Archive for the 'Fair Labor Standards Act' Category

Exceptions. Deductions from Exempt Employee’s Salary . . . . Again.

Last time we talked about the general rule regarding the Salary Basis Test. Remember, According to the regulations, to meet the salaried basis test, your employee has to “receive each pay period . . . a predetermined amount . . . which is not subject to reduction because of variations in the quality or quantity of the work performed.” The regulations go on to say “Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days of hours worked.”

Hold it just a second, what do you mean EXCEPTIONS PROVIDED IN PARAGRAPH (b)? That’s right, there are exceptions. Wouldn’t be a very good rule if there were no exceptions now would it? So what are these exceptions you ask? Well let me just tell you. You can make a deduction from a salaried employee’s pay for:

  • Absences of one or more full days for personal reasons, not sickness (NOT ½ DAYS, FULL DAYS, so if the employee is out for a day and a half you can only deduct for the full day);
  • Absences of one or more full days for sickness, if you have a sick pay plan that replaces the pay;
  • Off sets (not full day deductions) for amounts received for jury duty, military leave or attendance as a witness;
  • Penalties imposed in good faith for infractions of safety rules of MAJOR SIGNIFICANCE (one of the examples given is smoking in the explosives plant);
  • Unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules in accordance with a WRITTEN POLICY APPLICABLE TO ALL EMPLOYEES;
  • Time not worked in the first or last week of employment;
  • Time not worked when an employee is on FMLA LEAVE.

29 CFR §541.602(b).

So, if the employee is paid on a salaried basis how on earth do you decide what to deduct?

When calculating the amount of a deduction from pay allowed under paragraph (b) of this section, the employer may use the hourly or daily equivalent of the employee’s full weekly salary or any other amount proportional to the time actually missed by the employee. A deduction from pay as a penalty for violations of major safety rules under paragraph (b)(4) of this section may be made in any amount.

29 CFR §541.602(c).

OK, now before you get all worked up, let me throw in this caution. You mess these up and take an improper deduction and you have a problem. A big problem. So, before you do any of this CALL YOUR LAWYER. And stick around for next time when we talk about what happens if you do mess this up.


And if all of this seems familiar, it is. I posted this before. You can see it here.

The Salary Basis Test.

Last time we talked about the amount of salary to qualify for the White Collar exemptions, this time we are going to talk about the “salary basis test.” What you ask is the salary basis test. Great question. I’m going to answer it. Well, I’m going to let the regulations answer it:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

29 CFR §541.602(a).

So that is the general rule. Any week in which an exempt employee does any work, the exempt employee has to receive all of their salary (which has to be at least $455 for the week at least for now, but see my last post for the increase that will happen when the new regulations are finalized.   You can see is here) and it CAN’T be “subject to reduction because of variations in the quality or quantity of the work performed. . . . , an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” Id.

But that is just the general rule and there are exceptions. And we will talk about those next time.

The Salary Requirements . . . for Now.

Now we have to skip around a bit in the Regulations. You see, in order to be exempt, an employee generally has to meet the salary requirements and the duties requirements for the exemption that is applicable. So it would seem logical that the way to write the Regulations would be to do the intro, which we talked about last time, and then discuss the salary requirements that apply to all (well, most) of the various exemptions and then talk about the individual duties. It would make complete sense to do it that way, so of course that is not the way the government did it.

So let’s you and I be logical and hit the salary test first. To do that we skip down to Subpar G of part 541 of the Regulations. And we are going to start with how much salary is required. And before we do that I need to say this:


What? Then why are we doing this? Because I’m sick of waiting. So I’ll do my best. Again, how much do I need to make to be exempt? Right now, not much.

To qualify as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis at a rate of not less than $455 per week (or $380 per week, if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities. Administrative and professional employees may also be paid on a fee basis, as defined in §541.605.

29 CFR §541.600(a).

By the way, if you did the math, in order to be paid on a salary basis, you only need to be paid $23,660 per year. Now when the proposed Regulations are finalized, that number will go to “an amount that is equal to the 40th percentile of weekly earnings for full-time salaried workers” which for 2016 is estimated to be $970 per week or $50,440 annually. So while the numbers are going to change, the principle should stay the same. So on we go.

