Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

by Doug Weiner

            In a decision dated January 5, 2010 the D.C. Circuit raised that question in a case involving the administrative exemption in a Fair Labor Standards Act class action.  

Stating the District Court had no occasion to decide whether the job of a GEICO auto damage adjuster is so easy a caveman could do it, (referring to GEICO’s well known ad campaign in a light hearted footnote) the appellate court held that GEICO satisfied its burden of proof that its employees performed exempt administrative duties. The appellate court reversed the district court’s summary judgment for plaintiffs, and in a lengthy and well reasoned decision, upheld the exempt classification. Reversing the lower court, the appellate court directed judgment be entered for the employer. 

Exemptions to the FLSA are generally narrowly construed. The administrative exemption applies only to employees paid on a salary basis of at least $455 a week whose “primary duty consists of …the performance of office or non-manual work directly related to management policies or general business operations of his employer…which includes work requiring the exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. 541.200 et. seq. The court noted the question of whether an employee comes within an FLSA exemption is a question of law, and the appellate court reviewed de novo the district court’s grant of summary judgment to the plaintiffs. 

Plaintiffs did not dispute that they were paid the requisite salary, and performed non-manual work directly related to GEICO’s business operation. However the plaintiffs argued, and the district court found, that the amount of discretion they exercised was “insufficient” for exemption because the vast majority of their work consisted of using their training and skills to assess the value of the damage to customers’ vehicles in accordance with the employer’s directions, “limited in scope by both the information and standards contained in the computer software and the guidelines and limits on negotiating authority laid out by GEICO”. 

The appellate court found that although the parties disputed how much discretion the plaintiffs exercised, there was no dispute that plaintiffs work “includes some discretion” to perform their duties. The court then held that because it was undisputed that the plaintiffs’ job “includes” work requiring the exercise of discretion and independent judgment, the employer had met its burden of proof, and directed the district court to enter judgment for the employer.

The court, citing decisions from “sister” circuits finding auto damage adjusters exempt from overtime requirements by virtue of the administrative exemption, held that the defining regulation merely required the employees’ primary duty to “include” discretion and independent judgment, but does not specify how frequently the discretion must be exercised. The court held that because it was undisputed that the plaintiff exercised “some discretion and independent judgment during the course of his job” the employer had satisfied the final test to support the exempt classification.

How broadly will the D. C. Circuit’s analysis of the auto damage adjusters’ duties be applied to other employment circumstances? Because each worker’s classification of exemption depends upon a detailed factual analysis, and employers are required to bear the burden to prove an exemption is applicable, employers should proceed cautiously before reaching a determination that their employees satisfy all the criteria necessary for exemption. The court noted that in this case GEICO had re-classified their auto damage adjusters as non-exempt during the course of the litigation to limit further exposure in the event the exempt classification was not upheld. 

As many employers have learned to their sorrow, the question of properly applying FLSA exemptions is not so easy even a cave man could do it. 

            The court decided the appeals of Jerome Robinson-Smith v. Geico, case number 08-7146, and Christine Lindsay et. al. v. Geico, case number 08-7147, in the U.S. Court of Appeals for the District of Columbia Circuit.

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Furloughs are a hot topic in today's economy.  I previously reported on the potential usefulness of furloughs, as well as the risk that reducing an employee's salary as part of a furlough program could run afoul of the "salary basis" test and jeopardize the employee's exempt status. 

Recognizing the need for legal guidance on this issue, the U.S. Department of Labor's Wage and Hour Division recently issued a user-friendly "Frequently Asked Questions" fact sheet on furloughs. (Special thanks to my EBG colleague Elissa Silverman for bringing this to my attention.)

I don't see any major surprises here.  Nevertheless, employers considering the use of a furlough program would be wise to consult this fact sheet first.

On the issue of the salary basis test, FAQ # 7 confirms the basic rules that I discussed in March of this year:

7. Can an employer make prospective reduction in pay for a salaried exempt employee due to the economic downturn?

An employer is not prohibited from prospectively reducing the predetermined salary amount to be paid regularly to a Part 541 exempt employee during a business or economic slowdown, provided the change is bona fide and not used as a device to evade the salary basis requirements. Such a predetermined regular salary reduction, not related to the quantity or quality of work performed, will not result in loss of the exemption, as long as the employee still receives on a salary basis at least $455 per week. On the other hand, deductions from predetermined pay occasioned by day-to-day or week-to-week determinations of the operating requirements of the business constitute impermissible deductions from the predetermined salary and would result in loss of the exemption. The difference is that the first instance involves a prospective reduction in the predetermined pay to reflect the long term business needs, rather than a short-term, day-to-day or week-to-week deduction from the fixed salary for absences from scheduled work occasioned by the employer or its business operations.

