New FLSA Rules: It's Time for Employers to Protect Themselves
 
September 10, 2004
 

On August 23, 2004, the new white collar exemption rules to the Fair Labor Standards Act went into effect. While these rules do not change the way of computing overtime pay, they do clarify the standards for determining whether a position is exempt from overtime pay. They also provide a “safe harbor” for those employers who implement certain written policies and procedures. This article discusses what employers need to do between now and August 23 to ensure compliance and be able to take advantage of the safe harbor provision.[1]

The “safe harbor” provision adds a new safety net to the “window of correction” that is already in the FLSA regulations. Under the safe harbor provision, an employer will not lose an otherwise valid white collar (administrative, executive, or professional) exemption for improper salary deductions if the employer does not violate the regulations repeatedly or willfully, or continue to make deductions after receiving a complaint, and if the employer implements and enforces a written policy prohibiting improper deductions. If the employer has no such policy, the consequences of an improper deduction can be disastrous. The employer can lose the exemption not only for the employee against whom the improper deductions were made, but also for all employees in the same job classification who worked for the same manager for the entire time period. Thus, loss of an exemption can be an expensive problem.

In order to take advantage of the safe harbor, employers need to adopt and enforce a policy complying with the safe harbor requirements, distribute it to employees, and train employees concerning its requirements. Employers need to take this policy as seriously as their anti-harassment policies. Such a policy must explain what it means to be a salaried employee (that the employee is paid the same amount per period regardless of the quality or quantity of work). It must also state the general rule that the employer cannot deduct from the salary of an exempt employee and describe the exceptions to that rule:

• Deductions may be made for one or more full day absences for personal reasons, other than sickness and disability.
  
• Deductions may be made for one or more full day absences because of sickness or disability if such deductions are made under a bona fide plan, practice or policy of providing wage replacement benefits for these types of absences.
  
• Deductions may be made for Family and Medical Leave Act leave, including intermittent or partial day leave.
  
• Deductions may be made to offset payment amounts for jury duty, witness fees and military pay (but not for travel and parking).
  
• Deductions may be made for penalties or suspensions made in good faith for violations of written safety rules of “major significance.” However, this deduction almost never applies.
  
• Deductions may be made for good faith, full day disciplinary suspensions for violations of written work place conduct rules, but not for performance or attendance problems.
  
• Deductions may be made for the day(s) the employee does not work during his or her first and last weeks of employment.
  
• An exempt employee need not be paid for any work week in which he or she does no work at all.

The policy must also define improper deductions:

• Deductions are not permitted for partial day absences (except FMLA leave).
  
• Deductions are not permitted for variations in the quality of work.
  
• Deductions are not permitted for variations in the quantity of work.
  
• Deductions are not permitted for absences created or caused by the employer or by the operating requirements of the business.

Along with the definitions of proper and improper deductions, the policy must specifically prohibit improper deductions and state that improper deductions are a serious violation of company policy. It must contain a complaint mechanism for employees to report possible violations. When possible, those complaints should be made or referred to human resources and should be investigated promptly. Of course, the Fair Labor Standards Act, like Title VII, prohibits retaliation against an employee for making a complaint, and the wise employer will so state in the policy.

The policy must be clearly communicated to all employees. The best way to do so, and to provide proof of doing so if the Department of Labor investigation or a lawsuit should arise, is to distribute two copies to each employee before August 23 and have the employees sign one copy to be placed in his or her personnel file. It will then be impossible for the employee to claim that he or she is not aware of the policy.

The same procedure should be used with each new hire. The policy should be included in the employee handbook or manual and explained during new employee orientation. Each employee should be strongly encouraged, orally and in writing, to report promptly any problems with pay as soon as he or she becomes aware of the problem. Reminders during employee meetings and other appropriate times (newsletters, inserts in pay checks, for example) are helpful tools to communicate the policy clearly.

Every employer should develop such a policy and implement it before August 23, so that the safe harbor provisions will be available when the new rules go into effect. While doing so, it would be wise to review anti-harassment policies to make sure they include prohibitions against harassment because of race, religion, national origin, age, and disability as well as because of gender. The courts are now holding that the same affirmative defenses and the same criteria must be applied to these other forms of workplace harassment as well as sexual harassment. Having employees sign an extra copy of the anti-harassment policy to go into personnel files is more important than ever. Equally important is having employees sign attendance sheets for all training sessions and meetings when these topics are discussed. Extra paper work now can provide a stronger defense to any claim.

In addition to creating and implementing policies, employers must determine if any employees who are now considered exempt are earning less than $455 per week. Those employees must be reclassified as non-exempt or receive sufficient pay increases to qualify as exempt, provided that they meet one of the exemption tests. Every employer must also review the duties of each position classified as exempt to be certain that employees meet one of the exemption tests as those tests have been clarified. Although it is permissible to classify an exempt employee as non-exempt,[2] it is not permissible to classify a non-exempt employee as exempt. The task is not easy, but it is necessary. When the Department of Labor agents arrive at your place of business, they are not there to help you!

For more information, e-mail Mary Ann B. Oakley at maryann.oakley@hklaw.com or call toll free, 1-888-688-8500.

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1. See May, 2004 Newsletter for more details about the provisions of the new rules.

2. Registered nurses, for example, usually qualify for the professional exemption. However, many hospitals must classify them as non-exempt and pay overtime wages in order to hire a sufficient number of nurses because of competition.

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