Notice Requirements for Policy Changes (8/11)

We are updating several policies in our employee handbook.  How much notice do we have to give before they take effect?

In most situations, you can legally implement new policies or make policy changes without giving notice.  There are a few exceptions to this general rule.  One exception is when your organization has a union collective bargaining agreement or some other contract requiring advance notice of handbook changes.  In addition, under the federal Family and Medical Leave Act (FMLA), employers must provide 60 days notice of any change in their FMLA policy to their method of calculating the 12-month period used to determine whether an eligible employee has available FMLA leave.        Many employers clearly state their position by including specific statements in their handbooks reserving the right to make unilateral changes at any time.  This step helps ensure that the handbook will not be interpreted as a contract.  However, you are still best advised to give as much advance notice and explanation as possible.  This approach is good employee relations, especially if you are implementing a controversial new policy, such as drug testing or no smoking, or if the changes affect such items as employee benefits, work hours, rules, or compensation.       A good strategy is to give employees advance notice and an opportunity to review any new policies before implementation.  Review periods allow everyone to become familiar with the new provisions and to ask questions.  Thirty days is generally a reasonable amount of notice.  More notice may be appropriate for policies that change benefits, such as vacation calculation, or that create significant new obligations, such as work rule revisions or a drug testing policy.       Even if you cannot give a lot of advance notice, some notice is better than none.  Thus, if a new policy must take effect immediately, try to give employees at least a day or two to become familiar with it.  Some organizations involve employees directly in the policy-making process and solicit comments on policies before they are finalized.  This approach helps everyone “buy into” the new policies and can reduce resistance to change.  Even if you do not make employees part of the decision-making process, at a minimum, you should encourage them to discuss their concerns with their supervisors or the human resources manager.  Also, when appropriate, you may want to provide special training sessions to facilitate a difficult or unpopular transition.      Department heads and supervisors also should be briefed in advance of all policy announcements.  This step helps build their understanding and support and prepares them to answer employee questions.

Are Your Exempt Classifications a Lawsuit Waiting to Happen? (7/11)

Are your exempt employees properly classified?  If not, you could find your organization on the wrong end of a very costly lawsuit.

A new wave of class action litigation has been emerging over the last few years.  Employees and their attorneys are accusing employers of violating the Fair Labor Standards Act (FLSA) and state laws by misclassifying workers as exempt from overtime pay, and they are winning.  Earlier this year, HealthFirst agreed to pay $7.6 million to settle overtime claims that it violated the FLSA because it improperly classified over 1,000 outside sales and marketing employees as exempt.  In 2010, Staples agreed to pay out $42 million to over 5,500 assistant managers to settle claims that is had misclassified them as exempt.  BJ Wholesalers agreed to pay over $9 million to settle claims that over 1,500 mid-level managers were improperly classified as nonexempt in November 2009.  Clothier Abercrombie and Fitch paid over $2 million in 2006 to settle claims by over 250 store managers that it misclassified them as exempt.  And, the federal Department of Labor (DOL) collected almost $13 million on behalf of 9,600 employees misclassified as exempt for Fiscal Year 2008 (the latest enforcement statistics available).  These are just a handful of the numerous overtime settlements that have occurred in the last five years.      Further, your organization is not the only entity at risk.  You could be liable as well.  Human resource managers, business owners, and other decision-makers can be held personally liable under the FLSA according to recent court decisions.  Plaintiffs’ attorneys often pursue these decision-makers individually as a way to pressure the employer to settle the case.  The assumption is that the more people who are named personally, the more likely the employer will want to settle the claim.      Clearly, given the increased litigation activity, you cannot afford the risk of misclassifying employees.  While few organizations purposefully misclassify employees, many do so out of confusion about their obligations under federal and state laws.  The following overview of the FLSA provides you a blueprint for proper classifications and includes the exemptions criteria, five mistakes employers make in their classifications, and four tips for insuring your classifications are accurate. Defining the Exemptions The best defense against these FLSA cases is to make sure your organization is correctly classifying employees.  Complying with the terms of FLSA is a good starting point since the majority of state laws mirror the federal law.  (The FLSA exemptions are found in 29 U.S.C. §213(a)(1) and the exemption regulations are found in 29 C.F.R. §§541.100, et seq.)  Here are the basic requirements: General exemption requirements.  To be exempt from the FLSA’s requirements, an employee must meet certain job duty requirements, generally involving the use of independent judgment and discretion or supervision of other employees, and typically must be paid on a “salary basis.”  (Some exceptions apply to the salary basis, discussed below.)  The FLSA provides for six broadly used classifications of exemptions:  administrative employees, executive employees, professional employees, outside sales employees, highly skilled computer-related employees, and highly compensated employees.  Salary basis. The term “salary basis” is defined as the payment on a weekly or less frequent basis of a predetermined amount that constitutes all or part of compensation, without reductions for variations in the quality or quantity of the work performed.  Under this definition, exempt employees generally must receive their full salary for any week in which they perform work, without regard to the number of days or hours worked.  Deductions may be made from their salary, but only in limited circumstances such as for full-day absences for personal reasons or for illness when an employer has a bona fide sick leave plan.  Note, however, that the FLSA regulations indicate that doctors, lawyers, and teachers (typically categorized as professional exempt employees) do not have to be paid on a salary basis to be considered exempt.  In addition, the FLSA regulations state that administrative and professional employees may be paid on a “fee basis” rather than on a salary basis, as long as the fee is equivalent to $455 a week.  Further, outside sales employees do not have to be paid on a salary basis to be exempt, and computer professionals may be paid either on a salary basis or on an hourly basis of at least $27.33 an hour. Executive exemption.  Workers are employed in an executive capacity if they are compensated on a salary basis at a rate of at least $455 per week (equal to $23,660 annually), exclusive of board, lodging, or other facilities. In addition, the workers’ job duties must meet all three of the following criteria: (1)     Their primary duty consists of the management of the enterprise in which they are employed, or of a customarily recognized department or subdivision of it.  Examples of the “management of the enterprise” include: interviewing, selecting, and training employees; setting and adjusting employee pay and hours of work; directing the work of employees; appraising employee productivity and efficiency for the purpose of recommending promotions or other changes in status; disciplining employees; planning the work; determining the type of materials, supplies, machinery, equipment, or tools to be used or merchandise to be bought, stocked, and sold; and planning and controlling the budget. (2)     They customarily and regularly direct the work of two or more full-time employees or their equivalent. For example, one full-time employee plus two half-time employees equal two full-time employees.  (3)     They have the authority to hire or fire other employees, or their suggestions and recommendations are given particular weight concerning the hiring, firing, advancement, promotion, or any other change of status of other employees.        The regulations explicitly acknowledge that employees who perform both exempt and nonexempt duties still may qualify for the executive exemption, and that determination is made on a case-by-case basis.  Generally, exempt executive employees have the discretion to decide when to perform their various duties, while nonexempt employees are directed by a supervisor to perform exempt duties. Administrative exemption. Workers are employed in an administrative capacity if they are compensated on either a salary or fee basis at a rate of at least $455 per week, exclusive of board, lodging, or other facilities, and their work meets both of the following requirements: (1)     Their primary duty consists of the performance of office or nonmanual work directly related to the management or general business operations of their employers or of their employers’ customers.  To meet the “work directly related to the management or general business operations” standard, an employee must perform work directly related to assisting with the running or servicing of the business.  Examples include work in functional areas such as human resources; tax; finance; accounting; insurance; quality control; purchasing; marketing; research; safety and health; employee benefits; labor relations; public relations; computer network, internet, and database administration; legal compliance; and similar activities.  (2)     Their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. This standard requires the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. “Matters of significance” refer to the level of importance or consequence of the work performed.  Factors to consider include whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; and whether the employee has authority to waive or deviate from established policies and procedures without prior approval.  