But I don’t pay my exempt employees by the week, you say. I offer them an annual salary and pay bi-weekly, so do I still get the exemption? Yep.

The $455 (FOR NOW) a week may be translated into equivalent amounts for periods longer than one week. The requirement will be met if the employee is compensated biweekly on a salary basis of $910 (FOR NOW), semimonthly on a salary basis of $985.83 (FOR NOW), or monthly on a salary basis of $1,971.66 (FOR NOW). However, the shortest period of payment that will meet this compensation requirement is one week.

29 CFR §541.600(b). (And in case you are wondering, yes, I added the (FOR NOW). That is not in the Regulations.

So that is the basic rule. But right off the bat, before we even get out of this Regulation, there are some exceptions to this basic rule. For example, academic administrative employees meet this requirement if they are paid “on a salary basis at a rate at least equal to the entrance salary for teachers in the educational institution by which the employee is employed.” 29 CFR §541.600(c). And for certain computer employees, you can actually pay an hourly rate as long as it is at least “$27.63” per hour. And that is $27.63 per hour, not $27.62. Who comes up with these things? 29 CFR §541.600(d). And for professional employees who are teachers, lawyers or doctors and who are actually engaged in teaching, the practice of law or medicine, or are medical interns or residents, this section does not apply at all. That’s right, you don’t have to pay them a salary, you can pay them by the hour. And frankly, we will have to wait for the final Regulations to see what will happen to these numbers.

And that is not all. If an employee makes $100,000 per year and customarily and regularly performs any one or more of the exempt duties of an “executive, administrative or professional employee” that person is also exempt. In short, that means that if your employee makes $100k per year, that employee does not have to meet the entire duties test. That is a simplified way of putting it, but that is the basic rule. 29 CFR §541.601. Oh, and you get to prorate this in the first and last year of employment without losing the exemption. And the $100k does not have to be all “salary”, it can include commissions, nondiscretionary bonuses, stuff like that. And under the proposed Regulations, what happens to this number? Well, under the proposed Regulations “the highly compensated employee annual salary will be set at the 90th percentile of earnings for full-time salaried workers or an estimated $122,148 annually in 2016.”

So Steve, what the heck do I do between now and when the proposed Regulations are finalized? If you have salaried employees making more than $23,660 but less than $50,440, you might want to give us a call. We have some work to do.

White Collar Exemptions even if your collar isn’t white.

Oh man has it been a while. But the last time we were in this series we were going to start talking about “exemptions” and then we had proposed regs and then I got really busy and well, you know how it goes. So back to Exemptions.   And by exemptions I mean not having to pay overtime. That is what you thought I meant right? And we are going to start with the biggest category of exemptions, the White Collar Exemptions. I love that old school term. According to Wiki:

 The term refers to the white dress shirts of male office workers common through most of the nineteenth and twentieth centuries in Western countries, as opposed to the blue overalls worn by many manual laborers.

 The term “white collar” is credited to Upton Sinclair, an American writer, in relation to contemporary clerical, administrative, and management workers during the 1930s, though references to white-collar work appear as early as 1911.

 I love the term because I am a so called “white collar worker” but I don’t wear that many “white collars.” Mine tend to be a bit more colorful.


So what do the regulations mean when taking about this particular topic? Excellent question:

(a) Section 13(a)(1) of the Fair Labor Standards Act, as amended, provides an exemption from the Act’s minimum wage and overtime requirements for any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of an outside sales employee, as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of the Administrative Procedure Act. Section 13(a)(17) of the Act provides an exemption from the minimum wage and overtime requirements for computer systems analysts, computer programmers, software engineers, and other similarly skilled computer employees.

29 CFR §541.0

Look at the list, now you know.   Seems like an easy solution to having to pay overtime right, just classify your employees as “executive, administrative or professional” and away you go. Not so fast. First, the regulations make it clear that a job title alone is not enough. “A job title alone is insufficient to establish the exempt status of an employee. The exempt or nonexempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations in this part.”   29 CFR §541.2.

