Advanced Exemption Audits: Evaluate Your Overtime Classifications Now To Avoid Costly Trouble Later Friday, November 19, 2010 Presented by the Employer

Advanced Exemption Audits: Evaluate Your Overtime Classifications Now To

Avoid Costly Trouble Later

Friday, November 19, 2010Presented by the Employer Resource Institute

© 2010 Employer Resource Institute. All rights reserved. These materials may not be reproduced in part or in whole by any process

without written permission.

© 2010 Employer Resource Institute. All Rights Reserved

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About Our Speaker

Mary Topliff, Esq., founded the Law Offices of Mary L. Topliff in San Francisco in 1997, after practicing civil and employment litigation for nine years.

The firm specializes in employment law counseling, training and compliance, focusing on practical solutions to avoid costly legal issues. She has advised many organizations regarding a wide variety of fitness for duty and disability accommodation issues, provided training to managers and human resources professionals and has crafted customized policies and procedures to comply with legal requirements.

She is a published author and frequent speaker on legal issues impacting the workplace.

Advanced Overtime Exemption Audit Strategies

ERI Webinar, 11/19/10

Mary L. Topliff, Esq.

7

Agenda

• Overview of Key Legal Requirements

• Risks of Misclassification

• Meal/Rest Period Issues

• Audit Process --Analysis of Selected Jobs

• Strategies for Communication & Implementation

• What you can do now!

8

Overview of Key Legal Requirements

• Overtime Exemption Laws• Federal Fair Labor Standards Act (FLSA)

• Law favors payment by the hour• Presumption that employees are nonexempt • Burden on employer to prove overtime exempt• Employees cannot “agree” to be overtime exempt

• California Law• Labor Code and Wage Orders• Apply CA law to employees working in CA• Open legal issue regarding employees working occasionally in

CA

9


• Overtime Exemption Classifications

• Administrative

• Executive (Manager)

• Professional (Licensed/Learned/Computer/Creative)

• Outside Sales

• Two Components

• Paid on Salary Basis

• Exceptions: Computer professional, outside sales

• Employee’s Regular Duties Qualify for Specific Exemption

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• Salary alone is not determinative

• Salary subject to rules

• Fixed base weekly salary not subject to reduction due to quantity/quality of work

• Deductions from weekly salary in full-day increments

• Okay for employee-requested absences

• Not okay for employer-required absences

• Deductions from weekly salary in partial day increments

• Never okay

• Deductions from Vacation/Sick/PTO banks

• Not the same as deductions from salary

11


• California salary requirement: No less than two times State minimum wage based on 2,080 hours worked in year (i.e., full-time employment)

• Currently: $33,280/year

• Salary not prorated for part-time employees

• Tips on inadvertent deductions• Have policy for employees to raise issues• Address and fix quickly (specific employee issue + look at broader

implications/changes)• Employee acknowledgment that issue resolved

12


• “Duties” Test & 50% Rule

• More than 50% of employee’s actual work involves exempt duties during work week + employer’s realistic expectations and realistic requirements of job

• FLSA focuses on primary duties vs. quantitative analysis

• “Discretion and independent judgment” (DIJ) required for California Administrative, Professional, Executive Exemptions

• Most commonly misapplied element

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• “Discretion and Independent Judgment” Definition

• Power to make independent choice based on comparison & evaluation of possible courses of action without immediate direction or supervision on matters of consequence

• Skill or knowledge not equivalent

• Decision making regarding management policies/procedures; can deviate from established policies without approval; can negotiate and bind company on significant matters; carries out major assignments; performs work that substantially affects business operations; provides consultation or expert advice to management

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• California Administrative Exemption Summary

• Work directly relates to management policies or general business operations of employer or customers + assists proprietor or specialized work requiring specialized training or special assignments

• Common Misclassification Issues:

• Jobs involve production (product or service of business) or sales

• Jobs do not involve specialized work

• Jobs involve processing reports/data, but lack analytical work and recommendations

15


• California Professional Exemption Summary

• Licensed professional (of 8 specified) or learned or artistic profession in advanced field of science/learning after prolonged course of study

• Subset: Computer Professional requiring highly skilled in theoretical & practical application of systems analysis, programming or software engineering


• Advances in technology have decreased specialized technical aspects of some jobs (i.e. web/graphics designers)

• Coders, testers with lofty job titles

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• California Executive Exemption Summary

• Supervises at least 2 full-time employees with authority to hire/fire & >50% of time spent in supervisory functions


