flsa compliance update

Gerard P. Panaro, Esq. Of Counsel Howe Hutton, Ltd.

Avoiding Pitfalls with FLSA Compliance and Employee Timekeeping

Anna M. Hofmeister, CPA Partner – Outsourced Services Tate & Tryon CPAs and Consultants

May 9, 2012

Agenda

9:00–10:15 am: Gerard P. Panaro, Esq., Of Counsel, Howe & Hutton

Overview of FLSA Requirements

Understanding Exempt vs Non-exempt employee classifications

The difference between employees and independent contractors

Common FLSA compliance issues for nonprofits 10:15–10:25 am: Break

10:25–11:20 am: Anna Hofmeister, CPA, Partner, Tate & Tryon

Best Practices in time and record keeping

Best practices in producing meaningful and accurate personnel cost information

11:20 pm–11:30 am: Questions?

Fair Labor Standards Act: Classes of exempt employees:

There are eight categories: 1. Executives (those who manage the business,

supervise 2 or more people) 2. Administrators (those who exercise independent

judgment and discretion on matters of importance and who work in a line of the business (e.g., finance, facilities management, food service, etc.))

3. Professionals (e.g., in-house counsel, CPA, doctor (but not bookkeepers; not nurses (generally)))

4. Computer programmers (two exemptions: 1) paid at least $455/wk or 2) paid at least $27.63/hr (the equivalent of about $57,500 a year))

Gerard P. Panaro Howe Hutton 1901 Pa Av NW DC 20006 301-518-9267 (cell) 202-466-7252 x 102 (o) [email protected]

Fair Labor Standards Act: Classes of exempt employees:

There are eight categories (cont’d): 5. “Creative” or artistic people (but not necessarily

graphics people or copyeditors or proofreaders) 6. “Highly compensated” employees (those who do

work such as the foregoing, but make at least $100,000 a year)

7. Teachers or instructional employees 8. Athletic coaches


Criteria for exemption as an executive employee:

1. Compensated on a salary basis at a rate of not less than $455 per week

2. Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;

3. Who customarily and regularly directs the work of two or more other employees; and

4. Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.


Criteria for exemption as an administrative employee

1. Compensated on a salary or fee basis at a rate of not less than $455 per week

2. Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and

3. Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance to the business. This means acting with minimal supervision and being able to commit the organization.


Exercise of discretion and independent judgment:

In general, the exercise of discretion and independent judgment involves:

1. The comparison and the evaluation of possible courses of conduct, and

2. Acting or making a decision after the various possibilities have been considered

3. The exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision.

“Matters of significance” refers to the level of importance or

consequence of the work performed. Gerard P. Panaro Howe Hutton 1901 Pa Av NW DC 20006 301-518-9267 (cell) 202-466-7252 x 102 (o) [email protected]

In evaluating whether the requisite discretion and independent judgment exists, the following job duties should be considered:

[01.] Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;

[02.] Whether the employee carries out major assignments in conducting the operations of the business;

[03.] Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business;

[04.] Whether the employee has authority to commit the employer in matters that have significant financial impact;

[05.] Whether the employee has authority to waive or deviate from established policies and procedures without prior approval;


In evaluating whether the requisite discretion and independent judgment exists, the following job duties should be considered:

[06.] Whether the employee has authority to negotiate and bind the company on significant matters;

[07.] Whether the employee provides consultation or expert advice to management;

[08.] Whether the employee is involved in planning long or short-term business objectives;

[09.] Whether the employee investigates and resolves matters of significance on behalf of management; and

[10.] Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.


What “discretion and independent judgment” does not mean:

Must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.

Does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work.

An employee who simply tabulates data is not exempt, even if labeled as a “statistician.”


What “discretion and independent judgment” does not mean:

“Matters of significance” do not mean merely that the employer will experience financial losses if the employee fails to perform the job properly.

Employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee's duties may cause serious financial loss to the employer.


Examples of exempt/nonexempt administrative jobs

Clerical duties are nonexempt:

Data entry for accounts payable and accounts receivable;

Modifying account names/attributes in accounting software;

Word processing;

Sending notices;

Receptionist duties;

Ordering routine office supplies

(DOL Field Operations Handbook).


Meeting planner/Events coordinator is exempt administrative position

There is no question that a meetings planner or events coordinator meets the criteria for exempt administrative status. According to the DOL Field Operations Handbook (Rev. 661, revised 11/29/2010), managers of convention and visitors service sales are exempt


Criteria for exemption as a professional employee:

1. Compensated on a salary or fee basis at a rate of not less than $455 per week

2. Whose primary duty is the performance of work: a. Requiring knowledge of an advanced type in a field

of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or

b. Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.


