THE FAIR LABOR STANDARDS ACT: SUGGESTIONS FOR COMPLIANCE AND REFORM Jessica Lee1 and Paul DeCamp2

AMERICAN EMPLOYMENT LAW COUNCIL OCTOBER 23-26, 2002

Copyright ©2002 Gibson, Dunn & Crutcher LLP. All Rights Reserved.

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Jessica Lee is a partner in the Denver, Colorado office of Gibson, Dunn & Crutcher LLP, where she practices in the firm’s Labor and Litigation Departments. She received her B.A. from the University of Colorado at Boulder and her J.D. from the University of Texas School of Law. After law school, she clerked for the Honorable Jim R. Carrigan, U.S. District Court for the District of Colorado. She can be reached at (303) 298-5944. Jessica Lee is grateful to Ileana Ciobanu, a third-year law student at Yale University, for her research assistance. 2

Paul DeCamp is a senior associate in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP, where he practices in the firm’s Labor Department and the Appellate and Constitutional Law Practice Group. He received his A.B. from Harvard College and his J.D. from the Columbia University School of Law. After law school, he clerked for the Honorable Alan E. Norris, U.S. Court of Appeals for the Sixth Circuit. He can be reached at (202) 8873525.

TABLE OF CONTENTS I.

II.

III.

Strategies For Compliance................................................................................................. 1 A.

Minimizing The Risk Of “Misdesignation” Claims .................................. 2

B.

Minimizing The Risk Of Claims By Non-Exempt Employees ............... 11

Suggestions For Reform .................................................................................................. 14 A.

Proposals Regarding The “Duties Test” .................................................. 15

B.

Proposals Regarding The “Salary Basis” Test......................................... 18

C.

Proposals Regarding FLSA Damages And Litigation............................. 18

Conclusion ....................................................................................................................... 19

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In 2001, the number of collective actions filed in federal court under the Fair Labor Standards Act (the “FLSA”)3 exceeded the number of discrimination class actions filed under the equal employment opportunity laws. The U.S. Department of Labor (the “DoL”) has in recent years brought wage actions against a wide variety of employers in numerous different industries. Moreover, state wage and hour laws have increasingly served as the vehicle for substantial class action litigation. Suits under the FLSA and state wage laws can be exceedingly expensive and time-intensive to defend, and many of those cases have settled in the seven-figure and even eight-figure range. In July 2001 a jury in Oakland, California returned a verdict of more than $90 million based on an insurance company’s alleged failure to pay overtime to employees, and the court subsequently tacked on more than $34 million in pre-judgment interest, to bring the total award to more than $124 million. Employers who want to position themselves optimally to deal with such potential litigation need to focus on compliance with the FLSA and state wage and hour law. Of course, steps that tend to minimize the risk of high-dollar claims may also tend to reduce the risk of claims by individual employees, although these days the risk of multi-party mega-litigation is the real concern on the mind of most large employers. This paper presents strategies for compliance intended to minimize the risk of such litigation and proposes suggestions for reform that may, if adopted, provide further relief to employers. I.

Strategies For Compliance

Under the FLSA and state law, the main issues that tend to give rise to collective or classbased litigation, broadly speaking, are (1) claims for overtime based on an alleged misdesignation of employees as exempt from the overtime requirement, and (2) claims that employees classified as non-exempt have not been compensated for all hours worked.4 Hence, this Part will focus first on how employers can minimize the threat of "misdesignation" claims and second on lessening the risk of claims by non-exempt employees.

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This paper assumes that the reader has a general familiarity with the FLSA and its exemption scheme, particularly the so-called “white collar” exemptions for executive, administrative, and professional employees. For more background concerning the statutory and regulatory provisions as well as case law, see Paul DeCamp, Overtime Collective And Class Actions: The Need For Reform, ENGAGE (forthcoming October 2002); Joseph E. Tilson, FLSA Cases: The New Wave of Employment Litigation, 664 PLI/LITIG. 789 (2001); Michael A. Faillace, Automatic Exemption of Highly-Paid Employees and Other Proposed Amendments to the White-Collar Exemptions: Bringing the Fair Labor Standards Act into the 21st Century, 15 LAB. LAW. 357 (2000); Daniel V. Yager & Sandra J. Boyd, Reinventing the Fair Labor Standards Act to Support the Reengineered Workplace, 11 LAB. LAW. 321 (1996); Mark J. Ricciardi & Lisa G. Sherman, Exempt or Not Exempt Under the Administrative Exemption of the FLSA . . . . That Is The Question, 11 LAB. LAW. 209 (1995); Robert D. Lipman et al., A Call for Bright-Lines to Fix the Fair Labor Standards Act, 11 HOFSTRA LAB. L.J. 357 (1994). 4

Other issues certainly arise as well, but these seem to be the most significant ones in terms of current litigation trends.

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A.

Minimizing The Risk Of “Misdesignation” Claims

Under the FLSA and the law of most states, an employer is not required to pay an employee overtime where the employee has a “primary duty” that satisfies a statutory or regulatory definition of exempt activitysuch as the familiar executive,5 administrative,6 or professional7 exemptionsand receives at least a certain level of compensation paid on a “salary basis.” In California, the test is somewhat different, and the exemption inquiry focuses on whether an employee is “primarily engaged in” exempt work, meaning whether the employee spends more than fifty percent of his or her working time performing exempt tasks. California also has a remuneration standard for exemption, although it is not necessarily as exacting as the FLSA’s salary basis standard.8 There are several steps that employers can take to enhance their compliance with the duties and salary requirements of state and federal law regarding exemption. 1.