If I can’t just change the job title, how do I meet one of these exemptions. For there are whole lists of jobs that are excluded: (a) The section 13(a)(1) exemptions and the regulations in this part do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy.” 29 CFR §541.3(a).   Similarly,

(b)(1) The section 13(a)(1) exemptions and the regulations in this part also do not apply to police officers, detectives, deputy sheriffs, state troopers, highway patrol officers, investigators, inspectors, correctional officers, parole or probation officers, park rangers, fire fighters, paramedics, emergency medical technicians, ambulance personnel, rescue workers, hazardous materials workers and similar employees, regardless of rank or pay level, who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections for violations of law; performing surveillance; pursuing, restraining and apprehending suspects; detaining or supervising suspected and convicted criminals, including those on probation or parole; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; or other similar work.

 29 CFR §541.3(b).   Why not? “Such employees do not qualify as exempt executive employees because their primary duty is not management of the enterprise in which the employee is employed or a customarily recognized department or subdivision thereof as required under §541.100.” “Such employees do not qualify as exempt administrative employees because their primary duty is not the performance of work directly related to the management or general business operations of the employer or the employer’s customers as required under §541.200.” And “Such employees do not qualify as exempt professionals because their primary duty is not the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as required under §541.300.” Id. at (2)(3) & (4). That’s why.



IT TOOK A YEAR TO COME UP WITH THIS . . . you’ve got to be kidding!

No, they are not kidding. On Tuesday, June 30, 2015, the long awaited proposed rules on the so‑called “white collar” exemptions under the Fair Labor Standards Act were released by the Department of Labor. You remember the proposed regulations, right? About a year ago, the President directed the DOL to look into the exemptions and determine if changes were in order. Seems they were.

So finally, after a year, we have those changes. 295 pages of them. That seems like a lot of proposed changes, but wait . . . . most of that 295 pages is a history lesson on the previous changes. There are really only two big proposed changes in the regulations and both of them have to do with the salary level test. Before we get into those, let’s recap a bit – if it’s good enough for the DOL, it is good enough for us too.

In order to be exempt from overtime under the white collar exemptions, an employee must meet three tests. The salary basis test, the salary level test, and a duties test. The salary basis test means that an employee is paid a fixed salary in each workweek that does not vary depending on the quality or quantity of the employee’s work. That one is unchanged in the proposed regulations. The duties test is what the exempt employee’s job is. Or what the employee does. There are executive, administrative, professional, outside sales, and computer professional duties tests. Again, no change in the proposed regulations . . . BUT . . . the DOL is asking for comments on whether there should be changes. So stay tuned.

And finally, there is the salary level test and here is where the big change comes in. The current salary level test for the white collar exemptions is $455 per week or $100,000 per year for highly compensated employees. $455 per week is $23,660 per year and that amount is actually below the poverty level for a family of four. The proposed regulations will change how the salary level is set from this flat amount to an amount that is equal to the 40th percentile of weekly earnings for full-time salaried workers. The proposed regulations estimate that in 2016 that will be $970 per week or $50,440 annually. In addition, the highly compensated employee annual salary will be set at the 90th percentile of earnings for full-time salaried workers or an estimated $122,148 annually in 2016. That is a big change. In fact, according to the DOL, about 11 million employees will be impacted.

But there is another big change. For the first time ever, the DOL is proposing that the salary level automatically update on an annual basis without having to go through additional notice and comment rule making. They haven’t decided how yet, but are proposing either a percentile of earnings for full-time workers’ basis or changes based on inflation.

Now that you know all this, what do you do? Well first, don’t forget that these are proposed regulations. There is a 60 day public comment period, so the first thing you might want to do is comment. That having been said, the salary level is not likely to change and that or a number very close to it will likely be the final rule.

