Salary Basis

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By: Kyle Petersen and Ariel Fenster

Seyfarth Synopsis: A recent decision by the Southern District of New York clarifies common questions arising from the use of the fixed salary for a fluctuating workweek method of compensation (the “FWW”): (1) Do isolated pay deductions undermine the fixed salary requirement; (2) Must the employee’s hours fluctuate above and below 40 hours; and (3) Do employees have to subjectively understand the overtime pay calculations for there to be a mutual understanding that the fixed salary was intended to cover all hours worked at straight time? Spoiler Alert: This court answered no to each of these questions.

A Quick FWW Primer

The FWW method is one of two approved methods of calculating a salaried employee’s “regular rate” for overtime pay and may be used where a nonexempt salaried employee’s hours vary from week to week. The weekly salary covers all hours worked at straight time. When the hours fluctuate above 40 in a given week, the employee is then due an addition half-time compensation for the overtime hours. Like the hours worked, the overtime rate fluctuates from week to week and is the quotient of the weekly salary divided by the week’s hours worked. So, as the number of hours worked goes up, the regular rate goes down. If this doesn’t take you back to fourth grade math class, this example should:

Assume Donna’s Weekly Salary is $1,000 and her hours vary week to week.

  Hours Worked Salary Paid Regular  Rate for OT Overtime Pay Due
Week 1 50 $1,000 $20 ($1,000/50 hours) $100 [($20 x .5) x 10 hours)]
Week 2 40 $1,000 $25 ($1,000/40 hours) $0
Week 3 55 $1,000 $18.18 ($1,000/55 hours) $136.34 [($18.18 x .5) x 15 hours)]
Week 4 35 $1,000 $38.57 ($1,000/35 hours) $0

In order to use the FWW method, the regulations require that (1) the employee’s hours fluctuate from week to week; (2) the employee receives a fixed weekly salary regardless of the number of hours worked; (3) the fixed salary pays the employee at least minimum wage for all hours worked; and (4) the employer and employee have a clear mutual understanding that the employer will pay the employee a fixed salary regardless of the number of hours worked. If each of these factors is satisfied, the employer then need only pay the employee for overtime hours at a rate of 50% the regular rate for that week.

The Case

In Thomas v. Bed Bath and Beyond, Inc., several managers challenged the company’s implementation of the FWW method of pay, arguing that their weekly salaries were docked for absences (and thus were not “fixed”), their work hours did not fluctuate above and below 40 hours, and that there was not a “clear and mutual understanding” that the fixed weekly salary was intended to compensate the managers for all of their hours worked in a week. On each of these points, a federal district court sided with Bed Bath and Beyond, Inc’s (“BBB”).

First, the plaintiffs challenged whether they received a “fixed weekly salary” because the record contained a handful of occasions where a plaintiff’s salary was docked for absences. While the court acknowledged that the FWW method does not allow for salary deductions for time off, it ultimately took a practical approach that did not penalize BBB for isolated (and later rectified) instances of payroll errors.  The court also held that the company’s negotiated agreement with one plaintiff that she could take pre-planned vacation unpaid before she accrued paid time off did not undermine the FWW method because it did not call into question BBB’s intention to pay the employee on a fixed salary basis. Rather, it was an accommodation made during the hiring process for the benefit of the employee. This negotiated agreement before the employee took the job, the court explained, should not forever after preclude BBB from using the FWW method of pay. The real takeaway for employers here is that one-off incidents of payroll errors will not invalidate an employer’s use of the FWW.  Employers, however, should promptly rectify improper deductions when they are discovered.

Second, plaintiffs argued their hours did not actually fluctuate week to week within the meaning of the FWW regulations because their hours never dropped below forty hours per week.  In relying on the text of the regulation, the Court held the FWW requires only that an employee’s hours vary week to week.  Fluctuating does not mean the hours must go above and below forty hours. This interpretation opens the FWW method up to workers whose hours are regularly above 40, so long as they fluctuate above the 40-hour threshold.

