Webinar

Worker Misclassification: What Every Plumbing, Heating Cooling

Contractor Needs to Know

Wednesday, June 9, 2010 3:00 – 4:00 p.m. ET

Conducted by

Bill Ford

P.O. Box 1848 Bristol, Tennessee 37621

(423) 764-4127 (423) 764-5869 (Fax)

web site: www.sescomgt.com e-mail: sesco@sescomgt.com

©SESCO Management Consultants

Table of Contents Introduction ....................................................................................................................................1 White-Collar Exemptions • The “Executive” Salary Classification Tests .............................................................................2 • The “Administrative” Salary Classification Tests .....................................................................2 • The “Learned Professional” Salary Classification Tests ...........................................................2 • The “Creative Professional” Salary Classification Tests ...........................................................3 • The “Computer Employee” Salary Classification Tests ............................................................3 • The “Outside Sales” Salary Classification Tests .......................................................................4 • Highly-Compensated Employees ...............................................................................................4 • Technical Requirements of the “Guaranteed Salary” for White-Collar Exempt

Classifications ............................................................................................................................5 • Deductions from the Guaranteed Salary ....................................................................................5 Partial Exemptions.........................................................................................................................6 • Motor Carrier 13(b)(1) ...............................................................................................................6 • Retail Sales 7(i) ..........................................................................................................................9 • Important Notice ......................................................................................................................10 • Commissions Defined for Purposes of Implementing the Retail Sales 7(i)

Exemption ................................................................................................................................10 Common Wage and Hour Violations • Trap #1 – Misclassifying Non-Exempt Employees As Exempt ..............................................12 • Trap #2 – Not Knowing What Is And Isn’t Considered “Work” ............................................13 • Trap #3 – Not Paying For Off-The-Clock Working Hours .....................................................14 • Trap #4 – Not Calculating Employees’ Regular Rates Properly .............................................15 • Trap #5 – Taking Improper Pay Deductions............................................................................16 • Trap #6 – Improper or Incomplete Recordkeeping ..................................................................17 • Trap #7 – Misclassification of Independent Contractors .........................................................18 QSC/SESCO Human Resource Program Wage and Hour Opinion Letter

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Introduction

There are few Federal regulations which have as profound an impact on business operations as the Fair Labor Standards Act. Originally enacted in 1937, more than 85% of all non-supervisory employees in America are now covered by the FLSA which has been amended frequently by Congress after the first Federal minimum wage was established at 25 cents an hour. This minimum wage is now at $5.85 an hour. The federal minimum wage will increase to $6.55 an hour, effective July 24, 2008 and then again to $7.25, effective July 24, 2009. In addition to trying to keep pace with the statutory amendments, employers have had to follow a multitude of interpretative bulletins issued by the Administrator of the Labor Department’s Wage-Hour Division. As if that were not enough, the courts have required employers to adjust to a multitude of precedent-setting decisions, one after another. However, if one puts himself into the “shoes” of the Wage-Hour Division and understands how they “think compliance”, a large measure of vulnerability can be eliminated from personnel compensation practices. The process may involve some innovations to avoid stifling employees’ incentives because of rigid standards.

The Application of Minimum Wage and Overtime Compensation

To help exemplify application of coverage, consider the following: All employees of must: 1. Record hours worked on a daily basis, 2. Receive minimum wage, and 3. Receive overtime for hours worked in excess of 40 hours per week,

UNLESS OTHERWISE EXEMPT. The following are the white-collar exemptions and if all tests are met, including the guaranteed salary tests, then your organization does not have to have the employee maintain a time record or pay overtime.

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White-Collar Exemptions

The “Executive” Salary Classification Tests To qualify for the “Executive” employee exemption, all of the following tests must be met: 1. The employee must be compensated on a salary basis at a rate not less than $455 per week;

2. The employee’s primary duty must be managing the enterprise or managing a customarily

recognized department or subdivision of the enterprise;

3. The employee must customarily and regularly direct the work of at least two (2) or more other full-time employees or their equivalent; and

4. The employee must have the authority to hire or fire employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts, with the major emphasis on the character of the employee’s job as a whole.