• “Working” managers performing same duties as direct reports

• Having handful of direct reports

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Risks of Misclassification

• Worst case scenario example:

• Employee has worked in same job for 5 years, regularly works 45 hours per week, & paid $40k/year. Employee is very detail-oriented and keeps a calendar of each day’s work hours. If employee’s job is determined to be nonexempt:

• Statute of Limitations: 3 years under California Labor Code; 4 years under California Unfair Business Practices law

• Legal Exposure: $19.23/hr X .5 = $9.62/hr X 5 hrs/week = $48.08 X 52 weeks X 4 = $9,999

• Plus attorneys’ fees (your own + the plaintiff’s), expenses, downtime

• Even worse case scenario: More than one employee in same job

18

Meal & Rest Period Considerations (California-Specific)

• Additional risk of misclassification

• California Labor Code provides penalty of one additional hour’s pay for each work day in which meal or rest period is not provided

• Timesheets not typically required for exempt employees, thus no way to prove meal & rest periods provided/taken

• Statute of limitations held to be 3 years

• Brinkley and Brinker cases on appeal to California Supreme Court

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Impetus for Overtime Exemption Analysis

20

Getting Started

• Consider combining Overtime Exemption Analysis Project with another related project

• Example: Total Compensation Review or update of job descriptions or new HRIS systems

• Benefit: Creates efficiencies by addressing multiple issues and provides more context for job changes

21

Getting Started

22

Selecting Jobs to Evaluate

• Jobs that raise “red flags”

• Entry-level or trainee

• Manager title but no direct reports

• Catch-all titles: Analyst

• Sales jobs with non-sales titles

• Jobs that involve processing data, running reports

23

Selecting Jobs to Evaluate

Good Better Best

• Start with lowest paid exempt jobs

• Follow job family to obvious cut-off

• Include all exempt jobs below Director

• Analyze gray area exempt positions

• Include “red flag” jobs regardless of pay or grade

• Include catch-all titles like Analyst, Project Manager

24

Data Collection Alternatives

25

Common Pitfalls to Avoid during Analysis

26

Information-Gathering Considerations & Tips

• Who should conduct the analysis?

• Internal HR with in-house or outside counsel review

• External specialist – if attorney, opinion is attorney-client privileged

• Need thorough understanding of employee’s duties

• Insufficient to rely on manager’s insistence of importance of job

• Another data point: performance reviews

• Determine percentage of work time spent on specific duties

27

Information-Gathering Considerations & Tips

• How to determine “discretion and independent judgment”?

• Do not ask: “does the employee exercise discretion and independent judgment?”

• Ask definitional questions with specific examples

• Collect data on hours worked by employees in question

• Travel time?

• Eligible for production bonuses?

28

Analysis of Selected Jobs

• Jobs that have been subject of lawsuits:

• Pharmaceutical sales representatives

• Account executives

• Mortgage loan processors

• Insurance claims adjusters

• Variety of computer professionals

29

Implementation Issues

• Logistics of moving nonexempt employees out of exempt salary structure

• Anomalies may result:

• Employees making more than their boss due to overtime

• Same job at different locations may have different exemption classifications

• Treat differently or make the job nonexempt for all locations?

• Determine extent of “back” overtime

• Factors to consider: Has scope of job changed at particular time? Is job changing now?

30


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• Release Agreements• Cannot condition payment of wages owed on release agreement

• HR “Public Relations” problem • Need to explain why we didn’t get this right the first time

32


• Communicating the Results

• Manager Training

• FAQ’s are helpful

• Announcement to Employees

• Meetings or Memo?

• Assuring employees that change in exemption does not mean demotion or that job is not important

• Department meetings – head of functional area explains

• One-on-one meetings – impacted employee and manager discuss

33

Resources

• Industrial Welfare Commission Wage Orders and DLSE Enforcement Manual (www.dir.ca.gov)

• Department of Labor (www.dol.gov)

• Employer Resource Institute, “Who’s Entitled to Overtime: How to Avoid Mistakes When Classifying California Employees” (2009) (www.employeradvice.com)

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Mary L. TopliffLaw Offices of Mary L. Topliff555 Montgomery Street, Suite 1650San Francisco, CA 94111415/[email protected]

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Advanced Exemption Audits: Evaluate Your Overtime Classifications Now To Avoid Costly Trouble Later Friday, November 19, 2010 Presented by the Employer