The Fair Labor Standards Act (FLSA) key components are a limit upon the number of hours an employee can work at regular rate, the establishment of a minimum wage, and the regulation of child labor. Its purpose is to cause employers to hire more workers, rather than having existing employees work more hours. As of January, 2004 the minimum wage is $5.15 per hour.
Employees are covered by the FLSA if they are individually engaged in interstate commerce (or in the production of goods for interstate commerce). Since the definition of interstate commerce is broad enough to include the regular use of telephones and/or the receipt or movement of goods in interstate commerce, practically every employee is covered. In fact, undocumented aliens are FLSA employees, even though the Immigration Reform and Control Act prohibits their employment.
This following covers exemptions from the FLSA, calculation of hours worked, definition of a work week, and calculating the regular rate for nonexempt salaried employees.
Exemptions
Hours Worked
The Work Week
Rates
Fluctuating Work Weeks
Bonuses and Prizes
Commissions
Compensatory Time
Travel Time
Exemptions
The Department of Labor recently undertook a major overhaul of the exemptions from the Fair Labor Standards Act effective August 23, 2004. For updates on status of regulations contact counsel or access the Web site for the Wage and Hour Division of the Department of Labor.
There are two types of exemptions from the FLSA. Total exemptions apply to both minimum wage and overtime requirements. Partial exemptions apply only to overtime requirements. The most widely applied exemption from the overtime requirements are for the so-called "white collar" exemptions: executive, administrative, professional, and a new concept, the highly compensated employees.
Employees must be paid on a salary basis to qualify for the executive, administrative, or professional exemption. The new minimum salary level for most employees is $455 per week, which is the equivalent of $23,660 per year. The compensation cannot be reduced because of variations in the quality or quantity of the work performed.
Executive Exemptions
Administrative Exemptions
Learned Professional Exemptions
Highly-Compensated Exemptions
An employee is not paid on a salary basis if deductions from the predetermined salary are made for absences occasioned by the employer (for example, the firm is closed for the day) or by the operating requirements of the businesses (for example, there is no work available for the employee). If the employee is ready, willing and able to work, deductions may not be made for time when work is not available. However, the regulations now numerate seven exceptions from the "no pay-docking" rule:
1. Absence from work for one or more full days for personal reasons, other than sickness or disability.
2. Absence from work for one or more full days due to sickness or disability if deductions made under a bona fide plan, policy, or practice of providing wage replacement benefits for these types of absences.
3. To offset any amounts received as payment for jury fees, witness fees, or military pay.
4. Penalties imposed in good faith for violating safety rules of "major significance".
5. Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules.
6. Proportionate part of an employee's full salary may be paid for time actually worked in the first and last weeks of employment.
7. Unpaid leave taken pursuant to the Family and Medical Leave Act.
In addition, the regulations contain several examples of improper deductions from an exempt employee's pay. Those examples listed include:
1. Deduction for a partial-day absence to attend a parent-teacher conference.
2. Deduction of a day of pay because the employer was closed due to inclement weather.
3. Deduction of three days of pay because the employee was absent from work for jury duty, rather than merely offsetting any amount received as payment for the jury duty.
4. Deduction for a two-day absence due to a minor illness when the employer does not provide wage replacement benefits for such absences.
Executive Exemption
To qualify for an executive exemption, the employee must have the primary duty of management of the enterprise or of a customarily recognized department or subdivision and customarily and regularly direct the work of two or more other employees and have the authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of statue of other employees are given particular weight.
Management must be the principal, main, major, or most important duty that the employee performs. Factors to consider include, but are not limited to:
1. Relative importance of the exempt duties.
2. Amount of time spent performing exempt work.
3. Relative freedom from direct supervision.
4. Relationship between the employee's salary and the wages paid to other employees for the same kind of nonexempt work.
Employees who spend more than 50 percent of their time performing exempt work will generally satisfy the primary duty requirement. However, the regulations do not require that exempt employees spend more than 50 percent of their time performing exempt work.
