Archive for the 'Fair Labor Standards Act' Category

What’s on Second? New Regulations on Joint Employment under the FLSA – Part 2.

Yesterday we talked about the fist scenario under the new DOL regulations on joint employment under the FLSA.  Today we will talk about the second scenario the DOL gives.

(e)(1) In the second joint employer scenario, one employer employs a worker for one set of hours in a workweek, and another employer employs the same worker for a separate set of hours in the same workweek. The jobs and the hours worked for each employer are separate, but if the employers are joint employers, both employers are jointly and severally liable for all of the hours the employee worked for them in the workweek.


29 CFR § 791.2(e)(1).

Now here the DOL does not use the same 4-point test as they did in the first scenario.  Instead:

(2) In this second scenario, if the employers are acting independently of each other and are disassociated with respect to the employment of the employee, each employer may disregard all work performed by the employee for the other employer in determining its own responsibilities under the Act. However, if the employers are sufficiently associated with respect to the employment of the employee, they are joint employers and must aggregate the hours worked for each for purposes of determining compliance with the Act. The employers will generally be sufficiently associated if:

(i) There is an arrangement between them to share the employee’s services;

(ii) One employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or

(iii) They share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer. Such a determination depends on all of the facts and circumstances. Certain business relationships, for example, which have little to do with the employment of specific workers—such as sharing a vendor or being franchisees of the same franchisor—are alone insufficient to establish that two employers are sufficiently associated to be joint employers.


29 CFR § 791.2(e)(2)(i) – (iii).

Scenario number 1 makes a lot of sense; we see that temp employee situation every day.  But why this one?  Well, what the DOL (and the courts for years) are preventing here is a situation where two separate say corporate entities or LLC’s or even partnerships hire the same employee and then work that employee 30 hours for one corporation and 30 hours for the other corporation in the same workweek.  If the employers are not “joint employers” that employee gets 30 hours of straight time from one employer and 30 hours of straight time for the other employer.  But if they are joint employers, the same employee is entitled to 40 hours of straight time and 20 hours of time and one-half.  And both employers are liable for paying the overtime. 

(1)(i) Example. An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook?

(ii) Application. Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.


29 CFR § 791.2(g)(1)(i) & (ii).

29 CFR § 791.2(g)(1)(i) & (ii).

Under the prior guidance this is exactly what some employee groups were trying to do.  Work at two entirely separate McDonalds and sue McDonald Corporation for overtime.  Now don’t get too excited about going out and setting up a bunch of LLCs, there are limits to the protection the new regulations provide:

(2)(i) Example. An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook?

(ii) Application. Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the Act.


29 CFR § 791.2(g)(2)(i) & (ii).

If you want to see the new regulations you can find them here and if you are an employer who has questions, give me a call.

Who’s on First? New Regulations on Joint Employment under the FLSA – Part 1.

You know, over the years we have had occasion to discuss the issue of joint employment under the FLSA.  It was a big deal during the last administration.  In fact, back then we were talking about an Administrator’s Interpretation that the Obama DOL issued to “clarify” joint employer status under the FLSA.  That guidance was concerning in that it appeared to really broaden the scope of when a joint employer relationship existed.  It was such a big deal that we at WNJ spent a fair amount of time talking about what it meant.  We even did a panel discussion or two on the issue.  And then we got a new administration, and that new administration withdrew the guidance.  And we waited. 

The wait is over.  On January 16, 2020 the Department of Labor published final regulations on the issue.  These regulations amend 29 CFR Part 791 and are an attempt to clarify when a joint employer relationship exists.  As the DOL points out, it has been a while since Part 791 was updated:  “Since this 1961 update, the Department has not published any other updates to part 791 until this final rule.”  I think we would all agree that 59 years is a long time and a lot has changed about how the workplace works in that time.  So, what do the new regulations provide?  Well, including the preamble and all the required stuff, the Federal Register publication of the new regulations is 42 pages long.  We are not going into all of that.  I’m going to try to boil it down to a manageable bite-size bit or two for you.

