In yet another effort to tap into the wage and hour jackpot, in the case of Muldrow v. Surrex, the plaintiffs brought a claim for overtime and a failure to provide meal periods, among other claims, arguing that the senior consulting managers at the recruiter, Surrex, were not covered by the sales exemption, as they were not in “sales” positions. The court distinguished these recruiters from mechanics and drivers and ruled, “they are salespeople.” Fact was, the plaintiffs were involved principally in selling the product or service of recruiting.
A few points were made by the court:
- An employer is not precluded from calculating commissions based on anything other than a straight percentage profit.
- The employer may offset costs to determine profits as part of a commission scheme.
- The commissions must be sufficiently related to the price of services sold to constitute commissions for purposes of the exemption.
In this California case “consulting service managers” who were primarily engaged in selling recruitment services for Surrex, filed claims for overtime and missed meal periods. The court dismissed their case claiming the fit under the Sales exemption The most important language in the case is as follows:
“We conclude Labor Code section 204.1 sets up two requirements, both of which must be met before a compensation scheme is deemed to constitute ‘commission wages.’ First, the employees must be involved principally in selling a product or service, not making the product or rendering the service. Second, the amount of their compensation must be a percent of the price of the product or service.” http://www.courtinfo.ca.gov/opinions/documents/D057955.PDF
Note in the CarMax case the court ruled a flat fee commission satisfies the requirement.
The Federal standard for sales exemptions can be found here. There are exemptions for auto sales, retail sales and outside sales. Here’s an advisor on the Outside Sales
Outside Sales Employee section
This section helps you in determining whether a particular employee who is an outside sales person meets the tests for exemption from the minimum wage and overtime pay requirements of the FLSA.
- Review the Fact Sheet
- Start Outside Sales Employee section
As a farewell to 2011, the California Supreme Court went to great lengths to spell out the parameters of the administrative overtime exemption. This is the exemption from overtime laws that seems to get employers into trouble more than any other. If you are a human resource executive in California you must read this case. Yes, there is a lot of legal mumbo jumbo…but it’s something you must understand or you will unnecessarily expose your company to overtime claims. Perhaps as here on a class action basis.
In Harris v. Liberty Mutual Insurance, the court provided much guidance. Here is some of the instructive language:
[W]ork qualifies as administrative when it is directly related to management policies or general business operations. Work qualifies as directly related if it satisfies two components. First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be considered directly related‖ to management policies or general business operations in order to meet the test of the exemption. (Fed. Regs. § 541.205(a) (2000).)….
[T]he administrative/production worker dichotomy distinguishes between administrative employees who are primarily engaged in administering the business affairs of the enterprise and production-level employees whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and market.
The Court understands that:
[B]ecause the dichotomy suggests a distinction between the administration of a business on the one hand, and the production end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940‘s.
Bottom line: The administrative exemption causes the vast majority of mis-classification headaches. According to this decision even the judges and the DIR have a hard time getting it right. Read this case. Make sure your workers are not mis-classified. If they are, take a look at the report on HR That Works So You Have a Wage Claim Exposure–What Do You Do About It?
Q. We have a number of non-exempt employees who are nevertheless paid a salary. How do we calculate overtime for these employees?
A. The question above is a positive sign, because if you find yourself asking it you’ve passed the first hurdle of realizing that not all “salaried” employees are exempt from the overtime requirements of the Fair Labor Standards Act.
Generally speaking, calculating overtime is a simple affair. Employees must be compensated for hours worked in excess of forty hours in a single workweek at a rate of one and one-half times the employee’s regular hourly rate of pay. The “regular rate” is calculated by dividing an employee’s total non-overtime compensation for the week by the total number of hours worked. For employees who are paid a simple hourly rate, this calculation is simple, as the regular rate is simply the employee’s normally hourly rate of pay.
However, things get trickier when a non-exempt employee is paid a salary. Suppose Chuck is paid a salary of $1000 per week. He works 50 hours in a certain week – 40 hours of straight time, and 10 hours of overtime. To calculate Chuck’s overtime pay, you need one more crucial piece of information: how many hours is the $1000 salary intended to cover?