Concurrent performance of exempt and nonexempt work does not automatically disqualify an employee from exemption. Exempt executives generally decide when to perform nonexempt duties and remain responsible for the success or failure of business operations. Conversely, nonexempt employees generally are directed by a supervisor to perform the exempt work or perform the exempt work for defined periods of time.
A "customarily recognized department or subdivision" must have a permanent status and continuing function. However, it need not be physically within the employer's establishment, and may move from place to place. In addition, continuity of the same subordinate personnel is not essential to the existence of a recognized unit. Thus, the work force under the executive may change on a continuous basis. Normally, the employee in charge of each branch establishment is in charge of a recognized subdivision. But department or subdivision does not include a mere collection of employees assigned from time to time to a specific job.
The employee must perform the exempt duties in a frequency that is greater than occasionally but that, of course, may be less than constant. Customary and regular duties would include work that is normally and recurrently performed every workweek but does not include isolated or one-time tasks.
The phrase "two or more other employees" means two full-time employees or the equivalent and full time generally means 40 hours per week. The supervision of the same employees can be distributed among two or more exempt executives, but the hours worked by an employee cannot be credited more than once.
When determining whether an employee's suggestions and decisions are given particular weight, factors include, but are not limited to:
1. Whether it is part of the employee's job duties to make suggestions and recommendations;
2. The frequency with which suggestions and recommendations are made or requested; or
3. The frequency with which the employee's suggestions and recommendations are relied upon.
The executive employee's suggestions and recommendations may be reviewed by a higher level manager. Thus, the exempt executive need not have authority to make the ultimate decision. However, making an occasional suggestion regarding a change in status of a coworker does not meet the "particular weight" standard.
The executive exemption also includes employees who own at least a bona fide 20 percent equity interest in the enterprise and are actively engaged in management of the enterprise. The salary level and salary basis requirements do not apply to 20 percent equity owners.
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Administrative Exemption
To qualify for an administrative exemption, the employee's primary duty must be the performance of the office or nonmanual work directly related to the management or general business operation of the employer or the employer's customers, and exercise discretion and independent judgment with respect to matters of significance.
Management or general business operation refers to the type of work performed by the employee. The work must be directly related to assisting with the running or servicing of the business. It does not include working on a manufacturing production line or selling a product in a retail or service establishment.
Independent discretion and judgment involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. It must be exercised with respect to "matters of significance," a phrase that refers to the level of importance or consequence of the work performed, not merely routine matters within the department. The exempt administrative employee's decisions and recommendations may be reviewed at a higher level and, upon occasion, revised or reversed. Factors include, but are not limited to:
1. Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices.
2. Whether the employee carries out major assignments in conducting the operations of the business.
3. Whether the employee performs work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business.
4. Whether the employee has authority to commit the employer in matters that have significant financial impact.
5. Whether the employee has authority to waive or deviate from established policies and procedures without prior approval.
6. Whether the employee has authority to negotiate and bind the firm on significant matters.
7. Whether the employee provides consultation or expert advice to management.
8. Whether the employee is involved in planning long- or short-term business objectives.
9. Whether the employee investigates and resolves matters of significance on behalf of management.
10. Whether the employee represents the firm in handling complaints, arbitrating disputes or resolving grievances.
Discretion and independent judgment does not include applying well-established techniques, procedures, or specific standards described in manuals or other sources. Also specifically excluded is clerical or secretarial work; recording or tabulating data; and performing mechanical, repetitive, recurrent, or routine work.
Exempt employees may use manuals, guidelines, or other established procedures if they contain or relate to highly technical, scientific, legal, financial, or other similarly complex matters. However, the manual must be understood or interpreted only by those with advanced or specialized knowledge or skills. Employees are not exempt if they use manuals to apply well-established techniques or procedures within closely prescribed limits.
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Learned Professional Exemption
To qualify for the learned professional exemption, the employee's primary duty must be the performance of work requiring advanced knowledge in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction.