Criteria for exemption as a computer employee

1. Computer systems analysts, computer programmers, software engineers or other similarly skilled workers in the computer field

2. Compensated on a salary or fee basis at a rate of not less than $455 per week or

3. Compensated on an hourly basis at a rate not less than $27.63 an hour


Criteria for exemption as a computer employee

4. Primary duty consists of: a. The application of systems analysis techniques and

procedures, including consulting with users, to determine hardware, software or system functional specifications;

b. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

c. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

d. A combination of the aforementioned duties, the performance of which requires the same level of skills.


Computer network, internet and database administration is an example of work “directly related to management or general business operations” and will therefore qualify as an exempt administrative position


On the other hand, “information technology (IT) support specialists” is not an exempt position, as far as the DOL is concerned.

According to the DOL Field Operations Handbook: An IT Support Specialist (renamed from Help Desk Support Specialist)

who is responsible for the diagnosis of computer-related problems, conducts problem analysis and research, troubleshoots, resolves complex problems either in person or by using remote control software, and ensures timely closeout of trouble tickets is not exempt as an administrative or professional employee.


Case Study

Heffelfinger v. Electronic Data Systems Corp., 580 F.Supp.2d 933 (C.D.Cal., 2008)

Held: Information technology workers were exempt employees

Nature of work: The information technology workers worked at different customer locations

and were charged with writing code, programming, and administering databases or networks

Workers did more than “only installing and troubleshooting computer systems.” One employee was responsible for the design and integrity of database structures for a customer

Employee suggested various architectures and presented representations of network design which the customer accepted upon the employee's recommendations approximately 50 percent of the time

Second employee served as a technical team lead for a project which was highly visible, important, and critical to the customer's business operations.


Criteria for exemption as highly compensated employee

An employee with total annual compensation of at least $100,000 is deemed exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee


Employee vs. Independent contractor

FLSA uses an “economic reality” test.


Factors to be considered:

1. The degree of control exercised by the employer over the workers

2. The workers' opportunity for profit or loss and their investment in the business

3. The degree of skill and independent initiative required to perform the work

4. e permanence or duration of the working relationship

5. The extent to which the work is an integral part of the employer's business


Factors to be considered (cont’d):

6. No one factor standing alone is dispositive and courts are directed to look at the totality of the circumstances and consider any relevant evidence.”

7. “[T]he final and determinative question must be whether the total[ity] of the [circumstances considered] establishes the personnel are so dependent upon the business with which they are connected that they come within the protection of the FLSA or are sufficiently independent to lie outside its ambit.”


Opportunity for profit/loss. The appropriate inquiry has to do with relative investments, with control over larger aspects of the business, and with like forms of initiative.

Degree of skill/initiative. Does work require extensive skill, training, and expertise?

Permanence /duration of relationship. The more permanent the relationship, the more likely it is that a court will find a worker to be an employee.

Work integral part of business. Focus is on the work, not the individual person’s role. Courts consider this factor because independent contractor relationships often involve work that is not integral to the business—for example, if a pipe bursts and a plumber is hired to fix it, the plumber would typically be an independent contractor


Interns and the FLSA

The Test For Unpaid Interns: 1. The internship, even though it includes actual operation of the

facilities of the employer, is similar to training which would be given in an educational environment;

2. The internship experience is for the benefit of the intern; 3. The intern does not displace regular employees, but works

under close supervision of existing staff; 4. The employer that provides the training derives no immediate

advantage from the activities of the intern; and on occasion its operations may actually be impeded;

5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.


Additional explanation: factors for/against intern status (1)

1. In general, the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience (this often occurs where a college or university exercises oversight over the internship program and provides educational credit).



2. The more the internship provides the individual with skills that can be used in multiple employment settings, as opposed to skills particular to one employer’s operation, the more likely the intern would be viewed as receiving training.

3. Under these circumstances the intern does not perform the routine work of the business on a regular and recurring basis, and the business is not dependent upon the work of the intern.



4. On the other hand, if the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.

5. If an employer uses interns as substitutes for regular workers or to augment its existing workforce during specific time periods, these interns should be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.



6. If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled compensation under the FLSA.

7. Conversely, if the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bona fide education experience.



8. On the other hand, if the intern receives the same level of supervision as the employer’s regular workforce, this would suggest an employment relationship, rather than training.


WHD Advisory Opinion Letter on Volunteers

9. The internship should be of a fixed duration, established prior to the outset of the internship.

10. Further, unpaid internships generally should not be used by the employer as a trial period for individuals seeking employment at the conclusion of the internship period.

11. If an intern is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA.

U.S. Department of Labor/Wage and Hour Division (April 2012)

Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act


WHD Advisory Opinion Letter On Volunteers

1. Person is volunteer provided the services are not the same type of service the employee is employed to perform and take place outside of the employee’s normal working hours.

2. The FLSA recognizes the generosity and public benefits of volunteering and allows individuals to freely volunteer time to religious, charitable, civic, humanitarian, or similar non-profit organizations as a public service.

