Back to Basics: Exempt or Nonexempt How to Avoid Misclassification 21 st Annual PIHRA Legal Update January 2008 Veronica M. Gray, Partner Nossaman Guthner Knox & Elliott LLP 18101 Von Karman Ave., Suite 1800 Irvine, CA 92612 Phone: 949.477.7663 Email: vgray@nossaman.com www.nossaman.com
What We Will Cover Recent Verdicts & Settlements Key Terms Tools for Classifying an Employee Job Classification Audits What if you Misclassify an Employee 2
Notable Wage and Hour Verdicts & Settlements (Years 2006-2007, in millions) Company Amount Class Size UPS $87 20,000 IBM $65 32,000 Albertson s $53.3 7,000 Merrill Lynch $37 3,250 Wal-Mart $33 86,680 Siebel Systems $27.5 800 E-loan $13.6 500 Wells Fargo $12.8 4,500 Darden Restaurants (Red Lobster, Olive Garden) Rubio s Restaurant $7.5 Costco $5.3 Real Mex Restaurants (El Torito) $11 40,000 $5 Guitar Center $3.5 Northrop $2 900 3
Classification 4
Two Sets of Laws Federal The Fair Labor Standards Act (FLSA) & The Department of Labor (DOL) [www.dol.gov/esa] State Labor Code & Industrial Welfare Commission Wage Orders (Wage Orders) [www.dir.ca.gov/lwc/wageorderindustries] There are 17 IWC Orders " or Wage Orders" which regulate the wages, hours, and working conditions in certain industries or occupations. 5
Industrial Welfare Commission Wage Orders These orders regulate the wages, hours and working conditions in certain industries There are 17 such orders that are also known as IWC Orders or Wage Orders which are available online at www.dir.ca.gov/lwc/wageorderindustries 6
Division of Labor Standards Enforcement Division of Labor Standards Enforcement ( DLSE ) is an agency within the Department of Industrial Relations, which administers and enforces California s wage and hour laws. The DLSE s policies are contained in its 2002 Enforcement Policies and Interpretations Manual, available online at www.dir.ca.gov/dlse/manual- Instructions.htm. 7
Exempt vs. Nonexempt Exempt No Overtime Exempt status deprives an employee of the right to overtime and to many of the other protections afforded to nonexempt employees by the Industrial Welfare Commission Orders. Nonexempt Overtime Nonexempt status means that the provisions of the Industrial Welfare Commission Orders cover an employee. 8
Minimum Wage The minimum amount of compensation per hour that an employer is required by law to pay an employee for all hours worked. California - $8.00 since January 1, 2008. Federal - $5.85 since July 24, 2007. 9
Primarily Engaged In In California, each of the exemptions administrative, executive and professional require that the employee be primarily engaged in the duties which meet the test for the exemption. (Quantitative Analysis) The term primarily engaged in means that more than one-half of the employee s work time must be spent engaged in exempt work. Federal law only requires that the primary duty of the employee falls within the exempt duties. (Qualitative Analysis) 10
Salaried Employee A salaried employee must be paid overtime unless they meet the test for exempt status as defined by federal and state laws, or unless they are specifically exempted from overtime by the provisions of one of the Industrial Welfare Commission Wage Orders regulating wages, hours and working conditions. 11
Relationship Between the FLSA & the Wage Orders The Wage Orders specifically provide [t]he activities constituting exempt work and non-exempt work shall be construed in the same manner as such terms are construed in the following regulations under the Fair Labor Standards Act effective as of the date of this order: [former] 29 C.F.R. Sections 541.201-205, 541.207 208, 541.210, and 541.215. 12
Relationship Between the FLSA & the Wage Orders (cont.) Although the 2001 IWC Wage Orders specifically incorporated federal regulations under the FLSA as interpretive guidance for California law, the Wage Orders did not adopt the FLSA standards for primary duty, nor adopt the federal law s lower salary basis test provisions. 13
Relationship Between the FLSA & the Wage Orders (cont.) Because the IWC derived the duties that meet the test for the administrative exempt from language in the federal regulations, with the exception of the primary duty phrase, the provisions of the CFR which are specifically referenced by the 2001 Wage Orders contain detail guidance about how to define the terminology used in defining the exemption and the types of duties that typically will be found to be exempt. 14
Relationship Between the FLSA & the Wage Orders (cont.) Because the FLSA regulations regarding exemptions/overtime were revised, effective August 23, 2004, California law will be compared/analyzed to the former FLSA long and short tests and the new FLSA standard test. Although both California and federal law have a salary and a duties requirement, there are critical differences between the two. (See Chart comparing all four tests.) 15
Exemptions Administrative Executive Professional Computer Outside Sales 16
California Administrative Exemption The California Wage Order Nos. 1-2001 through 13-2001 and 15-2001 define a person employed in an administrative capacity as any employee who: Earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment (40 hours per week) ($640/week) ($33,280/yr); and 17
