The Fair Labor Standards Act: Many Traps for the Unwary

When most employers think about the Fair Labor Standards Act (FLSA), they think about two things - minimum wage and overtime. A typical employer, when asked what its obligations are under the FLSA, will respond, "I have to pay my hourly employees at least $5.15 per hour, and if they work more than 40 hours in a workweek, I have to pay them time-and-a-half." This response is correct - as far as it goes. There are, however, many more issues that need to be addressed, some of which are discussed below.

1. Exempt or Nonexempt? That is the Question.

   The most common, and potentially the most costly, mistake employers make under the FLSA is improperly classifying employees as being exempt from the FLSA's requirement that they be paid overtime. There are two common misconceptions of the exempt/nonexempt issue that often lead to this mistake. First, many employers seem to believe that, as long as they pay employees on a salary basis, the employees are exempt. This is a threshold requirement for exempt status, but the inquiry does not end here. Second, it is not uncommon for employers to place too much emphasis on the title of the position an employee holds in deciding he/she is exempt.

   Both of these mistakes have their roots in the same basic issue. When determining whether an employee is exempt or nonexempt, the employer must examine what the employee actually spends his/her time doing during the workday. It is the employee's job duties which ultimately will control his/her exempt status - not the mere fact that he/she is paid on a salary basis and/or has an important sounding title.

   There are a number of categories of employees who are exempt from the FLSA's overtime requirement. The three most common categories, and those which this article will focus on, are professional, administrative and executive employees.

   Professional Employees: This is the most straightforward of the three main exemptions. The employee must be paid a salary of at least $250 per week, and his/her primary duty must consist of the performance of:

   1. Work requiring knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; or
   2. Teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity in the school system or educational establishment or institution by which he/she is employed; or
   3. Work that requires theoretical and practical application of certain highly-specialized knowledge in computer systems analysis, programming and software engineering.

   If the employee meets this test, and his/her work requires the consistent exercise of discretion and judgment, or the work requires invention, imagination or talent in a recognized field of artistic endeavor, he/she will be deemed to be an exempt professional.

   Administrative Employees. This, on the other hand, is the most nebulous of the three main exemptions. The employee must be paid a salary of at least $250 per week, and his/her primary duty must consist of either:

   1. 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
   2. 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.

   If an employee meets this test, and his/her work includes work requiring the exercise of discretion and independent judgment, he/she will be deemed to be an exempt administrative employee.

   The big question in this area is: What constitutes work "directly related to management policies or general business operations" of the employer or the employer's customers? Unfortunately, neither the case law nor the regulations provide any clear answer to this question. The regulations provide broad characterizations of administratively exempt work as involving "those types of activities relating to the administrative operations of a business as distinguished from 'production' or 'sales' work." They also refer to "work of substantial importance to the management or operation of the business of [the] employer or [the] employer's customers."

   The bottom line is that the administrative exemption test needs to be applied on a case-by-case basis. It also, in the opinion of the author, is more vulnerable to challenge than any of the other FLSA exemptions. Accordingly, employers should not lightly designate employees as being administratively exempt.

   Executive Employees: This is the most popular exemption, and is also the one that has generated the most litigation and liability over its application. The test for determining whether an employee is an exempt executive is relatively simple. The employee must be paid a salary of at least $250 per week, his/her primary duty must consist of the management of the enterprise in which he/she is employed or of a customarily recognized department or subdivision thereof, and he/she must customarily and regularly direct the work of two or more other employees.

   The focal point of much of the litigation in this area is whether or not a particular employee has "management" as his/her "primary duty." The regulations offer a "rule of thumb" which states that "an employee who spends over 50 percent of his time in management would have management as his primary duty." The regulations are quick to point out, however, that time alone is not the sole test. Some other pertinent factors are:

   1. The relative importance of the managerial duties as compared with other types of duties;
   2. The frequency with which the employee exercises discretionary powers;
   3. The employee's relative freedom from supervision; and
   4. The relationship between the subject employee's salary and the wages paid other nonexempt employees who work alongside the employee.

