A bill introduced in the U.S. Senate (S. 1747) would significantly expand the scope of the current exemption for certain computer employees that is found at Section 13(a)(17) of the federal Fair Labor Standards Act.  The proposed "Computer Professional Update" Act (or "CPU" Act) was submitted by North Carolina Senator Kay Hagan and three co-sponsors.  It is now pending in the Senate's Committee on Health, Education, Labor, and Pensions.

A Little History

The FLSA exemption status of employees in the computer field has been a bone of contention since the mid-1960s.  The application of the FLSA's executive exemption in the computer field has been no different over that time, but for many years the U.S. Labor Department took a particularly narrow view of what sort of computer-oriented work qualified for the FLSA's administrative or professional exemption.

Then, in 1990, Congress directed DOL to issue regulations under which computer systems analysts, computer programmers, software engineers, and other similarly-skilled workers could be exempt.  DOL finalized professional-exemption regulations for this purpose in 1992.  However, the only employees in the running for exempt status were those meeting these descriptions whose work required "theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering . .  .."

One might infer that Congress was not satisfied with DOL's efforts, because in 1996 it amended the FLSA itself to add Section 13(a)(17) (link to reproduction below).  Among other things, Congress's own version did not require "theoretical and practical application of highly-specialized knowledge . . ..".  In 2004, DOL modified the regulatory exemption to harmonize it with the statutory one.

Still Behind The Times

The rapid evolution of computer technology, the Internet, and other areas has arguably left even these most-recent exemptions in the dust.  For example, to a considerable extent their definitions of exempt work incorporate outmoded terms and concepts dating to the early 1990s or even before.  Many believe that the exemptions, along with DOL's restrictive interpretations of them, fail to take into account substantial changes in the computer field and the occupations it encompasses.

The CPU Act would address this in a variety of ways.  For instance, unlike the present versions, it would incorporate "information technology" occupations and would expressly refer to work involving things such as databases, the Internet, intranets, networks, debugging, components and hardware, security, configuration, and systems integration and continuity.  It would also create an exemption for employees who are "directing the work of individuals" performing exempt computer or information-technology duties; presumably this would apply more-broadly than does the FLSA's executive exemption.

Even if the CPU Act becomes law, states and other jurisdictions need not provide such an exemption from their own minimum-wage and overtime laws.  Moreover, a jurisdiction that has its own computer-employee exemption would not be required to harmonize it with the CPU Act.

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FLSA Section 13 a 17.pdf (20.46 kb)

Among the famous last words in the federal Fair Labor Standards Act Hall of Infamy are, "Let's write the job descriptions to make them exempt." The problem is this:  Job descriptions do not "make" employees exempt.

Instead, most FLSA exemptions apply, if at all, only on an employee-by-employee basis according to the nature of each individual's actual work as judged against specific and often-detailed requirements.^*  Moreover, in any U.S. Labor Department investigation or in a lawsuit, the legal burden of establishing that a person is exempt rests with the employer, who must prove that each exemption requirement is met as to any individuals whose exempt status has been challenged.  The Labor Department and the courts construe FLSA exemptions very narrowly, and doubt is often resolved against the employer.

So no job description, irrespective of what it says, will bring about exempt status for an employee whose actual work does not meet the legal tests.  Does this mean that job descriptions are irrelevant to FLSA exemptions?  Absolutely not!

Job descriptions that are vague, ambiguous, jargonized, out-of-date, or poorly-written can lead to ill-considered and incorrect decisions about who is or is not exempt.  Those that are puffed-up for ego purposes, or that are unrealistic or inaccurate, can have a similar impact.  Flawed job descriptions can also seriously undercut efforts to defend against legal challenges to exempt status.

On the other hand, job descriptions that are accurate, specific, realistic, clear, well-crafted, and current can contribute appreciably to management's proper analysis of whether one exemption or another may legally be applied to an employee.  They can also play a significant role in defending against a claim that employees should not have been treated as exempt.

For example, one requirement for the FLSA's executive exemption is that an employee who has no authority to hire or fire must at least make suggestions and recommendations about those actions (or about other status changes) that carry "particular weight".  29 C.F.R. 541.100(a)(4).  The fact that making these suggestions and recommendations is truly part of an employee's job helps to show that they are indeed given "particular weight", and listing these responsibilities in the job description is some evidence that they really are part of the individual's work.  29 C.F.R. 541.105; 69 Fed.Reg. 22122, 22135 (April 23, 2004).

The bottom-line is that job descriptions standing alone are not enough to establish or refute exempt status, but poor ones are useless (or worse), whereas good ones are useful.

      ^*  Of course, some FLSA exemptions also impose compensation requirements.

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Affected employers will no doubt have a variety of wage-hour questions in the aftermath of Hurricane Irene.  The number and scope of the issues raised might well be practically endless.  In this post, we address in very general ways the federal Fair Labor Standards Act topics that experience suggests will be among the most-pressing.