California Administrative Exemption (cont.) Whose duties and responsibilities involve either: The performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer s customers; or The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and 18
California Administrative Exemption (cont.) Who customarily and regularly exercises discretion and independent judgment; and Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity (as such terms are defined for purposes of this section); or 19
California Administrative Exemption (cont.) Who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge; or Who executes under only general supervision special assignments and tasks; and Who is primarily engaged in duties that meet the test of the exemption. 20
The Key Terms Defining the Administrative Exemption Primary Duty Primarily Engaged Work directly related to management policies or general business operations Exercises discretion and independent judgment 21
Primarily Engaged (California Only) Means more than one-half of the employee s work time (quantitative analysis). Query: What if one employee works less than onehalf and another works more than one-half? 22
Work Directly Related to Management Policies or General Business Operations Work performed by employees who perform work of substantial importance to the management or operation of the business of his employer or his employer s customers. 23
Work Directly Related to Management Policies or General Business Operations (cont.) Must be directly related to assisting with the running or servicing of the business; i.e., advising management, planning, negotiating, representing the company, purchasing, promoting sales, business research, and control. Includes those whose work affects policy or whose responsibility it is to execute or carry it out. 24
Work Directly Related to Management Policies or General Business Operations (cont.) Does not include working on a production line or selling a product. Includes a wide variety of persons who either carry out major assignments in conducting the operations of the business, or whose work affects business operations to a substantial degree, even though their assignments are tasks relevant to the operation of a particular segment of the business. 25
Work Directly Related to Management Policies or General Business Operations (cont.) Includes persons employed as advisory specialists and consultants; i.e., credit managers, sales directors, claim agents and adjusters, wage-rate analysts, tax experts, account executives of advertising agencies, customers brokers in exchange firms, promotional persons, and others. 26
The Exercise of Discretion and Independent Judgment [With Respect To Matters Of Significance Or Of Consequence] Has The Authority To Make Choices Free From Immediate Supervision Or Direction. Involves The Comparison And The Evaluation Of Possible Courses Of Conduct And Making A Decision After The Various Possibilities Have Been Considered. 27
Factors to Consider in Determining Whether an Employee is Exercising Discretion and Independent Judgment Has authority to implement, formulate, or affect policy. Carries out major assignments. Affects business operations to a substantial degree. 28
Factors to Consider in Determining Whether an Employee is Exercising Discretion and Independent Judgment (cont.) Has authority to waive or deviate from company policy. Has authority to negotiate and bind the company on significant matters. Provides consultation or expert advice to management. 29
Factors to Consider in Determining Whether an Employee is Exercising Discretion and Independent Judgment (cont.) Is involved in planning short- or long-term company goals. Represents the company in handling disputes. Makes recommendations to management regarding policies and procedures. 30
Final Decision is Not Necessary to Come Within the Term Discretion and Independent Judgment The decisions made as a result of the exercise of discretion and independent judgment do not need to be final decisions. The decisions made as a result of the exercise of discretion and independent judgment may consist of recommendations for action rather than the actual taking of action. 31
Final Decision is Not Necessary to Come Within the Term Discretion and Independent Judgment (cont.) The fact that an employee s decision may be subject to review and that, upon occasion, decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment within the meaning of the regulations. Nevertheless, the exercise of discretion and independent judgment must be done customarily and regularly, which signifies a frequency which must be greater than occasional but less than constant. 32
Frequent Misapplication of the Administrative Exemption Confusion between the exercise of discretion and independent judgment, and the use of skill in applying techniques, procedures, or specific standards. Misapplication to employees making decisions relating to matters of little consequence. Misapplication to employees engaged in production aspects of the employer s business as opposed to administrative functions. 33
California Executive Exemption Earns a salary of at least $33,280 a year ($640/week) based on 40 hours Is primarily engaged in these duties, and Manages the organization or a department or subdivision, and Directs the work of two or more other employees customarily and regularly, and Has authority to hire or fire employees, or give recommendations that are given weight, and Customarily and regularly exercises discretion and independent judgment 34