“Duties Test” Concerns

First and foremost, employers must be aware that not all employees who are compensated at relatively high levels and do not perform manual work are exempt. Exemptions under the

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See 29 C.F.R. §§ 541.1, 541.119. Generally, the executive exemption applies to individuals paid on a salary basis and whose primary duty “consists of the management of the enterprise in which employed or of a customarily recognized department or subdivision thereof and includes the customary and regular direction of the work of two or more other employees therein.” 29 C.F.R. § 541.119(a). 6

See 29 C.F.R. §§ 541.2, 541.214. Generally, the administrative exemption applies to individuals paid on a salary basis and whose primary duty “consists of either the performance of office or nonmanual work directly related to management policies or general business operations or the employer or the employer’s customers . . . , where the performance of such primary duty includes work requiring the exercise of discretion and independent judgment.” 29 C.F.R. § 541.214(a). 7

See 29 C.F.R. §§ 541.3, 541.315. Generally, the professional exemption applies to individuals paid on a salary basis and whose primary duty “consists of the performance of work requiring knowledge of an advanced type in a field of science or learning . . . , which includes work requiring the consistent exercise of discretion and judgment, or consists of the performance of work requiring invention, imagination, or talent in a recognized field of artistic endeavor.” 29 C.F.R. § 541.315(a). 8

Because the FLSA does not preempt state wage laws, the states are free to enact legislation more protective of worker rights than the FLSA. Of course, in situations where a state’s standard is less demanding than the FLSA, an employer’s satisfaction of the state standard will not necessarily ensure compliance with the FLSA. As a result, on any given issue, employers must comply with whichever standard, whether state or federal, is more protective of worker rights.

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FLSA and state law are very particular and quite unforgiving, and failure to meet the requirements for an exemption in even one respectincluding the failure to satisfy one of the components of the regulatory “duties tests” for an exemption9will result in a complete failure of the exemption and an obligation that the employer provide back overtime for two or three years under federal law plus possibly an equal additional amount in liquidated damages, plus costs and attorneys’ fees, or back overtime for a potentially even longer period under state law, plus costs, attorneys’ fees, and other possible relief. a.

Is the core function of the job exempt?

The threshold question in the duties analysis is whether the main work that the employee performs falls within the scope of the exemption. Under the FLSA, the “primary duty” inquiry asks, in essence, what the main purpose of the employee’s job is. In some instances, the inquiry is easythe employee manages a department with a significant number of employees, or oversees the labor relations function, or is an attorney engaged in the practice of lawand the employee’s duties fall well within the contours of the relevant exemption. In other instances, however, there can be substantial doubt and confusion. Two examples that have recently given rise to high-profile litigation demonstrate the risks that employers face. First, the massive nine-figure jury award mentioned at the outset of this paper involved claims adjusters working for Farmers Insurance Exchange. Many, if not most, insurance companies have long believed that claims adjusters are exempt administrative employees, yet the California intermediate appellate court has ruled that those employees are, in fact, non-exempt “production” workers rather than exempt administrative employees. The court there concluded, among other things, that the claims adjusters are engaged in providing the service that the company exists to provide, thus falling on the production side of the line, rather than providing services that support the business, which might qualify as administrative work.10 The implications for this ruling extend well beyond claims adjusters in the insurance industry. Although there is substantial doubt as to the soundness of the California ruling and whether it will withstand the test of time even within California, for now the highly-publicized verdict will be sure to fuel further litigation as other plaintiff’s lawyers seek to test the waters in hopes of scoring a similar blockbuster award.

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See, e.g., supra notes 5-7.

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Although the Farmers case arose under California wage and hour law, and thus was technically subject to the “primarily engaged in” test rather than the FLSA’s “primary duty” test, the court analyzed the case by applying the distinction recognized under federal law between exempt administrative work and non-exempt production or sales work. Thus, the main inquiry for the court was whether the overall nature of the job was administrative, not whether the employees spent more than half of their working time performing exempt tasks, in part because failure to meet the “primary duty” standard necessarily indicates a failure to meet California’s more exacting requirement. See Bell v. Farmers Ins. Exch., 105 Cal. Rptr. 2d 59 (Ct. App.), review denied (Cal.), and cert. denied, 122 S. Ct. 616 (2001).

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Second, a number of companies that provide food and beverages for vending machines and office water coolers have made it a practice to designate their route delivery personnel as exempt outside salespersons. These companies take the position that the delivery personnel are supposed to solicit further business from customers when they make deliveries, and they are perhaps supposed to attempt to attract new customers. The plaintiffs in these cases, however, allege that as a practical matter, sales is a relatively unimportant or even nonexistent aspect of the job and that they spend little or no time actually attempting to solicit new business for the company. Instead, they describe their day-to-day work as involving predominantly or exclusively driving from customer to customer and stocking the vending machines or providing replacement water bottles as needed, with the need determined either by the open slots in the vending machines or by the customer’s standing order concerning the appropriate level of product. If the employees’ “primary duty,” or the main purpose of their jobs, is delivery work rather than sales work, then there is a significant risk that such employees would be found to be entitled to overtime compensation.11 b.

How does the employee spend his or her working time?

In California, the “primarily engaged in” standard potentially poses even greater risks for employers. Even where the employee’s primary duty is plainly within a recognized exemption, such that the employee unquestionably would be exempt under the FLSA, an employee who nonetheless spends fifty percent or less of his or her working time performing exempt tasks will be deemed non-exempt, unless the employer can demonstrate, in effect, that the employee was not performing the job correctly and that had the employee met the employer’s reasonable demands for the job the “primarily engaged in” standard would have been satisfied. California’s standard fuels litigation in part because the nature of exempt work is that the employee generally does not receive constant or even frequent supervision, and thus the employer may be at a disadvantage from the standpoint of disproving an employee’s claim that he or she actually spent more than half of the workweek engaged in non-exempt tasks. Whether subject to the FLSA’s test or California’s standard, a prudent employer will want to engage in periodic audits of the exempt status of its employees. One useful way to find out what tasks employees perform and how much time they spend on those tasks is to ask them. Employers should consider sending employees a questionnaire or survey asking employees to describe in detail their duties and how they allocate their time. Such a survey or questionnaire should be open-ended, at least in part. This way, employees are encouraged or at least permitted

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See, e.g., New Jersey Dep’t of Labor v. Pepsi-Cola Co., No. A-918-00T5, 2002 WL 187400 (N.J. Super. Ct. App. Div. Jan. 31, 2002); Stahl v. Delicor of Puget Sound, Inc., 34 P.3d 259 (Wash. Ct. App. 2001). A variant of this kind of claim involves messengers who receive a “commission” for each delivery they make. Unless the messengers are involved in making the sales that lead to the placement of the delivery order, there is a substantial risk that the messengers cannot constitute exempt commissioned salespersons. See Delivery Company to Pay $9.75 Million to Settle Wage Claims by Messengers, Daily Lab. Rep. (BNA), July 31, 2000, at A-6.

