Part of our ERISA Compliance Series, this webinar is hosted by ERISA Attorney Larry Grudzien and moderated by chief marketing officer Julia Goebel. This webinar will discuss the top wage and hour issues that may be unknowingly lurking within your company.

1. Common Wage
and Hour Issues
in Benefits
By Larry Grudzien
Attorney at Law

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Agenda
1. Wage and Hour Overview
2. Misclassification Crackdown
• Employee vs. Independent
Contractor
• Exempt vs. Non-exempt
• Joint Employment
3. Deductions From Salary
4. State Law Considerations
5. Liability for FLSA Violations
6. Other Benefit Issues
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WAGE AND HOUR OVERVIEW

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The Fair Labor Standards Act
Overview:
• FLSA - Enacted in 1938
• Federal law:
– Minimum wage
– Overtime pay
– Employment of minors
– Recordkeeping requirements
• Enforced by the U.S. Department of Labor
Wage & Hour Division (WHD)

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Covered Employers Under the FLSA
• Private sector employers with
$500,000 or more in revenue,
or 2 or more employees engaged
in interstate commerce
• Hospitals and other
health care institutions
• Public sector employers
• Schools
• Most non-profits
• Trade associations
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State Laws
• Almost every state has its own wage and hour law, which may or may not
prescribe a different hourly wage than what is prescribed by the FLSA, and
which may or may not follow the exemptions afforded by the FLSA.
• State laws typically are more generous to employees in terms of the
minimum wage, the scope of exemptions and the definitions of operative
terms such as "overtime."
• Many states require overtime pay in situations more favorable to
employees than under the FLSA.
• In seeking to comply with the law, employers should always consult both
federal and state laws concerning wages and hours.

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MISCLASSIFYING CRACKDOWN

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Misclassifying as
Independent Contractors
DOL crackdown on employers who misclassify
workers as independent contractors who are
employees under the law.
Effect of Misclassification on Workers
• Denied access to legal protections
and benefits, such as:
– Minimum wage and overtime pay
– Workers’ compensation
– Family and Medical Leave
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Tests for Independent Contractor Status – Federal & State
• DOL Economic Realities Test: is worker truly in business for him/herself
or is he/she economically dependent on employer for work?
• IRS 20-Point Test: Behavioral Control / Financial Control /
Relationship of the Parties
• State Law Tests: Workers’ Compensation /Unemployment Insurance /
State Wage and Hour Laws

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Right to Control - Factors
• Compliance with instructions
• Training
• Tools, business car
• Hires own employees
• Hired for a project/not by hour
• Sets own hours
• Not terminable at will
• Risk on profit or loss of project
• Method of payment
• Reports – medium or long-term
basis (not daily or weekly)
• No company benefits, vacation,
sick leave, 401(k),
health insurance, etc.

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State Laws
• In recent years, states have been establishing ABC tests for determining
common law employee vs. independent contractor status.
• These tests affect state taxes, like income tax and state unemployment
taxes, not federal taxes.
• At present, 26 states, including California,
have some variation of these tests.
• There are three parts.

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State Laws
• The worker is an independent contractor if these tests are met:
– The worker must clearly be free from being required to take direction for
work performance, as shown by both the terms of the employment contract
and the actual working relationship.
– The work must be outside the employer's usual business activities.
If the business is a trucking company, a trucker would be inside the usual
business activities, but a plumber would be outside the usual business
of the trucking company.
– Workers must be "customarily engaged" in an independent business or a
business similar to the work performed for the hiring company.
• Some states, like California, use all three of these tests, while other states
use only two.
• Check with your state if you have questions about the status of workers.

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Consequences of Misclassification
• Overtime liability
- Back pay and liquidated (double) damages
- Criminal penalties – fines up to $10,000
- Willful penalty - $1,000 violation
and imprisonment
• Payroll taxes, withholding, penalties, interest
• IRS and DOL audits
• Liability for medical expenses
for work-related injury
• Attorneys’ fees and costs
• And other consequences

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EXEMPT VS. NON-EXEMPT

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Revision to White Collar Exemptions in the Works!
• The Department of Labor revised the regulations located at 29 C.F.R.
part 541 with an effective date of January 1, 2020.
• WHD will continue to enforce the 2004 part 541 regulations
through December 31, 2019, including the $455 per week standard
salary level and $100,000 annual compensation level for
Highly Compensated Employees.
• The final rule is available at: https://www.federalregister.gov/
documents/2019/09/27/2019-20353/defining-and-delimiting-the-
exemptions-for-executive-administrativeprofessional-outside-sales-and