3. Such a person will ordinarily not be considered an employee for FLSA purposes if the individual volunteers for such organizations without contemplation or receipt of compensation.


WHD Advisory Opinion Letter On Volunteers

4. Paid employees may not volunteer to perform the same type of services for their employer that they are normally employed to perform.

5. The employee must also be a bona fide volunteer who performs the services for civic, charitable, or humanitarian reasons without coercion or undue pressure.

Source: FLSA2006-18 (June 2, 2006)


Stipends for volunteers:

1. A “volunteer” may receive “no compensation,” but may be paid “expenses, reasonable benefits, or a nominal fee.”

2. A fee would not be considered nominal if it is, in fact, a substitute for compensation or tied to productivity.

3. Generally, a key factor in determining if a payment is a “substitute for compensation” or “tied to productivity” is “whether the amount of the fee varies as the particular individual spends more or less time engaged in the volunteer activities.”

4. If the amount varies, it may be indicative of a substitute for compensation or tied to productivity and therefore not nominal.

5. Generally an amount not to exceed 20 percent of the total compensation that the employer would pay someone for performing comparable services would be deemed nominal.

Source:http://www.dol.gov/whd/opinion/FLSA/2008/2008_12_18_16_FLSA.pdf


Common FLSA compliance issues for nonprofits

Misclassification of employees as exempt

Misclassification of workers as independent contractors

Misclassification of workers as “interns” or “volunteers”

Use of “comp time”

Improper timekeeping; accounting for overtime


Recordkeeping requirements for nonexempt employees (1):

1. Name

2. Home address, including zip code

3. Date of birth, if under 19

4. Sex and occupation in which employed

5. Time of day and day of week on which the employee's workweek begins

6. Regular hourly rate of pay for any workweek in which overtime compensation is due

7. Explain basis of pay by indicating the monetary amount paid on a per hour, per day, per week, per piece, commission on sales, or other basis



8. The amount and nature of each payment which is excluded from the “regular rate”

9. Hours worked each workday and total hours worked each workweek

10. Total daily or weekly straight-time earnings or wages due for hours worked during the workday or workweek, exclusive of premium overtime compensation

11. Total premium pay for overtime hours 12. Total additions to or deductions from wages paid each pay

period including employee purchase orders or wage assignments

13. The dates, amounts, and nature of the items which make up the total additions and deductions


14. Total wages paid each pay period 15. Date of payment and the pay period covered by payment 16. Record and preserve, as an entry on the pay records, the

amount of retroactive payment of wages/compensation paid under supervision of WHD to each employee, the period covered by such payment, and the date of payment

17. Prepare a report of each such payment 18. Preserve a copy as part of the records 19. Deliver a copy to the employee 20. File the original with the WHD within 10 days




21. With respect to employees working on fixed schedules, an employer may maintain records showing instead of the hours worked each day and each workweek, the schedule of daily and weekly hours the employee normally works

22. In weeks in which an employee adheres to this schedule, indicates by check mark, statement or other method that such hours were in fact actually worked by him

23. In weeks in which more or less than the scheduled hours are worked, shows that exact number of hours worked each day and each week

Source: 29 CFR §516.2


Recordkeeping requirements for exempt employees (1):

1. Name 2. Home address, including zip code 3. Date of birth, if under 19 4. Sex and occupation in which employed 5. Time of day and day of week on which the employee's workweek

begins 6. Total wages paid each pay period 7. Date of payment and the pay period covered by payment 8. The basis on which wages are paid in sufficient detail to permit

calculation for each pay period of the employee's total remuneration for employment including fringe benefits and prerequisites

Source: 29 CFR §516.3 Gerard P. Panaro Howe Hutton 1901 Pa Av NW DC 20006 301-518-9267 (cell) 202-466-7252 x 102 (o) [email protected]

Records to be kept for three years:

Payroll records.

Certificates, agreements, plans, notices, etc. (collective bargaining agreements, plans, trusts, employment contracts, individual contracts, written agreements or memoranda summarizing the terms of oral agreements or understandings,

Sales and purchase records.



Records to be kept for two years:

Basic employment and earnings records. All basic time and earning cards or sheets

Wage rate tables

Order, shipping, and billing records

Source: 29 CFR § 516.6


Where records show insubstantial or insignificant periods of time

1. In recording working time under the Act, insubstantial or insignificant periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded

2. This rule applies only where there are uncertain and indefinite periods of time involved of a few seconds or minutes duration, and where the failure to count such time is due to considerations justified by industrial realities

3. An employer may not arbitrarily fail to count as hours worked any part, however small, of the employee's fixed or regular working time or practically ascertainable period of time he is regularly required to spend on duties assigned to him

4. 10 minutes a day is not de minimis Source: 29 CFR §785.47


Use of time clocks (1)

Time clocks are not required

Employees who voluntarily come in before their regular starting time or remain after their closing time, do not have to be paid for such periods provided, of course, that they do not engage in any work.

