Per Diem Rates Decline for Business Travel Expenses (11/10)

Per diem rates, the flat-rate amounts the Internal Revenue Service (IRS) allows you to use to reimburse employees for business travel when there is no detailed itemization of actual expenses, will decline for the year beginning October, 1, 2010, and ending September 30, 2011.  If you use the per diem rate, you only have to provide minimal documentation of the expenses as long as you use a high-low substantiation method.  This approach divides the country into “high-cost” localities and all other localities.  The current rates generally apply to per diem allowances paid to employees on or after October 1, 2010.        The per diem recently has been decreased from $258 to $233 for any high-cost locality (including Chicago, New York City, and San Francisco).  It also has decreased slightly from $163 to $160 for travel to any other locality.  The per diem rates cover lodging, meals, and incidental expenses.  The meal and incidental expense reimbursements (the per diem less lodging) applicable to travel within the continental United States remain unchanged at $65 per day for high-cost localities and $52 per day for any other localities.        To use the per diem rate, you must be able to show the time, place, and business purpose of the expenses and that the payment is reasonably calculated not to exceed the amount of anticipated expenses.  If you do not use this method, you must comply with the IRS substantiation requirements by providing extensive documentation for each expense reimbursed.

Be Careful Using Unpaid Suspensions to Discipline Exempt Employees (11/10)

You can suspend exempt employees for misconduct, without pay, for absences of less than a week.   But, be careful - the FLSA regulations impose very specific requirements you must meet before taking this action.

Six years ago, the Fair Labor Standards Act (FLSA) changed the way you could use pay practices to discipline exempt employees.  (Exempt employees include those employees classified as bona fide executive, administrative, professional, computer-related, and highly-compensated employees because they are paid on a salary basis and their job duties meet certain criteria.)  Prior to August 2004, you were severely restricted in using unpaid partial week suspensions of exempt employees for disciplinary reasons.  Your only recourse was to suspend them with pay, or to suspend them for a full week.      But that changed on August 23, 2004.  According to the FLSA regulations that took effect on that date, employers can use unpaid disciplinary suspensions in full day increments and in limited circumstances to discipline employees who are exempt from the law’s minimum wage and overtime requirements.  To take advantage of this suspension, though, you must be sure your policies comply with the DOL’s requirements or risk big penalties.  The Salary Basis Test According to the Department of Labor’s (DOL) wage and hour regulations, an employee is considered to be exempt if he meets certain job duty criteria and is paid on a “salary basis.”  An employee is considered to be paid on a salary basis if his pay is not subject to reduction because of variations in the quality or quantity of the work performed.  Thus, an exempt employee must receive the full salary for any week he performs any work regardless of the number of days or hours worked.      Note that a few exceptions can apply, such as certain full-day absences related to personal time off and illness under a sick leave plan and unpaid partial day absences taken under the Family and Medical Leave Act.  In addition, the FLSA regulations include two disciplinary situations where employers may make deductions from an exempt employee’s pay, as discussed below. Safety Rules of Major Significance The employee’s salaried status is not affected by “penalties imposed in good faith for infractions of safety rules of major significance.”  This deduction was part of the earlier exempt regulations and was not changed in the current rule.        “Safety rules of major significance” are those relating to the prevention of serious danger to the workplace or other employees, such as rules prohibiting smoking in explosives factories, oil refineries, and coal mines.  According to the DOL’s comments to the final regulations, deductions made for this reason may be in partial day increments.  Because of the limited definition, most employers cannot use this deduction. Conduct Rule Violations Under the FLSA revisions made in 2004, an exempt employee can be suspended without pay for one or more full days as disciplinary action imposed in good faith for workplace conduct rule infractions.   This disciplinary deduction provision was added in the new regulations.  (As noted above, employers previously could not suspend exempt employees without pay unless they suspended them for an entire week.  For example, in Block v. City of L.A., 253 F.3d 410 (9th Cir. 2001), the Ninth Circuit determined that the city could not claim that employees, subject to partial week suspensions for violation of rules unrelated to safety, were exempt from entitlement to overtime pay.)        To use this deduction, you must have a written policy that is applied to all employees.  (The DOL comments to the final rule indicate that just because the policy must cover all employees it does not preclude an employer from making case-by case disciplinary determinations.)  Note, too, that the comments to the final rule point out that the term “workplace conduct” covers just inappropriate conduct, including harassment, violence, drug or alcohol violations, or violations of state or federal laws.  It does not cover performance or attendance issues.  So, for example, you cannot suspend an exempt employee without pay for a day because he did not meet performance goals or has missed too many days of work.       Comments to the rule also make clear that the policy must be in writing.  The policy does not have to include an exhaustive list of specific violations that could result in a suspension, or even a “definitive declaration” of when a suspension would be imposed.  Rather, the written policy only has to be sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension.        For example, if you have a discipline policy that discusses what type of action may be taken, that policy should include a statement that employees may be suspended without pay.  (Comment (2)(c) of the Disciplinary Procedure Model Policy in Chapter 808 the Personnel Policy Manual System includes language intended to comply with this new requirement.)  Alternatively, you can include the disciplinary suspension in specific behavior policies, such as your harassment or drug and alcohol policies. Improper Deductions Can Cost You If you don’t carefully follow the regulations’ requirements, you may still violate the FLSA and jeopardize your employees’ exempt status.  Specifically, if you have an “actual practice” of making improper deductions from exempt employee salaries, you may lose the exemption for all employees who work in the same job classification and who are under the manager responsible for the deductions.  Factors the DOL will consider to determine if you have an “actual practice” include: 1.     The number of improper deductions made, particularly as compared to the number of employee infractions warranting discipline. 2.     The time period during which the improper deductions were made. 3.     The number and geographic location of employees whose salaries were improperly reduced. 4.     The number and geographic location of managers responsible for making the improper deductions. 5.     Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.   So, for example, if a manager at one facility routinely docks the pay of exempt engineers at that facility for partial day absences, then all engineers in that facility whose pay could have been improperly docked by that manager could lose their exemption.  However, engineers at other facilities working for different managers would remain exempt. Limited Safe Harbor for Improper Deductions Fortunately, the FLSA regulations also provide two “safe harbors” that allow you to preserve your exemptions if you make mistakes.  The first applies if you unintentionally make improper deductions or if the deductions are isolated.  In these situations, if you reimburse employees for the improper deductions, you will not lose the exemptions for those employees.  (This section effectively replaces the old regulation’s “window of correction,” which also allowed employers to correct inadvertent deductions without losing the exemption.)      A second, safe harbor is available even in situations where the deductions do not appear to be inadvertent.  This safe harbor applies, however, only if you (1) have a “clearly communicated” policy that prohibits improper deductions and includes a complaint mechanism, (2) reimburse affected employees, and (3) make a good faith effort to comply in the future.  In addition, the safe harbor will not apply if you willfully violate your policy against improper deductions by continuing to make the improper deductions after receiving employee complaints.      To qualify as a “clearly communicated policy,” the policy should be in writing and should be distributed to employees prior to the improper pay deductions.  Such a policy communication can occur, for example, at the time of hire, in an employee handbook, or on the employer’s Intranet.  (Note that Comment (8) in the Hours of Work Model Policy, Chapter 207, of the Personnel Policy Manual System is intended to satisfy this requirement of a “clearly communicated policy.”) Four Steps to Implement Disciplinary Deductions Before you apply disciplinary suspensions to exempt employees, you have to make sure your policy and procedures meet the specified requirements.  Here are four steps you should take to apply this deduction: 1.     Update your disciplinary and conduct policies to include unpaid suspensions.  Policies to review include your disciplinary procedure, any general behavior of employees/workplace rules policy, and specific conduct policies such as those prohibiting harassment and drug use.  2.     Implement suspensions only for serious misconduct.  Specifically, this category includes harassment, violence, drug or alcohol violations, violations of state or federal laws, and major safety rule infractions that present serious danger in the workplace. 3.     Make sure any disciplinary suspensions are for full days only.  The DOL comments to the regulations indicate that you can suspend exempt employees for partial days in the case of major safety rule infractions.  However, to avoid confusion, you may want to implement only full-day suspensions, even in those cases. 4.     If you think you have made a deduction in error, look to the safe harbors to correct it.  To invoke the safe harbor, you must have made the error by mistake or have a policy against improper deductions.  Plus, you must reimburse your employees for the mistakes.      Remember, too, that if you don’t implement these policies and procedures, you still can suspend your exempt employees.  However, the suspension must be with pay if it is for less than a full week.  Still, even a paid suspension can be an effective disciplinary technique since most employees understand clearly that termination is one of the next options.  With the new regulations, though, you now have the added flexibility to use unpaid suspensions for exempt employees.