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FLSA White Collar Exemptions
Salary Basis
• Generally $684 per week
Primary Duty
• Definition does not strictly require 50% of time
• Primary = principal, main, major or
most important

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Executive Exemption
• Primary duty - management of a recognized separate
department or subdivision; and
• Customarily and regularly supervises two or more full-time
employees or equivalent; and
• Has authority to hire or fire employees or recommends as
to hiring, firing, advancement, promotion, etc., and is
given “particular weight”

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Administrative Exemption
• Primary duty - office/non-manual work “directly” related to
management or general business operations of employer or
employer’s customers/clients
• Primary duty includes exercise of discretion and independent
judgment “with respect to matters of significance”
• Examples: typically applies to claims adjusting, financial services,
HR, auditing, tax, marketing, and quality control employees

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Learned Professional Exemption
Primary Duty - performance of work requiring an
advanced type of knowledge
• The employee must be compensated on a salary or fee basis
• Predominantly intellectual in character
• “Consistent” exercise of discretion and judgment in science or learning
• “Prolonged” course in specialized intellectual instruction
(B.A. or B.S., or beyond)
• Examples: Accounting, law, education, medicine, engineering,
theology, architecture, etc.

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Creative Professional Exemption
• Primary Duty - the performance of
work requiring invention, imagination,
originality, or talent in a recognized
field of artistic or creative endeavor
• The employee must be compensated
on salary of fee basis
• Music, writing, acting, graphic arts
• Case by case basis determination
depending on how much
own creativity
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Computer Professional Exemption
• Employee must be paid either on a salary or fee basis at a rate not less
than $684 per week or of compensated on an hourly basis, at a rated
not less than $27.63 per hour or more
• Employee’s Primary Duty:
– The application of systems analysis techniques and procedures,
including consulting with users, to determine hardware, software,
or system functional specifications
– The design of computer systems based on and related to user or
system design specifications
– The creation or modification of computer programs related to machine
operating systems
– A combination of above duties, the performance of which requires
the same level of skills

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Outside Sales Exemption
• Primary Duty - making sales or obtaining
orders for services or for use of facilities, and
• Employee customarily and regularly
engages in work away from the
employer’s place of business
• No salary requirement or
particular salary level
• Regulations explicitly exclude from
the exemption “Inside Sales”
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Highly Compensated Employees
$107,432 or more –
• Exempt if they meet any one of the criteria of the executive,
administrative, or professional duties
• Office or non-manual work
• Significantly higher than $65,000 in proposed regulations
• $107,432 = Salary, Commissions and Non-Discretionary Bonuses

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Blue Collar Employees
• The exemptions provided by FLSA Section 13(a)(1) apply only to
“white-collar” employees who meet the salary and duties tests set
forth in the Part 541 regulations.
• The exemptions do not apply to manual laborers or other
“blue-collar” workers who perform work involving repetitive
operations with their hands, physical skill and energy.

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Police, Fire Fighters Paramedics
& Other First Responders
• The exemptions also do not apply to
police officers, detectives, deputy sheriffs,
state troopers, highway patrol officers,
investigators, inspectors, correctional
officers, parole or probation officers, park
rangers, fire fighters, paramedics,
emergency medical technicians,
ambulance personnel, rescue workers,
hazardous materials workers and similar
employees, regardless of rank or pay level
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Is This Employee Exempt?
Sushi chef at restaurant
• Supervised by head (No.1) chef
• Paid on salary basis (above $684/wk)
• Not required to have a degree in culinary
arts but is continually instructed at the
restaurant in a classroom setting
• Required to have 5-10 years of experience
• Oversees the work of less experienced
sushi chefs
• Does not hire, fire, promote or discipline
lower level chefs
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Is this employee exempt?
A. Exempt under Executive Exemption
B. Exempt under Professional Exemption
C. Exempt under Administrative Exemption
D. Non-Exempt
What do you think?
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Real Case
D. Non-Exempt
• Not exempt under Executive exemption – no evidence
that mid-level chef made suggestions or recommendations
as to hiring, firing, promotion, etc. of lower level chefs
• Not exempt under Learned Professional exemption –
did not require academic degree
Solis v. Suroc, No. 1:12 CV 2107 (N.D. Ohio 2014)

