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FLSA Update - Round 3

Frequently Asked Questions (FAQ)

Following the Department of Labor’s (DOL’s) announcement of changes to the Fair Labor Standards Act (FLSA) white collar exemptions on May 18, we have fielded a variety of questions from clients and friends. As a result, we published two rounds of FAQs (FAQs #1 and FAQs #2) to assist you with the new rules. The questions keep coming and, accordingly, here are our FAQs #3:

Q: How can my employees be covered by the FLSA if my business is not?

A: As you may have read in our second set of FAQs, the FLSA covers employees of businesses with over $500,000 in annual volume. If the business is not covered, employees may still be covered by the FLSA. An employee is covered in every workweek in which he/she performs any work constituting engagement in interstate or foreign commerce (i.e., work involving movement of persons or things—including intangibles, such as information—across state lines or from foreign countries). For more information, see the DOL’s FLSA Advisor. Additionally, individuals involved in construction and domestic services (e.g., housekeepers, full-time babysitters, cooks) are generally covered by the Act. This leads to some strange results. An employee may be covered in one workweek and not the next. Also, some employees may be covered by the FLSA and others not.


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Q: How do the white-collar exemptions apply to part-time or short-term employees?

A: In order for a part-time or short-term employee to qualify for an exemption, the employee must still meet the salary requirement ($455/week, $913/week after December 1, 2016) and the duties test for that particular exemption. As to short-term employees, if the individual meets the definition of “employee” under the FLSA (i.e., economically dependent on the employer), the employee is covered by the Act.

Q: What if an otherwise exempt employee fails to meet the exemption’s duties test for a period of time?

A: If the primary duty of an otherwise exempt employee is not the performance of exempt work, for a period of time (and no matter the reason), the exemption is “destroyed” and the employee is entitled to overtime compensation for hours over 40/week for that period of time.

Q: If I wish to reclassify an employee, do I have to reclassify all employees with the same job title?

A: Each employee classification is an independent decision and circumstance. You could have individuals in the same position with your company who have different salaries and/or different classifications. Needless to say, this may cause issues amongst employees.

Q: Can I have a policy that requires prior approval to work overtime?

A: Yes, and you should. Keep in mind that non-exempt employees are owed 1½ × regular rate for hours worked over 40/week — even if they did not receive prior authorization for overtime.

Q: Can I offer time off or “comp time” to employees instead of paying 1½ × regular rate for overtime?

A: State and federal law do not permit comp time for private sector employees. That said, there are a few creative, practical “work-arounds” available to employers.

Q: Exempt employees do not keep time records. In reclassifying them as non-exempt, how do I get them to start recording time?

A: By law, one must keep time records for all employees (exempt and non-exempt). Some employees may perceive keeping records as a demotion of sorts if they were not previously required to do so. As such, messaging is a crucial element in asking employees to keep time records. Cite the change in the law. Consider a negative timekeeping system, where only deviations from the regular schedule are recorded.

Q: What time needs to be recorded?

A: All hours worked must be recorded, including perceived “unproductive” time, such as rest periods, on-call time, travel time, etc. Such time may be compensable, unless it qualifies as unpaid per the FLSA.

Q: If I reclassify an employee as non-exempt, but they do not work as much overtime as anticipated, do I owe them compensation to match their past pay as an exempt employee?

A: On the one hand, you are responsible only for the hours worked (including overtime) at the new rate. If the employee works fewer hours than anticipated (for whatever reason), his/her overall compensation will be less than when he/she was an exempt employee. You are not required to make up the difference. On the other hand, this could cause issues with employee morale - for example, those who may have already perceived a classification change as a demotion of sorts and now receive less compensation than when classified as exempt.

Q: How do I compute overtime for non exempt employees who work different jobs at different rates of pay?

A: The regulations allow two methods of computing overtime in such a circumstance. The first is to calculate overtime via a “blended rate.” To compute the blended rate, you divide the employee’s total earnings for the week, exclusive of premium pay for overtime, by the total number of hours worked. Then, for each hour worked over 40, you pay overtime at ½ the blended rate. Alternatively, the “separate rates” method allows you to pay overtime at 1½ × the regular rate applicable to whichever type of overtime work is performed. Employer and employee must agree in advance to use the separate rates method. The separate rates method also requires that the employee keep careful track of which type of work he or she is performing throughout the week. Depending on the circumstances, one method may be more suitable than the other.

Q: Can the FLSA changes be repealed?

A: As mentioned in our previous FAQs, one pending piece of legislation (S. 2707/H.R. 4773) seeks to do just that. Another mechanism is a “resolution of disapproval” via the Congressional Review Act; however, this is subject to presidential veto (which requires two-thirds of Congress to override). Stay tuned.

Q: What developments might we expect before the salary recalculation in 2020?

A: Even if the FLSA changes are not repealed in their entirety, the automatic adjustment process may be reviewed in the future (first adjustment is in 2020, then every three years thereafter). A rule change could eliminate this provision prior to the January 1, 2020 adjustment.

Q: Can we expect to see a spike in wage and hour litigation?

A: Messaging is key in implementing employee classification changes and avoiding litigation. Two common misperceptions contribute to such claims: changing from exempt to non-exempt as a demotion of sorts and changing from non-exempt to exempt as shorting overtime pay. Wage and hour claims tend to come from employees who perceive that they have been slighted by these changes. Focus forward, and explain changes and their impact.

Q: Can I insure against wage and hour claims?

A: Historically, wage and hour claims were not covered by insurance, for example, Employment Practices Liability Insurance (“EPLI”). In recent years, presumably relative to the significant rise in wage and hour litigation, insurers have begun to offer FLSA coverage. It all depends on your specific policy language, of course. Bear this in mind in seeking out coverage, and if sued, as many standard-form policies continue to exclude such coverage. Many policies have specific notice provisions. Accordingly, not notifying your insurance of a claim may waive defense and coverage. Various issues complicate the process of selecting or negotiating coverage for wage and hour claims, such as related yet distinct claims that often accompany wage and hour claims (e.g., retaliation).