What is an FLSA self-audit?

Last week’s newsletter addressed whether employers may deduct from discretionary leave banks (PTO) for the partial day absences of exempt employees.  To continue that conversation, this week’s newsletter provides a self-audit tool to evaluate whether an employee is exempt. Remember, the designation of an exempt employee starts with the presumption that the employee is not exempt.  The law presumes that employees are entitled to overtime compensation and to overcome that legal presumption, the employer has the burden of possessing the facts which support the exemption.

This Newsletter provides feedback regarding some general ideas under the law, but there are exceptions to the general rules governing the qualifications for exempt status and therefore here are some questions you should ask in the self-audit, while recognizing that there may be exceptions to the rules.

Audit Part 1

First, is the employee paid more that $455 per week?

If your answer is yes proceed to the next question.  If your answer is no the employee may, or may not, be exempt.

Second, is the employee paid the same amount of money for each week of work whether the employee works a little or a lot?  The same pay whether the employee works 37 hours or 43 hours?

If your answer is yes proceed to the next question.  If your answer is no the employee may, or may not, be exempt.

If you have scored two yes answers so far, you are part way to declaring the employee is exempt from the overtime requirements of the Fair Labor Standards Act.  The next part of the audit is more difficult than the first part of the audit.

Audit Part 2

In Part 2 of the audit we need to ask about the duties of employees to determine whether the employee is exempt.  We need affirmative answers to the Part 1 questions AND affirmative answers to the Part 2 questions before we can stamp exempt on the employee’s job description.  In Part 2, the questions are delivered as packages belonging to a category of employees the law has labelled as executive, administrative and professional.  Those labels are not the only labels but likely the most frequent labels we will encounter in a typical workforce.

Executive Employees-Part 2

1. Is the employee’s primary duty managing the enterprise or a department or subdivision of the enterprise?

2. Does the employee customarily direct the work of two or more other employees or their equivalent?

3. Does the employee have the authority to hire or fire other employees?  Or alternatively, if the employee lacks the authority, does the employee’s recommendation to hire or fire carry weight with the employees who have the authority to hire or fire employees?

An affirmative answer to the above three questions AND an affirmative answer to the Part 1 questions will support the argument that you have properly classified a worker as exempt.

Administrative Employee-Part 2

1. Is the employee’s primary duty performing office or non manual work?

2. Is that office or non manual work directly related to the management or general business operations of the employer or the employer’s customers?

3. Does the employee exercise discretion and independent judgment with respect to matters of significance? Said another way, does the employee evaluate and compare possible courses of action and then make a decision or recommendation after considering the various possibilities?

Affirmative answers to the above three questions AND affirmative answers to the Part 1 questions will support the argument that you have properly classified the worker as exempt.

Professional Employee-Part 2

1.  Is the employee’s primary duty to perform work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course in specialized intellectual instruction?

2.  Is the advanced knowledge obtained by completing an academic course of study resulting in a four year college degree or leading to certification?

Affirmative answers to the above questions AND affirmative answers to the Part 1 questions will support the argument that you have properly classified the worker as exempt.

Please note that for lawyers, doctors and teachers the minimum pay of $455 may not be necessary.

Also, as there are other employee classifications which will qualify for exempt status, this exemption analysis is not complete.

Recommendation:  Since the law presumes that workers are overtime eligible (nonexempt), before removing a single worker from overtime eligibility (exempt), do your homework and only if the worker qualifies should the employer consider transitioning the worker to exempt status.  Unless an audit of all of your employees has been completed since 2004, it is time to conduct the audit.  The above checklist is a good start in performing that audit.

About the Author:

Richard McGee is a lawyer in Minneapolis, Minnesota who focuses his practice on gaming, gaming regulation, tribal employment and litigation in tribal, state and federal courts.  Richard has the privilege of working with tribes and tribal organizations on Human Resources matters including training.  Additionally, tribes ask Richard to address specific topics while incorporating the tribe’s related laws and policies into the sessions.  This is an invitation to engage Richard to produce and facilitate training for your tribe.