Workplace Beating DOL to the Punch Conducting Internal Wage & Hour Audits 2014 BOND, SCHOENECK & KING, PLLC

Transcription

1 Workplace 2014 Beating DOL to the Punch Conducting Internal Wage & Hour Audits 2014 BOND, SCHOENECK & KING, PLLC

2 TABLE OF CONTENTS Page BEATING DOL TO THE PUNCH CONDUCTING INTERNAL WAGE & HOUR AUDITS... 1 I. WHY TO CONDUCT AN INTERNAL WAGE AND HOUR AUDIT... 1 A. Reduce Exposure For Financial Penalties... 1 B. Time and Expense of Litigation or DOL Audits... 5 C. Recent Private and DOL Settlements and Verdicts... 6 D. Use of Audits To Defeat Willful Classification... 7 II. Who should conduct an internal wage audit?... 8 A. Human Resources or Outside Counsel?... 8 B. Scope of Audit III. When should a company conduct an internal Wage and hour audit? A. Consider Conducting an Internal Wage and Hour Audit IV. What ISSUES TO AUDIT AND HOW TO AUDIT THEM? A. Audit Issue: Exempt / Non-Exempt Classification B. Review Job Evaluations C. Supervisory Interviews D. Consider Employee Interviews E. Independent Contractors F. Meal Periods G. Regular Rate Issues H. Compensable Time I. Recordkeeping J. Modern Issues V. Deductions A. Review Payroll Records For Any Deductions B. Overpayments and Loans Bond, Schoeneck & King, PLLC i

3 BEATING DOL TO THE PUNCH CONDUCTING INTERNAL WAGE & HOUR AUDITS I. WHY TO CONDUCT AN INTERNAL WAGE AND HOUR AUDIT A. Reduce Exposure For Financial Penalties 1. Employers who face claims that they have violated the Fair Labor Standards Act ( FLSA ) or the New York Labor Law ( NYLL ) are subject to a number of potential fiscal repercussions that are often significant, including back wages, 100% liquidated damages, Department of Labor ( DOL ) civil money penalties, and prevailing party attorneys fees. 2. Back Wages Statute of Limitations a. When an employer is found to have committed wage violations, the DOL will require an employer make up the difference between what the employee was paid and the amount he/she should have been paid, an amount which is referred to as back wages or back pay. b. Under the FLSA, generally, a two-year statute of limitations applies to the recovery of back pay. However, in the case of willful violations, a three-year statute of limitations applies. Violations might be willful if the employer knew or showed reckless disregard for lawfulness of his actions in one of two ways: (1) If his actions were intentional and deliberate; or (2) If his actions constituted more than mere negligence Courts have viewed violations as nonwillful when employers have made efforts to keep up with the requirements of the FLSA, but failed to comply because of mistaken interpretations of the law. c. NY Labor Law The statute of limitations under the NYLL is the longest in the country six years. This means that employees can collect six years worth of back wages from an employer. Using audits to uncover potential wage and hour issues allows an employer to fix any potential issue and thus avoid continuing violations for a six year period. 3. Liquidated Damages a. FLSA 2014 Bond, Schoeneck & King, PLLC

4 An employer that violates Sections 6 or 7 of the FLSA (minimum wage or overtime sections) shall be liable to the employees affected for unpaid minimum wages or overtime compensation and an additional equal amount as liquidated damages. In other words, doubling the back wage recovery. Liquidated damages are compensatory, not punitive, in nature. They are intended to compensate employees for losses incurred because they did not receive payments to which they were legally entitled when payments were due. Therefore, liquidated damages are normally presumed to apply. Good Faith Defense (1) Liquidated damages may be avoided by establishing a good faith defense under the FLSA and NYLL. (a) An audit itself will not necessarily establish a good faith defense, however, an attorney s letter on a specific issue which may be uncovered in an audit could be helpful in doing so. (2) Generally, courts have found the good faith and wilful standard to be the same under both the FLSA and NYLL law. (3) An affirmative good faith defense may exist where an employer s actions were taken in conformity with written administrative regulation, order, ruling, approval or interpretation of DOL and actions taken were in reliance on such ruling or policy. b. NY Labor Law The Wage Theft Prevention Act went into effect in It amends the notice of wage rate requirements and expands the civil and criminal remedies available to employees when employers fail to comply with these provisions. (1) Who is covered? All private sector employers are covered. Employees who work in other states are not covered. Federal, state, and local government employers are not covered, but charter schools, private schools, and not-for Bond, Schoeneck & King, PLLC

