Administering payroll for employees with variable work schedules and hourly rates can cause major headaches for employers. In an effort to simplify and reduce administrative costs, employers are oftentimes tempted to set a standard overtime rate to be paid at a set dollar amount to all employees regardless of variations in compensation rates and actual weekly compensation earned. However, as a recent Department of Labor Opinion Letter explains, employers must adhere to the FLSA’s overtime calculation rules when setting such rates.

The December 21, 2018 letter analyzed home health aides who provide in-home services to various clients. Some of the employees’ weekly schedules were heavily influenced by travel between clients throughout the day and, as a result, their hours worked varied greatly. To capture the total time worked and corresponding pay, the employer multiplied an employee’s time with clients by his or her hourly pay rate for such work. The employer then divided the total by the employee’s total hours worked, which includes both the client time and the travel time. The typical standard rate for the employees was $10 per hour, and if any employees worked over 40 hours in a given work week, they were paid time and a half for all hours over 40 based on that standard rate ($10 x 1.50 = $15/hour).

The Opinion letter took issue with the standard rate of $10 per hour. The $10 per hour rate was lawful for all employees who made $10 per hour or less, as an employer may choose to pay overtime greater than its statutory obligation. However, the DOL determined that the employer’s practice did not comply with the FLSA’s overtime calculation rules for those employees whose regular rate of pay exceeded $10 per hour. Those employees’ standard rate, when calculating overtime, could not be lower than their actual hourly rate.  As the DOL further explained, the employer’s practice did not entirely compensate certain employees for all overtime worked.

This letter reminds employers that, when calculating overtime compensation, the regular rate of pay cannot be arbitrarily selected, especially when the selected amount is potentially less than the employee’s actual hourly wage rate. Rather, overtime must be based on the actual rate of pay the employee earns.

In a 5-4 decision, the Supreme Court on Monday held in Encino Motorcars, LLC v. Navarro, et al., that current and former service advisors in a car dealership were not entitled to overtime under the Fair Labor Standards Act. The Court ruled that the service advisors were exempt from overtime under 29 U.S.C. §2113(b)(10)(A), which applies to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements. . .”

The service advisors claimed that while their job description required them to attempt to sell additional services beyond what prompted the customers’ visits, they did not sell cars or perform repairs. The majority of the Supreme Court disagreed with the service advisors and stated that the question is whether service advisors are “salesm[e]n . . . primarily engaged in . . . servicing automobiles.”  The Court concluded that they were. Much of the majority opinion and the dissent focused on the grammatical interpretation of the use of “or” to disjoin three types of employees doing two types of work on three kinds of products. The majority found that the language meant that a salesman primarily engaged in servicing automobiles was exempt, while the dissent argued that a salesman had to be engaged only in selling automobiles to qualify.

The service advisors also argued that the FLSA exemptions should be construed narrowly. The Supreme Court also rejected this argument because, according to the majority, the FLSA gives no “textual indication” that its exemptions should be construed narrowly and that there was no reason to give them “anything other than a fair (rather than a ‘narrow’) interpretation.” Notably, the Court stated that exemptions contained in the FLSA are to be construed just the same as the basic protections in the Act, noting that exceptions are often the price paid to have the law passed in the first place.

This is the second time this case has been before the Supreme Court.  In 2011, the Department of Labor issued a rule that interpreted “salesmen” to exclude service advisors, and the Ninth Circuit deferred to that administrative determination. In 2016, the Supreme Court, in its prior Encino Motorcars’ decision, held that courts should not defer to that rule because it was procedurally defective. The Supreme Court remanded the case back to the Ninth Circuit Court of Appeals to address whether service advisors are exempt. The Court of Appeals for the Ninth Circuit held on remand that service advisors were exempt without regard to the 2011 interpretation and that decision was reversed by the Supreme Court on April 2.

In general, the Family and Medical Leave Act (“FMLA”) provides that eligible employees may take twelve weeks of unpaid leave in a twelve-month period for the serious health condition of the employee, the employee’s spouse, the employee’s parents or the employee’s children. Thus, if an employee normally works five, eight-hour days a week, and the employee misses one eight-hour day because of an FMLA event, the employee uses one-fifth of a week of FMLA leave. FMLA permits an employer to convert these fractions to their hourly equivalent so long as the conversion equitably reflects the employee’s total normally scheduled hours. Although calculating the twelve-week period is simple enough when the employee works a regular schedule and takes leave in full day increments, complications arise when the employee’s work hours vary, and the employee takes intermittent leave. An example of this problem occurs when an employee is required from time to time to work mandatory overtime and misses the overtime because of an FMLA event.