The knowledge must be predominantly intellectual in character. It can include work requiring the consistent exercise of discretion and judgment. The advanced knowledge is generally used to analyze, interpret, or make deductions from varying facts or circumstances. Work involving routine mental, manual, mechanical, or physical work does not qualify. Finally, advanced knowledge cannot be attained at the high school level. Occupations with recognized professional status, as distinguished from the mechanical arts or skilled trades, are included under fields of science or learning.
This advanced knowledge is sometimes demonstrated by the fact that specialized academic training is a prerequisite for entering the profession. Furthermore, the best evidence that an employee meets this requirement is possession of the appropriate academic degree for the profession. The learned professional exemption is not available for occupations that may be performed with:
1. Only the general knowledge acquired by an academic degree in any field.
2. Knowledge acquired through an apprenticeship.
3. Training in the performance of routine mental, manual, mechanical, or physical process.
The exemption also does not apply to occupations in which most employees acquire skill by experience.
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Highly-Compensated Exemption
A new concept under the regulations is for highly compensated employees and it is intended to benefit employers who are paying an employee a high level of compensation but the employee does not quite meet all of the duties under one of the exemptions. The test has four separate parts that must be met:
1. Receives total annual compensation of at least $100,000
2. Is paid at least $455 per week, on a salary or fee basis
3. Performs office or nonmanual work;
4. Customarily and regularly performs any one or more of the exempt duties identified in the standard tests for the executive, administrative, or professional exemptions.
The employer is free to use any 52–week period for the year period. The total compensation can include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52–week period. The employer cannot include any of the following items in the employee's compensation for purposes of the total annual compensation: credit for board, lodging or other facilities, payments for medical or life insurance, or contributions to retirement plans or fringe benefits.
In the event that the employee's total compensation does not equal $100,000 by the end of the period, the employer has the opportunity to do a make-up payment. The employer may, within one month after the end of the year, make one final payment to the employee to reach the $100,000 level; if not, or the employee will be tested under the exemption for the standard duties test. Any employee who does not work the entire year can be paid a pro-rated amount of the $100,000.
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Hours Worked
Travel Time
Travel to and from work is not counted as work time under the Portal-to-Portal Act unless it is made compensable by express contract, custom, or practice. Travel from one job site to another during the workday must be counted for overtime purposes.
Time Preparing for Work
Time spent performing preliminary activities related to the job on the employer's premises or at a prescribed workplace is compensable if necessary to the performance of the work. For example, time spent changing clothes would be included as hours worked if employees were required to change into protective clothing at the job site.
On-Call, Stand-By, and Waiting Time
Whether on-call or stand-by time is compensable depends on whether the employee is "waiting to be engaged" or "engaged to wait." This tricky analysis depends on the facts of each case. One factor is whether the employee has the ability to engage in personal activities during that time, but the analysis also depends on any reporting times required by the employer.
Meal and Break Times
Meal time does not count as work if the meal tie is at least one-half hour and the employee is not interrupted. If, for example, a secretary is required to answer phones during her lunch period, she must be compensated for that time. Breaks are counted as work time unless they are 20 minutes or longer.
Work "Suffered or Permitted"
Time that the employee works but that the employer has not requested is usually counted for overtime purposes. If the employer knows or has reason to know that the employee is working, the employer has "suffered or permitted" such work, and it is considered working time. The reason the employee worked does not matter for purposes of determining whether the employer must pay the employee. If the employee has performed work, the employee must be paid.
The employer may, however, discipline an employee for working overtime without authorization or in violation of the employer's instructions or policy.
Training Time
An employee's attendance at lectures, meetings, training programs, and similar activities must be compensated unless all of the following criteria are met:
· Attendance is outside of the employee's regular working hours.
· Attendance is in fact voluntary.
· The course, lecture, or meeting is not directly related to the employee's current job.
· The employee does not perform any productive work during such attendance.
Fractions or Parts of an Hour
The Department of Labor allows "rounding" of work time in certain circumstances. Rounding is allowed to the nearest five minutes, one-tenth of an hour, or one-quarter of an hour because such rounding averages out over time and generally results in compensation for all hours worked.