Third, plaintiffs’ final argument is that they did not have a clear mutual understanding that they would be paid based off the FWW.  Plaintiffs advanced this argument even though they did not dispute signing acknowledgement forms that spelled out the method of pay FWW and did not dispute receiving documents informing them of their weekly salary (and sample overtime calculations), annual notices about their pay rate and method, and paystubs showing that their overtime pay was calculated under the FWW.

Despite the many ways in which BBB explained their method of pay to them, Plaintiffs argued that they didn’t really understand it. The court rejected their position, holding that an employee’s subjective lack of understanding of the details of the pay plan is irrelevant; rather, it’s an objective test as to whether employee knows they will be paid on a fixed based salary regardless of the hours worked. Given all of the notices and their own acknowledgements that they received (and understood) all the facts about their method of compensation, the court concluded that there was “no genuine dispute that the [plaintiffs] knew they would be paid a fixed based salary regardless of their hours worked.”  From this, employers can take comfort in establishing the clear and mutual understanding by providing notices that the base weekly salary is intended to compensate employees for all hours worked in a week. A particular employee’s later-claimed lack of understanding should not undermine the FWW if the communications and acknowledgments clearly laid out the facts establishing the FWW method of pay.

The FWW contains several traps for the unwary (and some state overtime laws do not permit its use), but at least here a court took a common-sense approach in assessing whether an employer fell into any of those traps.

Co-authored by Kyle A. Petersen and Molly C. Mooney

Seyfarth Synopsis: If Congress fails to pass a long-term funding bill, we could be facing a federal government shutdown with no money flowing to fund non-essential services. While it seems the crisis may be averted for now — with a short-term spending bill that would keep the lights on for another week — the potential for a shutdown still looms.  And with it comes concern for many private-sector employers with federal contracts.  If the money dries up, employers may need to consider cost-saving measures, such as temporary furloughs, reductions in hours, or reduced pay.

If Congress fails to pass a funding bill and the government shuts down, employers may need to consider cost-saving measures. Employers should bear in mind the potential wage and hour implications when implementing these changes.

  • Non-Exempt Employees: Reductions in Hours and Hourly Rate. Because non-exempt employees do not need to be paid for time when they are not working, employers can reduce their scheduled hours, as well as their hourly pay without implicating wage and hour laws. Such changes should be prospective and, of course, the hourly pay must still satisfy the federal and state minimum wage. When reducing rates of pay, it is important to check state law on how far in advance you must tell an employee their hourly rate is going down. It is also important to continue paying workers on time.
  • Exempt Employees: Full-Week Reductions in Hours and Salary. Frequent readers of this blog should know that exempt employees are subject to the salary basis test, which means that they generally must be paid the same minimum weekly salary regardless of how many or few hours they work each week. (Federal law currently requires a minimum weekly salary of $455). Reductions in that weekly salary could jeopardize the employee’s exempt status. This means that employers cannot subject exempt employees to partial week furloughs. Full-week furloughs are OK, so long as the employee performs no work during the week. And, yes, that includes abstaining from responding to email, taking phone calls, and other activities that could constitute hours worked.  Given that many employees are constantly “plugged in,” ensuring compliance with this requirement is essential yet challenging.
  • Exempt Employees: Partial-Week Reductions in Hours and Salary. As you might have surmised by now, partial-week reductions in salary are generally not permitted without risking an employee’s exemption. For example, employers generally cannot pay exempt employees 80% of their salary for working four-day workweeks instead of five at the employer’s request. A narrow and delicate exception to this rule is that employers can implement a fixed reduction in future salaries and base hours due to a bona fide reduction in the amount of work. While the FLSA and federal regulations do not specifically address furloughs, the Department of Labor’s opinion letters and courts have (almost) unanimously concluded that employers may make prospective decreases in salary that correspond to reduced workweeks, so long as the practice is occasional and due to long-term business needs or economic slowdown. How frequently an employer can furlough its exempt employees is not settled, but federal courts have held that salary reductions twice per year are infrequent enough to be bona fide.

Once the budget crisis passes and employees return to work, caution is still warranted in returning furloughed employees to work.  As always, when dealing with these issues, be sure to contact your wage and hour counsel.

Authored by Alex Passantino

‘Twas the week before Christmas, 2-0-1-5
When the poetry elves on the blog came alive.
Crafting their rhymes with a purpose so clear:
Presenting the wage-hour gems of the year.

