit more like the Executive in that it is a bit more straightforward and easy to understand. So let’s get down to it. To be eligible for a Professional Exemption you must:

(a) The term ‘employee employed in a bona fide professional capacity’ in section 13(a)(1) of the Act shall mean any employee:

(1) Compensated on a salary or fee basis at a rate of not less than . . . and (yes, I took this out again, but not all of it this time. Yes, the salary rate is going to change, but for this one it is not just a salary, but you can also pay on a fee basis. Look it up at 29 CFR §541.605).

(2) Whose primary duty is the performance of work;

(i) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or

(ii) Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

29 CFR §541.300.

So we have a couple of different kinds of “professionals” here. This first is “Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” That is a “Learned Professional.” The second is “Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” That is a “Creative Professional.” What’s the difference? Let’s look.

(a) To qualify for the learned professional exemption, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This primary duty test includes three elements:

(1) The employee must perform work requiring advanced knowledge

(2) The advanced knowledge must be in a field of science or learning; and

(3) The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

29 CFR §541.301.

To keep this short,

(b) The phrase ‘work requiring advanced knowledge’ means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical or physical work. Id.

(c) The phrase ‘field of science or learning’ includes the traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades where in some instances the knowledge is of a fairly advanced type, but is not in a field of science or learning.

Id.

And finally,

The phrase ‘customarily acquired by a prolonged course of specialized intellectual instruction’ restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession.

Id.

So what we are talking about here? Doctors, lawyers, engineers, teachers CPAs are professionals under this definition, but not HR professionals and paralegals are not.

So what about “Creative Professionals”?

(a) To qualify for the creative professional exemption, an employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work. The exemption does not apply to work which can be produced by a person with general manual or intellectual ability and training.

29 CFR §541.302.

Again, we get some nice explanations in the Regulations.   “To qualify for exemption as a creative professional, the work performed must be ‘in a recognized field of artistic or creative endeavor.’” Id. “The requirement of ‘invention, imagination, originality or talent’ distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy.” Id.

There are also special rules for Teachers and the Practice of Law or Medicine, but I’m not going to get into those. See you next time.

Administrative Employees. And, no, this does not mean that the receptionist is exempt.

The second of the White Collar Exemptions we are going to discuss is the administrative exemption. Why, you ask, is this the next one we are going to discuss? Because it is next in the Regulations. Now, we could have saved it for last and we could have done that because it is clearly the most complex, least well-defined of the Exemptions. Let me show you.

(a) The term ‘employee employed in a bona fide administrative capacity’ in section 13(a)(1) of the Act shall mean any employee:

(1) * * * (this is the Salary Level Test, and as I told you last time, I took this out because it is about to change)

(2) Whose primary duty is 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) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

29 CFR §541.200.

You can see already why this one is a bit more complex. The second requirement is pretty simple and straightforward. To start with, the primary duty has to be the performance of “office or non-manual work.”   OK, simple enough, it is not somebody who works on a production line or in a plant making a product. But what does “related to the management or general business operations” mean?

(a) To qualify for the administrative exemption, an employee’s primary duty must be the performance of work directly related to the management or general business operations of the employer or the employer’s customers. The phrase ‘directly related to the management or general business operations’ refers to the type of work performed by the employee. To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

29 CFR §541.201.

Well that’s very helpful . . . not. Fortunately, that is not all the Regulations provide us. They give us some examples.

(b) Work directly related to management or general business operations includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities. Some of these activities may be performed by employees who also would qualify for another exemption.

29 CFR §541.201.

OK, I get it now, it is support functions like HR and advertising and marketing. It is not stuff like, say, facilities management – you know, the janitors. That makes some sense. But that is not all. In addition to being a staff rather than a line function, the employee must “exercise discretion and independent judgment with respect to matters of significance.” What?

(b) The phrase ‘discretion and independent judgment’ must be applied in the light of all the facts involved in the particular employment situation in which the question arises. Factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.

29 CFR §541.202.

Come on, that is not helpful at all. Here is what we do know – the receptionist is not exempt. What we also know is that this standard requires that “the employee has authority to make an independent choice, free from immediate direction or supervision. . . .”  Id. So determining if someone meets this standard is a bit of an art rather than the more straightforward application of requirements under the Executive Exemption. This is also the sort of “catch all” category that employers tend to throw people in when they don’t know what else to do with them, and the one that causes the most trouble. Not often that you get a misclassified supervisor or professional (although it does happen from time to time). Very often you get a misclassified administrative employee. To help, the Regs give us examples. I’m not going to put them all in here, because the Regulation is very long, but go look at 29 CFR §541.203.

And one more thing. Before you go and classify your mortgage loan originators or paralegals as exempt, give us a call. Because they are not, and it will save you in the long run.

 

Executive Employees: That’s the People in Charge

OK, so last time we talked about improper deductions from an exempt employee’s pay. There are some other Regulations in that part, but we are not going to go into them as they don’t come up all that often.

