Ready or Not? Finding Pay Issues Before the DOL Does

1. Ready or Not? Finding Pay Issues Before the DOL Does Nicole J. Gray McDonald Hopkins LLC Amy L. Kullik Mansour Gavin LPA

2. Overview Fair Labor Standards Act (FLSA): • Provides wage protections and basic rights for workers, including federal minimum wage and overtime requirements

3. Overtime Requirements FLSA requires employers pay overtime to all employees who work more than 40 hours in a workweek, unless they meet one of the exemptions

4. Executive Administrative“White Collar” exemptions Professional Other: Outside Sales Computer Employees FLSA Exemptions

5. Exemption Considerations • Salary Basis: How employees are paid • Salary Threshold: How much employees are paid • $455/week ($23,660/year) • Duties Test: What kind of work do employees do

6. Highly Compensated Employees (HCE) HCEs may also be exempt if: • They earn $100,000 per year • commissions • nondiscretionary bonuses • Earn at least $455/week in salary or fees • Customarily and regularly perform the duties of one of the white collar positions listed in the FLSA

7. White Collar Exemptions Executive Exemption • Salary Basis & Salary Threshold • Duties: • Management/Supervision of 2 or more people with authority to hire/fire/promote or make recommendations of particular weight

8. White Collar Exemptions Administrative Exemption • Salary Basis and Salary Threshold • Duties: • Primary duty must directly relate to management or business operations • Include the exercise of discretion and independent judgment with respect to matters of significance

9. White Collar Exemptions Administrative Exemption Areas of work: Tax Human Resources Finance Labor Relations Marketing Database Administration Quality Control Purchasing Legal and Regulatory Compliance

10. Professional Exemptions Learned Professional • Salary Basis & Salary Threshold • Duties: • Perform work requiring knowledge of an advanced type in a field of science or learning • Customarily acquired by a prolonged course of specialized intellectual instruction • Exercise of discretion and independent judgment

11. Professional Exemptions Creative Professional • Salary Basis & Salary Threshold • Duties: • Involves performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor

12. Other Exemptions Computer Employees • Exception to Salary Basis – Hourly Basis of $27.63 • Duties: • Application of systems analysis techniques and procedures to determine functional specification, design and development of computer programs per system design specifications • Design, documentation, testing, creation of computer systems or programs • Or a combination

13. Other Exemptions Outside Sales Employees • No requirement for Salary Basis – salary, hourly, commission, fee, piece, bonus or combination, no minimum required • Duties • Making sales within meaning of section 3(k) of the Act, or obtaining orders or contracts for services or for the use of facilities which a consideration will be paid by the client AND who is customarily and regularly engaged away from the employer’s place of business in performing such primary duty

14. Proposed Regulations President Obama issued a 2014 memorandum, directing the Secretary of Labor to: • Consider how the regulations could be revised to update existing protections consistent with the intent of the FLSA • Address the changing nature of the workplace • Simplify the regulations to make them easier for both workers and businesses to understand and apply

15. DOL’s Notice of Proposed Rulemaking (NPRM) FOCUS – Salary Thresholds Only • Increase standard salary for white collar exemptions from $455/week to $921/week ($47,892) • Increase HCEannual salary threshold from $100,000 to $122,148 • Provide for automatic updates of salary and compensation levels going forward

16. DOL’s NPRM The NPRM sets the standard salary level at: • 40th percentile of weekly earnings for full-time salaried workers (for 2016 is projected to be $970/week or $50,440/annually) • 90thpercentile of earnings for full-time salaried HCEs ($122,148/annually) Notably, the NPRM provides that the DOL will automatically update the salary level on an annual basis using a fixed percentile of wages or the Consumer Price Index (CPI)

17. DOL’s NPRM NO CHANGES PROPOSED FOR DUTIES TEST (YET) • The NPRM does not contain proposed changes to the duties test as anticipated • DOL is seeking comment from employers: • examples in specific occupations • possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement

18. DOL’s NPRM Timetable • NPRM unveiled June 30 • Published in Federal Register July 6 – starts a 60-day comment period, set to expire September 4 • Extension requested by SHRM and U.S. Senate

19. Employer Challenges Complying with the DOL’s proposed rule will present significant challenges for employers: • Increased labor costs • Changes to policies and payroll practices • Management of automatic salary level increase to retain exempt status • Preparing for likely changes in duties test without certainty as to final rules

20. What Does This Mean? Any of your salaried "exempt" employees that make less than $970 per week or $50,440 annually would be re-classified as non-exempt and entitled to overtime if the current proposal is incorporated into the final rule • Compliance with the DOL’s record keeping requirements for non-exempt employees: • Hours worked each day • Total hours worked each workweek • Daily/weekly straight time earnings for the workweek • Overtime earnings for the workweek