The issue of calculating mandatory overtime as part of an employee’s FMLA leave entitlement was recently addressed by the United States Court of Appeals for the Eighth Circuit in Hernandez v. Bridgestone Ams. Tire Operations, LLC, 822 F.3d 1001 (8th Cir. 2016). In that case, an employee who was required to work mandatory overtime missed several overtime shifts to care for the serious health condition of his child. The employer included the mandatory overtime as FMLA time but did not include the hours when calculating the employee’s leave entitlement. After the employee had exhausted all his FMLA leave, and took subsequent, unexcused absences to care for his child, he was discharged because of his attendance. The employee sued the employer alleging that it had interfered with his FMLA entitlement. The Court of Appeals concluded that the employer was correct in counting the missed overtime hours against his FMLA entitlement. Notwithstanding this finding, the Court held that employer still had improperly interfered with the employee’s FMLA rights because, in calculating the number of hours to which the employee was entitled under FMLA, the employer did not include mandatory overtime. In other words, the employer counted the missed mandatory overtime in calculating FMLA usage but did not count mandatory overtime in calculating the amount of FMLA leave to which the employee was entitled.

In a situation like Bridgestone, if an employee’s schedule varies from week to week because of mandatory overtime to such an extent that an employer is unable to determine with certainty how many hours the employee would otherwise have worked but for the taking of FMLA leave, a weekly average of hours scheduled over the twelve months prior to the beginning of the leave (including any hours for which the employee took leave of any type) are to be used in calculating the employee’s leave entitlement.  For example, if an employee regularly scheduled to work 50 hours per week takes an entire week of FMLA leave, the whole 50 hours can be counted as FMLA time used, but that may or may not convert to one week of leave depending on how many hours are considered to be in the employer’s “work week.”  If the employer’s average work week is 50 hours, the FMLA allotment would also be one week; if the average week is 55 hours, the allotment would be .91 weeks; if the average week is 40 hours, the allotment would be 1.25 weeks.

Ultimately, the Bridgestone decision is an important reminder that employers who count missed overtime for usage purposes must also count overtime to calculate FMLA entitlement.

By now most employers are (hopefully) aware that the U.S. Department of Labor has significantly changed some of the rules governing exemptions from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”). The revised regulations will go into effect on December 1, 2016, and they will principally do the following:

  • Immediately double the minimum salary threshold for the “white collar” exemptions to $913 per week ($47,476 annualized)
  • Adjust the minimum salary threshold for inflation every three years
  • Change the way the minimum salary threshold is calculated so that employers can count certain bonuses and commissions toward as much as 10% of the threshold
  • Set the total annual compensation requirement for the highly-compensated employee exemption to the annual equivalent of the 90th percentile of full-time salaried workers nationally (i.e., $134,004)

Needless to say, these unprecedented changes present significant challenges for employers. Given the potential consequences of noncompliance it is essential that employers act immediately to ensure they have taken all necessary steps to comply with the new regulations prior to December 1st. While each workplace will be different, some general suggestions that employers should consider include the following:

  • Immediately identify exempt positions that fall below the new minimum salary threshold and consider
    • Who will get a pay raise to maintain the exemption
    • Who will be reclassified as non-exempt
  • For reclassified employees, study the employees’ average hours worked for purposes of setting new pay rates
  • Given the likelihood of increased litigation and stepped up DOL enforcement, consider reclassifying other “vulnerable” positions
  • Ensure accurate timekeeping of all hours worked
    • Train reclassified employees, many of whom will be uncomfortable with or resistant to tracking their hours worked
    • Train managers
    • Address “bring your own device” issues (e.g., after-hours e-mails, texts, and phone calls)
  • Review and update policies and procedures
    • Policies related to overtime
    • Policies related to recording hours worked
  • Communicate the changes to your workforce
  • Plan for future inflation-driven adjustments to the minimum salary threshold to the extent possible

Overtime_Clock_Lead_Copyright_ImilianAfter months of waiting and speculation, the White House later today will release a new rule that could make more than four million Americans eligible for overtime pay. The rule will become effective in December, and will do the following:

  • Immediately double the minimum salary threshold for most white collar exempt classifications to $47,476 per year ($913 per week)
  • Adjust the minimum salary threshold for most white collar exempt classifications for inflation every three years
  • Change the way that the minimum salary is calculated so that employers can count bonuses and commissions toward as much as 10 percent of the salary threshold

Although the changes in the new rule are significant, many employers will be very relieved to learn that the White House decided not to make changes to the duties tests for the white collar exemptions at this time. Some observers, however, believe that changes to the duties tests are inevitable, and that the timing of those changes will depend largely on the outcome of the election in November.