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The U.S. Department of Labor's Wage & Hour Division has issued two new opinion letters addressing circumstances under which employers may not reduce the hours of exempt employees without running afoul of the "salary basis" test and risking loss of the employees' exempt status.  

First, some background.  Employees exempt from the FLSA's minimum wage and overtime requirements as professional, executive, or administrative employees must be paid a salary of at least $455 per week. Under 29 C.F.R. § 541.602(a),

[a]n employee will be considered to be paid on a "salary basis" . . . if the employee regularly receives each pay period . . . 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. . . . An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

In the first opinion letter, the employer sought to reduce the hours worked by employees using the following system:

Your client proposes occasionally reducing the hours worked by exempt employees due to short-term business needs (e.g., low patient census). In such cases, the employer offers “voluntary time off” (VTO), where employees may, at their option, use paid annual, personal, or vacation leave, but continue to accrue employment benefits. The employer approves VTO on a first-come, first-served basis. If there are insufficient volunteers for VTO, the employer requires “mandatory time off” (MTO) under a seniority-based rotational method. Exempt employees required to take MTO may use accrued paid leave or take unpaid MTO. If the employee elects not to use accrued paid leave or does not have sufficient accrued paid leave to cover the VTO or MTO, the employer deducts the amount equal to the VTO or MTO from the employee’s salary, if it is shorter than one workweek. For unpaid VTO or MTO lasting an entire workweek, the employer does not pay the salary for that pay period. Salaried exempt employees may take VTO or be assigned MTO in one-day increments.

The DOL opined that salary deductions due to MTO lasting less than a workweek violate the salary basis requirement and may cause the loss of exempt status.  "Deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude." 

In the second opinion letter, the employer proposed requiring salaried exempt employees to stay home or leave work early during periods of insufficient work.  The employer would deduct the non-work time from the employees’ accrued paid time-off accounts. The employees would receive their regular salaries so long as they had sufficient hours in their PTO accounts to cover the non-work periods. If an employee’s accrued PTO was exhausted, the employee’s salary would be reduced in full-day increments, except that in no event would an employee’s salary be reduced below the $455 per week.

The DOL opined that this proposal would also run afoul of the salary basis test. 

If an employer requires that an exempt employee work less than a full workweek, the employer must pay the employee’s full salary even if: (1) the employer does not have a bona-fide benefits plan; (2) the employee has no accrued benefits in the leave bank; (3) the employee has limited accrued leave benefits, and reducing that accrued leave will result in a negative balance; or (4) the employee already has a negative balance in the accrued leave bank. 

The DOL also opined that if an exempt employee’s accrued PTO is exhausted and the periods of insufficient work continued, the employer would not be permitted to send the employee home and pay him a reduced salary for the week.  The DOL distinguished this situation from the scenario discussed in a 1970 opinion letter, in which the employer was considering a permanent change in the work schedule from 52 five-day workweeks to 47 five-day workweeks and 5 four-day workweeks. "In that case," the DOL noted, "the salary basis requirement was not circumvented because all the exempt employees were to be paid according to a bona fide reduction of one-fifth of their salaries for a fixed schedule of five annually recurring four-day workweeks."

The distinguishing principle was stated in a 1995 DOL opinion letter:

... a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment. Therefore, the exemption would remain in effect as long as the employee receives the minimum salary required by the regulations and meets all the other requirements for the exemption.

My takeaway from these opinion letters is this:  Employers that are considering reducing their exempt employees' hours due to insufficient work must proceed very carefully.  Reducing exempt employees' hours of work, and reducing their pay correspondingly, may be permissible if the changes are carried out in accordance with a fixed schedule over an extended period of time.  An employer may not make reductions in work hours and pay based on day-to-day or week-to-week determinations of how much work is available.  Such reductions will run afoul of the salary basis test, risk forfeiture of the employees' exempt status, and expose the employer to overtime claims from the employees when their workload increases.     

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The following is a reprint of a client alert authored by EBG attorneys Doug Weiner and Frank Morris, Jr.  It should be of interest to all Florida employers that are considering a reduction in force.

For many employers, these are desperate economic times. Every entity facing diminished revenue must consider cost cuts to survive. As news reports show, reductions in force (RIFs) are being used daily to achieve cost savings, and for some employers they may be the best solution. In some cases, however, the savings are not immediate as a result of statutorily required or voluntary notice periods, as well as costs of severance pay.

A different approach may be a furlough strategy, customized to fit each employer’s needs, which may also achieve a significant cost-savings benefit. Implementing a furlough can help retain the employer’s experienced workforce at a reduced cost, to help the enterprise weather the economic crisis. Most employees faced with, for example, the choice of a 20 percent annual pay reduction or the loss of their job would not hesitate to choose a reduction in pay. Further, both employers and employees taking advantage of a furlough program are well-positioned to take advantage of any increase in business activity in the inevitable economic recovery, whether it be this year or next. Furloughs are often viewed by the workforce more favorably than layoffs, thus preserving morale in the organization as well.