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The Work Week
A work week consists of seven consecutive 24–hour periods. It need not coincide with the calendar week and may start any time of the day. Different groups of employees may be assigned different work weeks. An employer may change the work week if the change is intended to be permanent. The use of the work week as a measure has nothing to do with the employer's pay periods. State law, not federal law, governs how frequently employees must be paid.
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Rates
Calculating the Regular Rate
Overtime compensation is calculated based on the employee's regular rate of pay (one and one-half the regular rate). An employee's "regular rate" is normally an hourly rate regardless of whether the employee is paid an hourly wage, a salary, piece rate, or commission.
The general rule for calculation of the regular rate is to divide all compensation received by the employee for the work week by the number of hours actually worked. The employee's regular rate will, therefore, be the same from week to week. The employee must be paid an additional time and one-half calculated using the regular rate, over and above the salary, for the hours worked in excess of 40. The regular rate must include all forms of compensation except gifts, payments for time not worked, such as vacation or holiday pay, expense reimbursements, discretionary bonuses, payments under certain profit sharing or savings plans, retirement plan contributions or insurance payments, and certain benefit premium payments.
Discussed in this section are a few special circumstances, including fluctuating work weeks, bonuses and prices, piece rate, basic rate agreements, and compensatory time.
Piece Rate
When an employee is employed at a piece rate, the regular rate is calculated by dividing total earnings for the work week by the number of hours worked in that week. Additional half-time must then be paid for the hours over 40.
Alternatively, the parties may agree in advance to an overtime piece rate at least one and one-half times the rate earned in nonovertime hours and, if certain other conditions are met, overtime may be calculated accordingly. Under this approach, if the employee normally performs two or more kinds of work at different piece rates, the parties can agree to apply an overtime piece rate for the type of work performed in overtime hours.
Basic Rate Agreements
The Act permits an employer to pay overtime at one and one-half times a "basic rate" agreed upon by the parties. The basic rate may, in certain circumstances, be used instead of the regular rate. A basic rate agreement must:
· Be agreed to by the employee before beginning of the work.
· Establish a basic rate.
· The rate must be preapproved by the Department of Labor or be of a type that does not require such advance approval.
· Additional overtime must be paid if the employee receives additional straight-time pay, such as incentive bonuses, which was not included in the calculation of the basic rate.
Approval by the Department of Labor of a basic rate agreement will be contingent upon a basic rate substantially equivalent to the average hourly earnings of the employee over a representative period of time.
The principal advantage of the basic rate agreement is that it permits an employer to avoid the burden of allocating certain forms of compensation over a number of work weeks and recomputing and paying additional overtime as required when the regular rate is used. The basic rate approach may be particularly helpful when employees are paid by commissions, recurring bonuses, or other incentive payments calculated on work performance over a substantial period of time. A representative period, accordingly to the regulations, consists of either the year or the quarter year immediately preceding the quarter year in which the basic rate is to be used. Once established, the basic rate must be used for calculating overtime in every week regardless of whether the employee would receive more or less compensation if the regular rate were to be applied. The basic rate is calculated by adding all payments for work during work weeks ending in the prior period, except normal statutory exclusions, and dividing that sum by the total number of hours worked during those weeks.
Where there is an agreement between an employer and employee to pay a monthly or semi-monthly salary for a specified number of days per week and a specified number of hours per day, a basic rate can be calculated and used for overtime compensation purposes without prior approval. The basic rate is calculated by dividing the salary by the number of regular working days in the period and then by the number of hours worked in the normal day. This procedure permits an employer to take into account variations in the number of regular working days in each period.
Whether the employee actually works more or less than the scheduled number of working days or normal work hours in a particular day will not affect computation of the basic rate.
By agreement between the employer and the employee, overtime may be paid based upon:
· A basic rate that is the employee's average hourly earnings for a period longer or shorter than the work week but not to exceed 16 days.
· The basic rate may be the average hourly earnings for the period required to complete a specified job or jobs.