In January, for new regs in this year our breath bated.
Then for six painful months, we speculated and waited.
And just as we geared up to celebrate Independence,
Out came a proposal that will create more defendants.

With a salary level that for 10 years has been flat,
They looked at New York’s and said “higher than that.”
More than double the old; and then they got clever …
The proposed sal’ry level will increase for forever.

Anticipated changes to duties caused quite a fuss
When DOL said “If you’ve got some ideas, just tell us.”
Of the Department’s proposal, employers were understandably wary,
So we wrote down some ideas on how to make it less scary.

Nearly 300 thousand comments they have to review,
It will be late into next year before they are through.

Next up on the list of your wage-hour joy,
Are the efforts to change what it means to employ:
Contractors. Joint employment. Fissured industry.
Interns. The “third way” and gig economy.

Economic reality. Right to control.
They’re integral to your business? Now you’re in a deep hole.
So many angles, it can drive you berserk.
As agencies and courts figure out what is “work.”

And if divergent decisions bring you a sense of elation,
Then please focus attention on class certification.
Approvals, denials, and some decerts, too.
No matter the side, there’s a case for you.

But as summer approached, there arose quite a stir,
A case that’d explain what the class cert rules were.
A Supreme explanation, o my-o, o me-o
We’d learn about class via Bouaphakeo.

They’ve argued, but there’s no decision, not yet,
And a limited ruling on records might be all that we get.
But the cases keep coming. Their numbers broke the charts.
Whether giant class actions or cases broken in parts.

And the response to those filings? The employers’ retort?
A wide range of ways to get them out of court.

Some cases get mooted. Some cases do not.
At Genesis’s open question, SCOTUS might take a shot.
Does an offer of judgment that’s not been accepted
Mean the plaintiff cannot proceed with his class as expected?

Increasingly used as a litigation life saver
Arbitration agreements with a class action waiver;
And when asked if state laws could class waivers prevent, yo,
The Supremes laid the smack-down to dear Sacramento.

With all of these options, it comes as a surprise then,
That one resolution keeps on getting the Heisman.
For reasons that many cannot understand,
To settle wage claims courts think they must hold your hand.

That’s our year in review, we whipped you right through it.
Next year? The new regs and a mad dash to review it.
But before 2015 joins the past’s ranks,
You keep on reading our blog, and for that we give thanks!

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Authored by Alex Passantino 

As Juno prepares to pummel the Northeast with snow, employers should prepare for any weather-related closures of their offices, factories, or other facilities.  The effect of a weather-related closure on compensation requirements varies for different types of employees and also varies by state.

EXEMPT EMPLOYEES

Most employees who are exempt from federal overtime requirements and paid on a salary basis are not subject to reductions to their weekly salaries because of a closure.  Even if an exempt employee misses a full day of work, the employer may not reduce the employee’s weekly salary (unless the employee misses an entire work week).  An employer that improperly reduces an employee’s salary might lose or jeopardize the ability to treat the employee as exempt from overtime pay requirements — potentially a very costly mistake.

Even though employers will almost certainly have to pay exempt employees their full salaries regardless of storm-related closures, employers do have the right to charge exempt employees for vacation or PTO for any work that they miss.  Employees who do not have enough accrued vacation or PTO to cover the closure, however, must still be paid their full weekly salaries.

The legal rules for paying exempt employees apply in all states.  Of course, in deciding whether to charge employees with vacation or PTO, employers may also want to consider non-legal factors such as employee morale and the organization’s finances.

NON-EXEMPT EMPLOYEES

For non-exempt employees, federal law requires only that employers pay employees for the hours they actually work.

TELECOMMUTING

In assessing pay requirements for all employees, employers should keep in mind that, even if an office or other facility is closed, some employees might work remotely.  Work performed remotely generally must be paid to the same extent as work performed on an employer’s premises — even if the employer did not request that the work be performed.  Non-exempt employees working remotely must generally be paid at their usual hourly rate (and subject to the usual requirements for overtime pay).