According to the courts, this issue is a matter of the agreement between Chuck and his employer. Suppose the company has an employee handbook that says that the normal workweek consists of 35 hours. If, based upon that statement, there is a general understanding that the base salary is intended to cover 35 hours of straight-time work, Chuck’s pay would be (assuming I have my math right) as follows:
Regular rate = $1000 / 35 hours = $28.57/hr
Total pay = Regular salary + 5 hrs additional straight time + 10 hrs at time and-a-half
Total pay = $1000 + (5hrs x $28.57/hr) + (10 hrs x $28.57/hr x 1.5) = $1,571.40
On the other hand, suppose Chuck and the company have an understanding that the $1,000 salary is intended to cover up to 50 hours of work per week. In that case, no additional straight-time pay would be due if Chuck works 50 hours. Chuck would still be entitled to an overtime premium for the 10 hours of overtime worked. However, because his salary covers straight-time for those hours, the additional overtime premium due is only one half of the regular rate of pay:
Regular rate = $1000 / 50 hours = $20/hr
Total pay = Regular salary + 10 hours at 1/2 the regular rate
Total pay = $1000 + (10hrs x $20/hr / 2) = $1,100
Now, a smart employer looking at the above calculation might say to itself, “Ah, let’s agree that the employee’s salary will cover up to 100 hours of work.” That would make the regular rate just $10 per hour, and save the company $50 in overtime expenses, right? If this looks too good to be true, it is. First, if Chuck is never actually scheduled to work 100 hours in a week, that agreement will likely be viewed as a sham by the Department of Labor. Second, the regulations say that if Chuck works less than agreed number of hours, then his regular rate is calculated by dividing his total non-overtime compensation by the total number of hours worked. In other words, regardless of how many hours the salary is meant to cover, if he only works 50 hours, his regular rate will still be $20 per hour.
Now, one last wrinkle: suppose it’s understood by all concerned that Chuck’s salary is intended to cover his straight-time compensation not for a specified number of hours, but for all hours that he happens to work in any given week, regardless of how many or how few. While paying a fixed salary for a fluctuating workweek is permissible and can in some cases reduce your overtime liability, there are also some strict limitations on this method, and some new uncertainty introduced by some regulations recently published by the Department of Labor.
Article courtesy of Worklaw® Network firm Franczek Radelet (www.franczek.com).
Lawsuit seeks more than $1 million in back wages for approximately 4,500 workers nationwide
HOUSTON — The U.S. Department of Labor has announced the filing of a lawsuit against Houston-based Kinder Morgan Inc. and Kinder Morgan Energy Partners LP for their failure to pay more than $1 million in overtime compensation to approximately 4,500 current and former operators, technicians, maintenance workers, laborers and administrative nonexempt employees in violation of the Fair Labor Standards Act. The department’s suit asks the court to order the defendants to pay the full amount of back wages due, along with liquated damages, and to prohibit them from violating the law in the future.
Kinder Morgan Inc., owner of Kinder Morgan Energy Partners LP, is one of the largest pipeline transportation and energy storage companies in North America, with an enterprise value of $30 billion and approximately 8,000 employees nationwide. The defendants provide services to local oil refineries and clients such as Conoco/Philips, Exxon Mobil and Shell.
“There is no excuse for denying workers their rightful wages, and this lawsuit demonstrates that the department will use all available enforcement tools, including litigation and penalties, to ensure accountability and compliance with the law,” said Secretary of Labor Hilda L. Solis.
The complaint was filed against both companies in the U.S. District Court for the Southern District of Texas, Houston Division, after an investigation by the Labor Department’s Wage and Hour Division found systemic violations nationwide resulting from the employers’ failure to include certain bonuses in overtime pay calculations for these employees.
The FLSA requires that covered employees be paid at least the federal minimum wage of $7.25 for all hours worked, plus time and one-half their regular rates of pay, including commissions, bonuses and incentive pay, for hours worked beyond 40 per week. Employers must also maintain accurate time and payroll records.
Word to the wise: Make sure you know what bonuses belong in OT and which ones don’t! Here’s what the CFR’s say about it:
§ 778.208 Inclusion and exclusion of bonuses in computing the “regular rate.”
Section 7(e) of the Act requires the inclusion in the regular rate of all remuneration for employment except seven specified types of payments. Among these excludable payments are discretionary bonuses, gifts and payments in the nature of gifts on special occasions, contributions by the employer to certain welfare plans and payments made by the employer pursuant to certain profit-sharing, thrift and savings plans. These are discussed in §§778.211 through 778.214. Bonuses which do not qualify for exclusion from the regular rate as one of these types must be totaled in with other earnings to determine the regular rate on which overtime pay must be based. Bonus payments are payments made in addition to the regular earnings of an employee. For a discussion on the bonus form as an evasive bookkeeping device, see §§778.502 and 778.503.