Common Misclassification of Executive Exemption Performs routine clerical or sales duties Performs the same type of work as subordinates [e.g., restaurant manager who waits on tables or cooks meals] Performs maintenance or repair work Assistant managers or trainees 35
California Professional Exemption Earns a salary of at least $33,280 a year ($640/week) based on 40 hours, and Customarily and regularly exercises discretion and independent judgment Licensed or certified to practice medicine, dentistry, optometry, architecture, teaching, engineering, accounting or law, or Is primarily engaged in a learned or artistic profession requiring advanced knowledge in a field acquired by a prolonged course of specialized study; or 36
California Professional Exemption (cont.) Is engaged in work that is original and creative in a recognized field of artistic endeavor not including copy writers, graphic designers, photographers, or many artists who do not depend primarily on invention, imagination or talent Is engaged in work that is predominantly intellectual and varied in character and the output cannot be standardized in relation to a given period of time 37
California Computer Professional Exemption Must be primarily engaged in intellectual or creative work, and Requires exercise of discretion and independent judgment, and Primarily engaged in certain systems analysis techniques, computer system programming, and design of software and hardware, and Is highly skilled and proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming and software engineering, and Is paid at least $36.00 per hour or a salaried equivalent 38
Common Misclassifications of Computer Professional Exemption Employee merely repairs, maintains or manufactures computers or related equipment Trainees or entry-level positions Writers of documentation, instructions, promotional material, or content for the Internet or CDs Professionals whose work is very dependent upon computer or software and who is skilled in computeraided software but who is not in a computer systems analysis or programming occupation 39
California Outside Salesperson Exemption Must be 18 years of age or older, and Spends more than 50% of their working time selling or obtaining orders, and Works at least 50% of their time away from the employer s place of business To meet the 50% requirement do not include time expended performing incidental deliveries, repairs or maintenance (Ramirez v. Yosemite Water (1999) 20 Cal.4 th 785) 40
Preservation Of The Exempt Status 41
Preservation of the Exempt Status (cont.) Key Principle: An exempt employee s salary is not subject to reduction because of variations in the quality or quantity of the work performed Thus, only subject to certain exceptions, exempt employees must be paid their full salary for any week in which they do any work, regardless of how few or how many hours they work 42
Preservation of the Exempt Status (cont.) Permitted Deductions Salary Docking Absences of a full day or more for personal reasons vacation, personal leave, and religious holidays Office closures due to inclement weather only if for entire week Partial day absences of at least 4 hours if there is a bank of vacation or PTO time* *DLSE Manual 51.6.21, 51.6.21.1, 51.5.15 & 5.15.4; Conley v. Pacific Gas & Electric Co. (2005) 131 Cal. App.4th 260. [deductions from an employee s vacation leave bank for partial-day absence does not violate CA salary-basis test because still receiving same amount in each pay period] 43
Preservation of the Exempt Status (cont.) Partial or full day absences for sickness or disability, where an employee is compensated for absences under a bona fide sickness/disability plan - if no plan - can only deduct if absence exceeds one week* FMLA/CFRA leave even if less than a full day Pregnancy leave not clear if less than a full day Workers compensation if employee is compensated for loss of salary in accordance with workers compensation law and have a plan/practice that replaces compensation lost due to non-industrial sickness or disability *Bona fide has not been defined in federal regulations nor by the DLSE. PTO plans are not considered by DLSE to be included. See DOL Op. Ltr 1/7/05 44
Preservation of the Exempt Status (cont.) Penalties imposed in good faith for infraction of safety rules of major significance (Fed only) Unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules* (Fed only) No work performed in a week Days that are not worked in the employee s first or final weeks of employment *Caveat: failure to make up time or work the required number of hours is not a violation and disciplinary suspension rules must be applied equally and not related to performance or attendance 45
Preservation of the Exempt Status (cont.) Provided no docking of wages, without risk of loss of exemption, employers may regulate the work hours of exempt employees* Establish number of hours exempt employee is to work (50) Require exempt employee to record hours worked Require exempt employee to make up work lost due to personal absences of less than one day U.S. Dept. of Labor Opinion Letter FLSA 2006-6 (March 10, 2006) *You can also compensate exempt employees in addition to their salary without losing the exemption 46