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to expound on all the independence and discretion the employees exercise, the authority the employees wield, and the various other cerebral aspects of their jobs. It may be useful to present these surveys to employees in conjunction with an annual review process since, for example, a store manager looking to be considered for a promotion is unlikely to submit a self-evaluation that overly emphasizes time spent sweeping the floors, but neglects to mention the supervisory and business planning aspects of his or her work. Signed self-evaluations in which an employee describes at length the various ways that he or she performed exempt work during the preceding year can be powerful evidence to undermine that same employee’s attempt, a year or two down the road, perhaps after the employee has been terminated for poor performance or some other reason, to “dumb down” the job by claiming in litigation that he or she merely performed nonexempt functions and was rarely required to exercise discretion and independent judgment. Another important way for employers, particularly in California, to address duties test concerns is to conduct time-motion studies. These studies involve sending someone into the workplace to observe the employee, with a stop-watch in hand, and to record minute-by-minute how the employee spends his or her time across the variety of available tasks. A less expensive, but perhaps less reliable, variant on this approach is to ask the employees themselves to keep track of and to report how they spent all of their working time over a representative period such as one week. A third way to gain insight regarding how employees designated as exempt spend their time is to look to other employees within the company who have held those same positions. For example, a useful source of information concerning how retail store managers spend their working time is likely to be the company’s district and regional managers. Many of those individuals, particularly the district managers, probably have been store managers themselves in the fairly recent past and will be able to provide solid information about the way the job is performed, whether that performance comports with the employer’s understanding of and expectations for the job, and whether the employer’s expectations are realistic or reasonable. Of course, one wrinkle is that, especially in a situation where overtime litigation has already been filed, some of the recently-promoted district managers or other comparable individuals may themselves be potential plaintiffs, as they might have held one of the jobs at issue in the litigation during the relevant limitations period. In such circumstances, an employer will want to be especially careful, and will need to coordinate with counsel, regarding how best to manage the possibility that some of the district managers might have divided loyalties under the circumstances. These concerns may affect what information is communicated to those individuals about the litigation, as well as what credence is given to the information those individuals provide to the company. c.

Is the designation still valid?

Because exempt employees often work with little ongoing direct supervision, it is important for employers to be aware that a company’s expectations regarding how a job will be performed are not necessarily met in all instances. In addition, employers tend to classify a job as exempt or non-exempt when the job is established and then never rethink or reexamine that initial decision. Jobs can change over time, however, as a company’s business changes to reflect changes in technology, staffing levels, product or service lines, customer needs, government regulatory requirements, and the economy, among other things. Thus, an exemption decision

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made 5, 10, or 30 years ago that was correct when made might have become questionable or even erroneous in the intervening years. Employers should attempt to stay ahead of the curve on this issue, rather than becoming aware of exemption concerns only after a complaint is filed seeking millions of dollars of back pay and other relief based on years of alleged misdesignation. Efforts to re-evaluate exemption decisions on a periodic basis also pay dividends in at least two respects. First, one thing that plaintiff’s attorneys generally focus on early in overtime litigation, or even before filing such litigation, is whether the employer took steps to ensure compliance with the exemption standards. Where an employer has been vigilant in addressing compliance issues and demonstrates that it has been aware of and has taken steps to manage these issues, a plaintiff’s attorney is less likely to regard the employer as a desirable target for a class claim. Documentation of compliance efforts is the key in this regard, because what the plaintiff’s attorney probably will be most interested in is what evidence the employer can present to a judge in opposing class certification or to a jury in a trial on the merits to support the claim of exemption. Where the plaintiff has signed documents clearly indicating exempt statussuch as self-evaluations, reports of how working time has been spent, and forms memorializing the employee’s exempt activities such as hiring, firing, disciplining, and reviewing subordinatesthat evidence will be an important consideration for all parties. Second, an employer’s efforts to ensure compliance with the law, even if ultimately unsuccessful, may significantly minimize exposure for damages. Under the FLSA, for example, the statute of limitations is ordinarily two years. Where a plaintiff or the DoL can establish that a misdesignation decision was willful, however, the limitations period expands to three years.12 Likewise, an employee is ordinarily entitled to what amounts to double damages, by virtue of the FLSA’s liquidated damages provision.13 Where an employer can establish that its classification decision was reasonable and in good faith, however, the court need not award liquidated damages.14 Thus, active measures to evaluate FLSA compliance potentially can reduce exposure for back overtime by two-thirds: from three years plus an equal amount in liquidated damages to two years with no liquidated damages. Third, ongoing compliance efforts may yield information indicating that one or more employees should be redesignated as non-exempt, perhaps in conjunction with a change in job category. It is important for employers to be open to the information they receive in the course of reviewing job duties. Compliance efforts are most effective when seen not exclusively as a means to support a litigation position that a given employee or group of employees is exempt, but rather as a genuine attempt to discern whether employees are currently performing jobs that do or do not entitle them to overtime compensation.

12

29 U.S.C. § 255(a).

13

Id.

14

29 C.F.R. § 790.22.

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d.

What if an exemption decision appears to be wrong?