The regulations contain several examples of jobs that may meet this exemption depending on their specific job duties, including human resources managers, certain insurance claims adjusters, certain financial service employees, executive or administrative assistants to business owners or senior executives, and purchasing agents with authority to bind the employer on significant purchases. Professional exemption. Employees are employed in a bona fide professional capacity if they are compensated on a salary or fee basis at a rate of at least $455 per week, exclusive of board, lodging, or other facilities, and their primary duty meets either the “learned professional” or the “creative professional” criteria.       To qualify as a “learned professional,” the employee’s primary duty must be the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. The work must be predominantly intellectual in character, and include work requiring the consistent exercise of discretion and judgment, as distinguished from the performance of routine mental, manual, mechanical, or physical work.  Advanced knowledge cannot be attained at the high school level.  Examples of exempt professionals include registered or certified medical technologists, registered nurses (not licensed practical nurses), dental hygienists and physician assistants who have completed four academic years of pre-professional and professional study, certified public accountants, and licensed funeral directors and embalmers.  Physicians and lawyers are considered exempt if they have a valid license or certificate permitting the practice of law or medicine.       Any employee actively employed by an educational establishment and whose primary duty includes teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge also is an exempt professional.  Examples include regular academic teachers, teachers of kindergarten or nursery school pupils, teachers of gifted or disabled children, teachers of skilled and semi-skilled trades and occupations, and vocal or instrumental music instructors.      To qualify as a “creative professional,” the employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.  Eligible fields include music, writing, acting, and the graphic arts. Outside sales exemption.  Employees are employed in a bona fide outside sales capacity if: (1)     Their primary duty is either (a) “making sales” as defined by the FLSA or (b) obtaining orders or contracts for services, or for the use of facilities, for which a consideration will be paid by the client or customer.  “Sales” as defined by the FLSA include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. In addition, it includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. (2)     They are customarily and regularly engaged away from the employer’s place or places of business in performing their duties.  Outside sales employees are those who make sales at the customer’s places of business, or if selling door-to-door, at the customer’s home.  Computer-related exemption.  Employees are eligible for the computer-related exemption if they are employed in computer systems analysis, programming, software engineering, or other related jobs requiring similarly skilled workers in the computer field.  They also must be compensated either on an hourly basis at a rate of at least $27.63 an hour or on a salary or fee basis of at least $455 per week, exclusive of board, lodging, or other facilities.  Further, their primary duties must consist of one or more of the following: (1)     The application of systems analysis techniques and procedures (including consulting with users) to determine hardware, software, or system functional specifications; (2)     The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs (including prototypes) based on and related to user or system design specifications; (3)     The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4)     A combination of the duties listed above, the performance of which requires the same level of skills.       The computer exemption does not apply to employees engaged in the manufacture or repair of computer hardware and related equipment.  However, FLSA regulations do not require that computer-related employees consistently exercise discretion and judgment (as professional employees). Highly compensated employees.  Workers are considered exempt if they meet the following three criteria: (1)     They earn total annual compensation of $100,000 or more, which must include at least $455 paid per week on a salary or fee basis.  Total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period, but does not include payments for fringe benefits.  (2)     They customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.  (3)     Their primary duty includes performing office or nonmanual work.  Highly-compensated production workers, carpenters, plumbers, construction workers, ironworkers, etc., will not qualify simply because they earn more than $100,000 a year.  Five Common Classification Mistakes Employers typically make five basic mistakes in misclassifying exempt employees: 1.     Base exempt status on job titles rather than job duties.  Job titles can be deceiving.  For example, there can be a vast difference in the levels of responsibility for employees called “administrative assistants,” making some clearly nonexempt (i.e., those who function primarily as secretaries) while others are exempt (i.e., those who act as the “right-hand” of a top executive and have decision-making responsibilities).  Instead, you always should look at the actual duties performed. 2.     Ignore primary job duties requirement.  