Imagine for a moment that you are sitting in your office with your feet propped up enjoying a typical balmy December afternoon in Houston, minding your own business, when your ever-dependable secretary-receptionist-office administrator walks in and casually mentions that she has spent the last thirty-five minutes talking to a very nice gentleman from the United States Department of Labor, Office of Inspector General, who happened to pop into the office to ask some routine questions about the company. You listen with growing amazement and dismay as your employee describes the interview, which involved your company's salary, vacation, and general employment policies.
Your dismay is not lessened by a telephone call you receive three hours later from the investigator from the Department of Labor who recites five infractions of federal wage and hour laws he discovered while visiting your business that morning. The first infraction on his list is your designation of your ever-dependable secretary-receptionist-office administrator as a salaried, rather than hourly, employee exempt from overtime requirements.
You are informed that your company now owes this employee back pay and may be subject to administrative penalties. Infuriated, you place a call to your attorney and demand to know what can be done about this invasion of your privacy by the federal government, as well as how you can avoid the administrative penalties the Department of Labor seeks to assess against your company. For the most part, you are thoroughly unhappy with the answers you receive.
Welcome to the DOL
Welcome to the wonderful world of the United States Department of Labor! A visit from a DOL investigator may be prompted by a complaint filed with their offices or may be the result of a targeted effort by the DOL in your particular industry. If you are operating in the construction industry in or around Harris County, Texas, you are operating in an industry that has been targeted by the DOL for investigation in the past and maybe will be in the future.
Typically, the DOL visits construction project sites and investigates the construction companies it finds working on the project. As long as someone at the site grants permission to the interviewers (that someone is likely to be a project superintendent or manager who represents the owner or general contractor), your employees might be interviewed by the DOL with no knowledge or preparation on your part.
The key to surviving this type of investigation lies in discussing the possibility of a DOL visit with your employees and educating them to respond appropriately.
This article is designed to help you be prepared for that unexpected visit. While we cannot provide all of the answers to the issues presented by an investigation from the DOL, we can provide you with a list of questions you should ask yourself today to determine whether you are prepared for a visit from the DOL tomorrow.
Overview of Federal Wage and Hour Laws
Your first question may be whether the DOL is authorized to enter your business establishment (or approach your employees offsite) and conduct its investigation without a subpoena. The answer is "yes" and "no." Federal government agents are authorized to enter into places of employment to inspect records and question employees, but the United States Supreme Court has held that the Fourth Amendment prohibition against unreasonable searches and seizures limits the right of federal agents to enter the workplace when the employer has an expectation of privacy (in other words, the DOL can be required to issue an administrative subpoena to obtain the employer's records).
Most employers would fall within the protected category, but not all employers do. If your company operates in a highly regulated industry, such as the sale of alcoholic beverages, for example, the company may have waived, in some instances, its opportunity to assert its Fourth Amendment rights.
In short, cooperation with a DOL investigation is voluntary, but interference with the investigation is prohibited. For practical purposes, this means that an employer should remind employees that talking to the DOL is voluntary, and that the employee may be (and should be) cooperative, but ask that a company representative (such as a human resources manager or attorney) be present for the interview. Early cooperation with the Department of Labor may also prove helpful when later trying to negotiate with the Department of Labor investigator regarding possible violations.
Fair Labor Standards Act
The primary law enforced by the Department of Labor is the Fair Labor Standards Act of 1938 (the "FLSA"). The FLSA mandates minimum wage requirements, overtime pay, child labor prohibitions, and record keeping requirements. In essence, it applies to all employers engaged in interstate commerce. With very few exceptions, the courts have interpreted "interstate commerce" to encompass virtually every employer in the United States. There are exceptions, for instance, if a company earns less than $500,000 in gross income in a year, it may, in some circumstances, be exempt from the overtime regulations. The FLSA protects full and part-time workers and employees who are not specifically exempted by their job duties from the Act. All non-exempt employees are entitled to overtime pay under the FLSA.