21. Everyone Has To Be Paid Hourly? NO. Hourly is not the same as “non-exempt.” • When properly done, non-exempt employees can be paid a salary • Employers can pay a non-exempt employee any way they want (e.g. hourly, piece rate, salary, commission) provided: • The employee receives at least the equivalent of minimum wage for every hour worked in the workweek; and, • The employee receives overtime pay for any hour worked in excess of 40 in the workweek

22. What Should Employers Do? • Identify affected employees • Assess financial and nonfinancial impact • Create implementation plan

23. Planning For The Proposed Rule • Identify affected employees • All employees currently treated as exempt who earn less than $970 per week ($50,440/year) • All HCEs who earn more than $100,000 but less than $122,148 per year • Determine whether to make changes based on compensation or based on position

24. Planning For The Proposed Rule • Assessing financial and nonfinancial impact • Determine how to treat affected employees going forward • Estimate overtime • Consider your options: • Reclassify as non-exempt • Assess other available exemptions • Change pay plan (e.g., increase pay, reverse engineer regular rate to account for OT assumptions, fluctuating workweek) • Restructure positions • Evaluate need for new hires (e.g., part-time or seasonal workers)

25. Assessing Financial Impact • Example: Financial Analyst • $40,000/year • Generally works from 8 a.m. to 5:30 p.m. Monday through Friday with a 30-minute lunch break • 45 hours per week • Option # 1 • $19.23/hr regular rate ($40,000/year ÷ 52 weeks ÷ 40 hours) • $28.85/hr OT rate ($19.23 x 1.5) • $ 913.45 per week ($19.23/hrx 40 hours) + ($28.85/hr x 5 hours) • $47,499.40 ($913.45 per week x 52 weeks)

26. Assessing Financial Impact • Option # 2 • Employee’s annual salary is increased to $50,440 • Remember that the salary test is indexed, so in order to maintain the exemption you will need to raise Employee’s salary every year by at least as much as the increase in the salary test (which will likely be tied to CPI) • Option # 3 • $40,000 = $769.23 per week (52 weeks) • $16.20/hr regular rate/$24.30 OT rate ($16.20 x 40) + ($24.30 x 5) = $769.50 • $769.50 per week x 52 weeks = $40,014 • Pay additional OT for hours worked over 45 in a week

27. Planning For The Proposed Rule • Nonfinancial considerations • Hidden OT (e.g., smartphones, e-mail, after hours events, travel) • Time tracking • Deduction practices • Morale issues • Communication/Training/Rollout • Updating policies • Annual salary reviews (if salary level is indexed annually, may require annual salary increases)

28. Planning For The Proposed Rule • Prepare now for duties test changes • Assess nature of duties being performed • Determine amount of time spent on “exempt” duties • Review and update job descriptions and other internal documents • Analyze changes in job titles and reporting structures • Interview/observe work being performed

29. Misclassification Analysis Examples of Exempt Duties Examples of Nonexempt Duties Data entry Inside sales Answering telephones Bookkeeping Submitting decisions to supervisor for approval Performing help-desk functions Performing repetitive tasks governed by guidelines or standard practices Exercising attention to detail • Supervising employees • Analyzing financial statements • Writing a computer program • Analyzing business metrics • Developing and enforcing significant company policies • Visiting potential customers at their places of business to sell goods or services • Choosing which products the company should sell • Being responsible for a significant budget

30. Misclassification Analysis Compare this job description: • HR Representative is responsible for all or part of these areas: • HRIS/Records Management and Data Integrity • Attracting and hiring new staff • Orientation/on-boarding of new hires • Compliance to regulatory concerns and reporting With this revised job description: • Recruit applicants and hire new staff by identifying and implementing effective recruiting methods, interviewing, evaluating, and recommending candidates • Ensure effective on-boarding and orientation of new hires as part of overall retention strategy • Manage HRIS/Records Management and Data Integrity and provide analysis of employment metrics • Knowledge of HR regulatory compliance requirements and develop policies to ensure company is meeting obligations and reporting requirements

31. Action Plan • AUDIT! • Self Audit • Identify affected employees and possible impact issues • Gather data for compensation analysis • Review policies on pay practices, leave, etc. and impact on newly classified non-exempt employees • Outside Audit • Privileged • Assists in compiling data and provides legal alternatives on re-classification • Golden opportunity to analyze and correct any misclassification . . . “The law made us do it”

32. Identifying Common Payroll Errors • Tracking Hours Worked • Error : Not tracking work time for non-exempt employees • Fix: Require all non-exempt employees to track hours all hours worked • Rounding • Error:Rounding only in the employer’s favor at the beginning & end of the shift • Fix: Round in the employer’s favor at one end & the employees’ at the other end Example: 8:54 a.m. punch-in rounded in employer’s favor to 9:00 a.m.; 4:54 p.m. punch-out rounded in employee’s favor to 5:00 p.m.