A copy of the new rule, along with a summary from the White House of the basis for the rule, can be found here.

Employers should begin reviewing their exempt classifications and salary structures to prepare for the December effective date of the new rule. If you have questions about the rule or implementation strategies, contact a member of the Frantz Ward Labor and Employment Practice Group.

Based upon information received from a number of sources, it now appears that the Department of Labor’s controversial changes to the rules governing the white collar exemptions under the Fair Labor Standards Act will be finalized and published in the coming weeks – potentially as early as next week. Once published, it is expected that employers will have only 60 days before the new rules take effect.

Click here to read this Client Alert.

On June 30, 2015, the Department of Labor (DOL) issued proposed rules that will significantly increase the minimum salary threshold required for an employee to be classified as exempt for purposes of overtime pay under federal law. It is expected that nearly 5 million additional workers will become eligible for overtime pay within the first year of the rule’s implementation.

Under the Fair Labor Standards Act (FLSA), employers are not required to pay overtime to certain “exempt” categories of employees. One such category is “white collar” employees such as executive, administrative, professional, outside sales, and computer employees. To qualify for one of the so-called “white collar” exemptions, an employee must meet a minimum salary requirement of $455 per week (or $23,660 per year) and perform certain job duties. The proposed rules increase the salary threshold amount for “white collar” employees to $970 per week (or $50,440 per year) starting in 2016. In addition, the DOL has proposed that the salary level should increase every year automatically after 2016 based on nationwide earnings data. The precise method for calculating this annual salary increase has not yet been determined.

The proposed rules also would alter the requirements for “highly compensated employees”, who are also exempt from overtime. The salary threshold for highly compensated employees will be increased from $100,000 to $122,148, annually.  

Notably, the DOL did not propose rules revising the duties tests applicable to the white collar exemptions.  Instead, the DOL has asked for public comment on whether the current duties tests are working as intended to determine whether an employee is truly a white collar employee eligible for overtime-exempt status.

Interested parties will have the opportunity to submit comments on the proposed rules before the DOL issues final regulations, which are likely to go into effect in 2016. Although the final regulations have not taken effect yet, employers should assess employees’ salaries to determine how the rules will affect their operating costs when implemented. Reclassification of employees or updated policies on performing overtime work may be appropriate. Now is the time to develop a reclassification plan that ensures proper documentation and recordkeeping, as well as effective communication of the changes to employees.  

The United States Supreme Court held today that pharmaceutical sales representatives are exempt from overtime under the outside sales exemption of the Fair Labor Standards Act.  The significance of the decision for labor lawyers and employers is not necessarily in the result, but in the Court’s sharp criticism of the DOL’s interpretation of its regulations in advancing its position. 

 A copy of the opinion is attached here, Christopher et al v. Smithkline Beecham, 567 U.S. ___ (2012), Slip Opinion No. 11-204.

The DOL took the position in amicus briefs that pharmaceutical sales representatives were not shielded from overtime by the outside sales exemption, because they were not technically making sales.  Rather, pharmaceutical sales representatives, or “detailers,” were promoting drugs to physicians and obtaining a “non-binding commitment” to prescribe a drug.  The DOL argued that this was promotion, not sales. 

In a 5-4 decision, the United States Supreme Court disagreed, holding that a transfer of title need not occur in order for the transaction to constitute a sale.

In order to reach the decision, the Court had to rule that the DOL’s interpretations were not entitled to the deference normally afforded to an agency interpretation.  Instead, the Court held that the DOL’s position was plainly erroneous, inconsistent with the regulations and not reflective of a “fair and considered judgment on the matter.” 

Of even more assistance to labor lawyers and employers is the language used by the Court in cautioning against the “unfair surprise” of imposing liability based on an the application of an interpretation made by an agency after the conduct occurred:

There are strong reasons for withholding Auer deference in this case.  Petitioners invoke the DOL’s interpretation to impose potentially massive liability on respondent for conduct that occurred well before the interpretation was announced.  To defer to the DOL’s interpretation would result in precisely the kind of “unfair surprise” against which the Court has long warned.

Syllabus at p. 3 (citations omitted).

We have recently asserted a similar argument on behalf of a client in an FLSA action involving a late DOL interpretation of the Motor Carrier Act exemption.  This case may prove helpful in reigning in broad interpretations asserted by the DOL in wage and hour matters. 

Ultimately, this decision hinges upon the principles of statutory construction and interpretation.