Over the course of the 16 years I have been practicing law, I have often represented small business owners who have inadvertently run afoul of the federal minimum wage and overtime laws. Those laws are contained within the Fair Labor Standards Act (“FLSA”) and the Department of Labor has promulgated countless regulations interpreting, limiting, and expanding the FLSA. The result is a complicated set of laws and regulations with numerous exemptions and exceptions. Most small business owners simply do not have the time or resources to learn and understand these rules. It is therefore not surprising such businesses often find themselves embroiled in costly and burdensome litigation for failure to comply with some provision of the FLSA. While this article is certainly not an exhaustive treatise on every aspect of the FLSA law and its attendant regulations, hopefully it will provide some guidance to small business owners and help them avoid some of the common mistakes.
One of the most common misconceptions a small business owner might have with respect to the FLSA is that if the employee is paid a salary, that employee is exempt from the FLSA requirements and the employer will not have to pay overtime for any hours the employee works in excess of 40 in any given week.[1] That is false. Simply because an employee is salaried, as opposed to hourly, does not itself exempt them from the minimum wage and overtime provisions. To clarify when overtime is required and when it is not, I will address (1) what the FLSA requires; (2) who is exempt from the FLSA (3) who is not exempt from the FLSA; and (4) how a salaried, non-exempt employee’s overtime wages are typically calculated.
- WHAT DOES THE FLSA REQUIRE
The FLSA is codified at 28 USC 8. There are two main operative sections to the FLSA, §206 which pertains to the minimum wage, and §207 which pertains to overtime wages. Section 206 mandates that employers must pay their employees no less than a specified hourly amount per work week (defined as 40 hours). That amount is currently $7.25 an hour. Be aware, however, that many states have set a minimum wage higher than the federal minimum wage. Section 207 provides that employers may not employ employees who are engaged in commerce, or the production of goods for commerce, or employees who are employed in an enterprise engaged in commerce or the production of goods for commerce for longer than 40 hours per week unless the employee is paid one and half times their regular rate for each hour or portion of an hour in excess of 40.[2]
- EXEMPTIONS
Within the FLSA are numerous exemptions where the minimum wage and overtime provisions are inapplicable. Such exemptions include, but are not limited to “any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center” §213(a)(3); “any employee employed in the catching, taking, propagating, harvesting, cultivating, or farming of any kind of fish, shellfish, crustacea, sponges, seaweeds, or other aquatic forms of animal and vegetable life…” §213(a)(5); “any employee employed in connection with the publication of any weekly, semiweekly, or daily newspaper with a circulation of less than four thousand the major part of which circulation is within the county where published or counties contiguous thereto…” §213(a)(8); and “any switchboard operator employed by an independently owned public telephone company which has not more than seven hundred and fifty stations…” §213(a)(10).
However, the most common exemption, and the exemption that most often trips up small business owners, is the executive, administrative, or professional exception, codified at §213(a)(1) (“the 213(a)(1) exemptions”). The 213(a)(1) exemptions exempts from the minimum wage and overtime provisions any employee who is employed in a “a bona fide executive, administrative, or professional capacity….” It also exempts academic administrative personnel, teachers in elementary or secondary schools, and outside sales personnel. Many small business owners erroneously believed their employees fall within the 213(a)(1) exceptions and thus require their employees to work in excess of 40 hours in any week but do not pay them anything additional for those hours. It is therefore critical for business owners to have a strong understanding of which employees are within the 213(a)(1) exemptions and which are not.
The Department of Labor (“the Department”) has promulgated rules interpreting the Fair Labor Standards Act which elucidate who falls within and outside this exception. These regulations can provide valuable guidance to a business owner and help them avoid an FLSA violation.
a. Executive
In 29 C.F.R. 541.100, the Department defines “employee employed in a bona fide executive capacity.” In order to qualify for the executive exemption, the employee must meet four criteria. First, the employee must be paid on a salary basis in an amount set by a complicated formula. (Pursuant to §541.600(1), the current minimum salary is $913 per week.) Second, the employee’s primary duty must be management of the company or a department of the company. Third, the employee must regularly direct the work of two or more subordinates. Finally, the employee must either have the explicit authority to hire or fire other employees, or the ability to make recommendations as to the hiring, firing, advancement, or promotion of other employees. If an employee lacks any one of the four criteria, that employee is not within the purview of the executive exemption.
b. Administrative
Section 541.200 pertains to the “administrative” exception. It defines “employee employed in a bona fide administrative capacity….” In order to qualify for the administrative exemption, the employee must meet three criteria. First, the employee must be paid a salary according to the same formula as the executive exemption. Second, the employee must be primarily engaged in “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers…” Finally, the employee’s duties must include the exercise of discretion and independent judgment on important business matters. As with the executive exemption, lacking any one of these three criteria renders the employee non-exempt with respect to the administrative exemption.
c. Professional
Section 541.300 expounds on the “professional” exception. It defines “employee employed in a bona fide professional capacity” as someone who meets two criteria. First, the employee must be paid a salary according to the same formula as that of the executive and administrative exceptions. Second, the employee’s job duties must either require advanced knowledge in the field of science or learning acquired from extended specialized education. Alternatively, the employee’s job must require the “invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. If the employee meets both requirements, the employee is within the professional exemption.