The prudent employer has followed the tips set forth in this paper thus far. It has familiarized itself with the applicable federal and state wage and hour laws. It has consulted with counsel. It has devised a compliance review system to evaluate the exempt status of its employees. It has examined the information that has come in and been receptive to information suggesting that certain employees probably are not exempt, or at least that there is an unacceptable level of risk in that regard. What should the employer do next? Although there is no risk-free way to address an instance where an employer believes that it has misclassified an employee or a group of employees, there are several steps an employer can take to manage that risk and to minimize the potential for further accrual of damages, thus making itself a less attractive target to a plaintiff's collective action lawyer. First, the employer can reclassify the employee or group of employees as non-exempt. Such a move itself runs the obvious risk of stirring up litigation, so it is important to handle the situation very carefully. The employer should consider reclassifying the employees in conjunction with other significant workplace changes, such as an overall operational reorganization, such that the change might draw less attention. The employer also might redesignate the employees as non-exempt in conjunction with a change in job title or, where there are many employees in the job category, the employer might break the group down into several new job titles.15 Second, and in conjunction with reclassification, the employer can send the reclassified employees a letter stating that it has conducted a review of the duties of the particular position and has determined that in the future it should be paid on an hourly rather than a salary basis. The employer can calculate how much back overtime the employee would be owed using a twoyear limitations period, no liquidated damages, little or no interest, and a fluctuating workweek methodology.16 The letter can then enclose a check in that amount, stating that the employer has

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Such an approach runs counter to the business trend toward having fewer job categories and fewer layers of hierarchy in a company’s organization. The employer will have to weigh the potential benefits gained from minimizing the risk of class action overtime litigation against the operational benefits that may be derived from having broader job classifications to determine the appropriate balance in each situation. 16

There are two main competing methods for calculating back overtime for misdesignated employees. One view, known as the fluctuating workweek method, treats a salary as compensating all hours worked in a week, such that the only back overtime due is the added halfpay for the overtime hours. The other view, sometimes called the Skyline approach based on a California appellate court ruling but also applied by some federal cases interpreting the FLSA, treats a salary as compensating no more than the first 40 hours of work in a week, such that the back overtime due is the full time-and-a-half for hours beyond 40 in a week. See Skyline Homes, Inc. v. Department of Indus. Relations, 211 Cal. Rptr. 792, 795 (Ct. App. 1985), overruled on other grounds, Tidewater Marine W., Inc. v. Bradshaw, 927 P.2d 296 (Cal. 1996). The difference between the back overtime numbers produced by these two methods is more than [Footnote continued on next page] 7

determined that the average hours the employee worked were X, and that the employer is therefore enclosing a check accordingly. The employer can request that if the employee has any information or evidence to suggest that a different number of hours is appropriate, the employee should please provide it to the employer. This approach does not eliminate the possibility of further liability, and it raises the risk that some employee will mention this remediation effort to an attorney, but by paying a significant amount of back overtime at the start, the employer can remove much of the incentive for a plaintiff’s attorney to bring a case against the employer. In addition, an employer’s efforts in this regard may be powerful evidence of an employer’s good faith in defense of subsequent litigation under the FLSA for purposes of avoiding liquidated damages or a third year of liability. Regardless of whether the employer volunteers to pay back overtime, if the employer wishes to maintain the exempt status of some or all of the employees in question, then it will be essential that the employer restructure the job or jobs so that the duties on a going-forward basis meet the standards for the relevant exemption. Such a restructuring could involve shifting nonexempt functions from the employees at issue to existing or newly-hired non-exempt individuals, or it could involve more far-reaching modification of business practices that reduce the overall amount of non-exempt work that must be performed through such means as automation or outsourcing. Whatever method is chosen, however, there should be a clear break between past and current practice, such that the affected employees will realize that their duties have changed in a meaningful way. e.

What if the DoL comes calling?

The DoL conducts investigations to determine whether employers have properly paid overtime to employees. These investigations usually result from one or more employee complaints. When the DoL conducts an investigation, an employer faces some tough choices. The employer must evaluate the facts. If there is a strong argument that the employees at issue have been misdesignated, then the employer may want to pursue early resolution of the matter with the DoL on a cooperative basis. If the employer sees the preservation of the exemption on a going-forward basis as very important, then it may decide to contest the DoL’s position. One downside to dealing with the DoL is the risk, as in the situation where an employer reclassifies employees and sends a letter and a check, that plaintiff’s lawyers will learn of the situation and elect to file private litigation under state wage and hour law. A settlement with the DoL will not extinguish claims arising under state law, so there might be further litigation focusing on the method for calculating back overtime, the applicable limitations period, liquidated damages, and the like. Another downside to a DoL investigation is that even if the DoL elects for some reason not to pursue formal action against the employer, the DoL might nevertheless conclude its [Footnote continued from previous page] three-fold, with the Skyline method yielding by far the greater amount of back overtime. The Skyline method appears to be mandated under current California law.

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investigation by sending the employer a letter stating that in the view of the DoL the employees at issue have been misdesignated. If the employer does not then redesignate the employees or change their job duties significantly, such a letter would likely constitute evidence in subsequent litigation, whether brought by a private party or the DoL, that the employer has acted willfully in electing not to pay overtime, thereby bringing into play liquidated damages and the extended, three-year limitations period. On the other hand, settlement with the DoL offers certain advantages over private litigation. First, if the DoL files suit, that suit cuts off the right of employees to bring private litigation. Second, a negotiated settlement with the DoL often can be arranged on the basis of a two-year statute of limitations and no liquidated damages or attorneys’ fees, and the calculation would be pursuant to the fluctuating workweek method, which as noted above is by far the lesser of the two widely used damages figures. Further, depending on the merits of the case, the DoL might be amenable to compromising somewhat regarding the amount of back overtime due, and there might be no requirement to pay interest. Third, the DoL has full authority to oversee the compromise of FLSA claims,17 whereas settlements to which the DoL is not a party or that do not involve court approval might in some circumstances be subject to challenge as effecting an impermissible waiver of FLSA rights. 2.

“Salary Basis” Concerns

The basic requirements for exemption under the FLSA’s “salary basis” test are easy to state, but somewhat more difficult to apply. For any workweek in which an exempt employee performs any work for the employer, the employee must receive a guaranteed fixed salary that meets or exceeds the threshold established by regulation and that is not subject to reduction for variations in quantity or quality of work. Over the years, salary basis issues have given rise to a significant number of FLSA collective actions and DoL opinion letters. Several basic principles have emerged. a.