The next thing you ought to do is figure out how many of your employees fall within the gap. How many exempt employees do you have that make more than $23,660 and less than $50,440? Once you have that done you have some time to decide how to react. And you can react in several ways. You can leave everything alone, continue to pay a salary to these folks and pay them overtime when they work overtime, or make sure that they don’t work overtime. For those that are close, give them a raise to get them above the $50,440. Or you can convert these folks to hourly pay rates. But whatever you decide, remember this – for all those employees who used to be exempt and soon will not be, once the proposed regulations become final and take effect, you MUST begin keeping records of hours worked.

Moving On. Eventually.

First of all, I’m back. Given what a great job Emily did making my life easier and drafting the last 8 or so posts on the FLSA, I’m not sure that me being back is such a good thing for you, but I’m back anyway. And why am I back you ask, why not keep letting some young associate draft these posts? Well let me tell you why. Mostly it’s because after the first of the year all of our new young associates have to start earning their keep. That means billing hours to clients and contributing to the bottom line. And while this little old blog of mine certainly contributes to the bottom line indirectly, it doesn’t do so directly, so all the time spent writing this does not count toward a young associate’s billable contribution to the firm. And while I am sure there are some older lawyers out there that are perfectly happy making a young associate do work that they don’t actually get any credit for, I like to think I am not one of them. So, I’m back. Sorry if you don’t like that. Write Emily, maybe she will start her own blog.

So, is that what the title of this one is all about, moving on from Emily? Sort of, but it means more than that. It means we are moving on from the regular rate and what goes into it and how to compute overtime. There are more regs on that topic, but we have hit the high points, so we are going to leave the detail stuff out and move on to something else. What you say?

Exemptions, that’s what. Yes, after all that time we talked about how you compute overtime, we are going to start talking about who does not have to be paid overtime. And we are going to start with the big ones, the White Collar Exemptions. You all know what they are and we are going to spend some time in them. And before we get into the detail, let’s get one thing out of the way. A lot of you call these people “salaried” employees. That is not right. Just because you pay an employee a salary, does not mean you don’t have to pay them overtime. I am going to explain that over the next couple of weeks. But for now, just take my word for it. But here is one other caution and the reason why we are not just moving on quickly.

The Department of Labor was supposed to have issued new proposed regulations on this very topic by now. And I thought, just by luck mind you, that I had the blog timed pretty well to hit this topic as the proposed regulations came out. Unfortunately, the proposed regulations have been delayed. Here is what we know, nothing. No that’s not true. What the DOL is now telling everyone is that we can expect the proposed regulations sometime this “spring.” Now here in Michigan, that means July. Just kidding, it only feels that way. Hopefully before the end of May. And once we get the proposed rules I will start back up again. In the meantime I’m sure something will pop up to keep us busy.

See you next time.

The regular rate exclusions: well, you showed up. I guess that’s worth something.

Editor’s Note:  OK you guys know how much I have really enjoyed Emily’s work on this blog but I have to give her a bit of constructive criticism here.  Don’t you think a better way to start this thing would have been “I woke up, got out of bed, dragged a comb across my head . . . ” etc. etc.?  Those of you that are old enough are all singing the Beatles’ “A Day In the Life” right about now, aren’t you?  Well, in fairness to Emily, she’s pretty young, and she may not even know who the Beatles are, then again one of them is singing with Kanye so. . . Maybe?  Anyway, we will leave it the way she wrote it.  Thanks again Emily for all of your hard work.

You get up in the morning. You drag yourself out of bed, into the car, and go to work. After all that, there is no work for you to do. The FLSA does not in any way require that employers compensate employees for coming in when there is no work to do if no hours are actually worked. Many employers do offer “show-up” or “reporting” pay for this situation, whether it be part of a collective bargaining agreement or as a voluntary benefit. Also, a few state laws require reporting pay: check with your labor attorney for details. Similarly, employers may offer “call-back” pay for cases where an employee is called back after the employee’s regular hours. Again, it’s not required by the FLSA, but it’s a relatively common term in a collective bargaining agreement.

The extra payments for showing up or being called back or reporting are not payment for hours worked, and so can be excluded from the regular rate. Of course, any part of the payment that is compensation for hours worked must still be included.