As illustrated by the scenario described at the beginning of this article, one issue commonly misunderstood by employers is the difference between a salaried worker and a worker paid on an hourly basis. A salaried worker is exempt from overtime requirements, as long as the worker falls within a proper exemption allowing for salaried status. Understanding these issues, and how the DOL interprets work time or "hours worked," is one of the keys to being prepared for a DOL investigation.
Required Record Keeping
As an initial matter, the DOL will ask to see a company's employment records, and the company has several obligations for retention of records under the FLSA. The act requires all employers to retain the following categories of documents as to each employee for three years:
- each employee's full name
- each employee's home address
- each employee's date of birth (the provision applies only to employees under 19 years of age)
- each employee's sex and occupation
- the time of day and day of week that the employee's work week begins
- the regular hourly rate of pay in any week overtime is paid
- the basis of pay (i.e., per hour, per day, per week, per piece commission or sales)
- total daily or weekly pay excluding overtime
- the total overtime pay
- the total additions or deductions from the employee's wages
- the dates, amount and nature of the items making up the additions or deductions
- the total wages paid during a wage period
- the date of first payment
- the pay period covered.
In addition, the FLSA requires retention of records reflecting calculation and payment of wages in general, including time cards, wage rate tables, work time schedules, and records explaining the basis for wage differentials. These records must be retained for two years. The employer is free to choose the method or form of order of the records, provided government inspectors are given access to the information. Any employer who willfully falsifies or destroys these records to avoid payment of wages is subject to a penalty of up to $10,000.00. Mere negligence or failure to retain these records should not subject you to such a penalty, but the risk inherent in not maintaining accurate records is not worth testing the Department of Labor's temperament.
Display of Labor Department Poster
In addition to records retention, the employer is faced with some posting requirements. An employer is required to have a poster placed in a conspicuous area of the work place that describes the prevailing minimum wage rate, the training wage rate, the company's prohibition against child labor, the company's provision applicable to tipped employees, and the enforcement provisions of the FLSA.
Employers should also be aware that the FLSA contains a separate provision commonly known as the Equal Pay Act, which mandates that male and female employees receive equal pay for work requiring equal skill, effort and responsibility and performed under similar working conditions. A DOL investigation of wages may lead to questions regarding a perceived disparity between wages paid to men and women for apparently equal work. Unlike the minimum wage and overtime requirements, there are no exemptions from the Equal Pay Act requirements.
Before you investigate your own records and prepare to correct any potential Equal Pay Act problems, however, be aware that an employer's corrective measures can cause as many problems as the initial discriminatory practice. If an employer decides that the company may have a problem under the Equal Pay Act provisions, the employer should be cautious of the manner chosen to remedy the situation. An employer may not comply with the Equal Pay Act by lowering the wage rate of any employee; therefore, lowering the wages of men to equal those of women will not solve the employer's problem, nor will lowering the wages of the men and raising the wages of the women to create a compromise rate.
Prohibition Against Child Labor
The FLSA also prohibits oppressive child labor, and an employer who finds himself in violation of the child labor laws may face substantial civil penalties for violation of those requirements. Child labor regulations are detailed with respect to the types of work which are permitted based upon the age of the child, and are too complex to be addressed within the scope of this article.
If your company employs anyone under the age of 18, suffice it to say that the employer should take measures to educate himself on child labor violations and how they affect his particular industry. By way of example, the construction industry (an industry currently targeted by the DOL) is one area where the Department of Labor has special requirements regarding child labor. Children under the age of 16, for example, are not allowed to work on construction project sites under any circumstances.
Portal to Portal Act
Several federal acts other than the FLSA affect wage and overtime obligations. The Portal to Portal Act of 1947 was enacted to offset the effects of a series of U.S. Supreme Court decisions that had expanded compensable working time to require payment under the FLSA for certain travel and "working" time usually regarded as "preliminary" and "postliminary" activities. Disputes in litigation over what constitutes working time under the FLSA and the Portal Act are common and can be complex.