Employers may not dock employee pay for partial-day absences.

A basic distinction between exempt and non-exempt employees is that non-exempt employees are paid for their working time, whereas exempt employees are compensated for their services and the job they perform. It might take an exempt employee one, six, ten, or eighteen hours to perform the necessary work in a given day, but regardless of how much time the employee actually spends at work on a particular day or in a given workweek, the employee’s guaranteed salary must not be reduced, or even subject to a policy that might permit reduction, based on the hours the employee works or the quality of the work produced. Such considerations may, of course, factor in to any performance evaluation or decisions regarding salary level, but an exempt employee’s compensation cannot be cut based solely on hours worked.

17

29 U.S.C. § 216(c).

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b.

Employers may deduct partial-day absences from available leave or vacation, so long as pay is not reduced.

Many employers provide their exempt employees with stated amounts of paid leave or vacation. Where an exempt employee misses time during the workweek, even where the time missed is less than a single day, the employer may deduct that time from any available leave or vacation time the employee may have accrued.18 If the employee exhausts available paid leave or vacation, however, then the employer may not begin deducting further missed time from the employee’s guaranteed salary. c.

Employers may reduce exempt employees’ pay for absences of one day or more under some circumstances.

If an exempt employee is absent for one day or more for personal reasons other than sickness or accident, the employer may reduce the employee’s pay accordingly. If the employer has in place a bona fide plan for providing compensation for loss of salary occasioned by sickness and disability, then the employer may reduce the employee’s pay pursuant to that plan for such absences of a day or more as well. Where, however, an absence of less than a full workweek is caused by “jury duty, attendance as a witness, or temporary military leave,” no deduction from salary may be made, even though the absence might be a full day or more, although an employer may offset the amounts the employee receives for those activities against the employee’s salary without defeating the exemption.19 d.

Employers may pay exempt employees additional compensation for excessive hours without undermining the exemption.

Since at least as far back as 1970, the DoL has taken the position in opinion letters that employers may pay “overtime” compensation to exempt employees who work in excess of a given number of hours, such as 40 in a week, without necessarily undermining the salary basis of the compensation.20 At least one federal appeals court has agreed with that view.21 The

18

This practice might raise concerns under California law. On August 2, 2002, the California Division of Labor Standards Enforcement issued a memorandum indicating, among other things, that reducing vacation banks in increments of less than one full day is inconsistent with exempt status. Although that memorandum is not necessarily binding in the same sense as a formal regulation would be, it is still very important for California employers to be aware of the State’s enforcement position. 19

29 C.F.R. § 541.118(a)(4).

20

See, e.g., opinion letters from April 1, 1970; April 6, 1995; March 17, 1997; and April 1,

1999.

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operative principles are that exempt employees are not statutorily entitled to premium pay, by virtue of their exclusion from the coverage of the FLSA’s obligation to provide overtime pay, but that employers are free to provide additional compensation above the guaranteed salary largely in their own discretion. There is a countervailing concern that by closely monitoring the exact time worked by its exempt employees, the employer is treating the employees as hourly employees. As a result, the DoL has been careful to say that such extra compensation for work beyond the normal workweek dos not by itself defeat an exemption, although the implication is that such a factor could be one piece of evidence that, in conjunction with other indicia of hourly treatment, could defeat an exemption. Thus, if an employer wishes to provide additional compensation for exempt employees who work unusually long hours, it may be advisable not to refer to the additional payment as “overtime” at all. Instead, it might be called a bonus, a production incentive, or something else along those lines. e.

Employers should clearly state that salary compensates for all hours worked.

As noted above, in the event that an employee is determined to have been misdesignated as exempt, there may be a dispute regarding how to calculate the back overtime due. The competing methodologies for calculating back overtime depend primarily on competing assumptions regarding whether the salary compensates for all hours worked in a given workweek or, instead, compensates for only the first forty hours. An employer seeking to maximize the odds that a court would employ the calculation more favorable to employers in the event of a misdesignation finding will want to inform its exempt employees up-front and periodically, perhaps through forms signed by the employees at the time of hire or promotion to exempt status and again in each edition of the employee handbook, that the salary they receive compensates them for all work rendered in a workweek, regardless of how many or how few hours the employees actually work. The employees should be informed that the working hours may and will fluctuate from week to week and that their jobs may well require more than forty hours of work per week. B.

Minimizing The Risk Of Claims By Non-Exempt Employees

Part I(A) of this paper focused on misdesignation claims and ways employers might reduce or eliminate their exposure for such claims by employees who have been designated as exempt. However, employers also face claims under the FLSA and state wage and hour laws by employees designated as non-exempt. These claims center around the allegation that the employee has not been paid for all hours worked. Sometimes these claims arise under the rubric of “off the clock” work, in which the parties agree that the tasks the employees performed constitute compensable work, but the employees contend that they were prevented or discouraged from reporting on their time records all hours they worked. In other instances these [Footnote continued from previous page] 21

Boykin v. Boeing Co., 128 F.3d 1279, 1281-82 (9th Cir. 1997) (holding that paying employees premium pay for certain overtime hours does not, by itself, undermine “salary basis”).

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claims involve disputes regarding whether the tasks performed are compensable working time, such as in the area of preliminary and postliminary tasks and so-called donning and doffing of clothing and equipment. Although there is no way to eliminate entirely the risk that employees will contend after the fact that they worked time for which they were not compensated, there are steps that employers can take to reduce the risk of such claims. 1.

Clearly Communicate That Non-Exempt Employees Will Be Paid For All Time Worked

Under the FLSA and state law, non-exempt employees are entitled to be compensated for all work that the employer suffers or permits them to perform. Part of the argument plaintiffs make in off-the-clock cases is that they did not record all of their time because they did not know that they were entitled to be compensated for all hours worked. To blunt that argument, as well as to ensure that supervisory employees understand the applicable rules, employers should adopt, periodically distribute, and enforce a policy that non-exempt employees will be paid for all time worked. Such a policy will give employees notice that they have a right to be compensated for their services, even if, for example, they did not receive pre-approval for overtime. 2.