Their early or late clock punching may be disregarded

Minor differences between the clock records and actual hours worked cannot ordinarily be avoided, but major discrepancies should be discouraged since they raise a doubt as to the accuracy of the records of the hours actually worked


Use of time clocks (2)

1. “Rounding” practices. There has been the practice for many years of recording the employees' starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour

2. For enforcement purposes this practice of computing working time will be accepted

3. But it must not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked



Speaker Biography

Gerard P. Panaro, Esq. is of counsel to Howe & Hutton, Ltd. in its Washington, D.C. office. He has over 30 years of experience in the practice of employment law and representation of nonprofit organizations in the District of Columbia and Maryland. Jerry advises tax-exempt organizations and small businesses and negotiates on their behalf on matters related to employment, corporate and tax matters, antitrust and administrative law. He is the author of Employment Law Manual (1998), and writes a newsletter on employment law for Aspen/Panel Press. He also does writing, training and seminars on employment law matters for clients and has done webinars for BankersonLine.com.

Gerard P. Panaro, Esq. Of Counsel

Howe Hutton, Ltd. Washington DC - Chicago IL

- St. Louis MO

Mobile: 301-518-9267 Office: 202-466-7252 x 102

E-mail: [email protected] www.howehutton.com

Overview:

Accounting requirements

Reliable financial information

Effective & efficient internal controls

Grant requirements

What to look for in timekeeping & payroll systems

Accounting Requirements

Reasonable

Consistent

Timesheets

Estimates

Reliable Financial Information

Labor is often the largest expenditure

Daily time recording

Signed by the employees and approved by their supervisors

Payroll recorded based on timesheets

Benefits recorded based on personnel

Well documented and communicated procedures

Effective Internal Control

Following should occur and have confidence of staff that it is in operation:

Time is tracked accurately

Transactions are authorized and approved

Segregate the timekeeping, payroll preparation, payroll approval, and payment functions

Information is properly and promptly retained

Applicable risks are weighed to ensure errors and omissions are minimized

Effective Internal Control (continued)

Meet needs of users

Monitor the results/outputs for accuracy

Clearly written and communicated policies and procedures setting forth responsibilities

Applying available technology and concepts to achieve efficiency and effectiveness

Grant Requirements

Acceptance of grant creates legal obligation

OMB Circulars

Grant agreement

Grant Requirements (continued)

Overview

Segregate federal grant/contract program costs

Support all payroll and fringe benefit costs

Consistent application

Ensure no expenses claimed were misused

Administrative or financial capability to manage grant/contract funds

Awareness to document labor expenditures


Personnel Activity Reports: Must reflect after-the-fact determination of true activity

Must account for total activity for which employee is compensated

Must be signed by the employee and responsible supervisor

Approvals must be visual with an audit trail

Must be prepared daily and coincide with one or more pay periods

Must reconcile to dollars charged to grant/contract


When Audited

Substantiate federal grant/contract expenditures.

Appropriate timekeeping procedures are in place

Procedures are documented

Appropriate accounting and payroll tracking system in accordance with government agency directives are in place

Efficient Internal Control

Weigh cost vs. benefit of processes and details required

Integrated timesheet, payroll and accounting systems

Reminders

Programmed approval process

What to Look for in a Tracking System

Compliance with applicable legal requirements

Compliance with grant requirements

Reliable financial information

Be effective

Be efficient

What to Look for in a Tracking System (cont.)

Multiple approvers

Lock out codes

Deactivate codes

Adjust rates based on hours worked

Export capabilities

Syncing to other systems

What to Look for in a Tracking System (cont.)

Remote access

Reminders

Reports

Back-ups

Questions?

Speaker Biography

Anna. M. Hofmeister, CPA is the partner in charge of Tate and Tryon’s Outsourced Accounting Services department and has more than 20 years of experience servicing the accounting, consulting, audit, and tax needs of the nonprofit industry. She is responsible for overseeing all phases of our outsourced accounting engagements. In her role as an interim or permanent CFO, Ms. Hofmeister frequently presents to finance committees and boards of directors on topics such as financial results, key performance indicators, improving financial performance, cash flow projections, cost allocations, U.S. and foreign operations and unrelated business income. Some of the most notable clients she oversees include the Alexander Graham Bell Association for the Deaf and Hard of Hearing, American Association of Poison Control Centers, Global Health Council, and National Court Reporters Association.

Anna M. Hofmeister, CPA Partner - Outsourced Services Tate & Tryon CPAs and Consultants Direct: 202-419-5103 E-mail: [email protected] www.tatetryon.com

mailto:[email protected]�

http://www.tatetryon.com/�

flsa compliance update

Business