The “Administrative” Salary Classification Tests To qualify for the “Administrative” employee exemption, all of the following tests must be met: 1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per

week;

2. The employee’s primary duty must be 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. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The “Learned Professional” Salary Classification Tests To qualify for the “Learned Professional” employee exemption, all of the following tests must be met: 1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per

week;

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2. The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

3. The advanced knowledge must be in a field of science or learning; and

4. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

The “Creative Professional” Salary Exemption Tests To qualify for the “Creative Professional” employee exemption, the following tests must be met: 1. The employee must be compensated on a salary or fee basis at a rate of not less than $455 per

week.*

2. The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting, and the graphic arts.

*The minimum salary requirement does not apply to bona fide teachers. Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. The “Computer Employee” Salary Classification Tests To qualify for the “Computer Employee” exemption, the following tests must be met: 1. The employee must be compensated either on a salary or fee basis (as defined in the

regulations) at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;

2. The employee must be employed as a computer systems analyst, computer programmer,

software engineer or other similarly skilled worker in the computer field performing the duties described below;

3. The employee’s primary duty must consist of:

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

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• 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;

• The design, documentation, testing, creation or modification of computer programs

related to machine operating systems; or

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

The “Outside Salesperson” Salary Classification Tests The Wage-Hour Division defines the classification of “Outside Salesperson” as any employee primarily hired in the capacity of an outside sales representative and who performs the following job duties and responsibilities on a regular, recurring basis: • Employed for the purpose of and who is customarily away from the place or places of

business in making sales or obtaining orders or contracts for services, or for the use of facilities for which a consideration is paid by the customer.

It is the general enforcement policy of the Wage-Hour Division that so-called “in-house salespeople” who are engaged primarily in taking orders by telephone on a daily basis are not eligible for the “outside salespersons” salary classification free from the minimum wage and overtime requirements. There is no minimum salary required for personnel meeting the “outside salesperson” accounting tests. Highly-Compensated Employees The regulations contain a special rule for “highly-compensated” workers who are paid total annual compensation of $100,000 or more. A highly-compensated employee is deemed exempt under Section 13(a)(17) if:

1. The employee earns total annual compensation of $100,000 or more, which includes at least $455 per week paid on a guaranteed salary basis;

2. The employee’s primary duty includes performing office or non-manual work; and

3. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

The $100,000 in salary must be guaranteed and there can be no portion “at risk” such as a commission or incentive pay plan.

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Technical Requirements Of The "Guaranteed Salary" For White-Collar Exempt Classifications A week is the shortest period over which the minimum guaranteed salary payments can be made in deciding whether or not the minimum wage salary test has been met. However, the salary requirements for “Executive”, “Administrative”, “Computer Related”, “Professional” and “Outside Sales” salaried employees can be paid into equivalent amounts for periods longer than a week as outlined in the table below.

Paying employees more frequently than every week is also permitted by the Wage-Hour Division. Executive and administrative employees may be paid on a daily shift basis so long as the arrangement specifies that not less than the required weekly amount will be paid in any week in which the employee performs any work. Weekly

Guarantee Bi-Weekly Guarantee

Semi-Monthly

Guarantee

Monthly Guarantee

Executive

$455

$910

$985.83

$1,971.66

Administrative

$455

$910

$985.83

$1,971.66

Computer

$455

$910

$985.83

$1,971.66

OR $27.63 per hour or more, if paid hourly. Professional

$455

$910

$985.83

$1,971.66

Outside Sales

No minimum salary requirement.

So far as deductions from these guaranteed wages, the general rule is that those employees who meet the salary and duties tests for these white-collar exemption classifications must receive full salary in any week they do any work without regard to the number of days or hours worked. Deductions may not be made for absences caused by the employer if the employee is ready, willing, and able to work, or for absences caused by jury duty, attendance as a witness or temporary military leave, during the specific workweek. You may offset amounts received by the employee as jury or witness fees or military pay for a particular week against the salary due for the lost days in that week. Of course, no pay is due for weeks in which no work is performed. Deductions from the Guaranteed Salary • Deductions may be made when an employee absents him or herself from work for a day or

more for personal reasons, other than sickness or accident. Thus, if an employee is absent for a day or longer to handle personal affairs, his exempt status will not be affected if deductions are made from the salary for such absences.

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• Deductions may also be made for absences of a day or more occasioned by sickness or disability (including industrial accidents) if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by sickness and disability. Thus, if the employer’s particular plan, policy, or practice provides compensation for absences, deductions for absences a day or longer because of sickness or disability may be made before an employee has qualified under such plan or after the individual has exhausted his leave allowances thereunder.

• To offset amounts employees receive as jury or witness fees, or for military pay.

• Deductions from pay may be made for penalties imposed in good faith for infraction of safety rules of major significance.

• Deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one (1) or more full days for infractions of workplace conduct rules.

• Unpaid leave under the Family and Medical Leave Act may be deducted in full day, partial day or hourly increments according to policy.

• Finally, deductions may be made in initial and terminal weeks of employment. In such weeks, the payment of a proportionate part of the employee’s salary for the time actually worked will meet the salary requirements.