5 profit corporations are covered, since they are not public entities. (2) Mainly, the law requires that workers receive initial and yearly pay notices and proper wage statements, and that they be free from retaliation for complaining about possible violations of the Labor Law. Pre-Wage Theft Prevention Act: (1) Liquidated damages were limited to 25% of wages due (N.Y. Lab. Law 198-(1-a)); and (2) Violations had to be willful for liquidated damages to be available (unlike the FLSA, where liquidated damages are presumed and compensatory in nature). Post-Wage Theft Prevention Act: (1) Potential liquidated damages are increased to 100% of back wages due, unless the employer is able to show that it had a good faith basis that the method of payment was lawful. Now follows the FLSA model. (2) No willful violation is needed for liquidated damages to be assessed. (3) Liability for unpaid wages plus interest, as well as ability to recoup attorneys fees still intact. (4) Employees or labor commissioner can recover prejudgment interest in any civil action to recover unpaid wages and to collect attorneys fees and costs incurred in enforcing any court judgment. (5) State labor commissioner has authority to assess up to 100% liquidated damages in an administrative action and can bring any legal action necessary, including an administrative action, to collect on claims. (6) If the commissioner finds that an employer engaged in willful or egregious violations, or that the employer previously violated New York wage laws, the commissioner shall direct payment to the commissioner [in other words, the New York Department of Labor] of an additional sum... in an amount not to exceed double the total amount of wages, benefits, or wage supplements found to be due Bond, Schoeneck & King, PLLC

6 (7) Penalties under Labor Law Section 195 also increased. (8) The Wage Theft Prevention Act now mimics the FLSA s standard for assessment of liquidated damages. An employee who does not receive the mandatory pay notice of wages within 10 business days of his or her first day of employment may bring a civil action to recover damages of $50 for each workweek that the violation occurred, plus costs and reasonable attorneys fees. These damages are capped at $2,500. Similarly, with respect to existing employees, if any do not receive the mandatory wage statements, the employer may be subject to a civil action and damages of $100 per week, per employee, for each week the violation occurred but not to exceed a total of $2,500, plus costs and reasonable attorneys fees. 4. DOL Civil Money Penalties a. The FLSA authorizes the DOL s Wage and Hour Division to assess employers civil money penalties ( CMPs ) of up to $1,100 for each violation for repeated or willful violations of the minimum wage and overtime requirements of the Act. This includes employers who are authorized to pay special minimum wages to workers with disabilities. b. CMPs may be assessed for a repeated violation when it can be proven that the employer had previously violated the minimum wage or overtime requirements of the FLSA. CMPs for a willful violation may be assessed when it can be shown that the employer knew that its conduct was prohibited by the FLSA or showed reckless disregard for the requirements of the FLSA. c. CMPs are intended to discourage employers from future noncompliance and are not tied to the amount of the back wage liability incurred. They will ordinarily be assessed based on violations occurring within the normal two-year investigation period. Where violations are determined to be willful, the investigation will cover a three year period. d. Employers may also be subject to a civil money penalty of up to $11,000 for each employee who is the subject of a child labor violation. 5. Fee-Shifting a. An award of attorneys fees to a prevailing plaintiff is mandatory Bond, Schoeneck & King, PLLC

7 The FLSA provides that the court shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow reasonable attorney s fees to be paid by the defendant, and the cost of the action. The NYLL provides that the court shall allow such employee to recover the full amount of... all reasonable attorney s fees... as required under the civil practice law and rules.... b. Defendants, however, are not entitled to their fees under the FLSA. Exceptions to this rule exist for bad faith, vexatious, or oppressive litigation. 6. The Bottom Line on Attorneys Fees a. The recovery of attorneys fees often substantially exceeds the back wage recovery. The relative ease of bringing collective action lawsuits and the modest standard for collective certification have resulted in an explosion of wage and hour litigation over the past decade. The American Bar Association ( ABA ) has published statistics showing that collective / class action wage and hour litigation now outnumbers all other employment class action matters combined. B. Time and Expense of Litigation or DOL Audits 1. An internal wage and hour audit is the primary way employers can try to determine whether they are in compliance with wage and hour laws and regulations. At a time when the Obama Administration is committed to cracking down on wage and hour violations, employers should perform internal audits to give themselves a chance to remedy any noncompliance before being audited by the DOL or served with a lawsuit by current or former employees. Audits provide employers with an opportunity to proactively ensure compliance with legal requirements and, to the extent potential issues are identified, also allow the employer to analyze best strategies for resolving them, including an informed decision whether to make back pay restitution and/or see releases for example. 2. Employers should preserve documents from internal audits. Doing so may expedite the DOL s investigation in the event the employer gets audited by the DOL and, as stated above, the existence of an audit may help fend off wilful violations. 3. If an employer conducts an audit and discovers potential violations, the issue of what to do next is highly fact-specific and employers are advised to work with their counsel in formulating the best strategies to resolve 2014 Bond, Schoeneck & King, PLLC