REPORTING PAY

Certain Northeastern states have additional requirements that apply to hourly employees who report to work when a facility is closed or not operating at full capacity.  For example:

  • Connecticut has a reporting pay requirement that applies to employees in the “Mercantile trade.”  Employees in that industry must be paid four hours at their regular rate of pay, if they actually report for work.  The “Mercantile trade” is defined as the wholesale or retail selling of commodities and any operation supplemental or incidental thereto.  A two-hour guarantee is in place for the restaurant and hotel industries, if the employee was not “given adequate notice the day before” that she should not report for work.
  • Massachusetts mandates reporting pay for non-exempt employees of at least three hours at the statutory minimum wage ($9.00) if they are scheduled to work more than three hours on a given day and actually report for work.  Employees scheduled for less than three hours need only be paid for their scheduled hours.
  • New Hampshire requires reporting pay for non-exempt employees who actually report for work of at least two hours at their regular rate.
  • New Jersey requires reporting pay for non-exempt employees who actually report for work of at least one hour at their applicable wage rate (unless, prior to this report to work, the employer already made available to the employee the minimum number of hours of work agreed upon for the week).
  • New York requires “call-in pay” for non-exempt employees of at least four hours, or the number of hours in the regularly scheduled shift (whichever is less) at the basic minimum hourly wage ($8.75) for employees who actually report for work.  A 2009 New York Department of Labor opinion letter, however, interpreted the reporting-pay obligation as not applying if “the amount paid to an employee for the workweek exceeds the minimum and overtime rate for the number of hours worked and the minimum wage rate for any call-in pay owed.”  Employees working in the hospitality industry may be subject to different requirements.
  • Rhode Island requires an employer to pay an employee who reports for duty at the beginning of a work shift (where the employer offers no work for him to perform) not less than three (3) times the employee’s regular hourly rate of pay.
  • Washington, D.C., requires reporting pay of at least four hours at the statutory minimum wage ($9.50) for non-exempt employees who actually report for work if they are scheduled to work for at least four hours.  Employees scheduled for less than four hours need only be paid for their scheduled hours.

Some of the reporting pay requirements noted above may be waived if the employer makes a good faith effort to provide employees with reasonable advance notice that they should not to report to work.  Employers that foresee that their facilities will be closed should give employees who are scheduled to work as much notice as possible for both practical and wage/hour compliance reasons.

If you are an employer with questions about the requirements summarized above or any other impacts that the storm may have on your legal obligations as an employer, we encourage you to contact any Seyfarth Shaw attorney with whom you work.

Authored by Alex Passantino

As we expected when we reported on this yesterday, President Obama today signed a Presidential memorandum directing the Secretary of Labor to “restore the common sense principles” related to overtime.  In his remarks, President Obama focused on his belief that overtime protections have “eroded,” that “if you work more, you should be paid more,” and that “millions” of workers who currently are eligible for the FLSA’s overtime exemption should not be. 

The President’s remarks indicate that any regulatory proposal will represent a fundamental change.  Although the President mentioned that there will be some efforts at clarification and simplification, it is clear that the end goal for these regulatory revisions will be to dramatically decrease the number of employees for whom employers may claim an overtime exemption.  

The details are still sparse, with the President directing the Secretary to consider how the regulations could be revised to:

  •  Update existing protections in keeping with the intention of the Fair Labor Standards Act.
  • Address the changing nature of the American workplace.
  • Simplify the overtime rules to make them easier for both workers and businesses to understand and apply.

During his remarks, the President indicated that the Administration would be listening to both employers and employees during the course of the regulatory process.  We will, of course, continue to keep you updated with the latest developments.  Join us during our webinar as we discuss what we can expect in the coming weeks and months.

UPDATED 3-13-14:

The Presidential Memorandum has been posted.

 

Authored by Alex Passantino

Today, the New York Times reported that the Obama Administration intends to propose comprehensive changes to the Fair Labor Standards Act’s most significant exemptions — the exemptions for executive, administrative, and professional employees.  

Although the details are still fuzzy, it appears — as we suggested last week — that the Administration will seek to raise the salary level for the exemption to apply.  The article references salary numbers as high as $984 per week, regardless of whether the employee works on Wall Street or in Hahira, Georgia.