Partial Exemptions The regulations also provide for “partial” exemptions which are exemptions from overtime only. The following exemptions could be applied to your organization if all requirements are met. However, under the partial exemption tests, employees still must record their true and accurate hours of work on a daily basis and receive at least minimum wage for all hours worked for the Motor Carrier Act or time and one-half (1½) minimum wage for all hours worked for the Retail Sales exemption. Motor Carrier 13(b)(1) The Motor Carrier Exemption appears to be a rather straightforward, “partial” exemption from overtime. However, when one begins to challenge position responsibilities that may meet the exemption, one quickly realizes that the partial exemption can be extremely complicated to apply. There are two (2) classes of employers that can claim the benefit of the Motor Carrier Exemption:

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1. “An employer which is an operator coming within the purview of the Motor Carrier Act. This is generally limited to private “for hire” carriers of property and common and contract “for hire” carriers of both passengers and property; or,

2. An employer that places goods in interstate or foreign commerce via a vehicle with a GVWR of 10,001 pounds or more.”

These two (2) classes of employers can claim the benefit under the Motor Carrier 13(b)(1) partial exemption only for those employees who’s duties directly affect the safety of operation of motor vehicles used in interstate or foreign commerce upon public highways. These employees include drivers, helpers, loaders, and mechanics. Please consider the following description of each: • Driver – one who operates a vehicle in interstate commerce for the purpose of delivering

goods or services. This does not include warehousemen driving vehicles within the warehouse or on company property. The driver must operate the vehicle on public highways.

• Driver’s Helper – An employee who rides “shotgun” and assists the driver in both driving

duties as well as in the safe operation of the vehicle. The driver’s helper may also assist in backing the vehicle or otherwise maneuvering the vehicle. A driver’s helper is NOT someone who is merely along for the ride in order to get from point “a” to point “b”, nor is it an individual who rides along only to help the driver unload the vehicle. He must affect the safe operation of the vehicle.

• Loader – Employees who place and position goods (or direct the placing and positioning of

goods) onto a truck, which then will be delivered interstate. To affect the safe operation of the vehicle, the loader must be in a position of placing goods onto a truck in such a way that the load is distributed throughout the vehicle to ensure its safe operation. Or, the load must also be “tied down” or otherwise secured to ensure the safe operation of the vehicle. Such employees need not devote all or even the majority of their time to safety-affecting activities in order to be covered by the Motor Carrier Act. Thus, it is enough that a loader devotes a “substantial part” of his time to activities affecting safety of operation. On the other hand, the mere handling of freight at a terminal, before or after loading, or even the placing of certain articles of freight on a motor carrier truck may be so trivial, casual or occasional part of an employee’s activities, that his activities will not come within the kind of “loading” which is described by the Act and which, in the Secretary of Transportation’s opinion, doesn’t affect safety of operation. This is known as the de minimus exemption from coverage.

The de minimus exemption from coverage would include items that are loaded on a vehicle in such a way that there is no judgment involved in loading. For example, an employee loads a vehicle onto a truck. The vehicle being loaded is guided by rails (no judgment on positioning) and is automatically locked into place at a predetermined location in the truck by

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chocks. This would also include employees who are specifically told by a supervisor how and where to place items on a vehicle. The supervisor would be exempt from overtime but the employee actually placing the items on the vehicle would not, because he had no judgment in loading the vehicle and was only acting a conduit for the supervisor. Another de minimus category includes items that when loaded are so light in weight that there is no way for them to be loaded as to affect the safety of the vehicle. Such items include boxes of shoes and luggage.

• Mechanic – Mechanic must be “wrench-in-hand” and must perform duties that affect the

safety of the vehicle. Examples are repairing motors, steering apparatus, transmissions and differentials, checking brakes, checking and adjusting horns and lights, checking and repairing springs, checking, inflating and replacing tires, checking and repairing tyrods, etc. All these activities are considered engaged in activities that will affect the safe operation of the vehicle. Duties such as checking oil and gas, greasing, repairing bodies, washing or painting vehicles are not involved in activities affecting the safe operation of motor vehicles.

When goods are transported interstate and an individual performs one or more of these duties as a regular part of their job, then the individual is exempt from overtime for all workweeks, regardless whether occasionally there may be workweeks in which no work is performed that affects the safety of the vehicle. For example, a driver attends a weeklong training session and performs no job that affects the safety of a vehicle upon a highway that week. He would still be exempt from overtime in the week he attended the training session. However, if an employee performs work regularly that does not affect the safety of a vehicle or regularly performs de minimus work such as a warehouse worker who usually does not drive on the public highways, then the 13(b)(1) exemption is a week-to-week exemption – meaning if an employer wishes to take advantage of the exemption, the employee’s responsibilities must be “tested” every week in which an exemption is claimed to ensure that week is spent doing the work described above.