8 potential issues. Some basic questions that require thoughtful deliberation based on specific facts may include: a. When should the employer implement changes to fix the potential violations? Immediately or some other time such as new calendar year? The type of potential violation is a key consideration. Transition issues with respect to off-the-clock issues may be very different than potential issues with respect to misclassification. b. For exemption issues, should the employer immediately reclassify the position? Depending on the facts, some employers may elect to only prospectively make the position non-exempt. There are numerous factors that should be considered in this decision including but not limited to how close to the line is the position to being exempt? c. Should the employer make voluntarily back pay restitution? If so, how long should the employer go back? d. Should the employer require signed releases or other types of certifications such as certifications confirming hours worked? Generally speaking, private settlement agreements releasing FLSA claims are not enforceable but such releases are enforceable under the NYLL. The general rule is that for FLSA releases to be enforceable, they must be court-supervised or DOL approved. e. Should the employer pay liquidated damages and/or interest on the back pay? f. How should the issue be communicated to employees? C. Recent Private and DOL Settlements and Verdicts 1. Torres v. Gristede s Operating Corp., 04 Civ (S.D.N.Y. 2012) Plaintiffs filed a class action and two related lawsuits against Gristedes, a supermarket chain, for FLSA and NYLL violations. The parties settled for $3.5 million, exclusive of attorneys fees. A Southern District of New York judge awarded plaintiff s counsel an amount nearly equal to the damages in the case - $3,415, in attorneys fees and $442, in costs for a grand total of $6,858, Stewart v. CUS Nashvile, LLC, No. 11-cv (M.D. Tenn. 2014) Plaintiffs were awarded $ in back wages and liquidated damages and $54, in attorneys fees and costs. The court noted that the attorneys fees and costs award was approximately 69 times the value of the underlying judgment Bond, Schoeneck & King, PLLC

9 3. DCK North America, a construction contractor based in Pennsylvania and operating in Arizona, agreed to pay more than $500,000 in back wages to 12 subcontractors for prevailing wage and fringe benefit violations. 4. TNT Car Wash and Quick Lube agreed to pay $107,307 in back overtime and minimum wages to 89 employees for unpaid wages and improper wage deductions. The Wage and Hour Division also found that the company had violated child labor laws by hiring a 15-year-old at the car wash. TNT agreed to pay an additional $25,664 in civil money penalties for the willful nature of the violations. 5. Toys R Us This year, Toys R Us paid $4 million to settle a class action in California federal court for meal, break, overtime, and minimum wage violations. 6. Aspen Hospitality Cos. This year, Aspen Hospitality Cos. agreed to pay nearly $1 million in back wages and liquidated damages to settle minimum wage, overtime, and record-keeping violations. 7. Pacifica Restaurant and Oyster Bar As a result of a DOL investigation, Pacifica Restaurant and Oyster Bar paid $172, this year in back wages and liquidated damages. D. Use of Audits To Defeat Willful Classification An employer can use the fact that it conducted an internal audit, particularly one reviewed by counsel, to enhance its chances of defeating willful classifications. 1. Herrmann v. Gutterguard, Inc., 199 Fed. Appx. 745 (11th Cir. 2006) ( If the officers and managers received advice and information from [counsel] about compliance with wage and hour law during the audit and review, that fact will become important in determining whether they acted willfully in failing to pay the plaintiffs overtime ). 2. Reich v. Monfort, Inc., 144 F.3d 1329 (10th Cir. 1998) ( In determining that the defendant s actions were willful in this case the district court relied in part upon a finding that the defendant s managers had known about the compensability of the pre- and postliminary activities at least since an audit in 1984 and the same issues were resolved at a sister plant... in July The evidence presented at trial showed that a wage and hour investigator had conducted a limited investigation of defendant s slaughter division in 1984 and the audit disclosed violations that were the same as those cited in the present action. As a result of the 1984 investigation defendant paid back wages to sixty-seven employees ). 3. Deloatch v. Harris Teeter, Inc., 797 F. Supp. 2d 48 (D. D.C. 2011) ( The plaintiff has provided no evidence that the defendant acted recklessly or 2014 Bond, Schoeneck & King, PLLC