◊   What do we do about lost time records for work already performed but not yet paid?

If the only records of hours worked are lost or unusable, then there is no perfect solution.  Re-create the most accurate accounting you can under the circumstances.  Perhaps the preferred approach is to ask each employee to make the best-possible estimate of his or her hours worked. You should obtain the employee's written acknowledgement of his or her best recollection and should include the employee's authorization allowing later corrections in worktime and pay should more accurate hours-worked information become available.

◊   How do we track employees' worktime without our electronic/computerized time clocks?

Employees may record all hours worked by using handwritten timesheets.  To ensure accuracy, each employee should enter his or her own time and should record the actual times when the employee's work starts and stops each workday.

◊   As we recover, must we keep paying overtime on top of our other burdens?

At this time, there is no FLSA "emergency" exception that relieves the obligation to pay FLSA-required wages.  Employees subject to the FLSA's overtime provision must receive overtime premium at a rate of at least 1.5 times their regular rates of pay for all hours worked over 40 in the designated seven-day workweek.

If employees are covered by a collective bargaining agreement, it might contain additional overtime provisions requiring more than the FLSA does.  Perhaps the terms of the agreement relax those requirements in emergencies.  However, a collective bargaining agreement cannot override the FLSA's requirements.

◊   Can an employee volunteer to perform recovery services for us without pay?

The FLSA does not permit employees to "volunteer" unpaid time to the employer under any but the narrowest of circumstances.  For example, if a manufacturing facility sets up a hotline or makes other arrangements to provide a clearinghouse for information about the status of the workplace and employee reporting times, non-exempt employees volunteering to perform such services are engaged in compensable hours worked for FLSA purposes.  Employers considering any kind of unpaid "volunteer" services by their employees should evaluate the legality of doing this carefully and in advance.

◊   Must we keep paying employees who are not working?

Under the FLSA, for the most part the answer is "no".  FLSA minimum-wage and overtime requirements attach to hours worked, so employees who are not working are typically not entitled to the wages the FLSA requires.

One possible FLSA-related exception is for employees treated as FLSA-exempt whose exempt status requires that they be paid on a "salary basis".  Generally speaking, if such an employee performs at least some work in the designated seven-day workweek, the "salary basis" rules require that he or she be paid the entire salary for that particular workweek.  There can be exceptions here, too, such as might sometimes be the case where the employer is open for business but the employee decides to stay home for the day.

Also, non-exempt employees paid on a "fluctuating-workweek" basis under the FLSA normally must be paid their full fluctuating-workweek salaries for every workweek in which they perform any work.  There are a few exceptions, but these are even more-limited than the ones for exempt "salary basis" employees.

Of course, an employer might have a legal obligation to keep paying employees because of, for instance, an employment contract, a collective bargaining contract, or some policy or practice that is enforceable as a contract or under a state wage law.

◊   What can we do about charging missed time to vacation and leave balances?

The FLSA generally does not regulate the accumulation and use of vacation and leave.  The "salary basis" requirements for certain FLSA-exempt employees can implicate time-off allotments under various circumstances, some guidance on which the U.S. Labor Department has provided in opinion letters accessible here and here.

Again, however, what an employer may, must, or cannot do where paid leave is concerned might be affected by an employment contract, a collective bargaining contract, or some policy or practice that is enforceable as a contract or under a state wage law.

◊   When is travel time "hours worked" for purposes of computing FLSA wages due?

FLSA travel-time "rules" are not seamless, up-to-date, or necessarily logical or consistent with common sense.  The best-known ones are that:

•   Normal commuting between home and work typically is not considered to be hours worked, and

•   Travel between one assignment and another during a workday typically is hours worked.

However, even these principles are subject to exceptions and elaboration.  The best starting point is to consider each scenario an employer faces under the U.S. Labor Department's basic interpretations on travel time.  They are compiled at 29 C.F.R. §§ 785.33-785.41 and may be accessed here.

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Remember that other requirements, such as those applying to government contractors or subcontractors and those of states or other jurisdictions, can also be relevant to these questions.

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The answer to our July 11 Quick Quiz is, "One And One-Half Days' Worth".

To qualify for the federal Fair Labor Standards Act's executive, administrative, or professional exemption, employees usually must be paid on a "salary basis".  This means that the employee must regularly receive each pay period a predetermined amount (of not less than $455 per week) constituting all or part of his or her compensation.

With limited exceptions, this fixed amount cannot be subject to reduction based upon either the amount of time the employee works or how well he or she performs the work.  The circumstances under which this salary can be reduced for part-days missed are even more restricted.