Let’s start with why we care.  Under the FLSA if two employers are joint employers, both employers are “jointly and severally liable” for making sure the employee gets the minimum wage and probably more importantly, overtime.  So the new regulations say that there are really two scenarios under the FLSA where the joint employer analysis is relevant. 

(a)(1) In the first joint employer scenario, the employee has an employer who suffers, permits, or otherwise employs the employee to work, see 29 U.S.C. 203(e)(1), (g), but another person simultaneously benefits from that work. The other person is the employee’s joint employer only if that person is acting directly or indirectly in the interest of the employer in relation to the employee.


29 CFR § 791.2(a)(1)

.

What are we talking about here?  Most commonly we are talking about a situation where you run a company and you hire a temporary service agency to provide you with employees.  In this case, the DOL has articulated a 4-factor test to determine if a joint employer relationship exists:

Those four factors are whether the other person:

(i) Hires or fires the employee;

(ii) Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

(iii) Determines the employee’s rate and method of payment; and

(iv)  Maintains the employee’s employment records.


Id

Now there are some ruffles and flourishes that explain all that but the important thing to remember is no single factor standing alone is enough and the fourth factor (maintaining records) is not enough standing alone.

So how are you supposed to know how to apply that to a real life situation, like for example I own a company and I retained a temp agency go send me temps?  Well, the DOL was nice enough to include some examples in the regs.

(6)(i) Example. A packaging company requests workers on a daily basis from a staffing agency. Although the staffing agency determines each worker’s hourly rate of pay, the packaging company closely supervises their work, providing hands-on instruction on a regular and routine basis. The packaging company also uses sophisticated analysis of expected customer demand to continuously adjust the number of workers it requests and the specific hours for each worker, sending workers home depending on workload. Is the packaging company a joint employer of the staffing agency’s employees?


29 CFR § 791.2(g)(6)(i).

Sound familiar?  Sure it does, it’s you if you use temps.  So what is the answer?  DOL gives us that too.

(ii) Application. Under these facts, the packaging company is a joint employer of the staffing agency’s employees because it exercises sufficient control over their terms and conditions of employment by closely supervising their work and controlling their work schedules.


29 CFR § 791.2(g)(6)(ii).

OK Steve, now give me an example where there is a joint employer relationship.  Don’t have to, the DOL did.

(7)(i) Example. A packaging company has unfilled shifts and requests a staffing agency to identify and assign workers to fill those shifts. Like other clients, the packaging company pays the staffing agency a fixed fee to obtain each worker for an 8-hour shift. The staffing agency determines the hourly rate of pay for each worker, restricts all of its workers from performing more than five shifts in a week, and retains complete discretion over which workers to assign to fill a particular shift. Workers perform their shifts for the packaging company at the company’s warehouse under limited supervision from the packaging company to ensure that minimal quantity, quality, and workplace safety standards are satisfied, and under more strict supervision from a staffing agency supervisor who is on site at the packaging company. Is the packaging company a joint employer?


29 CFR § 791.2(g)(7)(i)

(ii) Application. Under these facts, the packaging company is not a joint employer of the staffing agency’s employees because the staffing agency exclusively determines the pay and work schedule for each employee. Although the packaging company exercises some control over the workers by exercising limited supervision over their work, such supervision, especially considering the staffing agency’s supervision, is alone insufficient to establish that the packaging company is a joint employer without additional facts to support such a conclusion.


29 CFR § 791.2(g)(7)(ii).

See the difference?  Here it seems to be that the DOL considers day-to-day supervision the deciding factor.  And in most cases you supervise your temps, so you are (and always have been) a joint employer with the temp agency.

OK, that’s cool and surprisingly not that surprising.  What about scenario number 2?  Well, let’s talk about that next time shall we?

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.

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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