Preservation of the Exempt Status (cont.) Do not make deductions for: Quality or quantity of work Unavailability of work Disciplinary or safety violation reasons* Jury/witness/military service Lost or damaged equipment Reduced workload Temporary shutdowns [but can reduce workweek and reduce pay on a pro-rata basis provided it meets the salary test] * Federal regulations permit 47
Job Classification Audit What You Need To Do & Ask Design the scope of your audit Determine when you will do it Determine how you will do it Determine who will do it 48
Job Classification Audit (What You Need To Do) 49
Job Classification Audit (What You Need to Do) Base the exemption on the actual work performed, not merely the job description; Maintain records of actual (exempt) work performed; Analyze/record how the employee spends his/her time (exempt v. nonexempt); 50
Job Classification Audit (What You Need to Do) Train employees on the difference between exempt and nonexempt work; Inquire into the realistic requirement(s) of the job, including how the employee should spend his or her time and whether the employee's practice diverges from the employer's realistic expectations; Determine whether the employer's expectation is realistic; i.e., that the employee will be primarily performing managerial duties; 51
Job Classification Audit (What You Need to Do) Make sure that the job description is based on "reality" and not "idealized;" Determine whether an employee is avoiding a valid exemption by his/her own substandard performance; and Determine whether the employee's practices diverge from the employer's realistic expectations. 52
Job Classification Audit (What You Need to Ask) 53
Job Classification Audit (What You Need to Ask) How much time is spent in the performance of managerial duties; What is the relative importance of the managerial duties as compared with other types of duties; 54
Job Classification Audit (What You Need to Ask) Does the employee carry out major assignments in conducting the operations of the business; Does the employee perform work that affects business operations to a substantial degree; Does the employee have authority to commit the employer in matters that have significant financial impact; Does the employee have authority to waive or deviate from established policies and procedures without prior approval; 55
Job Classification Audit (What You Need to Ask) Does the employee have authority to negotiate and bind the company on significant matters; Does the employee provide consultation or expert advice to management; Does the employee become involved in planning long-or-short-term business objectives; Does the employee investigate and resolve matters of significance on behalf of management; 56
Job Classification Audit (What You Need to Ask) Does the employee have personal responsibilities, troubleshooting or problem-solving activities on behalf of management; Does the employee have the authority to handle atypical or unusual situations; Does the employee have authority to set budgets; Does the employee have responsibility for assessing customer needs; 57
Job Classification Audit (What You Need to Ask) Does the employee serve as a primary contact to public or customers on behalf of the employer; Does the employee have the responsibility for advertising or promotional work; Does the employee have the responsibility for coordination of departments, requirements, or other activities for or on behalf of employer or employer s clients; 58
Job Classification Audit (What You Need to Ask) Does the employee have the responsibility for the decisions made as a result of the exercise of discretion and independent; Does the employee represent the company in handling complaints, arbitrating disputes or resolving grievances. 59
Reclassification 60
Reclassification (cont.) The Team Human Resources/Management/Finance/Legal Issues Are any of the employees improperly misclassified Do you need to revise the job descriptions Did any of the employees work overtime How will you determine the amount of overtime Will there be payments for back pay, penalties, and/or interest What/When will the employees be told Who will tell the employees 61
Reclassification (cont.) What about terminated employees What will be the effective date Will they continue to be salaried or converted to hourly Impact of increase in minimum wage Impact on any other compensation plans How will you maintain time records and record meal (and rest) breaks Advise payroll Training & Communication Evaluate all risk factors 62
Consequences of Misclassification (cont.) Unpaid overtime Civil Penalties Interest (10%) Attorneys fees Court costs Injunctive relief Statute of Limitations 4 years Potential exposure for individual liability 63
Individual Liability? Reynolds v. Bement (2005) 36 Cal. 4 th 1071 Jones v. Gregory (2006) 137 Cal. 4 th 798 64
Caveats Job titles are of no consequence. The actual determination of exempt or nonexempt status must be based on the nature of the actual work performed by the individual employee. A salaried employee does not necessarily mean an exempt employee. 65