For example, say I get paid $10.00 per hour, but my employer and I have an arrangement where if I show up and there is no work to do, I will get paid for at least three hours of time. One day I show up and there is only one hour of work to do, so I do the hour of work and get paid $30.00. I worked for one hour, so $10.00 of the $30.00 is compensation for hours worked, which must be included in the regular rate. The other $20.00, however, is payment for hours not worked, and so need not be considered when calculating the regular rate. However, that $20.00 also cannot be credited towards overtime compensation since it is not payment for hours worked.

Back when I was a toy store salesperson, (I told you I was a toy store salesperson when we talked about bonuses and you were just as fascinated then as you are now) if the store needed extra help, there was a bargaining process to try to get us to come back in. Usually the currency was food, alcoholic beverages, or the use of the boss’s boat. Once it was to be allowed to take on the most coveted job in the store for the next day, which was to go out to a field, set up a bunch of kites, and supervise them all day. It all sounds like fun and games until a 12-foot ghost delta (that is a kite for those of you that aren’t geeks like me) is falling out of the sky and you have to keep it from hitting the horrified bystander children. I think call-back pay would have been a better option.  So this was fun (OK not really, but I got credit for it) and maybe Steve will “let” me do it again (but I hope not) so until then. Thanks, and now back to this blog’s regularly scheduled author.

The regular rate exclusions: premium pay

Many employers operate on holidays, or weekends, and pay employees more on holidays to encourage them to work. Some do this the wrong way – for example, it always seems wrong to me that it’s New Year’s Day, not New Year’s Eve, that gets the “holiday” status. Once, I worked at a video store that was open 365 days a year, and I worked New Year’s Eve. That year there was a huge snowstorm and everybody wanted movies. They paid me time and a half, all right – but only for the hour and a half that my 5 p.m. to 1:30 a.m. shift bled over to New Year’s Day from New Year’s Eve. But, I digress. I don’t work in video rental now for a reason (plus my employer declared bankruptcy about six months after I left along with most other traditional video rental companies).

But I digress, so back to how to treat this premium pay when calculating the regular rate? A burning question, I know. The FLSA considers these premiums a form of overtime pay only if the premium is at least time and one-half of the employee’s rate for similar work in non-overtime hours. 29 CFR § 778.203(a). For pieceworkers or workers with more than one rate, this rate is “either (1) the bona fide rate applicable to the type of job the employee performs on the “special days,” or (2) the average hourly earnings in the week in question.” 29 CFR § 778.203(a). If the premium meets that requirement, it need not be included in the regular rate and can be credited towards overtime compensation.

The other type of premium considered an overtime premium is extra pay for hours outside of an employee’s normal working hours; for example, if the employer pays a premium for working more than eight hours a day. That can be credited toward your overtime obligation.  Here is what I mean.  If you promise to pay time and one half for all work in excess of 8 hours in a day and the employee works say 10 hours on Monday so by the end of the week they have worked 42 hours you don’t have to pay the overtime premium twice.  In other words, you get credit at the end of the week for the 41st and 42nd hours because you already paid the employee time and one half for the 9th and 10th hour they worked that workweek.

The catch is that you can’t give an employee arbitrary “normal working hours” to avoid paying overtime. For example, say my employee’s “regular” working hours are 8 a.m. to 12 p.m., and during that time I pay an artificially low hourly rate. From 12 p.m. to 5 p.m., I pay the employee time and one-half for working outside of her “regular working hours.” That way I can get out of rolling the higher rate into the regular rate for overtime, right? No – the regs call this scheme out as “a device to contravene the statutory purposes and the premiums will be considered part of the regular rate.” 29 CFR § 778.202(c).

The regulations do make a distinction between paying employees a premium for work outside of regular working hours and paying a premium for undesirable working conditions, like a standard shift differential. If you pay a premium for work outside an employee’s regular working hours (which must not exceed eight hours per day) or outside of the regular workweek (which must not exceed 40 hours per week) and the pay with premium is at least time and one-half, then that is considered overtime compensation and you need not include the premium in the regular rate. However, if you pay a premium for undesirable working conditions, such as paying more for hours worked between midnight and 6 a.m. only, that premium can neither be excluded from the regular rate nor credited towards overtime compensation. 29 CFR § 778.204(b). The rationale is that you are not really paying an overtime premium, you are paying more because no one likes working overnights.   And by the way, if you don’t like working overnight, don’t go to law school.  Lawyers work all the time.