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Cost of Misclassification
• Jim is an assistant manager at Wellness Pharmacy
• Jim has no supervisory authority and does not manage others
(he is not exempt)
• Jim has been treated as an exempt employee
• His pay over the last three years has been at a rate of $15 per hour
• Jim now claims he has worked 45 hours/week the last three years

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It Will Cost You!
Cost of Misclassification:
Number of hours > 40 x 1.5 Regular Rate
x 2 years (not willful) or 3 years (willful))
x 2 (Liquidated Damages)
x Employees
+ Attorney Fees (Employer and Plaintiff)
+ Costs of Litigation + Costs of Employees
Participating in Litigation

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Unpaid Wages
Individual Action
• 150 weeks (for the three years) x 5 hours per week = 750 overtime hours
• 750 overtime hours x $22.50 ($15 x 1.5) = $ 16,875 in unpaid wages
• Liquidated damages : $16,875 x 2 = $33,750
vs.
Collective Action
• 100 current and former assistant managers
join the collective action
• 100 x $16,875 = $1,687,500 in unpaid wages
• Liquidated damages: $1,687,500 x 2 = $3,375,000

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Attorney’s Fees And Costs
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• Under the FLSA, prevailing plaintiffs
are entitled to an award of
their attorneys’ fees
• Plus you have to add in your
own fees in defense of the case
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JOINT EMPLOYMENT SITUATIONS

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Joint Employment Situations
When does it exist?
• There are two potential scenarios where an employee may have one or
more joint employers:
– the employee has an employer who suffers, permits, or otherwise
employs the employee to work, but another individual or entity
simultaneously benefits from that work.
– one employer employs an employee for one set of hours in a workweek,
and another employer employs the same employee for a separate set of
hours in the same work week.

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What factors are used to determine if a joint employment situation exists?
• Following six factors to identify any association between the joint employers:
• whether the joint employers jointly controlled how the worker
did his or her job,
• whether the joint employers shared power over hiring and firing decisions
concerning the worker,
• how long the joint employers had been working with each other,
• whether one joint employer exercised control over the other,
• whether the work was done at a location controlled by one or more
of the joint employers, and
• whether the joint employers shared responsibility regarding tasks typically handled
by an employer, such as payroll.
Joint Employment Situations

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Joint Employment Situations
• What is the effect of the joint employment determination?
– If the employers are acting independently of each other and are disassociated
with respect to the employment of the employee, each employer may disregard
all work performed by the employee for the other employer in determining its
liability under the FLSA.
– However, if the employers are sufficiently associated with respect to the employment
of the employee, they are joint employers and must aggregate the hours worked for
each for purposes of determining if they are in compliance.
– The employers will generally be sufficiently associated if there is an arrangement
between them to share the employee’s services, the employer is acting directly
or indirectly in the interest of the other employer in relation to the employee,
or they share control of the employee, directly or indirectly, by reason of the
fact that one employer controls, is controlled by, or is under common control
with the other employer.

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DEDUCTIONS FROM SALARY

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Exempt Employee Salary Deductions
• Generally, exempt employees must be paid their full salary
for all weeks in which they perform any work, regardless of
quantity or quality
• Beware of the “fake salary!”
• Can lose the exemption for all employees in the same job
and the same affected department!

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Exempt Employee Pay Deductions
You can deduct for:
1. Absence from work for one or more full days for personal reasons,
other than sickness or disability;
2. Absences due to sickness/disability of a full day if the deductions
are made under a bona fide plan, policy or practice of providing
replacement pay for these types of absences;
3. No deductions, only offsets, for jury fees, witness fees,
or military pay;

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Exempt Employee Pay Deductions (cont.)
4. Deductions of any type may be imposed in good faith for
violating safety rules of “major significance”;
5. Unpaid disciplinary suspension of one or more full days
imposed in good faith for violations of workplace conduct
rules (e.g., sexual harassment, workplace violence);
6. Proportional rate of full salary for time actually worked in
the first and last weeks of employment; and
7. Any unpaid leave taken pursuant to the Family and
Medical Leave Act.