Clearly Communicate That Non-Exempt Employees Must Record All Time Worked

Off-the-clock litigation often centers around the claim that one or more supervisors directed or otherwise pressured employees not to record all of their working hours. The argument might be that the supervisors were under pressure to have payroll fall within a certain budget, or that supervisors or managers had a financial incentive to reduce labor costs so as to increase their own bonuses or other compensation. By adopting, periodically distributing, and enforcing a policy that non-exempt employees must record all time worked, employees will be on notice that supervisors are not permitted to require off-the-clock work. Employees will also be on notice that it is not acceptable to underreport one’s hours so as to appear more efficient to a supervisor. This policy should clearly address not only the foregoing situations, but also the arguably more benign situation where an employee joins a car pool, begins arriving at work early, and elects to start working immediately, even though his or her shift has not yet begun. The employee must report all time worked, without exception, even if the hours worked are somewhat outside the employees’ normal schedules or routines. 3.

Clearly Communicate That Non-Exempt Employees Must Receive Pre-Approval For Overtime

A policy requiring non-exempt employees to obtain pre-approval of overtime, preferably in writing, forces both the non-exempt employees and the supervisors to consider the advisability of overtime work before the employer incurs liability for the premium wages. Employers should adopt, periodically distribute, and enforce a pre-approval policy for overtime, because such a policy helps to discourage overtime work except where that work is genuinely appropriate and because it acts as a further brake on inflated claims of off-the-clock work. In the end, an employee might still file a lawsuit arguing that he or she did not report all hours worked, including unreported overtime, for one or more of the reasons described above.

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But the likelihood that such a claim would succeed is significantly reduced if an employer can show that the employee’s alleged actions would have violated three different company policies and that the employer has consistently enforced those policies. 4.

Clearly Communicate That Non-Exempt Employees Must Not Perform Any Work Whatsoever During Breaks, Or Else Must Record It As Working Time

Another common workplace occurrence is that a non-exempt employee may elect to have lunch at his or her desk or work area. While he or she is eating lunch, the phone rings, and it is a work-related matter, or a supervisor sees the employee and starts discussing work. Employers should adopt, periodically distribute, and enforce a policy that non-exempt employees must not engage in any work whatsoever while they are on breaks or meal periods and that if for any reason circumstances require that they perform such work, they must record the time for the entire meal or break as hours worked.22 The rationale is that if the employee was subject to interruption and an obligation to remain available for work, then the employee has not truly been relieved of all duties and thus is continuing to render services even though much of the break time is not devoted to performing actual work. In addition, some jurisdictions, such as California, mandate that if the break is interrupted, the employee must receive a separate full break that day, or else the employer may be liable for penalties. 5.

Be Aware Of Potentially Compensable Tasks At The Start And Conclusion Of Shifts

Ordinarily, tasks are not considered compensable work unless they are engaged in primarily for the benefit of the employer. De minimis preliminary and postliminary activities are thus not generally viewed as work. Yet one area that has received particular scrutiny recently is the time spent by employees in the fields of poultry and beef processing donning and doffing work clothing.23 The clothing and gear these employees wear arguably serves more of a

22

See 29 C.F.R. § 785.19(a) (meal periods not compensable under FLSA only where employee “is completely relieved from duty”). Under the FLSA, rest periods ranging “from 5 minutes to about 20 minutes” are considered working time and are compensable. 29 C.F.R. § 785.18. Although the FLSA does not mandate rest periods, such rest periods are often required under state law. 23

See, e.g., Reich v. IBP, Inc., 38 F.3d 1123 (10th Cir. 1994) (holding that time spent by meat processing employees donning and doffing sanitary outergarments was not integral and indispensable to the employer and thus not compensable); Tum v. Barber Foods, Inc., (145 Lab. Cas. (CCH) ¶ 34,463 (D. Me. Jan. 23, 2002) (recommending denial of summary judgment to poultry processor whose sanitation employees are required by government regulation to wear certain clothing and equipment); Swift to Pay $3 Million to Settle Suit by Meatpacking Workers in Minnesota, Iowa, Daily Lab. Rep. (BNA), Jan. 11, 2001, at A-3; Angela Swinson, Perdue [Footnote continued on next page] 13

function than merely protecting the employees’ clothing, but instead has a safety component and may be mandated to some extent by government regulation. Where employees commonly spend more than five minutes at the start or end of a shift putting on or removing clothing or equipment, or washing tools, or straightening the work area, employers should think hard about whether that time is spent primarily for the benefit of the employer or the employee, and compensation may be appropriate. While such time might seem relatively insignificant, the potential liability can be quite high when a few minutes per day are aggregated over the course of several years and for possibly hundreds or even thousands of employees. II.