Three other acts affect work that has peripheral connections to the federal government, and should be considered particularly by companies operating in the construction industry. The Walsh-Healey Act requires that all employees engaged in providing manufactured materials or supplies to the federal government must be paid the locally prevailing minimum wage as determined by the Secretary of Labor. T
The provision applies only to federal contracts in excess of $10,000.00 and imposes special child labor, convict labor, and safety requirements, and requires that all affected employees be paid overtime for all hours worked in excess of 40 in one week. The Act severely limits the subcontracting of work by a material man or supplier, and the Act therefore ordinarily does not extend beyond a principal contractor.
The Davis-Bacon Act (DBA) requires that all laborers and mechanics engaged in construction, alteration, or repair of a public work project in excess of $2,000.00 must be paid an amount equal to the total of the locally prevailing wages and fringe benefits as determined by the Secretary of Labor. By comparison, the Walsh-Healey Act does not require the payment of locally prevailing fringe benefits. The DBA is applicable to the principal contractor and all subcontractors who work under the principal.
McNamara-O-Hara Service Contract Act
The Service Contract Labor Standards Act provides that all employees engaged in providing services to the federal government pursuant to contracts in excess of $2,500.00 must be paid the locally prevailing wages and paid separately the locally prevailing fringe benefits or an amount equal to those benefits. The amount and nature of locally prevailing wages and benefits are determined by the Secretary of Labor. The Act contains some exemptions for the provision of transportation, telecommunication services, and public utility services, and also contains a unique successorship provision which requires a contractor who replaces an earlier contractor on a contract to pay the wages and benefits required under the predecessor's collective bargaining agreement.
Hourly vs. Salary Employees
In the scenario described at the beginning of this article, the company was found to be in non-compliance for paying its secretary-receptionist-office administrator a salary rather than hourly wage. The company ran afoul of the FLSA because the DOL considers the actual duties and responsibilities of such an office employee (regardless of the employee's title or designation) to determine whether or not the employee should be paid on an hourly basis.
In the case of an "office administrator" who also answers the telephone and functions as a secretary, the DOL is likely to find that the worker's duties do not fit within the administrative exemption to allow the employee to be paid on a salary, rather than hourly, basis. As described in more detail below, the office administrator primarily must perform work related to management policies and which requires discretion and independent judgment. An employee who does these things 50% of the time, and spends the other 50% answering telephones, might not meet the exemption.
This particular area of the law represents some of the most misunderstood and misapplied provisions of the basic wage and hour laws. The FLSA governs this issue and can be simplified into a few basics, which will provide a framework for a review of the company. These basics, however, present only the beginning of an analysis, and should not be relied upon without a specific review of the company and the roles of its employees.
Federal Minimum Wage
Under the FLSA, a basic work week is defined as 40 hours of work before overtime must be calculated and paid. The federal minimum wage, at this time, is $7.25 per hour. Unless an employee is exempted from coverage of the FLSA, then the employee must be paid at least $7.25 per hour for each hour worked. If an employee works more than 40 hours in any 7-day period, the employer must pay the individual at least one and one-half times their regular rate of pay for each hour worked in excess of 40 hours.
The first fundamental question raised by this analysis is how to determine whether an employee is exempt from the FLSA. There are a number of specialized exemptions, but the main issues generally arise over what are commonly described as the "white collar" exemptions. These exemptions exclude from protection of the FLSA any employee who meets the description of an executive, administrative, or professional employee. Under Section 13(a)(1) of the FLSA, the minimum wage and overtime pay provisions of the Act do not apply to "employees employed in a bona fide executive, administrative, or professional capacity."
Meeting these exemptions is not as easy as it sounds. The exemptions depend upon the nature of the duties performed by the particular employee and on the salary received. A particular title assigned to an employee or a particular position is immaterial. For each employee that an employer claims to be exempt, a fact-specific analysis will be applied by the DOL to determine whether that exemption has been accurately applied.