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Safe Harbor for Pay Deductions
Safe harbor for inadvertent and
isolated improper deductions if:
• Written policy concerning deductions
• Written notice of policy given
to employees
• Policy contains complaint procedure
• Employer responds and
rectifies errors
• Full reimbursement made
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• For private employers, all wages must be paid for the pay
period at issue and “make-up time” cannot be extended
outside the work week
• For public employees, “compensatory time” can be
accrued up to specific limits, must be reasonably available
for use, and must be paid out on termination
Comp Time

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Intern or Employee?
• College students agree to
provide unpaid services to
a company
• Students perform low-level
tasks, such as answering
phones, making deliveries,
picking up paychecks for
other employees, etc.
• Company provides
training on how to
perform these tasks
but not on overall
business
• Students receive
academic credit
• No expectation of
receiving a job at
conclusion of service

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What do you think?
Are the students interns or employees?
A. Unpaid interns –
they receive academic credit
B. Unpaid interns - they agreed
they won’t be paid for their services
C. Employees – they performed work
that other employees would have to do
D. I don’t know
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Real Case
• Similar to Fox Searchlight intern case
• Employees - work did not primarily benefit interns, company did not
provide training on the operational aspects of the business, and other
employees would have had to perform these tasks
• Workers cannot waive FLSA coverage
• On appeal, the court applied the Primary beneficiary test
Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536-37 (2d Cir. 2016)

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Real Case
• Courts have used the “primary beneficiary test” to
determine whether an intern or student is, in fact, an
employee under the FLSA.
• In short, this test allows courts to examine the “economic
reality” of the intern-employer relationship to determine
which party is the “primary beneficiary” of the relationship.

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Real Case (cont.)
Courts have identified the following seven factors as part of the test:
• The extent to which the intern and the employer clearly understand that there is no expectation of
compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—
and vice versa.
• The extent to which the internship provides training that would be similar to that which would be given
in an educational environment, including the clinical and other hands-on training provided by
educational institutions.
• The extent to which the internship is tied to the intern’s formal education program by integrated coursework
or the receipt of academic credit.
• The extent to which the internship accommodates the intern’s academic commitments by corresponding to
the academic calendar.
• The extent to which the internship’s duration is limited to the period in which the internship provides the
intern with beneficial learning.
• The extent to which the intern’s work complements, rather than displaces, the work of paid employees while
providing significant educational benefits to the intern.
• The extent to which the intern and the employer understand that the internship is conducted without
entitlement to a paid job at the conclusion of the internship.

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STATE LAW ISSUES

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State and Local Wage and Hour Issues
• Minimum wage – some are higher than federal
• Overtime exemptions – defined differently
than under FLSA
• Meal and break periods
– Are meals and breaks required
– Paid or unpaid?
• Wage payment laws
– How often must workers be paid
– When must final paycheck be made
– What must be included in
itemized wage statement
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LIABILITY FOR FLSA VIOLATIONS

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Liability For FLSA Violations
• “Any person acting directly or indirectly in the interest of the
employer in relation to the employee”…
• Power to hire and fire
• Control over schedule of work or conditions of employment
• Maintenance of records
• Control over method or rate of payment
• Control over business enterprise (more than one business
for common purpose)
• Possible criminal penalties too

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Take-Aways
• DOL is cracking down on FLSA violations
• Private FLSA lawsuits on the rise
• Misclassifications and other FLSA violations are costly!
• Perform regular audits to ensure compliance:
– Employee vs. independent contractors
– Exempt vs. non-exempt
– Pay deductions
– Interns
– Proper record-keeping

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OTHER RELATED BENEFIT ISSUES

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Workers Compensation Issues
• Although most states provide protections to keep employers from firing
workers in retaliation for filing a workers' compensation claim, most
states don't address the continuation of benefits in the wake of an
extended absence caused by a work-related disability.
• Because of this, employers may choose to stop paying for health
coverage for an employee that's on disability leave.
• Two federal programs, the Family Medical Leave Act and COBRA's
mandate for continuation of health coverage can help injured workers
retain their health coverage if they pay the cost themselves.

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Part-time Employee Issues
• What benefits to offer?
• Vacation or sick time?
• COBRA issues
• Cost?
• How to treat full-time employee
who full-time?
• Turn over
• Pretax contributions?
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Independent Contractor Issues
• Consequences of offering benefits?
• What benefits to offer?
• Must offer COBRA?
• Any MEWA issues
• Cost?
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Temporary Employee Issues
• Hired from an agency or a direct hire?
• Does it make a difference?
• Does agency offer benefits?
• Who is the employer?
• Who has control?
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QUESTIONS???

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Contact Information
Larry Grudzien, Attorney at Law
• Phone: 708-717-9638
• Email: larry@larrygrudzien.com
• Website: www.larrygrudzien.com