Suggestions For Reform

The FLSA, which was designed primarily to address the problems of unemployment and poverty among factory workers during the Depression, no longer reflects the realities of the modern workplace. Through its work with the Fair Labor Standards Act Reform Coalition, Gibson, Dunn & Crutcher LLP is at the forefront of efforts to reform the FLSA’s regulations and update them to reflect the substantial changes in the American workplace in the six-plus decades since the 1938 enactment of the FLSA. Change is necessary to ensure the protection of the rights of both employers and employees. The DoL is currently considering whether to amend the regulations interpreting the executive, administrative, and professional exemptions, and the Government Accounting Office has issued a report concluding that these exemptions should be updated, so there is a window of opportunity for the business community to achieve positive results that can bring the FLSA into the twenty-first century. The problems inherent in the FLSA’s increasingly outdated exemption scheme are confirmed by the rise in recent years of collective actions and parallel state-law class actions challenging employer exemption decisions. The FLSA’s rules, especially in the area of applying the duties tests for the executive, administrative, and professional exemptions, are difficult to apply and are increasingly fostering litigation unrelated to the core policies underlying the FLSA. These problems are further underscored by the reality that in many instances the supposedly representative plaintiff who purports to bring a claim on behalf of all other similarly situated employees is a former employee with a history of poor job performance who was terminated for cause, thereby providing a particularly poor example of the alleged duties of the members of the putative plaintiff class or collective group. To be feasible and sensible, any reform should include fair criteria that are easy to apply. Employers overwhelmingly want to comply with the law, if someone can simply provide a law that has a discernible meaning. Clear exemption standards can allow employers and employees alike to know their respective rights concerning overtime, thereby reducing the risk of expensive and highly disruptive litigation. Updated exemption standards should also reflect the overall changes in the workplace since 1938. Exemptions should establish that highly compensated, sophisticated workers are exempt, without requiring a detailed inquiry into the nature of their [Footnote continued from previous page] Settles Donning, Doffing Dispute; DOL Sues Tyson Foods on Similar Charges, Daily Lab. Rep. (BNA), May 10, 2002, at A-5.

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jobs. Moreover, reform should eliminate the various traps that enable plaintiffs who have suffered, at most, highly technical violations of the statute, and whose legitimate expectations have in no way been disturbed, to bring multi-million dollar claims against companies that attempted in good faith to comply with the law. A.

Proposals Regarding The “Duties Test”

One possibility for reform is to shift the focus of the exemption inquiry from job duties to compensation. History and common sense suggests that in determining which employees are most in need of the government’s protection, the best indicator is the level of compensation employees receive. Compensation typically reflects the prestige of the job and the bargaining power of the employee, as well as the availability of other employment options for the employee. As the FLSA is currently structured, under most circumstances a college-educated office worker earning $50,000 or more per year receives greater protection than the manager of a fast food restaurant earning half that amount. Along these lines, the FLSA’s regulations could be revised to include a presumption of exempt status above a certain compensation level and a presumption of non-exempt status below that level. Under such a system, there could be a burden-shifting framework similar to the McDonnell-Douglas analysis applied to most discrimination claims, in which the party seeking to overcome the presumption would have to introduce substantial evidence that the presumption has been rebutted, with the other side then having an opportunity to challenge that showing and to demonstrate that the presumption should be enforced. Another possibility is to have not a presumption, but rather a bright line providing that all employees who earn above a certain amount of money in a given time period, such as a week or a month or a year, are exempt without regard to the number of hours worked or the duties performed or how exactly the compensation is provided, so long as the total dollars meet the threshold. The advantages of such a clear approach are obvious, but it seems unlikely that after more than six decades the government will be willing to abandon entirely a duties-based exemption analysis. 1.

Suggestions For The Executive Exemption

The executive exemption has become outdated in part because of the blurring of the lines regarding what constitutes a “department or subdivision” that an individual can oversee.24 To allow greater flexibility, the exemption should be broadened to include individuals responsible for a “department, subdivision, or functional unit” of the employer. Such an approach deemphasizes formal hierarchy and organizational charts, and focuses instead on the reality of how an employer conducts its operations.

24

See supra note 5.

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Another prospect for reform is to move away from the strictly vertical conception that a supervisor supervises only individuals who report solely to him or her. Modern cooperative and team-based approaches to supervision often involve several supervisors who may jointly oversee the work of a significant number of subordinate employees. Supervisors in such circumstances plainly exercise authority and judgment commensurate with, and perhaps greater than, supervisors with exclusive responsibility for smaller groups of employees. To accommodate this contemporary model of workplace organization, the executive exemption should be broadened from the current standard requiring “the customary and regular direction of the work of two or more other employees” by adding the phrase “or the customary or regular leadership, alone or in combination with others, of five or more employees.” 2.

Suggestions For The Administrative Exemption

Much of the confusion concerning the administrative exemption, particularly in recent years, has involved the requirement that administrative work be “directly related to management policies or general business operation of employer/customer.” That phrase is inherently ambiguous, increasingly so as the modern workplace moves away from the heavy industrial model that was predominant in the 1930s. Among other things, that phrase has led to the legal rule purporting to distinguish between exempt administrative work and non-exempt production or sales work, a distinction that simply does not yield determinate results in a wide range of situations. That phase from the regulations should be deleted and replaced with a requirement of “responsible work of substantial importance to the employer/customer.” This change shifts the emphasis away from the murky and largely irrelevant inquiry concerning the purpose of the employee’s job in relation to the employer’s business and toward the overall importance of the position and the responsibility the employee has, concerns that are much more germane to the question of which employees need or do not need the overtime protections of the FLSA. The administrative exemption as currently worded also requires “discretion and independent judgment.” Does “independent judgment” differ from “judgment”? The qualifier “independent” should be deleted. If the employee is exercising “discretion and judgment,” that should suffice to demonstrate that the position is sufficiently cerebral and non-manual to warrant exemption. 3.

Suggestions For The Professional Exemption

One of the most significant changes in “professional” work between 1938 and the present is the vast expansion of fields in which highly specialized and advanced learning is obtained, as well as the wider assortment of ways in which individuals obtain that learning. The exemption currently requires that members of “learned” professions, as distinct from “artistic” endeavors, acquire their knowledge “by a prolonged course of specialized intellectual instruction and study as distinguished from a general academic education and from an apprenticeship.”25 To bring the professional exemption in line with the modern workplace, the focus should be on what

25

29 C.F.R. § 541.301(a). See also 29 C.F.R. § 541.301(b)-(f).

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employees know, rather than on how they know it. Such a result would be achieved by expanding the exemption to include individuals whose primary duty “consists of the performance of work requiring the application of intellectual ability and specialized knowledge to job tasks or requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study.” Another unnecessarily complicating and confusing requirement is that professional duties involve “the consistent exercise of discretion and judgment.” The reality of many professions is that in addition to the moments of inspiration and art in which professionals create and innovate, there is often a great deal of rather mundane work. By way of example, a litigation associate in a large law firm might spends months on end doing nothing but reviewing documents in connection with discovery in order to determine whether the documents address a subject about which a client’s adversary has inquired. That work requires little or no discretion, yet the attorney is no less a professional during those months, and no more entitled to overtime pay, despite the long hours such work may entail. So long as an individual is performing work that otherwise meets the standards for the professional exemption, it should be enough that the work involves “the exercise of discretion and judgment.” In addition, the exemption should be expanded to include the broad range of creative individuals whom most people would consider to be professionals. This list should include, for example, writers, editors, photographers, and landscape/design professionals.26 4.

