DOL Proposes To Increase Exempt Salaries to $55K/year from $35K/year

 At the end August, the federal Department of Labor announced that it was proposing on September 8 to amend 29 C.F.R. 541.600 of the Fair Labor Standards Act regulations to increase the minimum salary for exempt employees from approximately $35K/year to $55K/year.  Under the proposed regulation, employees could not be classified as exempt from the FLSA (under the white collar exemptions for executive, administrative and professional employees) unless they were paid a guaranteed salary of at least $1,059 per week.  In other words, employees would be entitled to be paid overtime compensation whenever they work more than 40 hours in a week if they are paid less than $1,059 per week.   The minimum threshold for highly compensated employees will similarly be increased to $143,988/year from the current $107K in the proposed amendment of 29 C.F.R. §541.601.    The proposed regulation would also automatically adjust the minimum salary threshold every three years.  The DOL will accept comments about the rule for 60 days (or until November 7).  A similar regulation was proposed near the end of the Obama Administration, but was enjoined by a federal court and was later withdrawn.

DOL Releases Long-Awaited Regulatory Proposals Governing Overtime Compensation Exemptions and the New Salary Basis Test

This morning, the Department of Labor released its long-awaited proposals to revise the Fair Labor Standards Act regulations governing the entitlement to exemption from overtime compensation.  As expected, the DOL proposes to increase the minimum salary which would qualify a position for an overtime exemption (i.e., exempt jobs) from $455/week (or $23,660/year, which is beneath the poverty rate for a family of four) to $921/week (or $47,892).  (Interestingly, the DOL’s website indicates that the new annual salary would be $50,440 and not the amount listed in its proposed regulations).   Thereafter, and somewhat like Ohio minimum wage law, the DOL proposes to peg the minimum salary amount to “the 40th percentile of weekly earnings for full-time salaried workers” so that the minimum salary level would increase annually.   The DOL also proposes to raise the exempt salary rate for highly compensated workers from $100,000/year to $122,148/year (with a similarly escalator clause pegged at the 90^th percentile), but proposes no other changes to the highly compensated exempt worker regulations.  While the DOL is not currently proposing to modify the duties test for exempt positions, it is inviting comments on whether it should do so in order to further limit the amount of non-exempt work which may be performed by exempt employees.

The DOL discusses for many pages why it substantially increased the minimum salary.  In short, it contends that the 2004 FLSA regulations combined the lower salary level for the traditional long duties test with short duties test (which typically required a higher minimum salary level) to create the standard duties test and, therefore, short-changed many exempt employees.  It also criticizes how the 2004 salary level was set differently than in past years and that it relied on regional instead of national data.  The current proposal also chose a salary level that made the minimum wage approximately same ratio to the minimum exempt salary as it had been in 1958 and 1970.

The DOL notes that many employers prefer to pay their salaried employees a significant portion of their compensation through non-discretionary bonuses and incentive payments to give the employees a sense of ownership in their work and to improve their performance.  Historically, the FLSA regulations have not considered these payments as part of the salary basis test (except for highly compensated employees).  However, the DOL is considering including these bonus and incentive payments into the new salary basis test, so that employers do not entirely eliminate these pay-for-performance systems.  However, if it were to adopt such revisions, the DOL would only permit 10% of such bonuses to be considered as part of the mandated $921 weekly salary amount needed to meet the overtime exemption and would require that such bonuses be paid out weekly or monthly, instead of merely annually or quarterly as most of them currently are.  (This, of course, reflects that most of the bureaucrats making the rules have been paid by the government with steady tax income so long that they have no understanding of how the real world works in the private sector).   The DOL also would not permit “catch up payments” as are currently permitted for highly compensated exempt employees.

Likewise, the DOL seeks comments about whether to include commission payments in the salary level test on the grounds that they are similar to nondiscretionary bonuses.