10 willfully with regard to its alleged failure to pay him for overtime work. Indeed, the defendant s time and attendance policies explicitly outlined procedures to ensure compliance with the FLSA, and the record reflects that the defendant sought to monitor its compliance through routine audits of employee time records ). 4. Wolfslayer v. IKON Office Solutions, Inc., 2004 U.S. Dist. LEXIS (E.D. Pa. 2004) (holding that the employer had discharged its burden on summary judgment by showing that there is an absence of evidence to support the employee s case on the issue of willfulness where it had numerous compliance and audit policies). II. WHO SHOULD CONDUCT AN INTERNAL WAGE AUDIT? A. Human Resources or Outside Counsel? 1. Primary benefits of using outside counsel to assist in conducting audits: a. If an audit uncovers a potential issue and the employer receives an opinion letter from outside counsel which analyzes and concludes that a certain pay practice is legal, the opinion letter may help establish a good faith defense in certain jurisdictions. b. Using an attorney may help create attorney-client privilege for certain communications involved in the audit, as well as work product privilege for others. To protect the attorney-client privilege, outside counsel can explain to each interviewee that the questions are being asked for purposes of providing legal advice to the company and, therefore, the conversation should be kept confidential. (1) In Upjohn Co. v. United States, 449 U.S. 383 (1981), the Supreme Court determined that the attorney-client privilege applies to communications between a company employee and the attorney if: (a) (b) The communication involves information necessary for the attorney to provide legal advice to the company; The communication and information relate to matters within the employee s scope of employment; (c) The employee making the communication was aware that the information was being shared with the attorney in order to provide the organization with legal advice; and 2014 Bond, Schoeneck & King, PLLC

11 (d) The communication was kept confidential and not disseminated beyond employees who, considering the corporate structure, need to know its contents. (2) The protection of the privilege extends only to communications and not to facts. A fact is one thing and a communication concerning that fact is an entirely different thing. The client cannot be compelled to answer the question, What did you say or write to the attorney? but may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a statement of such fact into his communication to his attorney. Upjohn, 449 US at (internal quotations and citations omitted). (3) In the corporate setting, according to the Upjohn test, attorneys can gather information from any employee witnesses and the privilege belongs to the company, not the individual employee. Employees being interviewed by counsel should therefore be given an Upjohn warning, explaining: (a) (b) (c) That the lawyer represents the company, not the individual; That communications between the employee witnesses and the company s attorneys are privileged; and That the privilege belongs to the company and not the individual employee, so the employee has no control over whether the company waives the privilege. (4) Designate appropriate communication as work-product or protected by the attorney-client privilege. (5) Simply copying counsel on communications may not be enough to invoke the attorney-client privilege. (6) Documents created by attorneys or at an attorney s direction during an internal FLSA audit must meet the following requirements to be protected work product: (a) They must have been created in anticipation of litigation; (b) An articulable claim that is likely to lead to litigation (i.e., a notice of investigation by the DOL) has arisen; 2014 Bond, Schoeneck & King, PLLC

12 (c) (d) The documents must contain more than a bare recitation of facts; and The documents must be permeated with the attorney s own words, opinions, and impressions. See Hickman v. Taylor, 329 U.S. 495 (1946). (7) Only share protected communication with higher level management who can bind the company. (8) Action items should reflect they were done at the direction of counsel. c. Attorneys can help identify specific wage and hour laws that may be different than federal law. This is particularly true for employers with locations in multiple states. d. Depending on the facts, it may be better not to document certain conclusions. An attorney can help assess whether to document or not with potential litigation in mind. e. Experienced wage and hour attorneys are able to identify potential red flags that often exist reflecting common wage and hour issues. 2. Attorney involvement does not necessarily mean the attorney needs to conduct the entire audit. Every employer is concerned about legal costs and experienced wage and hour attorneys can provide effective guidance on how HR can conduct and help flesh out issues along the way and/or review conclusions depending on the scope and target of the audit. For example, attorneys often prepare memos on the how to conduct a certain type of wage and hour audit which might include preparing a script for HR to use when interviewing supervisors to identify potential off-theclock activities. 3. Other individuals and companies might need to be involved in your audit, such as: B. Scope of Audit a. Bookkeeper/Certified Public Accountant; b. Professional Payroll Service; and/or c. Employee Lease Company/Professional Employer Organization. 1. The scope of an audit is often determined on whether there is a complaint filed already. Such complaint-driven audits usually focus on the specific 2014 Bond, Schoeneck & King, PLLC

13 issue. In the absence of a complaint, the employer may opt to conduct a proactive wall-to-wall wage and hour audit or instead may elect to focus on a particular issue such as exempt classification. The employer needs to determine the scope of the audit which often turns on cost and time considerations. Other audits are driven by recent changes in the law. 2. Some general questions that should be considered when determining the scope of the audit: a. Has the company conducted an audit recently? If so, the scope need not be as large and the audit can build on previous information gathered. b. Is there a discrete issue the company should audit? Selecting a discrete issue to audit can keep costs down. c. Who can help conduct the audit? (1) Human resources; (2) Legal; (3) Payroll; (4) Information technology; (5) Operations; Make sure the company s information technology department sets up proper document retention procedures during the audit. Supervisors are key personnel to properly conduct most wage and hour audits. (6) Any internal auditing teams. d. What potential records will need to be reviewed? The answer depends on the scope of the audit but common records to be reviewed may include: (1) Employee handbooks; (2) Payroll documents; (3) Job descriptions; 2014 Bond, Schoeneck & King, PLLC