§ 778.209 Method of inclusion of bonus in regular rate.
(a) General rules. Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation. No difficulty arises in computing overtime compensation if the bonus covers only one weekly pay period. The amount of the bonus is merely added to the other earnings of the employee (except statutory exclusions) and the total divided by total hours worked. Under many bonus plans, however, calculations of the bonus may necessarily be deferred over a period of time longer than a workweek. In such a case the employer may disregard the bonus in computing the regular hourly rate until such time as the amount of the bonus can be ascertained. Until that is done he may pay compensation for overtime at one and one-half times the hourly rate paid by the employee, exclusive of the bonus. When the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the period during which it may be said to have been earned. The employee must then receive an additional amount of compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week.
(b) Allocation of bonus where bonus earnings cannot be identified with particular workweeks. If it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week, some other reasonable and equitable method of allocation must be adopted. For example, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each week of the period to which the bonus relates, and if the facts support this assumption additional compensation for each overtime week of the period may be computed and paid in an amount equal to one-half of the average hourly increase in pay resulting from bonus allocated to the week, multiplied by the number of statutory overtime hours worked in that week. Or, if there are facts which make it inappropriate to assume equal bonus earnings for each workweek, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each hour of the pay period and the resultant hourly increase may be determined by dividing the total bonus by the number of hours worked by the employee during the period for which it is paid. The additional compensation due for the overtime workweeks in the period may then be computed by multiplying the total number of statutory overtime hours worked in each such workweek during the period by one-half this hourly increase.
§ 778.210 Percentage of total earnings as bonus.
In some instances the contract or plan for the payment of a bonus may also provide for the simultaneous payment of overtime compensation due on the bonus. For example, a contract made prior to the performance of services may provide for the payment of additional compensation in the way of a bonus at the rate of 10 percent of the employee’s straight-time earnings, and 10 percent of his overtime earnings. In such instances, of course, payments according to the contract will satisfy in full the overtime provisions of the Act and no recomputation will be required. This is not true, however, where this form of payment is used as a device to evade the overtime requirements of the Act rather than to provide actual overtime compensation, as described in §§778.502 and 778.503.
§ 778.211 Discretionary bonuses.
(a) Statutory provision. Section 7(e) (3)(a) of the Act provides that the regular rate shall not be deemed to include “sums paid in recognition of services performed during a given period if * * * (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly * * *”. Such sums may not, however, be credited toward overtime compensation due under the Act.
(b) Discretionary character of excluded bonus. In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a). Similarly, an employer who promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, is his discretion, the financial condition of the firm warrants such payments, has abandoned discretion with regard to the amount of the bonus though not with regard to the fact of payment. Such a bonus would not be excluded from the regular rate. On the other hand, if a bonus such as the one just described were paid without prior contract, promise or announcement and the decision as to the fact and amount of payment lay in the employer’s sole discretion, the bonus would be properly excluded from the regular rate.
(c) Promised bonuses not excluded. The bonus, to be excluded under section 7(e)(3)(a), must not be paid “pursuant to any prior contract, agreement, or promise.” For example, any bonus which is promised to employees upon hiring or which is the result of collective bargaining would not be excluded from the regular rate under this provision of the Act. Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made and the like are in this category. They must be included in the regular rate of pay.
§ 778.212 Gifts, Christmas and special occasion bonuses.
(a) Statutory provision. Section 7(e)(1) of the Act provides that the term “regular rate” shall not be deemed to include “sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency * * *”. Such sums may not, however, be credited toward overtime compensation due under the Act.
(b) Gift or similar payment. To qualify for exclusion under section 7(e)(1) the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment is geared to wages and hours during the bonus period and is no longer to be considered as in the nature of a gift. If the payment is so substantial that it can be assumed that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift. Obviously, if the bonus is paid pursuant to contract (so that the employee has a legal right to the payment and could bring suit to enforce it), it is not in the nature of a gift.
(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate under section 7(e)(1) even though it is paid with regularity so that the employees are led to expect it and even though the amounts paid to different employees or groups of employees vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency. A Christmas bonus paid (not pursuant to contract) in the amount of two weeks’ salary to all employees and an equal additional amount for each 5 years of service with the firm, for example, would be excludable from the regular rate under this category.