A number of developments this year – the recent decision in Flores v. City of San Gabriel on the intersection of wage and hour law and employer health plans, the new changes coming December 1, 2016 to overtime exemption rules under the Fair Labor Standards Act (“FLSA”), and the U.S. Department of Labor’s (“DOL”) increased scrutiny of employers’ FLSA practices – together provide a resounding “wake-up call” to employers. This is the year to assure FLSA compliance. Indeed, litigation based on alleged violations of the FLSA and state wage laws continues to grow exponentially, with federal wage and hour filings up 450% since 2000 and hitting an all-time high in 2015. A multitude of legislative, regulatory, and litigation developments highlight the need for agencies to audit their policies and practices for FLSA compliance.
An FLSA audit is an opportunity to examine an agency’s policies and practices to identify any possible FLSA violations. FLSA audits may examine every applicable wage and hour issue, or may look at one or two pressing concerns. Audits typically involve reviewing various documents, such as payroll records, memoranda of understanding, and agency rules, as well as interviewing agency employees who are familiar with certain practices.
Under the FLSA, all compensation that is “remuneration for employment” must be included in the regular rate unless it falls within one of several narrowly construed statutory exceptions. The regular rate is not to be confused with the base hourly rate or salary and must include all requisite special pays in the overtime calculation. Recently, in Flores v. City of San Gabriel the Ninth Circuit held that cash payments to police officers made in lieu of health benefits must be included in the regular rate for overtime purposes under the FLSA (and that under some circumstances, health plan payments made on behalf of employees must also be included).
A payroll audit can assess whether an agency includes all special pays required by the FLSA in determining a non-exempt employee’s regular rate of pay and whether the agency is calculating the FLSA regular rate of pay correctly.
Employee Classification Audits
On May 18, 2016, the DOL issued new regulations modifying the weekly salary and annual compensation threshold levels for white collar exemptions to FLSA overtime requirements. These regulations become effective December 1, 2016. One of the most significant changes is that the weekly salary threshold level is more than doubled from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The upcoming regulations trigger new wage and hour obligations. Thus, it is critical for agencies to become familiar with these new regulations and evaluate employee classifications.
Misclassifying employees as exempt or non-exempt is a common FLSA error. Unless exempt, employees must generally be paid at the rate of 1.5 times their “regular rate” of pay for all hours worked more than 40 in a week. The most common exemptions, or “white collar” exemptions, apply to executive, administrative, professional, outside sales, and certain computer-related employees. The burden is on the employer to show that an employee is properly classified as exempt.
There is no time like the present for agencies to use the upcoming December 1 deadline and FLSA changes as a catalyst to conduct a classification audit. The audit may be based on the upcoming salary level changes for exemptions. Alternatively, it could also involve a comprehensive review of the duties employees are actually performing and the percentage of time spent performing those duties to determine if employees qualify under one of the exemptions.
Hours Worked Audits
The DOL continues to increase its rate of audits and general scrutiny of employers’ FLSA compliance. One area of focus is whether non-exempt employees are getting compensated for all “hours worked.” Under the FLSA, overtime compensation must be paid for all hours worked over a maximum amount in a work period (usually 40 hours in a seven day FLSA work week). Hours worked under the FLSA is broadly defined to include all hours employees are “suffered or permitted to work” for their employer, including time they are necessarily required to be on duty on the employer’s premises or time worked even if the employer did not request the employee to perform that work. Thus, the issue is often ripe for challenge by employees.
An “hours worked” audit can identify whether an agency’s calculation of hours worked is correct when an employee, for example, travels for work or attends a training. The audit can also examine whether employees work off-the-clock hours and can identify whether these hours are compensable under the FLSA.
Finally, the FLSA provides employers a defense to liquidated damages (double damages) if the employer can show that in good faith it tried to follow the FLSA and was reasonable in believing that it was in fact in compliance. Thus, agencies should regularly audit FLSA compliance to help support a good faith defense.
2016 is the year for agencies to take a close look at their policies and practices and ensure they are in strict compliance with the FLSA. An essential preventive tool for agencies is an FLSA audit. It is only through a comprehensive analysis into an agencies’ compensation, classification and time-keeping practices, and an examination of whether those particular practices comply with FLSA requirements that an agency can properly navigate the FLSA and its regulations and reduce the risk of FLSA lawsuits.