14 (4) Job evaluations ; (5) Records of employees leave (i.e., vacation, sick time, etc.); (6) Job duties surveys; (7) Any past complaints and how they were handled; (8) Payroll policies; (9) Any documents concerning independent contractor relationships; (10) Union agreements; (11) Time and day on which each employee s workweek begins; (12) Overtime records including authorization or denial of overtime; (13) Records of wage deductions (i.e., wage garnishments); (14) Clock punch procedures and other recordkeeping records such as biometric recording; (15) Documents related to frequency of pay; (16) Computer log in and log out records; and (17) Bonus, commission and other types of special payments plans or policies. e. How large is the company? Does it operate in multiple states? It is very important to ensure that wage and hour audits focus on compliance with both the FLSA and state law issues as many states, such as New York, have very different wage and hour laws and often they do not overlap with federal law. Employers must comply with the legal requirement that offers the employee the most protection. For example, under New York Law the test for an executive exempt employee is more restrictive than the FLSA. Thus, New York employers must ensure that the New York duties test is satisfied when conducting an exemption audit in New York. f. Who is involved in payroll decisions? g. Does the company use an outside payroll company? h. For what time period should the company gather information? 2014 Bond, Schoeneck & King, PLLC

15 A good rule of thumb is to go back at least two years. III. WHEN SHOULD A COMPANY CONDUCT AN INTERNAL WAGE AND HOUR AUDIT? A. Consider Conducting an Internal Wage and Hour Audit 1. Generally, it is prudent to conduct (at least partially) a wage and hour audit every 2-3 years to ensure the employer is staying current with new legislation. 2. It is also a good idea to conduct and audit: a. Whenever a new law is passed that might change the company s pay procedures, e.g., Wage Theft Prevention and higher minimum wage increase in New York; b. When the company is releasing a new handbook (or revising an old one); c. At the start of a new year; d. If job descriptions are more than several years old; e. If there has been material turnover of either supervisors and/or employees; f. When a complaint has been lodged against the company; g. After or shortly before an acquisition; or h. In response to litigation trends (for example, restaurants and health care providers have been targets of wage and hour lawsuits in recent years). 3. Ultimately, sooner is better than later! IV. WHAT ISSUES TO AUDIT AND HOW TO AUDIT THEM? A. Audit Issue: Exempt / Non-Exempt Classification Unless specifically exempted, non-exempt employees covered by the FLSA must receive overtime pay for hours worked in excess of forty (40) in a workweek at a rate not less than time and one-half their regular rates of pay. In addition, employers must compensate non-exempt employees at least the basic minimum wage (currently $8.00 in New York) for all hours worked in a 2014 Bond, Schoeneck & King, PLLC

16 workweek. Thus, employers must ensure that there are accurate recordkeeping with respect to hours worked for all non-exempt employees. One of the most common types of FLSA violations is misclassification of exempt employees. Employers can help minimize their risk of liability by auditing job positions to help ensure that their employees are properly classified as exempt. This generally means reviewing job positions to determine if they satisfy (1) duties test (2) salary basis test and (3) minimum weekly salary test. 1. The most common exemptions are often referred to as the white collar exemptions. These include: a. Executive and Administrative (1) FLSA (a) Executive The employee s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. The employee must also have the authority to hire or fire other employees, or the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. The employee must be compensated on a salary basis at a rate not less than $455 per week. Note: An employee who owns at least a bona fide twenty percent (20%) equity interest in the enterprise in which he/she is employed, regardless of the type of business organization, and who is actively engaged in its management, is considered a bona fide exempt executive. (b) Administrative The employee s primary duty must be the performance of office or non-manual work directly related to the management or general business 2014 Bond, Schoeneck & King, PLLC

17 (2) New York operations of the employer or the employer s customers. The employee s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. The employee must be compensated on a salary basis at a rate not less than $455 per week. (a) The executive and administrative exemptions under New York law are identical to those of the FLSA except that: (i) (ii) One must earn at least $600 per week currently inclusive of board, lodging or other allowances to be considered an executive/administrator under New York law. To qualify for the executive exemption, employees must customarily and regularly exercise discretion. b. Professional (1) FLSA (a) Learned Professional Exemption The employee s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. The advanced knowledge must be in a field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instruction. A field of science or learning includes law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy, and other occupations that have a recognized professional status and are distinguishable from the 2014 Bond, Schoeneck & King, PLLC