- WHO IS NOT EXEMPT
Just as the Department of Labor has provided guidance as to employees for whom the executive, administrative, and professional exemptions do apply, the Department has also elucidated professions where the 13(a)(1) exemptions do not apply. According to §541(3)(a), the 13(a)(1) exemptions do not apply to “manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy.”
The Department’s rational is that these employees should be protected by the FLSA because they “gain the skills and knowledge required for performance of their routine manual and physical work through apprenticeships and on-the-job training, not through the prolonged course of specialized intellectual instruction required for exempt learned professional employees….” Such employees include “non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers….” Section 541(3)(b) provides another long list of professions who are outside the scope of the exemption, including police officers, probation officers, park rangers, fire fighters, and paramedics. According to the Department, these occupations are outside the scope of the exemption because these employees do not manage a business, they are not involved in work directly related to the management of a business, and their work does not require “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor….”
- FLUCTUATING WORK WEEK METHOD OF CALCULATING A NON-EXEMPT SALARIED EMPLOYEE’S REGULAR RATE
Applying the FLSA and Department regulations creates a category of employees who do not fall with the 13(a)(1) exemptions and thus are entitled to be paid overtime for any hour or portion thereof they work in excess of 40 in any given week. However, those employees may be paid a salary as opposed to an hourly wage, and they may work more than 40 hours only occasionally. So once an employee determines an employee is outside the scope of the exemption and thus entitled to overtime, how does the employer calculate what the overtime pay should be? According to the Department, an employer may use the Fluctuating Work Week (FWW) method to calculate the overtime to which the employee is entitled.
As the United States District Court for the Southern District of Florida explained in Lewis v. Keiser Sch., Inc. (S.D. Fla., 2012), the employee must meet five criteria in order for the employer to be able to use the FWW method. First, the employee’s hours must fluctuate from week to week. Second, the employee must receive a fixed weekly salary that remains constant irrespective of the actual number of hours the employee works. Third, the amount the employee receives must be at least enough to pay the employee for all hours worked not less than the federal minimum wage. Fourth, the employee and employer must mutually understand that the employee will be paid a fixed salary regardless of the number of hours actually worked. Finally, the employee must be paid, in addition to the fixed salary, half his or her hourly wage for every hour or portion thereof in excess of forty in any given week.
This prompts two important questions. First, we are discussing non-exempt salaried employees. How do we calculate the hourly wage of someone who is paid on a weekly basis? Secondly, the FLSA mandates that an employer must pay overtime at 150% of the hourly wage, yet the FWW requires only 50% of the hourly wage. Fortunately, the federal courts have clarified both issues. With respect to the hourly rate of a salaried employee, the United States Supreme Court explained that the “regular rate” is determined by dividing the number of hours actually worked by the weekly wage. See Overnight Motor Transportation Company v. Missel, 316 U.S. 572 (1942); See also Kohlheim v. Glynn County, Ga., 915 F.2d 1473, 1480 (11th Cir.1990). Consequently, if a salaried employee is paid $1,000.00 per week and works 45 hours in a given week, the employee’s “regular rate” would be $22.22 per hour ($1,000.00 divided by 45 hours). In that scenario, the employee would be entitled to be paid the regular $1,000.00 salary, plus an additional $111.10 for that week ($22.22 multiplied by the 5 hours in excess of 40 worked that week.)
So the overtime rate is determined, but why half-time instead of time-and-a-half? The Southern District of Florida answered that question in Torres v. Bacardi Global Brands Promotions, Inc., 482 F.Supp.2d 1379, 1381 (S.D. Fla., 2007). The Court explained that since the salaried employee is being paid a flat salary for all hours worked in a work week, irrespective how many hours that is, that salary includes payment for all hours in excess of 40 hours in a week. Consequently, as a result of the fixed salary arrangement, “a non-exempt employee who receives a weekly salary for all hours worked has, by definition, already been paid his “regular rate” for all hours worked in the workweek. Thus, a salaried employee is only owed half-time for any hours worked in excess of forty per workweek.” In other words, the non-exempt salaried employee is entitled to be paid 150% of their regular rate, but the salary constitutes the 100%, thus entitling the employee only to an additional 50%.
Given the complexities of the FLSA, it can be very easy to run afoul of its provisions. Unfortunately, the FLSA contains very draconian punitive remedies for FLSA violations including full payment of unpaid overtime for up to three years, an equal amount in liquidated damages, and payment of the employee’s attorneys’ fees. Consequently, even a minor underpayment can result in a significant financial liability. Therefore, the best practice is to know the FLSA provisions and ensure you are in full compliance with those provisions. Hopefully, this article will help small business owners do just that.
[1] Another misconception is that an employer may escape the obligations of the FLSA simply by paying them a 1099 rather than a W-2 and designating the employee as an “independent contractor.” That is also false. I will address that misconception in another forthcoming article. Stay tuned.
[2] These provisions, like other sections of the FLSA and every other federal law, has numerous exceptions where the law is inapplicable. For the sake of brevity, this article will concentrate on the FLSA’s main provisions and will not delve into every exception.
Posted on: 1 Dec, 2017