The proposed new regulation still would not consider discretionary bonuses as part of the salary level test and would still exclude room and board, etc. from the calculation.  It would similarly exclude “payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits.”  It also maintains separate tests for the movie industry and American Samoa.  In addition, certain professions remain outside the salary basis tests, including lawyers, judges, physicians and academic administrative personnel.

All in all, the only surprise in the proposed regulations was that the DOL did not modify the 2004 standard duties test for exempt positions.  The proposed minimum salary rate has been whispered in employment law sectors and the news media for many months.  However, employers should remain vigilant in case the DOL changes its position about the duties test and whether and how it will permit incorporation of bonuses, commissions and incentive payments into the salary basis test.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

DOL Announces $4.8M Settlement with Wal-Mart Over Overtime Pay Owed to Misclassified Employees

Yesterday, the federal Department of Labor announced that it had reached a settlement with Wal-Mart Stores, Inc. over the nationwide misclassification of more than 4,500 individuals employed as asset protection coordinators and vision center managers between 2004 and 2007. The settlement includes payments to the affected employees of unpaid overtime over a three-year period, plus an equal amount as liquidated damages. In addition, Wal-Mart will pay the DOL $463,815 in civil penalties because of the repeated nature of the violations. The settlement follows an investigation by the Wage & Hour Division, re-classification of the employees by Wal-Mart in 2007 and negotiations over the past four years. The DOL did not explain how Wal-Mart had misclassified the employee. For instance, it did not explain whether the employees did not exercise independent discretion, were not paid on a salary basis, or lacked sufficient managerial authority.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Failure to Pay Any Salary to Exempt Employee Can Violate the FLSA

This morning the Sixth Circuit issued an interesting, yet concise, FLSA decision, which is no small feat. Orton v. Johnny’s Lunch Franchise, LLC, No. 10-2044 (6th Cir. 2-22-12). In this case, the plaintiff former-executive alleged in his complaint that his former employer and the company’s president (also deemed an employer under the FLSA) failed to pay him any salary or reimburse him for expenses in the last five months that he worked in 2008 because of cash-flow problems. The defendants moved to dismiss the complaint on the grounds that the president was not an employer and on the grounds that the plaintiff was exempt. Ultimately, the district court dismissed the complaint and refused the plaintiff leave to amend on the grounds that he was an exempt employee and cannot assert a claim for back wages under the FLSA. The court held that the employer’s failure to pay any salary to the plaintiff for five months was insufficient to convert him to a non-exempt employee (who was owed minimum wages and overtime). The Sixth Circuit reversed and remanded on the grounds that the district court improperly placed the burden of proving the exemption on the plaintiff and that the employer was required to prove under the 2004 FLSA regulations that its deductions from salary actually received were permissible under the salary-basis regulations. This obviously could not be done at the 12(b)(6) stage without an evidentiary record.

First, the Sixth Circuit noted that an employee’s exempt status is an affirmative defense that must be plead in the employer’s answer and proven by evidence. Although the court was critical of the district court for overlooking this significant issue, there may have been some confusion in that the plaintiff may have conceded that his position would be exempt in normal circumstances and did not challenge the court’s finding on appeal.

Second, the Court found the 2004 amendment to the FLSA regulations modified the law on whether a failure to pay any salary is actionable under the FLSA. The former regulation provided in relevant part that:

“An employee will be considered to be paid ‘on a salary basis’ within the meaning of the regulations if under his employment agreement he regularly receives each pay period . . . .” 29 C.F.R. § 541.118(a) (1973) (emphasis added).

However, the 2004 regulation changed this to:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed . . . . 29 C.F.R. § 541.602(a) (2004) (emphasis added).