18 mechanical arts or skilled trades, where the knowledge could be of a fairly advanced type, but is not in a field of science or learning. The employee must be compensated on a salary basis at a rate not less than $455 per week. (b) Creative Professional Exemption (2) New York The 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. The employee must be compensated on a salary basis at a rate not less than $455 per week. The NYLL does not impose any additional criteria beyond those required by the FLSA. However, there is no minimum weekly salary threshold in New York for professional exempt employees. c. Highly Compensated Employees (1) FLSA Highly compensated employees performing office or nonmanual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption. 2. Other Basic Common FLSA Exemptions (this list is not all inclusive). a. Computer professionals (may be paid hourly if rate of pay exceeds $27.63 per hour). b. Outside salespersons. c. Commissioned sales employees of retail or service establishments Bond, Schoeneck & King, PLLC

19 d. Drivers, driver s helpers, loaders and mechanics employed by a motor carrier (if the employee s duties affect the safety of operation of the vehicles in transportation of passengers or property in interstate or foreign commerce). e. Salesmen, partsmen and mechanics employed by automobile dealerships. f. Employees employed by seasonal and recreational establishments. g. New York Adopts by reference the FLSA s Section 7 and 13 exemptions, however, Section 13 exempt employees must still be paid an overtime rate of 1 ½ times the state minimum wage (as opposed to regular rate) for hours worked over 40 per week. 12 NYCRR Salary Basis Test To be properly classified as exempt, executive, administrative and professional employees must be paid on a salary basis. This basically means if the employee is ready, willing and able to work, he/she must be paid the guaranteed weekly salary without deductions unless such deductions are expressly authorized by law. The list of permissible deductions from the weekly salary of exempt employees are: a. Employee is absent from work for one or more full days for personal reasons, other than sickness or disability; b. Employee is absent for one or more full days because of sickness or disability (including work-related accidents) and the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness and disability; c. Employer imposes penalties in good faith for infractions of safety rules of major significance; d. Employer imposes, in good faith, unpaid disciplinary suspensions of one or more full days for infractions of certain written workplace conduct rules; e. Employee takes leave under the federal Family and Medical Leave Act; or f. Employee is absent the entire workweek or performs no work during an entire workweek Bond, Schoeneck & King, PLLC

20 Impermissible reductions in salary basis pay can render an exempt employee nonexempt and those similarly situated Bond, Schoeneck & King, PLLC

21 Safe Harbor Policy If an employer has a clearly communicated policy that prohibits the improper pay deductions specified in 29 C.F.R (a) and includes a complaint mechanism, reimburses employees for improper deductions and makes a good faith commitment to comply with the FLSA s salary basis test in the future, the employer will not lose the exemption unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. To make a good faith commitment to comply with the FLSA s salary basis test, employers should review payroll records for any deductions, partial or otherwise. They should also determine the set weekly pay and manually review fifty-two (52) workweeks to determine the minimum salary is met. If not, ask why? In other words, is it because of a permissible deduction? 4. Review Salary Threshold Requirements a. FLSA Employees who earn at least $455 per week ($23,660 per annum) are exempt from overtime compensation requirements. (Computer professionals are exempt if they earn $455 per week or $27.63 per hour). To determine whether the payment meets the minimum salary level requirement, one must consider the time worked on the job and analyze whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. For example, an artist paid $250 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if 40 hours were worked. The salary level test does not apply to teachers, lawyers or doctors. b. New York Executive and administrative employees must be paid for their services on a salary basis of not less than $ ($ on or after 12/31/14, $ on or after 12/31/15) per week inclusive of board, lodging, or other allowances. Professional employees must be paid for their services on a salary basis of not less than $455 per week under the FLSA. To ensure compliance, employers should review payroll records and confirm that all employees classified as exempt are paid at least $455 (or $600 if executive or administrative in NY) per week (or $27.63 per hour if 2014 Bond, Schoeneck & King, PLLC

22 computer professional). If they are not getting paid at least the applicable amount, ask why. Is it because of a permissible deduction? Employers should also compare payroll records, Wage Theft Prevention Act notices, offer letters, etc. for consistency. 5. Auditing the Duties Test a. Review Job Titles Employees job titles are not determinative; however, they are often helpful in classification audits. DOL will normally associate a certain job title to certain duties. Thus, employers should consider changing job titles, if necessary, to avoid common non-exempt titles such as clerk, administrative assistant, Help Desk, bookkeeper, etc. b. Review Job Descriptions First determine which exemption(s) apply and review duties test for those exemptions (see above). Then, ask: (1) Are the duties accurate? How old are the job descriptions? When was the last time they were reviewed and/or revised by either the supervisor or the employee? The job descriptions are only helpful if they are accurate. (2) Do exempt employees job descriptions accurately describe the primary job duties of their positions as exempt? Compare duties to language in regulations describing exempt type duties for specific exemptions. (3) Do employees sign off on their job descriptions? Potential red flag: If different people now hold the position than when the job description was written. Ideally, employers should require employees to certify that they have read and understand their job description. (4) Are duties in job descriptions referenced in job evaluations? (5) Does the employee exercise discretion and independent judgment with respect to matters of significance? Identify language in the job descriptions that reflect discretion and independent judgment to matters of significance? For executive exempt employees common description of primary duties should include: supervising, directing, evaluating, hiring, discipline or termination (or recommendations of such) Bond, Schoeneck & King, PLLC