In addition, the Times article seems to indicate that the Administration plans to adjust the primary duty test — described in the article as something that employers can simply “declare” — presumably to implement a California-esque hard 50% limitation on work deemed non-exempt.  It is likely that changes to the duties tests will also be proposed.  In particular, the Administration may seek to change the test for the administrative exemption, where a previous sub-regulatory effort has thus far fallen flat.

Of course, we will know much more when the regulation is actually proposed, and will update you once it is, or when additional details of the Administration’s plans emerge.

Once the regulation is proposed, the public will have the opportunity to provide comments on the proposal, which the DOL will have to review and analyze prior to any revisions becoming effective.

Co-authored by Meredith Bailey and Alex Passantino

Early this morning, President Obama signed legislation ending the sixteen-day federal government shutdown and returning hundreds of thousands of federal employees back to work.  The end of the shutdown also prompts the welcome return of many private sector employees by employers ready to resume operations.  Employers are reminded that special considerations may accompany the return of exempt employees from furlough status:  The Fair Labor Standards Act (“FLSA”) requires that exempt employees be paid on a salary basis even if their return results in a partial work week.

Salary Basis Test

The FLSA requires that exempt administrative, professional, and executive employees be paid on a salary basis at not less than $455 per week.  State laws may impose a higher threshold.  See examples here.  To be paid on a “salary basis,”  an employee must regularly receive a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.  The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.

An exempt employee must receive the full salary for any workweek in which the employee performs any work, regardless of the number of days or hours worked (subject to  limited exceptions not discussed here).  So whether an exempt employee returns today, Friday, or the middle of next week, employers are cautioned to pay his or her full salary for the week of return.  Any reduction in salary due to a partial-week furlough could result in the loss of exempt status for the employee and may give rise to employer liability for overtime pay.

Remember, the critical time period is the FLSA “workweek,” which is a fixed and recurring period that does not necessarily match up with a calendar week.  In determining whether an exempt employee has worked during the workweek, ensure that you are using the FLSA workweek period as your guide.

As an alternative, an employer may also keep exempt employees on furlough through the end of this workweek and not pay any salary. The failure to pay a salary for a workweek in which an exempt employee performs no work does not negatively impact that employee’s salary basis status. See here.

Use of Accrued Leave

And yet another option is that an employer can reduce an exempt employee’s salary and substitute paid leave (voluntarily or involuntarily), so long as the employee receives payment equal to the employee’s regular salary in any week in which any work is performed.  See here.  Thus, employers may require exempt employees to use paid leave through the end of this workweek, and return to work next week.  This approach does not decrease weekly payroll costs but can help promote an employer’s overall financial condition by eliminating some accrued liability in the form of paid leave from the employer’s books.

As always, when in doubt, call or write your wage-hour counsel.

Authored by Ed Bergmann

Last Friday, the Fourth Circuit issued an unpublished per curiam decision in Kulish v. Rite Aid Corporation and Eckerd Corporation [here], which affirmed a decision by the District of Maryland [here] that took a practical approach to the “salary basis” requirement for white-collar exempt employees.  The FLSA’s salary basis regulations require most exempt employees to receive the same guaranteed salary every week regardless of the number of hours they work.  The policy at issue in the Kulish case took advantage of an exception to that general rule, which allows employers to reduce their employees’ pay if they take a full-day absence for personal reasons.

The District Court’s decision in the Kulish case upheld Rite Aid’s unpaid leave policy, which permitted pharmacists to take unpaid personal days under some circumstances, but required them to do so only in full-day increments.  The pharmacists claimed that the policy resulted in reduction of their pay for absences “occasioned by the employer” – thus causing a salary basis violation – by requiring them to a full day off when they desired only a partial day away from work.  The District Court, however, approved the policy, finding that it did not force employee absences for reasons within the employer’s control.  Instead, it ensured that employees were paid for all time worked and allowed them to make their own choices when faced with scheduling issues.  Pharmacists could switch shifts with other pharmacists for personal absences of a partial day or simply take a full day in lieu of a partial day.  Late arrivals, breaks, store closures for inclement weather, and other emergencies did not affect the pharmacists’ salaries.