Suggestions Applicable To All Exemptions

Three further thoughts seem to apply to all exemptions. First, the illustrative lists of job titles, which were in common usage in the 1930s, should be updated to reflect the job titles that employees commonly receive in today’s workplace. While some of the original job titles may still be relevant, entire industries and sectors of the current economy did not exist in the 1930s, and those businesses deserve to have some guidance regarding the application of the exemptions to their employees. Second, the exemptions in their current form place too much emphasis on the amount of time spent on exempt duties rather than the purpose and responsibilities of the job. If a person is in charge of a department, then it should not matter whether that individual chooses to delegate certain otherwise exempt functions and to keep for himself or herself various non-exempt functions. What matters is that the employee has the choice, and he or she determines the tasks performed. Third, and related to the previous point, the FLSA regulations should more clearly establish that an employee cannot through poor performance unilaterally convert what should be an exempt position into a non-exempt position. Whether this issue is seen as an affirmative defense or as part of the employee’s affirmative case, an employer should not be required to pay

26

See 29 C.F.R. § 541.302 (describing jobs considered to be artistic professions).

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back overtime to an individual who failed to meet the employer’s legitimate expectations that the job would be performed in a way that would warrant exempt treatment. Indeed, the California Supreme Court has already construed that state’s overtime laws accordingly.27 There seems to be no reason not to make a similar modification to the FLSA. B.

Proposals Regarding The “Salary Basis” Test

An issue that has given rise to significant litigation, including a decision of the U.S. Supreme Court,28 is whether the fact that an employer has in place a policy that on its face might conceivably result in the reduction of an employee’s pay for an absence of less than one week defeats the salary basis prong of the exemption analysis. Many employers have in place broadly worded policies that address such matters as discipline, suspensions, and the effect of missed work on employee compensation. At the same time, those policies are often understood as applying only to non-exempt employees, and not to the exempt employees. The current regulatory scheme indicates that an employee is not exempt if his or her pay is “subject to” impermissible deductions. In order to ensure that otherwise proper exemptions not be defeated, at a potential cost of many thousands of dollars per employee, the standard should be modified so that only employees who have been subjected to actual, uncorrected deductions would be deemed not to be paid on a salary basis. The FLSA regulations provide for a window of correction such that where an employee’s pay has been subjected to an impermissible deduction that is either inadvertent or made for reasons other than lack of work, the exemption is not lost if the employer reimburses the employee and promises to comply with the FLSA in the future.29 The DoL, however, interprets “or” as “and,” such that an inadvertent deduction will defeat the exemption if it is made for reasons other than lack of work. That reading of the regulation is inconsistent with the regulations’ plain text, and the DoL should reverse its position on this issue. C.

Proposals Regarding FLSA Damages And Litigation

Two of the most challenging issues currently seen in the courts are how to calculate damages for back overtime when an employee has been misdesignated as exempt and how to decide whether a potential group of plaintiffs is sufficiently similarly situated to warrant collective action treatment as opposed to individualized adjudication. The relative scarcity of clear case law on these issues creates uncertainty, thereby encouraging and complicating litigation.

27

Ramirez v. Yosemite Water Co., 978 P.2d 2, 13 (Cal. 1999).

28

Auer v. Robbins, 519 U.S. 452 (1997).

29

See 29 C.F.R. §§ 541.118(a)(6) (executive exemption), 541.212 (administrative exemption), 541.312 (professional exemption).

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On the issue of damages, the FLSA regulations or the FLSA itself should establish once and for all that the proper measure of damages in a misdesignation case is to use the fluctuating workweek calculation, whereby the employee's salary is allocated across all hours worked in a week to determine the regular rate, such that the only overtime due is the half-time premium for the overtime hours. That approach has been followed by a number of courts,30 and it has the virtues of comporting better with parties expectations and minimizing unjust windfalls. With regard to whether and when FLSA cases should be certified as opt-in collective actions, the regulations or the statute should clarify that once a plaintiff makes a prima facie showing that the potential plaintiffs are similarly situated, the burden shifts to the employer to come forward with sufficient evidence to establish that the facts concerning more than a small number (e.g., the lesser of fifty individuals or five percent of the putative collective group) of the individuals in the putative collective plaintiff group differ materially from the circumstances alleged by the putative representative plaintiff or plaintiffs. If the defendant makes that showing, then the case should be deemed inappropriate for certification as a collective action, because individualized issues would necessarily overtake any potential benefit to collective adjudication. III.

Conclusion

The FLSA presents unique challenges to employers. From the standpoint of compliance, the only risk-free way to manage exemption decisions is to designate all employees as nonexempt and to pay them on an hourly basis, but that option is inconsistent with sound business practices. Similarly, the only way to avoid claims by non-exempt employees for off-the-clock time is to videotape all employees all the time, a costly measure that may violate state laws and collective bargaining agreements as well as undermine morale. In the real world of compliance decisions, therefore, employers must work closely with experienced employment counsel to manage on an ongoing basis the risks relating to the FLSA’s outdated and increasingly ambiguous exemption scheme, as well as the other risks described in this paper.

30

See, e.g., Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138-39 (5th Cir. 1988); Rushing v. Shelby County Gov’t, 8 F. Supp. 2d 737, 743-45 (W.D. Tenn. 1997); Zoltek v. Safelite Glass Corp., 884 F. Supp. 283, 286-88 (N.D. Ill. 1995).

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