The Fair Labor Standards Act (“FLSA”) requires hourly and non-exempt salaried employees to be paid time-and-one-half their regular rate for weekly hours worked over forty. Accordingly, the first place to look for cuts in employee payroll costs is in non-exempt employee overtime pay. The FLSA was designed to give employers an incentive to spread employment from employees who work over forty weekly hours to other workers who are working fewer hours. In an environment where costs are critical, it is generally an inefficient use of payroll dollars to pay the additional wage premium required for overtime work.

Eliminating non-exempt overtime work is only the first step in reducing payroll costs among hourly non-exempt employees, salaried non-exempt employees and salaried exempt employees. Take an example in which it has been decided that in a department of 100 employees, where all three categories of employees work, that payroll expenses must be cut by 20 percent. One possibility is to reduce the department headcount by 20 percent, eliminating 20 jobs and the costs associated with them. Another possibility is to implement a mandatory furlough period with 20 percent pay cuts for all 100 employees. The furlough strategy takes more administrative time to manage properly, but it potentially saves 20 jobs while achieving the necessary cost-saving objective.

The FLSA allows employers to implement a variety of options to impose salary reductions and pay cuts, as do most state laws. A salary may be prospectively reduced without violating the “salary-basis” test of the FLSA for exempt employees, including a reduction in pay proportionate to a reduction in the number of days worked. Managers may implement furloughs and RIFs simultaneously or in a phased sequence. As with all such strategies, any applicable state and local requirements need to be determined, as federal law will defer to a state or local standard that provides a greater protection to the employee. California, as shown by the state’s decision to furlough state employees, allows furloughs to be implemented in accord with particular wage-hour requirements that must be considered.

The FLSA permits prospective adjustments to an exempt employee’s salary, including revisions to commission agreements or bonus compensation plans based on the quantity or quality of work, which do not reduce the “predetermined amount” of the employee’s salary (of course, the terms of the plans also need to be checked before changes are made). In concept, if the duties test for exemption is satisfied, the predetermined salary of, e.g., an exempt Sales Manager, could be as low as $455 per week, while the compensation the employee actually receives could be substantially higher (based upon commissions for meeting sales goals or bonuses for meeting other performance criteria). To preserve the salary basis of the exempt employee, the predetermined amount of salary would have to be paid for workweeks in which there were no commissions, or for which no bonus payments were made.

Careful strategic planning is required before implementing a furlough. Considerations include:

• Exempt salaried employees may have their salaries prospectively reduced to a lower predetermined amount so long as they stay above $455 per week. Salary adjustments may not be designed to circumvent the requirements of the FLSA.

• Hourly workers must be paid for every hour they are directed or permitted to work. Permitting “extra” work as, for example, spending more than de minimus time checking a Blackberry®, even when unauthorized, may well give rise to the obligation to pay for the time. Accordingly, managers must take the necessary steps to ensure the furlough plan realizes the necessary cost savings.

• It is a good practice to give employees clear notice specifying that no “volunteer work” is permissible and no work is to be performed unless specifically authorized by a predetermined schedule or authorization by an appropriate manager. Implementing a strict policy of prohibiting unscheduled work and having an administrative procedure to uniformly enforce the policy is well advised.

• Managers may consider asking hourly and salaried non-exempt employees for the return of employer-owned remote access devices during a furlough. Employees who access their work email accounts while on their “time off” may be working, or may start working. If they are working, even though advised not to do so, the employer may well incur wage liability, defeating the purpose of the furlough. Unauthorized work by non-exempt employees in violation of the employer’s furlough policy may generate exposure to significant wage claims. Violations of the furlough policy should be considered a serious disciplinary issue, warranting sanctions, including suspension and discharge. Withholding pay for hours actually worked, however, is not a legal option, even when the hours worked were not authorized.

• Salaries for exempt and non-exempt employees may be prospectively reduced so long as those adjustments are not so frequent as to appear designed to circumvent the requirements of the FLSA. Quarterly adjustments have been found by the U.S. Court of Appeals for the Second Circuit to be in compliance with the FLSA. Adjustments to the predetermined amounts of salary should be implemented as infrequently as feasible so as not to raise an argument that the adjustments are a pretext to avoid compliance with the FLSA.

In sum, properly implemented salary reductions should comply with the salary requirements of the FLSA. Although it requires strategic planning and careful implementation, employers may find many benefits by implementing an effective cost-savings furlough plan that saves money and jobs, versus the RIFs dominating the news.

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