Caveats (cont.) If you are required to comply with California and federal law, always follow the law most favorable to the employee. The employer always has the burden of establishing that a white collar exemption applies. 66
Caveats (cont.) Directly and Closely Related Work. Work which is directly and closely related to the performance of work which comes within the definition of administrative exemption is considered exempt work; i.e., routine/nonexempt in nature; [work without which the more important (exempt) work cannot be performed properly] -- note taking, typing own report, or preparing drawings. 67
Caveats (cont.) Communicate with the employees. 68
Final Word TO SECURE OURSELVES AGAINST DEFEAT LIES IN OUR OWN HANDS. SUN TZU - ART OF WAR 69
Executive Employees Federal Standard (7/24/07) California Standard Salary $468 per week $640 per week (1/01/08) Duties Primary duty consists of the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision of the enterprise. Customarily and regularly directs the work of two or more other employees. 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. The management of the enterprise or of a customarily recognized department or subdivision. Customarily and regularly directs the work of two or more other employees. Has 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 will be given particular weight. Customarily and regularly exercises discretion and independent judgment. Primarily engaged in duties that meet the test of the exemption. 70
Administrative Employees Federal Standard (7/24/07) California Standard Salary $468 per week $640 per week (1/01/08) Duties Primary duty consists of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer s customers; or the employee performs functions in the administration of a school system, an educational establishment, or institution that directly relate to the academic instruction or training of the establishment. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Performing office or non-manual work directly related to management policies or general business operations of the employer or the employer s customers; or performing functions in the administration of a school system or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and Customarily and regularly exercises discretion and independent judgment; and Regularly and directly assists a proprietor or employee employed in a bona fide executive or administrative capacity; Performs specialized or technical work requiring special training, experience, or knowledge, under only general supervision; or Executes special assignments and tasks under only general supervision; and Primarily engaged in duties that meet the test of the exemption. 71
Learned Professional Employees Federal Standard (7/24/07) California Standard Salary $468 per week $640 per week (1/01/08) Duties Primary duty consists of the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. Licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or Primarily engaged in an occupation commonly recognized as a learned or artistic profession; and Customarily and regularly exercises discretion and independent judgment in the performance of duties. 72
Creative Professional Employees Federal Standard (7/24/07) California Standard Salary $468 per week $640 per week (1/01/08) Duties Primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. [See Learned Professional Exemption] 73
Computer Employees Federal Standard (7/24/07) California Standard Salary $468 per week Not less than $36 per hour (1/1/08) Duties Employed as a computer systems analysis, computer programmer, software engineer, or other similarly skilled worker in the computer field. Primary duty of (A) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or (B) 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; or (C) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (D) a combination of duties described in (A), (B) and (C), the performance of which requires the same level of skills. Primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment. Primary duty of: (A) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications; (B) 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; or (C) documentation,testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems. Employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering. A job title shall not be determinative of the applicability of this exemption. 74
Outside Sales Employees Federal Standard (7/24/07) California Standard Salary None Required. None Required. Duties Primary duty consists of making sales or obtaining order or contracts for services or the use of facilities for which a consideration will be paid by the client or customer. Customarily and regularly engaged away from the employer s place or places of business. Customarily and regularly works more than half the working time away from the employer s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities. 75
Questions? Veronica M. Gray, Partner Nossaman Guthner Knox & Elliott LLP 18101 Von Karman Ave., Suite 1800 Irvine, CA 92612 Phone: 949.477.7663 Email: vgray@nossaman.com www.nossaman.com/employmentlaw Copyright, 2007 Nossaman Guthner Knox & Elliott, LLP. All Rights Reserved The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice. 76