U.S. Department Of Labor Issues A Series Of Wage-And-Hour Opinion Letters

In response to requests from the public, the U.S. Department of Labor ("DOL") recently published opinion letters addressing several wage-and-hour issues under the Fair Labor Standards Act ("FLSA"). These opinion letters offer insights into DOL’s interpretation of the "white collar exemption" regulations that the agency revised last year and address situations in which employers must include bonuses and incentive pay in their calculation of overtime compensation. Discussed in more detail below, these opinion letters can help employers avoid costly mistakes in structuring their payroll practices.

To qualify as an exempt executive, administrative, or professional employee under the FLSA, an employee ordinarily must be paid on a salary basis. This means that the employee must receive the same predetermined amount for each week worked, regardless of the quantity or quality of work performed during the week. Although DOL regulations permit employers to make deductions from exempt employees’ salaries for full-day absences in certain circumstances, it has long been the rule that employers may not reduce an exempt salaried employee’s pay for partial-day absences, unless the absences qualify as unpaid leave under the federal Family and Medical Leave Act. However, under the "white collar exemption" regulations that were in effect until August 2004, DOL and the courts permitted employers to deduct accrued leave from a vacation, sick leave, or paid-time-off benefit plan for the time a salaried exempt employee was absent from work, even when the absence was for only part of a workday. In a recent opinion letter, DOL confirmed that the 2004 revisions to the "white collar exemption" regulations do not change this established rule. In re-affirming the rule, DOL reasoned that a reduction of the exempt employee’s bank of accrued paid leave is not a deduction from the employee’s salary, as the employee continues to receive the same predetermined amount of pay for the week in which the partial-day absence occurs. DOL warned, however, that when an employee exhausts all of his or her accrued paid leave, the employer may not then begin deducting from the employee’s salary for partial-day absences. The general rule against such salary deductions remains in effect.

In an opinion letter interpreting the recently revised "white collar exemption" regulations, DOL reaffirmed its longstanding position that paralegals and legal assistants ordinarily do not qualify for the "professional employee" exemption and are eligible for overtime pay. To qualify as an exempt "learned professional," an employee must perform work requiring advanced knowledge "customarily acquired by a prolonged course of specialized intellectual instruction." In the opinion letter, DOL noted that while many paralegals possess four-year advanced degrees, most paralegal programs are two-year associate degree programs. DOL observed there was no evidence that a four-year specialized paralegal degree is a standard prerequisite for entry into the field. However, DOL noted that the "learned professional" exemption is available for paralegals who possess advanced specialized degrees in other professional fields and who apply their advanced knowledge of that field in their work. For example, an engineer hired as a paralegal to provide expert advice on patent matters may qualify for the exemption.

To qualify for the FLSA’s exemption for administrative employees, an employee’s primary duty must involve the exercise of discretion and independent judgment. Although the revised "white collar exemption" regulations state that insurance claims adjusters "generally meet the duties requirement for the administrative exemption," DOL concluded in a recent opinion letter that some claims adjusters may not qualify for the exemption. The claims adjusters DOL considered in the opinion letter had no authority to negotiate or settle disputed claims and were required to obtain approval before deviating from specific guidelines. The vast majority of their work consisted of telephone interviews conducted from a list of prepared questions. DOL concluded that these adjusters were not exercising the discretion and independent judgment necessary to qualify under the FLSA’s administrative exemption.

Under the FLSA, overtime pay for all hours worked in excess of forty in a workweek is calculated at a rate of one-and-a-half times the employee’s regular hourly rate. The regular rate, however, is not necessarily equivalent to an employee’s hourly wage or the hourly equivalent of an employee’s salary. In a series of recent opinion letters addressing overtime compensation, DOL reaffirmed the general principle that all remuneration for employment, including nondiscretionary bonuses and incentive pay, must be factored into the calculation of the employees’ regular rate of pay for the purpose of determining overtime compensation. Discretionary bonuses that are paid without prior promise or announcement and that are determined at the end of a pay period rather than the beginning, however, may be excluded from overtime calculations, as may certain other payments that the FLSA expressly designates as excludable from the regular rate of pay. DOL’s responses to the specific factual inquiries discussed below illustrate how these principles should be applied.

In the first instance, DOL considered an employer who paid its employees $9 per hour, but offered a $3 per hour bonus if the employees’ team met its production goals. The employer did not include the bonus as part of the employees’ regular rate of pay calculation for overtime purposes. Instead, the bonus was simply paid for every hour worked, including overtime hours. DOL concluded that this arrangement resulted in an underpayment of overtime because the nondiscretionary bonus was not included as part of the employees’ regular rate.

In a separate opinion letter, DOL stated that a "piece rate" bonus must also be included in overtime calculations. In this instance, the employer paid employees either a piece rate for installation of security systems or a guaranteed $6 per hour, whichever was higher. In either case, overtime was calculated based on the $6 rate, but if the piece rate was higher, the employer would provide an additional bonus made up of the excess created by the piece rate. DOL found this method to be incompatible with the FLSA’s overtime regulations, stating that the employer must include the amount of the piece-rate bonus in the employees’ regular rate of pay for the purpose of calculating overtime pay.

Finally, DOL found that a lump-sum premium paid for work during overtime hours did not comply with the FLSA. In this instance, an employer guaranteed delivery employees a $600-per-week salary and offered a bonus to employees who worked overtime and made more deliveries. DOL stated that this nondiscretionary bonus must be included in the employees’ regular rate of pay for overtime calculations.

The recent spate of DOL opinion letters interpreting the FLSA provide helpful guidance in applying the revised "white collar exemption" regulations and remind employers to exercise care in calculating overtime pay for nonexempt employees when a bonus or incentive pay is part of the compensation scheme. Misclassifying nonexempt employees as exempt, making improper deductions from the salaries of exempt employees, and failing to include nondiscretionary bonuses and incentive pay in the calculation of a nonexempt employee’s regular rate of pay can all lead to claims for unpaid overtime, liquidated damages, and attorney’s fees. Although DOL opinion letters are not binding on the courts that hear such claims, courts typically treat opinion letters as persuasive authority, and the DOL’s interpretation of the FLSA is given substantial weight. Therefore, in the absence of contrary judiciary authority, employers would be wise to adhere to the principles announced in these opinion letters in administering their compensation programs.