23 (6) Does the employee customarily and regularly direct the work of at least two (2) or more other full-time employees or their equivalent? (If relying on executive exemption). (7) Does the employee have the authority to hire or fire other employees, or are the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees given particular weight? Make sure job description indicates these are important duties of the position. They should probably appear first. (8) Is the employee responsible for a division or sub-division of the company? (9) Common non-exempt descriptors for administrative work: Filing, maintaining, reviewing established procedures and policies, processes, etc. These duties suggest little discretion and judgment over matters of significance. (10) Samples of Exempt Employee Job Descriptions: Good - Duties include: develop work schedules for all staff technicians and make adjustments as needed to accommodate changing workloads; evaluate staff productivity, efficiency, and other specific work quality performance indices; audit work completed by in-house staff and take corrective actions where necessary; perform staff performance evaluations and make decisions regarding merit increases or promotions; interview potential new hire candidates and make hiring decisions; initiate disciplinary actions and counsel employees when required.... Good - Directs and manages the financial programs and supporting information systems of the company, including budgeting, financial reporting and audit coordination; Participates as a member of the executive management team to establish and implement short and long-range organizational goals, objectives, policies and operating procedures. Provides strategic consultation to management on financial issues, including financial analyses and projects, cost identification and allocation and revenue and expense analysis; Actively monitors the company s business results and provide feedback to management for improvements to the business, not necessarily limited to financial areas; Develops business-related rapport with management team 2014 Bond, Schoeneck & King, PLLC

24 and become a resource of information and advice. Ensures that the Accounting Department effectively supports business operations and goals; Directs the implementation of strategic business and/or operational plans, projects, programs and systems, as appropriate to the finance and accounting objectives of the company; Establishes, maintains and implements financial and accounting record systems and procedures to ensure that all financial transactions are recorded according to generally accepted accounting principals (GAAP); Actively oversees and coordinates the preparation of financial statements, financial reports, special analyses and information reports; Presents reports and recommendations for programmatic and fiscal changes to management; Oversees the supervision of accounting personnel, which includes work allocation, training, problem resolution, performance evaluation, and recommendation for personal actions; Motivates employees to achieve peak performance and productivity; Constantly monitors financial operations to ascertain control deficiencies and implement corrective internal controls; Supports the internal audit team and external auditor s efforts to test and verify controls; Actively oversee the cash management, invoicing, credit/collections and accounts payable functions of the company; Monitors the disbursement and collection of funds for proper authorization and control; Develops good budgeting and benchmark techniques to identify potential problem areas; Communicates and encourages compliance with company policies and procedures, and ethical business conduct, through motivation and leadership. Good - Participates, as a member of the executive management team, in general business planning by assisting in the development and implementation of operating plans and strategies, budgets, short and long term goals and general management policies; analyzes operational problems and develops action plans to resolve them; helps oversee hiring, firing and discipline of employees; plans, distributes, directs and oversees work; evaluates performance and provides counseling and guidance; helps monitor compliance with legal requirements and company policies.... Good - Maintains the Company s system of accounts; keeps books and records on all Company transactions and assets; assists in preparation of budget; conducts financial forecasts; maintains other planning and control procedures, 2014 Bond, Schoeneck & King, PLLC

25 and analyzes and reports on variances; prepares financial statements for [Company] and branch offices; reconciles all general ledger accounts; maintains costing system for inventory; works with banks, insurance brokers, accountants and lawyers on behalf of the Company; responsible for hiring, disciplining and terminating accounting department staff; directs and assigns work, supervises and evaluates performance and provides training for accounting staff.... Bad Handles financial emergencies under supervision; supervises when necessary; performs managerial functions; oversees others; evaluates risk; reviews [Company s] financial statements; reports to supervisor(s). (11) Administrative Exemption: Typical Non-Exempt Employee Job Descriptions: (a) Greets all visitors; opens all mail and distributes it; mails invoices to customers; enters daily check receipts in for distribution to sales, accounting, management and credit; answers all incoming calls and takes messages or transfers to appropriate person; ensures sufficient funds are in the postage meter for outgoing mail; types letters; takes outgoing mail and Federal Express envelopes to pick-up locations. Issue: Where it the discretion and judgment over matters of significance? (b) Pick orders from warehouse inventory; sort incoming shipments for proper storage; load and unload trucks, as directed by manager; receive and unload shipments, as directed; clean facility, as directed. Issue: Where is the administrative work? Non-manual and office work? (c) Provides full secretarial and administrative support, including dictation, transcription, screening and fielding telephone calls and handling correspondence; manages ongoing projects and upcoming events as assigned; greets guests; organizes breakfasts and lunches hosted by [Company]; handles requests from customers for certificates of insurance; updates insurance policies per amendments; maintains employee manuals and job description files, and 2014 Bond, Schoeneck & King, PLLC