The exempt or non-exempt status is "determined on the basis of whether his duties, responsibilities and salary meet all the requirements of the appropriate section of the regulations."
Executive Exemption Requirements
The term "employee employed in a bona fide executive... capacity" in Section 13(a)(1) of the Act is defined by the regulations as an employee:
- whose primary duty is managing the enterprise in which he is employed or of a customarily recognized department thereof; and
- who customarily and regularly directs the work of two or more other employees; and
- who has authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and
- who customarily and regularly exercises discretionary powers; and
- who does not devote more than 20% of his time, or 40% in the case of retail and service establishments, to duties not directly related to the duties in paragraphs (a) through (d); and
- who is compensated...on a salary basis at a rate of not less than $155.00 per week..exclusive of board, lodging, or other facilities...shall be deemed to meet all the requirements of the section.
The above is commonly referred to as the "long test." Paragraph (e) does not apply in the case of "an employee who is in sole-charge of an independent establishment or a physically separated branch establishment" or who owns at least 80% of the enterprise in which the employee is employed.
If the employee is compensated on a salary basis at a rate of not less than $250.00 per week exclusive of board, lodging or other facilities, the "short test" is applied. In such an application, the employer must only satisfy paragraphs (a) and (b) above.
Professional Exemption Requirements
Few employers are able to fulfill the stringent requirements of the professional exemption because its coverage is limited. The term "employee employed in a bona fide...professional capacity" in Section 13(a)(1) of the Act is defined by the regulations as any employee:
- whose primary duty consists of:
- work requiring knowledge of an advanced type of science or learning acquired by a prolonged course of specialized intellectual instruction and study; or
- work that is original and creative "in a recognized field of artistic endeavor;" or
- teaching, tutoring, instructing, or lecturing...as a teacher in a school system or educational establishment; or
- work that requires theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering; and
- whose work requires the consistent exercise of discretion and judgment; and
- whose work is predominantly intellectual and varied in character; and
- who does not devote more than 20% of his time in activities "which are not an essential part of and necessarily incidental to the work described in paragraphs (a) through (c);" and
- who is compensated at a rate of not less than $170.00 per week exclusive of board, lodging and other facilities.
Employees compensated at a rate not less than $250.00 per week exclusive of board, lodging and other facilities are required to satisfy the "short" test only, which requires that the employee's primary duty consists of work described in paragraphs (a)(1), (3) or (4). The salary requirements do not apply to individuals who hold valid law or medical licenses (or are engaged in internships or residency programs).
Administrative Exemption Requirements
Typically, many employers are unable to meet the requirements of the executive exemption because their employees do not supervise two or more employees and/or do not have the authority to hire or fire. These same employees, however, may assume managerial duties. Thus, although all the exemptions are construed narrowly, the administrative exemption often provides the greatest opportunity for employers to claim an exemption.
The term "employee employed in a bona fide...administrative capacity" in Section 13(a)(1) of the Act is defined by the regulations as any employee:
- whose primary duty consists of either:
- the performance of office or non-manual work directly related to management policies or general business operations of his employer or his employer's customers; or
- the performance of functions in the administration of a school system, or educational establishment...; and . . .
- who customarily and regularly exercises discretion and independent judgment; and
- who regularly and directly assists a proprietor, or...bona fide executive or administrative employee; or
- who performs work along "specialized or technical lines requiring special training, expertise, or knowledge;" or
- who executes under only general supervision special assignments and tasks; and . . .
- who does not devote more than 20% of his time, or 40% in the case of retail or service establishments not directly related to the duties in paragraphs (a) through (c); and
- who is compensated on a salary basis at a rate of not less than $155 per week exclusive of board, lodging or other facilities, shall be deemed to meet all the requirements of this section.
Similar to the executive exemption, employees compensated on a salary basis at a rate of not less than $250 per week exclusive of board, lodging or other facilities are required to satisfy only the "short test," which is that the employee's primary duty consists of work described in paragraph (a), which includes work requiring the exercise of discretion and independent judgment.