One exception to this so-called "no-docking rule" is that deductions may be made from the salary for absences of one or more full days caused sickness, disability, or work-related accidents, if the deduction is made under a bona fide plan, policy, or practice that provides compensation for such absences.  As a practical matter, this usually means that, so long as an exempt employee has a paid-time-off allotment to cover the absence, he or she is paid the normal salary, and the absence is charged against the PTO balance.

The sick-day exception also permits proportional deductions to be made from the salary itself for whole-workday absences of this kind during the period:

♦   Before the employee qualifies for PTO, and

♦   After the employee exhausts the PTO allowance.

However, the sick-day exception does not authorize salary deductions for part-days missed.^*

But this part-day restriction does not prevent charging these absences against PTO allotments.  As the U.S. Labor Department has said, "Where an employer has a benefits plan (e.g., vacation time, sick leave), it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, whether the absence is a partial day or a full day, without affecting the salary basis of payment, if the employee nevertheless receives in payment his or her guaranteed salary."  Opinion Letter of Acting Wage-Hour Administrator FLSA2005-7 (January 7, 2005).  Consequently, Alice's employer is permitted to subtract the three half-days she missed, that is, the full one and one-half days' worth, from her PTO balance.

If Alice had no PTO balance remaining, then her employer could not dock her salary for any of the sick-time missed.  This is true because she would not have been absent for a whole day on any of the three days she was out sick.

Of course, employers should also review these matters under any applicable wage laws of a state or other jurisdiction.  For example, a state might take a more-restrictive position under the "salary basis" rules applying to exemptions from its own overtime requirements.

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^*  A different exception for an employee's absences covered by the federal Family and Medical Leave Act might permit part-day salary deductions under the proper circumstances.

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Alice performs work meeting the duties requirements for the federal Fair Labor Standards Act's administrative exemption.  She usually works 50 hours in five days each workweek.  She is paid a weekly salary of $950.  Alice is eligible for five paid days off each year, and she has three days left.

In one particular workweek, Alice has the flu and is sick for half-days on Monday, Tuesday, and Thursday.  She works only 31½ hours in that workweek.  How much of Alice's sick time may her employer apply against her paid-time-off allotment under the U.S. Labor Department's FLSA "salary basis" principles?

Please use the poll buttons to the right to register your answer.

Our recent Quick Quiz Answer on recovering losses from non-exempt employees has caused some to ask whether the same analysis applies to employees who are treated as exempt under the federal Fair Labor Standards Act's executive, administrative, or professional exemption (including the "computer employee" and "highly compensated employee" versions).  To answer this question, let's repeat the facts with a few changes:

Store Manager Alex is paid on a salary basis at the rate of $800 per week.  He meets all of the duties requirements for the FLSA's "executive" exemption.  On Monday, he approves accepting a $150 check in payment for merchandise.  He was so busy that he forgot to ensure that the cashier had the necessary customer information, and now the check has been returned because the account is closed.  Alex's employer is unable to contact the customer.

A written company policy that is given to all Managers when they are hired requires Alex to pay for the loss that workweek through payroll deduction, in cash, or by personal check.  As the policy requires, the District Manager has Alex sign a memo saying that he agrees to make the payment.  Alex adds a notation that he prefers to pay in cash.  He works exactly 45 hours that workweek.  Under the FLSA, how much can the employer recover from Alex that workweek?

The "Salary Basis" Principle

To qualify for the FLSA's executive, administrative, or professional exemption, most employees must be paid on a "salary basis".  This means that the employee must regularly receive each pay period a predetermined amount (of not less than $455 per week) constituting all or part of his or her compensation.  With limited exceptions, this fixed amount cannot be subject to reduction because of variations in the quantity or quality of the work performed.  Officials at the U.S. Wage and Hour Division have said that deducting a cash loss from an exempt employee's salary destroys the "salary basis" of pay required for exempt status.  See, e.g., Opinion Letter of Deputy Wage-Hour Administrator Dated April 1, 1999 (cash missing from a locked bank bag)(link below).  The rationale is that such a deduction is based upon the "quality" of the employee's work.  Cf. Opinion Letter of Wage-Hour Acting Administrator FLSA2006-7 (March 10, 2006)("salary basis" impaired by policy of deducting from salary for cost of lost or damaged tools or equipment).

So The Answer Is . . .

The employer may not directly or indirectly recover any of the loss from Alex's salary in that workweek or in any future workweek, at least not if the employer wants to preserve Alex's exempt status under the FLSA.  As with non-exempt employees, this is true even though the employer published a policy in advance, and even though Alex signed something saying that he would make the payment.  Furthermore, it makes no difference whether Alex pays in cash, or by check, through payroll deduction, or in some other manner.  It might be possible to recover the loss from commissions or bonuses Alex is due separately from his salary, provided that this (1) is done in a way that carefully avoids impairing the salary, (2) is permitted under all other applicable laws, and (3) is consistent with the terms of the commission or bonus plan.