26 distributes as required; daily filing of correspondence and other documents.... Issue: Where it the discretion and judgment over matters of significance? Using established protocol and procedures not sufficient. (d) Prepares bi-weekly shipment status reports for commercial agreement suppliers; inputs and/or calculates expenses pertaining to each commercial agreement shipment; prepares liquidation report when appropriate; prepares monthly reports indicating all liquidated and non-liquidated shipments; inputs data for bi-weekly payroll for transmittal to payroll service; assists payroll (as back-up); maintains personnel records; administers 401(k) program enrollment, termination, loan program; maintains records for Company credit cards; assists accounts payable (as back-up); prepares various reports and schedules as requested.... Issue: Where it the discretion and judgment over matters of significance? Using established protocols and procedures not sufficient. (e) Collects fees for fines, licenses or permits issued, bail or documents filed and issues receipts; processes payments in various forms, i.e., cash, credit, money orders, electronic payments and transfers; prepares record of daily cash reports for review by supervisor; maintains files and records related to cash receipts and financial transactions either manually or through computer software; maintains files for pending license or permit applications; answers routine questions of the public in person, by telephone or via correspondence related to payment of fines, licenses or permits issued, bail, etc.; may prepare bank deposits; uses computer applications such as spreadsheets, word processing, calendar, and database software in performing work assignments. Issue: Where it the discretion and judgment over matters of significance? Using established protocols and procedures not sufficient Bond, Schoeneck & King, PLLC

27 (f) (g) Answers telephones; accepts assignments from supervisor; performs banking functions as directed; uses necessary software programs; handles mail. Maintains inventory of supplies; computerizes the inventory; orders supplies; organizes storage facility; coordinates deliveries of supplies; communicates with Company personnel regarding need for additional supplies.... B. Review Job Evaluations Job evaluations are usually a very good indicator (or should be) of employees primary duties. Do performance evaluations reflect importance of exempt work? In other words, is the employee being rated on primary exempt work duties? Do employees sign their job evaluations and acknowledge the duties expected of them? Are those duties consistent with that of an exempt position? Do the job evaluations relate to the job descriptions? They generally should. Job evaluations supporting exempt status: Great job on that research project for the CEO. You really found excellent compensation studies. Good job managing your department. The department s attendance, productivity and morale has improved dramatically over the past year. Good job working with the board to develop a clear vision for the special project. Although you developed a written strategic plan, it did not include measurable goals and objectives consistent with the organization s mission. Your recommendations for new programs and business lines were well researched and presented. You failed to conduct performance evaluations of those under your supervision. Job evaluations potentially indicating non-exempt status: Great job answering the phones so quickly. You have gotten much better using Microsoft Word. You show great enthusiasm when greeting visitors at the front desk. You seem to have an attitude when asked to make copies. Wonderful job loading the truck so efficiently Bond, Schoeneck & King, PLLC

28 You have improved your organizational skills, especially your maintenance of personnel files. Very good progress eliminating data inputting mistakes. Excellent job catching mistakes from the established protocol. C. Supervisory Interviews Most exemption audits should include supervisory interviews. Have they reviewed the job description? When was the last time? Do they agree they are accurate? Are there personality and/or operational differences between employees in the same job title? Supervisory interviews can be particularly helpful with respect to auditing administrative exempt employees because this exemption relies on independent judgment and discretion which often turns on how much discretion and judgment a particular supervisor gives to an employee. How much oversight is there? How much discretion do they really have? Do they have a budget? Do they submit reports with recommendations? How often is the supervisor looking over the shoulder of the employee? Administrative exemption: Ask supervisors how often they follow the recommendations of an exempt administrative employee? What evidence do we have reflecting these facts? Do we have interview notes? Do they sign off on post-interview submissions on applicants? Executive exemption: Ideally, these employees should be part of the hiring / firing process. Is there evidence of their involvement? If they do not make ultimate decision to hire or fire, how often are their recommendations followed on these issues? Review records to determine these answers. For example, if recommendations to hire/fire/discipline followed 10% of time in last 5 years red flag! D. Consider Employee Interviews Whether or not you should interview the actual employees is a highly fact sensitive matter. Analyze pros and cons of doing so. Do employee interviews indicate that the duties actually performed by employees match the duties expected of them according to their job descriptions? Do employees complete a self-assessment form? If so, do they identify their biggest projects? Potential downside: Raising a potential issue with misclassification. Will employees start asking tough questions? 2014 Bond, Schoeneck & King, PLLC