No Increase to Social Security Benefits for Second Year  (11/10)

The Social Security Administration (SSA) recently announced that the Social Security wage base and benefits for 2011 will not change from 2010 levels.  2011 will be the second year in a row that SSA benefits have not been increased automatically as a result of an increase in the cost-of-living adjustment (COLA).  2010 was the first year since 1975 that Social Security benefits did not increase.      Starting in 1975, the Social Security Act has provided that Social Security benefits increase automatically each year if there is an increase in the Bureau of Labor Statistics (BLS) Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  The period used to calculate any increase runs from the third quarter of the last year to the third quarter of the current year.  The CPI-W generally reflects the increases seen in such consumer goods and products as groceries and gas.  Since 2008 was the last year that an increase the CPI-W was determined, the BLS data measured the CPI-W from the third quarter of 2008 to the third quarter of 2010.  Since there was no increase during this period, there will be no COLA adjustment for 2011.  In addition, since there is no COLA change, there will be no increase in the maximum amount of earnings subject to the Social Security tax or to the retirement earnings test for exempt amounts.        Accordingly, the Federal Insurance and Contributions Act (FICA) tax rate, which includes the 6.2% Social Security tax and 1.45% Medicare tax, will remain at 7.65% in 2011 for both the employee and employer portions.  The maximum amount of wages and self-employment income subject to the 6.2% Social Security tax for 2011 will not change from the 2010 level of $106,800.  Since the Medicare tax does not have a maximum wage cap, all tangible earnings are subject to its 1.45% tax.      Workers between the ages of 62 and “full retirement age” who receive early Social Security benefits and continue to work may earn up to $14,160 a year without affecting their benefits, the same as in 2010.  (“Full retirement age” is defined as 66 for retirees born between 1943 and 1954.  The full retirement age will gradually continue to increase until it reaches age 67 for those born in 1960 and later.)  Above that earning limit, one dollar of benefits will be withheld for every two dollars in earnings.        However, in the year that an individual reaches full retirement age, a modified test applies allowing the retiree to earn up to $37,680 before being penalized, the same as in 2010.  Above this special $37,680 earnings test, one dollar of benefits will be withheld for every three dollars earned.  The cap and penalty are lifted the month the individual attains full retirement age.      As a comparison point, for fiscal 2009, the last year there was an increase, the cost-of-living increase for recipients of benefits was 5.8%.  That amount was a substantial increase from 2.3% in 2008 and was the largest increase since 1982.  The SSA attributed that increase to a spike in consumer prices, largely resulting from higher gas prices.  (The SSA announced these results on its Web site at http://www.ssa.gov/pressoffice/pr/2011cola-pr.htm.)