Instead, we are going to move on to what I hope are the last 5 posts on the FLSA before we try to find another topic to write about: the heart of the so-called White Collar Exemptions. We talked about them back here. We have already discussed the Salary Basis Test and the Salary Level Test and now, over the next 5 posts, we will talk about the duties tests and call it a day.

We start with the bosses. The Executive Employees. To be an Executive Employee, you must:

(a) The term ‘employee employed in a bona fide executive capacity’ in section 13(a)(1) of the Act shall mean any employee:

(1) * * * (this is the Salary Level Test and I took this out because it is about to change);

(2) Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;

(3) Who customarily and regularly directs the work of two or more other employees; and

(4) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

29 CFR §541.100.

Pretty simple, right? Basically it means you are a manager or supervisor of two or more employees. But, if you work for a smaller company, for example, it might also mean you are an owner:

The term ‘employee employed in a bona fide executive capacity’ in section 13(a)(1) of the Act also includes any employee who owns at least a bona fide 20-percent equity interest in the enterprise in which the employee is employed, regardless of whether the business is a corporate or other type of organization, and who is actively engaged in its management. The term ‘management’ is defined in §541.102. The requirements of Subpart G (salary requirements) of this part do not apply to the business owners described in this section.

29 CFR §541.101.

Management means basically what you would think it means:

… activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.

29 CFR §541.102.

The Regulations also tell you what a “Department or Subdivision” means at 29 CFR §541.103, that “two or more other employees” means “two full time employees or their equivalent”, 29 CFR §541.104; what “particular weight means when determining if an employee has the ability to effectively recommend, for example, hiring or firing”, 29 CFR §541.105; and finally, what happens when an employee has concurrent duties, 29 CFR §541.106.

The concurrent duties section is particularly important when it comes to managers in the retail setting. The Regulations recognize that in retail, different rules apply:

(b) For example, an assistant manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves and cleaning the establishment, but performance of such nonexempt work does not preclude the exemption if the assistant manager’s primary duty is management. An assistant manager can supervise employees and serve customers at the same time without losing the exemption. An exempt employee can also simultaneously direct the work of other employees and stock shelves.

29 CFR §541.106.

See, pretty simple, right? You bet it is, but don’t worry, it will get more complex as we go.

It is going to cost me what? The Effect of Improper Deductions from Exempt Employee’s Salary.

I know, it’s been a while, but we are back. And last time we talked about the general rule for the “salary basis test” and the limited deductions you can make from an exempt employee’s salary and still keep the exemption. And last time I warned you to be very, very careful before you start making any deductions from an exempt employee’s salary. And why did I tell you to be very, very careful? Because the penalty, if you will, if you do make these improper deductions, is pretty darn bad.

(a) An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis. An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis. The factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to: the number of improper deductions, particularly as compared to the number of employee infractions warranting discipline; the time period during which the employer made improper deductions; the number and geographic location of employees whose salary was improperly reduced; the number and geographic location of managers responsible for taking the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

29 CFR §541.603(a).

You see, you lose the exemption altogether. That means you are liable for overtime. But that is not all. You aren’t just on the hook for the employee from whom you made the improper deductions.

(b) If the facts demonstrate that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. Employees in different job classifications or who work for different managers do not lose their status as exempt employees. Thus, for example, if a manager at a company facility routinely docks the pay of engineers at that facility for partial-day personal absences, then all engineers at that facility whose pay could have been improperly docked by the manager would lose the exemption; engineers at other facilities or working for other managers, however, would remain exempt.

29 CFR §541.603(b).

Yep, that’s right, you do this wrong and you lose the deduction for everyone in the same job classification working for the same managers responsible for the improper deduction. Got 35 supervisors working for a manager that is making improper deductions for one of them? Lose the exemption for them all. And that can run into some real money.

But don’t worry too much. If it is just a mistake, you can fix it.

(c) Improper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, if the employer reimburses the employees for such improper deductions.

29 CFR §541.603(c).

And to cap it off, you can protect yourself even more. Have a policy that prohibits improper deductions and put it in your handbook. Give employees a way to report improper deductions and investigate it and do something about it if improper deductions occur.

(d) If an employer has a clearly communicated policy that prohibits the improper pay deductions specified in §541.602(a) and includes a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future, such employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. If an employer fails to reimburse employees for any improper deductions or continues to make improper deductions after receiving employee complaints, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. The best evidence of a clearly communicated policy is a written policy that was distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.

29 CFR §541.603(d).

But keep one thing in mind, and this is important for every policy you have. I think you need a policy like the one described in the regulation.  But that also means you have to enforce it.  It is better to have no policy than it is to have a policy you are not going to enforce. So when you put this policy in place and someone complains, do the investigation, and if there are improper deductions, fix them. If you don’t do that, again, you lose the exemption for the whole class of employees working for the same manager.

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