The decision appeared to recognize the dilemma many employers face when responding to exempt employees’ requests for partial day personal absences: whether to allow the time off, and if so, how to ensure salary basis compliance.  Clearly, employers want to avoid hour-for-hour approaches with exempt employees.  Rite Aid’s  full-day leave requirement attempted to strike a reasonable balance, and the District Court so found and the Fourth Circuit affirmed.  The decision provides helpful guidance regarding polices covering exempt employee personal absences.

SDNYBy Robert S. Whitman and Howard M. Wexler

If an employee is erroneously misclassified as exempt, she is entitled to recover any unpaid overtime at the rate of time-and-a-half for all hours over 40.  Right?

Wrong, according to a welcome decision (here) from Judge J. Paul Oetken of the Southern District of New York.   The decision confirms what employers in misclassification cases have advocated for years:  that the measure of damages is the “half-time” method, under which the employee receives an overtime premium of .5x rather than 1.5x for hours worked over 40.

This approach is often referred to as the “fluctuating work week,” or FWW, method.  Under Department of Labor regulations, several conditions must be met in order to use the method:  (1) the employee’s hours must fluctuate from week-to-week; (2) the employee must receive a salary that does not vary with the number of hours worked; (3) the hourly rate must equate to minimum wage or higher; (4) the employer and employee must share a “clear and mutual understanding” about payment of the fixed salary regardless of the number of hours worked; and (5) the employee must receive overtime at a rate of not less than one-half the regular hourly rate.

In Stein v. Guardsmark, LLC, the plaintiff was a secretary who was classified as exempt yet received a half-time overtime premium for any hours over 40 per week.  She sued, claiming she was improperly classified and that she did not receive the appropriate overtime amount.

In granting the defendant’s motion for summary judgment, Judge Oetken held that even if the plaintiff was misclassified, she nonetheless received all legally required overtime pursuant to the FWW method.  Although his analysis of each prong of the FWW test is worth a read, Judge Oetken’s analysis of the “salary basis” and “clear and mutual understanding” prongs are particularly important takeaways for employers given that these are the two criteria that plaintiffs most frequently argue have not been met.

Judge Oetken soundly rejected the plaintiff’s argument that because she received overtime for hours over 40, she was not paid on a salary basis.  He held that “the payment of overtime does not compromise a finding that an employee was paid on a salary basis.”  The court also disagreed with the argument that because the plaintiff’s pay was docked one day for leaving work early, the employer did not intend to pay her on a salary basis.  In rejecting this claim, Judge Oetken noted that courts “have looked skeptically on single incident docking of pay as proof that an employer did not intend to pay its employees on a salary basis.”

As previously discussed here, one of the most common tactics that employees use to fend off application of the FWW method is by arguing that the employer and employee did not share a “clear and mutual understanding” that the employer will pay the fixed salary regardless of the number of hours worked.  Judge Oetken, echoing the position taken by the DOL, held that “where an employee continues to work and accept payment of a salary for all hours of work, her acceptance of payment of the salary will validate the fluctuating workweek method of compensation as to her employment.”

It was irrelevant that the plaintiff was never specifically told that she would be paid pursuant to the FWW method or that she “did not have a full grasp of this method of calculating overtime until it was explained to her by her attorney.”  Given that the plaintiff received an offer letter stating her base salary, coupled with the fact that she never submitted any complaints about how her overtime was calculated, Judge Oetken held that there was “no room for doubt about the existence of a clear mutual understanding” about payment under the FWW method.

This thorough decision is good news for employers defending misclassification cases, since application of the half-time method reduces the measure of damages by a considerable amount.  If appealed, it may also present the Second Circuit with the opportunity to decide (as other Circuits have, but it hasn’t) whether the half-time method can be applied in these cases.

Please join us on Thursday, March 14 at 10:00 AM ET as we liveblog the Senate HELP Committee’s hearing on “Keeping up with a Changing Economy: Indexing the Minimum Wage.” Seyfarth’s Alexander Passantino, former Acting Administrator and Deputy Administrator of the U.S. Department of Labor’s Wage and Hour Division, will give real-time analysis of the hearing and take questions from liveblog participants.

The liveblogging will take place on this blog.  Please register to receive a reminder on the day of the event.

Click here to register