This requirement is important and can become an issue particularly with managers who spend time performing nonexempt work.  The FLSA regulations define primary duty to mean the principal, main, major, or most important duty the employee performs.  Factors to consider include: (a)     the relative importance of the exempt duties as compared with other types of duties; (b)     the amount of time spent performing exempt work; (c)     the employee’s relative freedom from direct supervision; and (d)     the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.       The amount of time spent performing exempt work also can be a useful guide in determining whether exempt work is the primary duty of an employee.  Typically, employees who spend more than 50% of their time performing exempt work will satisfy the primary duty requirement. However, time alone is not the sole test, and employees who spend less than 50% of their time on exempt duties still may meet the primary duty standard if the other factors support the exemption.  3.     Limit discretion and independent judgment.  This requirement is the most frequently misunderstood and misapplied condition, especially for administrative exemptions.  Work that involves following established techniques or procedures usually requires more skill than discretion or judgment.  In contrast, employees who are required to “think on their feet” and evaluate information to make decisions are more likely to be exempt.  4.     Make deductions improperly for partial day absences.  If you make deductions from an exempt employee’s pay for absences of less than a day, you will be considered to be treating the employee as an hourly worker instead of as an exempt employee paid on a salary basis.  Thus, you could be liable for any overtime worked by the employee, as well as for all other exempt employees subject to your policy allowing deductions for partial day absences.  Note, however, that the federal Family and Medical Leave Act (FMLA) does allow employers to make deductions for partial day absences for any hours taken as intermittent or reduced FMLA leave without affecting the employee’s exempt status.  Further, you may make deductions for certain full day absences, such as for personal days and sick days as part of a bona fide sick leave plan. 5.     Require exempt employees to work at least 40 hours a week.  If you require exempt employees to work a specific number of hours or arrive at a specific time, you may appear to be treating them like nonexempt employees and, thus, may jeopardize their exempt status.  Instead of focusing on the number of hours an employee works or the starting and ending time, you are better advised to focus on the employee’s job requirements and output.       So, if you can show that the exempt job duties require at least 40 hours a week, then your policy will have a strong legal basis and may be better understood by your employees.  For example, if your executive employees manage other employees who must work 40 hours a week, arguably they also should work a minimum of 40 hours a week in order to be available to provide guidance to their employees.  However, if you cannot show how the minimum hours worked are related to the exempt employees’ job duties, then you may want to reconsider this requirement. Review Classifications, Know the Requirements As the million dollar settlements above show, you need not only to understand the FLSA exemption requirements but also to be able to bring your organization into compliance with them.  The following four tips will help make the process easier: 1.     Become familiar with both federal and state exemption requirements.  While many states have incorporated the FLSA’s exemption criteria into their wage and hour laws, several also mandate additional obligations that you should be aware of if you operate in those states.  For example, California and New York require higher salary rates for exempt employees than the does the FLSA. 2.     Review the current classifications of your employees.  Document your exempt employees’ duties and make sure they meet the standards discussed above.  The amount of time spent on specific duties usually is a meaningful guide in determining employees’ primary duties.  Don’t rely on job titles; instead focus on the work the employee actually performs. 3.     Consult an attorney if you think you have misclassified employees.  Your attorney will be able to advise you about the proper course of action to take to correct the problem.  In some cases, you may be able simply to reclassify employees to reflect their current job duties.  In others, you may need to compensate misclassified employees for unpaid overtime. 4.     Do not ignore the problem.  The potential penalties for overtime exemption violations under the FLSA are too great to take a chance that you might not face a lawsuit, particularly once you have been alerted to a problem with your classifications.  Wage claims can come up at any time, but often result when disgruntled exempt employees feel they have not been compensated fairly for the long hours they work.  If you cannot show that your employees meet the exempt classifications (see # 2, above), your organization could owe substantial back overtime wages and penalties.  And, just to make the issue even more compelling, you can be personally liable for FLSA decisions.  So make sure you address any potential classification problems.