If an employee is paid a fixed amount for the completion of a task or job, the basic rate may be the employee's average hourly earnings for each job so that, if overtime is spent on one particular job, the overtime rate may be based upon the basic rate for that job. Another advantage of this approach is that it permits an employer, which pays bi-weekly or semi-monthly, to compute overtime on the basis of the average hourly earnings for the biweekly or semi-monthly period.
In all situations using this approach, overtime must be calculated based upon a work week basis.
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Fluctuating Work Weeks
The use of a fluctuating work week pay plan will save an employer more than two-thirds of the expense of paying overtime to salaried, nonexempt employees.
If the employer and employee agree that the salary paid to the employee compensates the employee for all hours worked during a week and that the actual number of hours worked each week will fluctuate, the regular rate is determined by, each week, dividing the weekly salary by the number of hours worked during that week. In this case, the regular rate will change from week to week. Only an additional half-time of compensation needs to be paid for hours worked in excess of 40 because the employee will have already received "straight-time" compensation for those hours. The straight-time compensation, of course, must equal at least the minimum wage.
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Bonuses and Prizes
The general rule is that a bonus must be included in the regular rate unless the employer has complete discretion to pay the bonus and to determine its amount. If the employer promises in advance to pay a bonus, the employer has abandoned discretion and the bonus must be included in the employee's regular rate. The mere fact that bonuses have previously been paid at regular intervals may require the bonuses to be included in the computation of regular rates.
If an employee receives a prize for the quality or quantity of work performed during the employee's usual working hours at his or her normally assigned tasks, or for such things as attendance, courtesy, and efficiency, the value of the prize must be included in calculation of the regular rate.
When a bonus or prize should be included in the regular rate, it must be apportioned over the work weeks during which it was earned.
To avoid overtime claims based on the amount of bonuses, the employer's policies should state that the firm has discretion to determine whether to pay a bonus and the amount of any bonuses.
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Commissions
Commissions are normally included in the computation of an employee's regular rate. They must be allocated among the work weeks for which they are paid. The employee must be paid additional compensation at half his or her regular rate for each hour worked in excess of the applicable maximum. If it is not possible or practicable to allocate a commission among work weeks in proportion to the amount earned each week, the Department of Labor's regulations identify other permissible means of allocation.
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Compensatory Time
Private sector, nonexempt employees may not receive compensatory time in lieu of overtime pay. In the public sector, employees may be compensated for overtime efforts through a paid time-off equal to 1.5 hours for every hour of overtime worked.
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Travel Time
The Wage and Hour Rules regarding travel time are summarized as follows. Any time the employee is actually working is compensated. The FLSA uses the phrase "to suffer or permit to work" as the concept to explain when work must be paid. This can include time spent waiting or time spent traveling to job sites in certain circumstances.
Normal home-to-work and work-to-home travel at the beginning and end of a workday is not considered work time. Because it is not work time, the employee is not paid for this time spent traveling to work and home from work. The FLSA labels this travel time as portal-to-portal travel.
When travel is part of the actual workday of the employee, the time must be paid. For example, an employee who travels between worksites during the day is paid for all time traveling to and from the worksites.
If an employee is required to travel to another worksite that is more than 30 miles from his or her office, all time spent traveling to and from the distant worksite is paid time.
Special travel time rules apply when an employee is required to stay overnight while traveling. All travel time that cuts across the employee’s normal work hours is paid time. This rule applies seven days per week even if the employee normally only works five days per week. Travel outside of the employee’s normal work hours is not considered paid time. For instance, if the employee’s normal work hours are 8:00 a.m. to 5:00 p.m., all hours spent traveling during that time is paid time. Travel outside of that time would not be paid, unless the employee must drive for the travel. If the employee was offered public transport (for example, plane, train, or bus) for the travel but elected instead to drive, the time spent driving would not be paid time. If the employee spends any time actually working during the travel time, the time spent working is paid time. For instance, if the employee does paperwork on the plane while traveling, this time would be work time.
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