The Sixth Circuit previously addressed the impact of the 2004 changes on the salary-basis test in Baden-Winterwood v. Lifetime Fitness, Inc., 566 F.3d 618, 627-28 (6th Cir. 2009). “The new regulation now “focus[es] on pay received,” rather than the terms of the employment agreement, but the regulation still requires that a defendant show that the plaintiff was paid: “(1) a predetermined amount, which (2) was not subject to reduction (3) based on quality or quantity of work performed.” The district court improperly relied on decisions applying the pre-2004 regulation, which had made the employee’s employment agreement the starting place for any analysis.

The new (2004) regulations, which all parties correctly agree are applicable in this case, establish that employment agreements are no longer the relevant starting point for whether an employee is paid on a salary basis. Baden-Winterwood, 566 F.3d at 627. The question is therefore not what Orton was owed under his employment agreement; rather, the question is what compensation Orton actually received.

In this case, the plaintiff alleged that he was not paid any salary or wage from August until he was laid off in December 2008. The complaint also mentioned that this was because the defendants had trouble making payroll. “Whether Orton’s allegations “suggest” one reason for the deduction in salary is irrelevant; his allegations do not preclude multiple reasons for the deduction, and it was the defendants’ burden—not the plaintiff’s—to establish that the reason for the deduction was proper.” In any event, this allegation does not meet the employer’s burden for proving that the alleged deduction was permissible under the FLSA.

For example, a company experiencing cash-flow issues cannot claim the exemption if the company prevents an otherwise salaried employee from coming in three days a week and then pays him less accordingly. Such a deduction in pay would undeniably be due to an absence occasioned by the employer, see 29 C.F.R. § 541.602(a), even though the employer decided to take the action due to cash flow problems. The regulation makes no exception for deductions in pay just because they were motivated by cash flow shortages. . . ..

That is not to say a company with cash flow issues is left with no recourse. Nothing in the FLSA prevents such an employer from renegotiating in good faith a new, lower salary with one of its otherwise salaried employees. The salary-basis test does not require that the predetermined amount stay constant during the course of the employment relationship. Of course, if the predetermined salary goes below a certain amount, the employer may be unable to satisfy the salary-level test, which explicitly addresses the amount an employee must be compensated to remain exempt.

The Court also found no legal significance in a complete reduction in pay rather than a partial reduction – as existed in pre-2004 case law because of a focus on the terms of the employment agreement. “ Therefore, to the extent these cases are at all instructive regarding the new regulations, they support the general principle that the reasons for the reductions in pay are dispositive, not the amount.”

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Managers’ Exempt Status Was Destroyed by Employer’s Recoupment of Overpayment of Incentive Bonuses.

Today, a unanimous Sixth Circuit addressed the Fair Labor Standards Act exempt status regulations in a class action lawsuit brought in Columbus alleging that the employer violated the salary basis regulations and owed the Plaintiffs overtime compensation. Baden-Winterwood v. Life Time Fitness, Inc., Nos. 07-4437/4438 (6th Cir. 5/19/09). The Court addressed compensation paid both before and after the revised FLSA regulations were issued by the Department of Labor in August 2004. The Plaintiffs were paid a mix of base salary and incentive bonuses. The Plaintiffs challenged employer policies which permitted the employer to recoup prior overpayments of incentive bonuses from employee salaries and actual deductions made from employee salaries in 2005 to recoup such incentive bonus overpayments. The employer’s compensation plan changed in 2006 to “hold back” 20% of potential incentive bonuses for possible future recoupment. The Sixth Circuit agreed with the district court that the actual deductions for “bonus recoupment” impermissibly reduced the Plaintiffs’ base salaries in 2005 due to the quality or quantity of their work and was not a permissible recoupment of an overpayment or advancement of wages or other compensation.