The regular rate exclusions: employee benefit plans

I sat here and thought about how to make employee benefits entertaining. Or funny. Anything to make people actually read a post about how to structure employee benefits plans so they are excludable from the regular rate under the Fair Labor Standards Act. Unfortunately, I’m a lawyer, not a comedian, so you are just going to have to bear with me on this one.

Most employers provide some kind of benefit program to their employees – as the statute puts it, to “[c]ontributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees” 29 CFR §778.200(a)(4). The regulations specify that it does not matter how the plan is financed and whether employees contribute to the plan, but if the plan is combined with a profit sharing program, it must also meet the requirements for employer contributions to profit sharing programs to be excluded from the regular rate. 29 CFR § 778.214.

As you might have expected, there are some rather specific requirements for whether payments to employee benefit plans may be excluded from the regular rate, just like there were for profit sharing plans and stock options grants. Again, if these are all just too much for you, you don’t have to go it alone here. Just call one of the many skilled employee benefits attorneys here at good old WNJ and they (we) can help.

Number one, contributions to the benefits plan must be “made pursuant to a specific plan or program adopted by the employer, or by contract as a result of collective bargaining, and communicated to the employees.” 29 CFR § 778.251(a)(1). That sounds easy enough – create a plan or program, and don’t keep it a secret.

Number two, the purpose of the plan must be “to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, (something Steve is rapidly approaching), retirement, illness, medical expenses, hospitalization, and the like.” 29 CFR § 778.215(a)(2). The way the regs put it sounds a little doom and gloom to me, but it’s the standard stuff of employee benefits: life insurance, disability insurance, health insurance, and retirement planning.

Number three, the regs give you several options on how to determine the contributions and benefits to the plan. We are just going to cover the basics here. The first option is for the plan’s benefits to be “specified or definitely determinable on an actuarial basis.” 29 CFR § 778.215(a)(3)(i). This would be a more traditional defined benefit plan, similar to a pension.

The second option is for the plan to have “a definite formula for determining employer contributions and a definite formula for determining benefits paid under the plan.” This would be a hybrid of a defined benefit and defined contribution plan.

The third option is to provide for a formula for determining employer contributions and “a provision for determining the individual benefits by a method which is consistent with the purposes of the plan or trust under section 7(e)(4) of the act.” 29 CFR § 778.215(a)(3)(i)-(iii). This is a defined contribution plan. The regulations provide that whenever there is a defined contribution from the employer, as in options 2 and 3 above, the requirement for the formula “may be met by a formula which requires a specific and substantial minimum contribution and which provides that the employer may add somewhat to that amount within specified limits . . .” The variation allowed by the employer must not be so great that “the formula becomes meaningless.” 29 CFR § 778.215(a)(3)(iv).

If you’re still with me (and I forgive you if you aren’t) the employer’s contribution to the plan must be irrevocable and the employee must not be able to assign benefits or receive cash, except under certain circumstances such as termination of employment. 29 CFR § 778.215(4)-(5).

The regular rate exclusions: employee benefit and profit sharing plans

I know you woke up this morning wondering if you have to include payments under a savings or profit sharing plan into the regular rate when you pay overtime. No? I know I did.

The answer is probably not, if your plan is a bona fide profit sharing plan under the FLSA. The FLSA excludes employee benefit plans in two provisions. The first refers to “a bona fide profit-sharing plan or trust or bona fide thrift or savings plan” and leaves it up to the Department of Labor to specify requirements for those plans. 29 CFR § 778.200(a)(3). You probably get legal help of some kind in the employee benefits area – now is a good time to use it. The regulations governing employee benefits are fairly specific. So I will give you the shorthand version, and if you need help, call your trusty labor lawyer.