Under some circumstances, a combination of 2 exemptions described above can allow an employee to maintain an exempt status even if they are unable to satisfy every element of a particular exemption. Under combination exemptions, however, the employee must meet the stricter requirements on salary and non-exempt work. In short, employees qualify for a combination exemption only if they satisfy the long test, including the stricter salary and non-exempt work requirements.
Contract Labor vs. Employees
Another pitfall for many employers during a DOL investigation involves the use of independent contractors as opposed to employees. The FLSA was enacted to protect employees from substandard wage abuse and excessive hours that Congress found to be rampant and detrimental to the national well being and free flow of commerce. Obviously, the FLSA provisions on minimum wage, overtime, equal pay, and child labor apply only to "employees."
The FLSA, however, defines the term "employee" broadly and, not surprisingly, unhelpfully. For purposes of the FLSA, an employee is defined as "any individual employed by an employer." As that definition is particularly unenlightening, the FLSA further defines the verb "employ" expansively to mean "suffer or permit to work."
In today's highly mobile employment market, many employers rely more and more heavily on independent contractors rather than on employees. Some employers do so specifically to avoid falling within the many federal and state guidelines applied to employees. Consequently, the government takes a very strict view when it seeks to determine whether a worker is an employee or an independent contractor.
The primary consideration to determine whether a worker is an employee is whether the hiring entity has the right to control the manner in which the work of the individual is to be performed. Once again, how the parties have designated that working relationship is not relevant. The DOL is likely to emphasize:
- the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise,
- whether the contract gives any right to the hiring party to detail how the work is to be performed,
- whether the hiring party has control of the business of the contractor,
- whether the contract is for an indefinite or relatively long period,
- whether the hiring party has the right to cancel the contract at will, and
- whether the purported independent contractor is performing work that is the same or similar to that performed by the hiring party's employees.
If the DOL cannot, based on the foregoing, clearly establish a right of control, the DOL usually moves forward and makes the following inquiries:
- Is the alleged independent contract listed on the payroll with the appropriate tax deductions, or are the payments to this charged to the labor and salary account or selling expenses account instead of the account to which attorneys' fees, auditors' fees and the like are charged
- Must employees of the alleged independent contractor be approved by the possible employer?
- Does the possible employer keep the books and prepare payroll for the possible employee?
- Is the alleged independent contractor assigned to a particular territory without freedom of movement outside thereof?
- Does the alleged independent contractor have an independent economic or other interest in his work other than increasing his own pay?
- How do the respective tax returns of the parties list the remuneration paid?
Defining "Hours Worked"
In addition to salary versus hourly employees and employee status, one of the most common question faced by employers is how to determine what hours actually count as "hours worked" for purposes of the FLSA. The FLSA defines hours worked as time during which an employee is necessarily required to be on an employer's premises, on duty or at a prescribed work place.
This definition may require that an employee be compensated for the time the employer does not otherwise consider working time, such as travel time, waiting time, and certain meal, rest and sleep periods. Again, the basics described herein represent only the beginning of an analysis, and should not be relied upon without a specific review of the company and the roles of its employees.
The DOL has developed a de minimis rule whereby short periods of time (a few minutes) may be disregarded in calculations of work time. On the other hand, the DOL and courts do not allow employers to get away with not paying an employee overtime if the employer knows that the employee is putting in extra time, but not recording those extra hours on time sheets.
Such work still is considered work for the benefit of the employer, and the employee must be paid accordingly. For example, if the company knows that its receptionist, Susan, arrives thirty minutes early every work day so that she can organize her desk, clear up matters from the day before, and generally prepare for the working day before the rest of the staff arrives, the employer must pay Susan overtime for those hours, even if she does not record that time on her time sheets. Even if an employee works extra hours that are specifically not approved by the employer, the overtime must be paid. The fact that the employee was not approved to work those hours is a disciplinary matter.