On July 10, 2007, District Judge Frost “granted in part Plaintiffs’ motion for summary judgment, finding “that the deductions from the salaries of eight Plaintiffs were deductions resulting from ‘variations in the quality or quantity of the work performed,’ in violation of the salary-basis test.” Baden-Winterwood v. Life Time Fitness, No. 2:06-CV-99, 2007 U.S. Dist. LEXIS 49777, at *42 (S.D. Ohio July 10, 2007) (quoting 29 C.F.R. § 541.602(a)).. . . . In his review of Plaintiffs’ overtime claims, the district court undertook a thorough three-part analysis. First, the district court determined the effect of the” DOL’s August 2004 salary-basis regulations in which “only an “actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.’” Id. at *22 (quoting 29 C.F.R. § 541.603(a)). This meant that Plaintiffs’ claims covering the period of time before August 23, 2004 would be analyzed under the” Supreme Court’s 1997 opinion in Auer v. Robbins, 519 U.S. 452 (1997), which held that “the salary-basis test denies exempt status “if there is either an actual practice of making . . . deductions [based on variations in quality or quantity of work performed] or an employment policy that creates a ‘significant likelihood’ of such deductions.” Claims involving pay periods after August 2004 were to be governed by the DOL’s new regulation. Second, the district court determined that the employer did not violate the Auer test. Finally, the district court determined that the deductions from plaintiffs’ salaries in 2005 “specifically related to the quality or quantity of work each Plaintiff had performed” and that the Plaintiffs worked overtime during those pay periods. However, the district court limited Plaintiffs’ recovery to overtime pay for the three pay periods in 2005—the periods ending November 9, November 23, and December 9—during which Life Time Fitness took actual deductions from Plaintiffs’ salaries.” Both sides appealed.

On appeal, the Sixth Circuit rejected the Plaintiffs’ argument that Auer applied to all pay periods at issue, and instead, agreed with the district court’s decision to apply Auer only to pre-August 2004 pay periods and the “new” DOL regulation to pay periods after August 2004. Nonetheless, the Court reversed the district court’s decision that the employer complied with the Auer test and found that the employer’s pre-August 2004 policies impermissibly subjected the Plaintiffs’ salaries to the risk of deduction. Finally, the Court affirmed the district court’s decision that the employer made impermissible deductions from the employees’ salaries during three pay periods in 2005. Unlike other situations where an employer is permitted to recoup from salary prior advancement of wages or loans to employees,

Life Time Fitness did not provide loans to its employees. To be sure, it did make advance bonus payments. However, to recover overpayments, Life Time Fitness impermissibly dipped into Plaintiffs’ guaranteed salaries. Unlike the situation in both DOL letters [permitting recoupment of wage advances and loans], Life Time Fitness knowingly made salary deductions as part of a pre-designed bonus compensation plan. . . . The deductions were not made to recover irregular salary advances or payments mistakenly made by the payroll department. See id. The plain language of 29 C.F.R. § 541.602 provides, “[s]ubject to the exceptions provided in [section 541.602(b)], an exempt employee must receive the full salary for any week in which the employee performs any work . . . .” 29 C.F.R. § 541.602(a). Section 541.602(b) provides, generally, that deductions may be made for absenteeism, sick leave (in certain circumstances), penalties imposed in good faith for infractions of safety rules, unpaid disciplinary suspensions, and, under the DOL letters described above, for mistaken overpayments. But, there is no support for the contention that the FLSA allows for the reduction of guaranteed pay under a purposeful, incentive-driven bonus compensation plan.” (emphasis added).

The Court also rejected the employer’s argument that the incentive bonuses were not based on individual employee performance, but rather, were based on departmental performance, including a number of factors like “her supervisees’ performance, the size and location of a particular club, club-usage volume,” etc. As noted by the district court, “it is strange for Defendant to argue that individual performance was mainly irrelevant to the computation of bonus payments. [Life Time Fitness] offered, after all, that it created the bonus plans ‘[a]s a means for providing incentives for certain of its employees.”

Perhaps if the recoupment deductions had been limited to future bonus payments and had not invaded the employees’ base salaries, the employer would have avoided violating the FLSA.

Insomniacs can read the full opinion at http://www.ca6.uscourts.gov/opinions.pdf/09a0177p-06.pdf

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.