33. Identifying Common Payroll Errors • Training Time • Error:Not paying for attendance at training • Fix:Training related to the job & required by the employer is compensable • Don’t forget remote training during non-work time • Off-the-Clock Work • Error: Not compensating for all hours worked • Common mistakes: Mandatory training & “off-duty” meeting time, travel time, pre/post schedule work • Fix: Track and pay for all work performed for the benefit of the employer

34. Identifying Common Payroll Errors • Bonus/Incentives • Error: Not including bonus/incentive pay in calculating OT rate • Fix: Include all non-discretionary pay in calculating regular and OT rate • Meal Breaks/Rest Periods* • Error: Deducting for meal breaks of less than 30 minutes; deducting for rest periods of less than 20 minutes • Fix: Include meal breaks of less than 30 minutes in hours worked; pay for rest periods of less than 20 minutes *Review state law requirements to ensure compliance

35. Identifying Common Payroll Errors • Docking Exempt Pay • Error: Improper deductions from salary destroy exempt status • Fix:Generally, no partial day salary deductions and full-day deductions only in specified circumstances; Learn what deductions are permissible and don’t make any others • Ignoring State Law Requirements • Error:Not considering applicable state law wage/hour requirements • Fix: Be aware of both federal and state wage/hour laws and note that if the state offers greater benefit/protection that state law will apply

36. Dollars and Sense • Since 2009, the DOL has added hundreds of investigators and become increasingly more aggressive in investigations • DOL collected over $240 million in back wages from employers in 2014 • Example: • “Exempt” Rental Coordinator: $44,000/year; works 8:00 a.m. – 6:00 p.m. with a ½ hour lunch break (47.5 hours/week) • Determined to be misclassified • Back wages for 2 years = $24,741.60 • Add liquidated damages = $49,483.20

37. DOL Investigation – Now What? How does a DOL wage and hour investigation arise? • Employee complaint • Competitor complaint • Targeted industry • Geographic focus DOL will generally not disclose particular trigger

38. What Is The Investigator Looking For? • Violations of the FLSA and other statutes • Minimum wage • Overtime • Classification • Exempt/non-exempt • Employee/independent contractor • Youth labor / interns • Policies, required postings, record keeping • Deductions • Form and timing of payment

39. DOL Investigation: Process Overview • Initial contact • Document requests • Employee interviews • Settlement conference/negotiations • Litigation?

40. Initial Contact • Typically, the investigator sends a letter notifying employer of date and time of intended visit • Response • “Oh $%#@!!!” and call your lawyer • Develop rapport • Negotiate a more convenient date • Try to limit or at least understand scope of investigation • Gather documents • Designate point person or inspection team

41. Opening Conference • DOL has the authority to: • Investigate and gather data • Enter premises and inspect records • Question employees • Expect the DOL investigator to: • Discuss the purpose and scope of investigation • Advise what documents/records will be reviewed • Advise whether they plan to interview employees • May request a tour of the facility

42. Document Review • Typical requests: • Information regarding FLSA coverage (e.g., ownership and structure, annual revenue, EIN) • Employee list and corresponding payroll records (previous 2-3 year period) • Policies regarding time-keeping practices • Considerations: • Does the information require an explanation? • Keep the relevant time frame in mind • Limit scope of production, if possible

43. Employee Interviews • Employee Interviews: DOL’s most important investigative tool because it tests the accuracy of employer’s records • May be on- or off-site • May be current or former employees • Chosen by investigator • Private interviews; exceptions for management and key employees • Considerations: • Who will be interviewed? • Purpose of interview? • Management presence? • Place and timing of interviews? • Message to employees?

44. Investigation Findings • Closing conference: occurs at conclusion of investigation to inform of findings and seek an agreement if there are any violations • Minor/technical violations: corrective action • Wage violations: back wages • Serious or willful violations: fines/civil penalties • Considerations: • Review findings to rebut or verify back wage calculations • Assess whether to submit a position statement • Negotiate with investigator • Appeal determination

45. Liability • Back wages in the amount of unpaid minimum wages or unpaid overtime compensation • Liquidated damages (to be paid to employee) equal to the amount of unpaid wages due to the employee • Employers that willfully or repeatedly violated minimum wage or overtime requirements can face up to $1,100 in civil penalties (to be paid to the government) for each violation

46. Tips For Surviving DOL Investigation • Get outside help • Designate a “point person” and create a response team • Promptly gather the requested information and be mindful of what is produced • Cooperate with the investigator • Do not hide the truth • Fully engage in discussions with the investigator • Rebut the findings with contrary evidence

47. How To Protect Your Business • Ensure that your time and payroll practices are in good order BEFORE the DOL (or state labor department) comes knocking • Don’t ignore employee complaints • Don’t retaliate against employees for complaints • Train managers and payroll staff about wage/hour laws • Post required notices – federal and state • Contact counsel if you receive notice of a state or federal audit

48. Questions Nicole J. Gray, Member, McDonald Hopkins LLC 216.348.5418 ngray@mcdonaldhopkins.com Amy L. Kullik, Shareholder, Mansour Gavin LPA 216.453.5911 akullik@mggmlpa.com This presentation is intended for general informational purposes only and should not be construed as legal advice.