The areas of compensable working hours that have caused the most problems are waiting time, on-call time, compensatory time, travel time and sleeping time, preparatory and finishing activities, and training or special meetings. Regulations and case law apply to each of these categories and should be considered in detail if you feel that your company may have a problem with one of these areas.
An employee involved in waiting time, for example, may be one who waits before starting duties because they arrive at the work site earlier than the required time. An employee who arrives on his own earlier than the time he should have arrived is not entitled to be paid for the time he waits. If, however, an employee reports at the required time and then waits because no work is yet available, the waiting time is compensable work. By contrast, all time spent in waiting while an employee is on duty constitutes hours worked. This is true even in cases where the employees are allowed to leave the job site or the premises.
If your company retains employees on an on-call basis, you should analyze that on-call time to determine whether the employees are entitled to compensation. One fairly recent court case from the 5th Circuit determined that when an employee is not actually called to work, any on-call time at home or at locations substantially removed from the employer's place of business is not work time for purpose of the FLSA overtime wage provision. Bright v. Houston Northwest Medical Center Survivor, Inc., 34 F.2d 671 (5th Cir. 1991). In that case, the employee was required to wear a beeper, restrict alcohol consumption and be able to report to the employer's place of business within twenty to thirty minutes. These factors did not negate the exemption, as the court held that the employee was clearly able to use his on call time effectively for his own purposes.
Travel Time and Sleep Time
Travel time and sleeping time are dealt with under two general policies: one for employees on tours of duty of less than 24 hours, and another for those who work around the clock. If your company requires long hours which include travel or sleep time, the employee's hours must be analyzed to determine whether they qualify as "hours worked." For example, if employees are scheduled to work for less than 24 hours, but are permitted time for sleep, time permitted for sleeping is considered work time as long as the employees are on duty and must work when required.
Work time during preparatory and finishing activities is also analyzed on a fact specific basis. In general, courts hold that if the activity is undertaken for the employer's benefit, then the more indispensable it is to the primary goal of the employee's work, and the less choice the employee has in the matter, the more likely such work will be found to be compensable work.
Time spent during meetings, training, workshops and professional meetings is dealt with specifically under the DOL regulations. The time spent will be considered working time unless all of the following four requirements are met:
- Attendance is outside the employee's regular working hours;
- Attendance is voluntary (it is not voluntary if attendance is required by the worker or if the employee is led to believe that non-attendance would prejudice working conditions or employment standing);
- The employee does not perform productive work while attending; and
- The program, lecture or meeting is not directly related to the employee's job.
If the State requires training or continuing education of a general applicability as a condition of practice of the trade or profession, and the training is not tailored to meet the particular needs of the employer, the FLSA does not consider such training to be working time.
The idea of "compensatory" time also often causes confusion for employers and, when calculating "hours worked," involves allowing employees to work overtime in one pay period and take time off in another and "average" out the time to 40 hours in each week. This scenario is not permitted under the FLSA for private sector employers. Public sector employers, on the other hand, are permitted to use compensatory time under certain circumstances.
Aside from the topics covered in this article, many other issues can arise during a DOL investigation. Methods for calculating overtime and regular pay rates, and questions regarding allowable wage deductions represent just two other topics that commonly cause problems for employers.
To minimize your company's risk, try to ensure that all employees understand their wages (having compensation agreements in writing often helps avoid contested wage claims) and, when faced with a question about wages or employment policies, do not guess. Seek the advice of your attorney before the DOL appears at your door, rather than afterwards.
If your company is faced with a DOL investigation, all of these issues, and probably others, may be addressed, at least briefly. For those of you operating in the construction industry, a review of company employment records and policies would be wise at this time. DOL investigations, like IRS audits, can prove to be very expensive, in light of potential back-pay and administrative penalties.
If the DOL determines that your company has violated wage and hour laws, that determination can be challenged, and employers should not be afraid to negotiate with the DOL. As with most legal problems, however, review and preparation today will prove invaluable when facing a visit from the DOL tomorrow.