Under the regs, a “thrift or savings plan” is a program “for the purpose of encouraging voluntary thrift or savings by employees by providing an incentive to employees to accumulate regularly and retain cash savings for a reasonable period of time or to save through the regular purchase of public or private securities.” 29 CFR § 547.1(b). A profit sharing plan is a program “for the purpose of distributing to employees a share of profits as additional remuneration over and above the wages or salaries paid to employees which wages and salaries are not dependent upon or influenced by the existence of such profit-sharing plan or trust or the amount of payments made pursuant thereto.” 29 CFR § 549.1(b). In English, a profit-sharing plan is an extra benefit to employees, not part of their main compensation package.

The thrift or savings plan provisions and the profit sharing plans provisions share a few key themes. Number one, the plan needs to be a “definite program or arrangement.” 29 CFR §§ 547.1(b), 549.1(b). In other words, the plan needs to actually be a plan. Number two, there needs to be a provision for which employees participate, which is somewhat flexible, except that it may not be based on performance or efficiency. 29 CFR §§ 547.1(c), 549.1(d)(1)-(2). You can, however, exclude people based on work schedule – so for purposes of overtime, you need not include the high school kid who comes in to water the plants for an hour every two weeks in your profit sharing plan. 29 CFR §§ 547.1(c), 549.1(d)(1). Number three, there must be a formula for determining the amounts paid to employees, which can be based on straight-time pay, base rate of pay, or length of service. 29 CFR §§ 547.1(d), 549.1(e). So you have a fair amount of flexibility as far as who gets what, as long as that is not dependent on performance or efficiency. 29 CFR § 549.1(a).

Savings plans and profit sharing plans share some pitfalls, too. Payments under a plan cannot be excluded from the regular rate if the amount an individual gets is dependent on production, efficiency, or hours worked. 29 CFR §§ 547.2(c), 549.2(e). Participation in a savings plan must be voluntary. 29 CFR § 547.2(a), and employee wages cannot be offset or affected by the savings plan or profit sharing plan. 29 CFR §§ 547.2(b), 549.1. And that is key to excluding these types of plans. In short, what you can’t do is disguise “pay” as “profit sharing” and still exclude if from the regular rate calculation. Don’t try it, you will get caught.

Again, this is a quick version, so call your lawyer if you are trying to set up a program for the first time or if your program’s features have not been reviewed in a while.

Some companies also choose to compensate their employees with stock options. Back in the late nineties, while you were panic-buying Beanie Babies, the Department of Labor found that if an employer offered stock options as a form of compensation and the employees exercised the option and made a profit, that profit had to be included in the regular rate. This announcement caused an epidemic of heart palpitations in HR professionals around the country. After this determination by the DOL, Congress passed the Worker Economic Opportunity Act, amending the FLSA so that profits made on exercised stock options are not included in the regular rate if the stock option program complies with certain requirements.

These requirements are relatively simple, but specific. Number one, the employer must communicate the terms and conditions of the program to employees, either when the options are granted or when the employee begins participating. 29 CFR § 778.200(8)(i). Number two, the options must not be exercisable within the first six months after the grant, and the option’s exercise price must be at least 85% of the stock’s fair market value at the time of the grant. 29 CFR § 778.200(8)(ii). The statute makes exceptions for employees who die, become disabled, or retire before the 6 month period is over, and the limitation also does not apply if there is a change in corporate ownership. Number three, the employee’s exercise of the option must be voluntary – easy enough. 29 CFR § 778.200(8)(iii). Number four only applies if eligibility to participate in the program is tied to performance. If they are, the grants must be tied to the performance of a business unit of at least 10 employees, not individuals, or the entire plant. 29 CFR § 778.200(8)(iv)(A). However, the grants can be based on the duration of an individual’s service or a minimum schedule of hours or days worked. Employers can also base grants on past performance of individual employees, but only if the determination is discretionary and not pursuant to a contract. 29 CFR § 778.200. If you need a refresher on the true meaning of discretionary, see my post on discretionary bonuses.

There’s more to talk about in the employee benefits and incentives area, but we’ll leave it for next time.

« Previous PageNext Page »