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Opinion of Deputy Administrator 04 01 99.pdf (22.46 kb)

In a major decision with possible relevance outside of the pharmaceutical industry, the Second Circuit U.S. Court of Appeals (Connecticut, New York, and Vermont) gave strong deference to a U.S. Labor Department legal brief and overruled a lower court in deciding that Novartis's pharmaceutical sales reps were not exempt from overtime as outside salespersons or as administrative employees under the federal Fair Labor Standards Act or applicable state laws.  On the same day, the Second Circuit also summarily ruled against Schering in a similar case.

The exemption status of pharmaceutical sales reps (who frequently earn substantial compensation) has been hotly litigated with varying results in recent years.  Consider the following unofficial scorecard:  By our count, prior to the Novartis decision, pharmaceutical companies had an 86% win rate (6 out of 7 cases) in federal district court decisions finding that the FLSA's administrative exemption was applicable.  Pharmaceutical companies had a 71% win rate (12 out of 17 cases) in federal district court decisions finding that the FLSA outside-sales exemption applied to their sales reps.  Many of those cases are on appeal.

On February 2 and March 24, 2010, the Third Circuit (Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands) found that a pharmaceutical sales rep at Johnson & Johnson and sales reps at AstraZeneca were exempt under the administrative exemption.  The court did not rule on the FLSA's outside-sales exemption.

The unique, highly-regulated circumstances of the pharmaceutical-sales environment has contributed to the split among the courts deciding these cases, particularly the fact that federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician.  As the Second Circuit highlighted in finding that Novartis's reps were not primarily engaged in "making sales" but instead merely promoted drugs to physicians, (1) they could only give free samples; (2) they could not lawfully transfer drug ownership in exchange for anything of value; (3) they could not lawfully take an order for the purchase of drugs; and (4) they could not obtain a physician's binding commitment to prescribe drugs.  Even though the physician is widely considered to be the "linchpin" in the process of choosing drugs to prescribe, federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician – the court concluded that fully consummated sales by pharmaceutical companies are made to wholesalers, rather than to physicians.

Several other courts (including the lower court in Novartis's case) have taken a "common sense" approach and held that the pharmaceutical sales reps "make sales in the sense that sales are made in the pharmaceutical industry" and thus qualified for the FLSA's outside-sales exemption.  Moreover, the Novartis lower court found that sales reps were not "robots" or "automatons," as they contended, but that instead they exercised judgment in tailoring presentations to physicians and qualified for the FLSA's administrative exemption.

The Second Circuit disagreed as to both exemptions.  Significantly, the Circuit was heavily influenced by the DOL's interpretations in DOL's friend-of-the-court legal brief supporting the sales reps.  The court believed itself required to grant "controlling deference" to the brief because the DOL's interpretations were not "plainly erroneous or inconsistent with the [DOL's] regulation" on the issues.

These wage-hour battles in the pharmaceutical field are not over, but some of the lessons for employers in any industry include these:

•   Beware so-called "outside sales" employees who are not really making sales within the meaning of the FLSA's outside-sales exemption (such as those who only promote products or services that are actually sold by others).

•   Beware "promotion" or "marketing" employees who are not exercising "discretion and independent judgment in matters of significance" within the meaning of the FLSA's administrative exemption but are instead exercising only "skill in applying well-established techniques, procedures, or specific standards."

•    Because DOL guidance documents and legal briefs can affect the outcome of litigation, think ahead about how DOL might be expected to interpret FLSA exemption rules in the future.

UPDATE 7/23/10:  On July 19, 2010 the U.S. District Court for the District of New Jersey ruled for the employer in Jackson v. Alpharma, Inc., finding that the pharmaceutical sales representatives there were exempt under the FLSA's administrative exemption.  The District of New Jersey is within the Third Circuit, and the court therefore followed the Circuit's February decision in Smith v. Johnson & Johnson which applied the administrative exemption to a pharmaceutical sales rep.

The Jackson court chose not to address the outside sales exemption.  Interestingly, the court also said, "in light of the Third Circuit's clear opinion in Smith .  .  ., the Court does not find it necessary to discuss" the Second Circuit's more-recent Novartis decision.  Further, the court did not mention DOL's amicus brief which was filed in the Novartis appeal and which the Second Circuit said was entitled to "controlling deference" on the administrative exemption in a similar setting.  As Jackson shows, pharmaceutical companies continue to fare better (in terms of percentages) with the FLSA's administrative exemption than with the outside sales exemption.

UPDATE 8/21/10:  In Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline, 9th Cir., No. 10-15257, the U.S. Labor Department has filed a "Friend of the Court" brief urging the U.S. Court of Appeals to overturn a lower court's finding that Glaxosmithkline pharmaceutical sales representatives qualified for the FLSA's "outside salesman" exemption.

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