   Perhaps the most common scenario where the exempt executive status of an employee is challenged involves "working foremen" or "working supervisors." This refers to a situation where a supervisor spends the majority of his/her time engaging in the same work activities as the nonexempt employees he/she is supposed to be supervising. This is precisely the type of situation the above factors are intended to address. For example, in a case wherein the exempt status of the assistant managers of Burger King restaurants was challenged, the court held that even though the assistant managers spent the vast majority of their time flipping burgers and cooking fries, they were in charge of the restaurant, i.e., they were always managing. Once again, however, it is imperative that employers carefully think through the exempt/nonexempt issue before classifying a particular employee or group of employees.

2. Independent Contractors.

   Because the FLSA only requires employers to pay overtime to their employees, many employers try to get around this requirement (not to mention certain tax obligations) by designating individuals who work for them as being independent contractors. Whether or not a particular worker is properly characterized as an independent contractor is something which needs to be determined on a case-by-case basis. The fundamental issue in making this determination is the extent to which the employer has the right to control the subject worker.

   There is no single "right to control" test which can be applied in determining a worker's status as an employee or an independent contractor. Rather, the courts and administrative agencies which have addressed this issue look to a variety of factors when making this determination. These include:

   • Is the worker free to come and go as he/she wishes, or does the company set his/her hours?
   • Is the worker paid a set fee for completing a particular task (regardless of how long it takes), or is he/she paid on an hourly or salaried basis?
   • Does the worker provide his/her own tools, supplies, etc., or are they provided by the company?
   • Is the worker free to work for other companies, or is he/she required to devote all of his/her efforts to the company in question?
   • Does the work being performed require some specialized skill, or is it routine work which can be performed by a broad spectrum of individuals?
   • Does the worker provide his/her own office, workshop, etc., or does he/she work at the company?
   • Does the work performed by the worker vary from that being performed by the company's employees, or is it substantially similar?
   • Is there a written agreement describing the contractual relationship between the worker and the company, or is it a simple exchange of work for money?
   • Is the worker subject to the company's rules and regulations, or is he/she free to comport himself/herself as he/she pleases?
   • s the relationship between the worker and the company intended to last only for the duration of a single project, or is it open-ended?

   The foregoing list is by no means exhaustive, nor is any particular factor determinative of the issue. If, however, a company has a worker who fits more squarely within the second halves of the above bullet points than the first halves, that worker more than likely will be determined to be an employee. Accordingly, all of the FLSA's requirements (not to mention the IRS's) will apply.

3. Working Off-The-Clock.

   The phrase "working off-the-clock" refers to a situation where a non-exempt employee performs services for his/her employer, but does not record it on his/her time card/sheet. Off-the-clock work is often performed voluntarily by employees either because they are trying to impress their employers with their efficiency (i.e., it will appear they got a lot done in very little time), or because they truly are dedicated workers. This type of off-the-clock work is often performed without the knowledge of the employer. Employers also have been known to require off-the-clock work to avoid overtime and keep within a budget.

   Regardless of which type of off-the-clock work is performed, however, it must be compensated. Employers are required to pay employees for all work they perform on behalf of the employer, without exception. Obviously, in the case of off-the-clock work which is being performed without the employer's knowledge, it will be difficult for an employer to disprove any claims that such work was, in fact, performed. One suggestion is to maintain a policy which specifically prohibits off-the-clock work, and subjects offenders to disciplinary action. The presence of such a policy could impact the credibility of an employee who claims he/she worked off-the-clock, i.e., he/she will have to admit violating company policy in order to make such a claim.

   In conclusion, the FLSA is an oft-overlooked but omnipresent statute which can have a tremendous impact on an employer's bottom line. We strongly recommend that every employer conduct a thorough audit of its wage/hour practices before the Department of Labor or a plaintiff's attorney does it for you.