The 13(b)(1) exemption only applies to overtime; it does not apply to recordkeeping or minimum wage requirements. All employees still must maintain an accurate time record of hours worked on a daily basis and receive at least minimum wage for all hours worked. The application of Section 13(b)(1) becomes more complicated when you analyze what is meant by “interstate commerce” as defined by the Act. The Department of Labor, Wage Hour Division will extend this partial exemption to drivers, driver’s helpers, loaders and mechanics affecting the safety of the vehicle transporting goods and services intrastate as well. The Fair Labor Standards Act extends this exemption to those persons affecting the safety of the vehicle who are transporting goods and services interstate or intrastate as long as the goods are part of a “practical continuity of movement” across state lines from the point of origin to the point of destination. For example, if a wholesale distributor in the state of Florida orders a special case of product normally not in stock for a customer and the product comes from Georgia, then the product is continuing in interstate commerce. Therefore, the individual who delivers this product to the

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ultimate retail location is considered in interstate commerce and therefore, is affecting the safety of the vehicle by delivering the product. The individual who loads the product may or may not be affecting the safety of the vehicle depending on how the product is loaded. Once the product reaches the “final destination” or the retailer, then commerce stops and the availability of exemption ends. Any item purchased in bulk and subsequently warehoused, such as soft drinks, will stop being considered in interstate commerce once they reach the warehouse if the wholesaler has “no fixed and persisting” transportation intent beyond the storage point at the time of shipment. Orders filled and delivered to retailers or restaurants from these warehoused items would not be considered to be in interstate commerce. Other examples would be a special order of parts at a car dealership for a customer’s vehicle or goods shipped by FedEx sent to a central warehouse and earmarked to a particular customer to be delivered by an employer’s driver. As one can see, the exemption becomes rather complicated when considering if the goods are still in interstate commerce, although the company and its employees (i.e., drivers, driver’s helpers, loaders and mechanics) are not themselves delivering across state lines. Interstate commerce can also involve a return of product back across state lines, such as a driver picking up product and transporting product to be delivered to another state for “re-work” or repair. The driver picking up and delivering this product would be considered involved in interstate commerce. In conclusion, a thorough audit of the application of the 13(b)(1) exemption should take place to determine whether or not this exemption is practical for use in the organization. This is only a brief overview of the Motor Carrier Exemption. If you have any questions, feel free to contact your consultant or SESCO.

Retail Sales 7(i)

Section 7(i) of the Fair Labor Standards Act makes it possible for commissions to be paid employees and overtime is not required by law. However, employers have to be considered a retail or service establishment and: 1. The employee must average (regular rate of pay) in excess of one and one-half (1½) times

the statutory minimum hourly wage applicable at that time, and 2. More than one-half (50%) of the employee’s compensation for a representative period of

time, not less than one (1) month, represent the commissions. Employees still must maintain an accurate record of hours worked on a daily basis.

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Important Notice: Special Guidance to Service Contractors in the Application of the Retail Sales 7(i) To qualify for the Retail Sales 7(i) exemption, your organization must be considered “retail.” To be considered retail, 50% or more of your sales must be made within the state that you are operating and 75% of your sales must be made to the ultimate customer (retail). Furthermore, the concept of retail for service contractors is determined by defining service and repair vs. contracting and construction. Service and repair is considered retail sales as goods are delivered for purchases at stipulated prices of items such as certain plumbing and heating equipment, electrical fixtures and supplies for residential installation. Installation which is incidental to a retail sale (as distinguished from a construction or reconstruction contract to do a building’s alteration, a repair job or at a contract price for materials and labor required) is considered an exempt activity. By way of example, if the installation for the customer of such goods sold to him at retail requires only minor carpentery, plumbing or electrical work (as may be the case for oridnary plumbing fixtures, or household items such as stoves, garbage disposals, fans, window air conditioners) would normally be considered incidental to the retail sale of the goods involved. Thus, general service and repair sales are considered retail and if at least 75% of your gross sales are “retail,” you can apply the Retail Sales 7(i) exemption. Under this method, you can place Technicians on a flat rate system or other “commission” or “incentive” systems and avoid overtime. Caution should be exercised to the practical application of the Retail Sales exemption and whether or not your organization is considered retail. Those organizations in which more than 75% of their gross sales are from construction, remodeling, major installation or other “contract” work would not be considered a retail establishment and therefore can not apply the Retail Sales 7(i) exemption. Examples of such non-retail sales include: • Installation of bathrooms, kitchens or new construction or remodel construction. • Service and/or repair is provided under a previously established contract for service. • Services are provided to contractors or subcontractors and not to the ultimate consumer such

as residential customers. • Services or goods are available for resale through other organizations. Commissions Defined for Purposes of Implementing the Retail Sales 7(i) Exemption The following are examples of what constitutes commission compensation and what does not for the purpose of applying the Retail Sales 7(i) exemption:

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What is a Commission? • Salary plus commission: Under this method of compensation the employee receives a

commission on all sales in addition to a base salary. • Quota bonus: This method of compensation is similar to above except that the commission

payment is paid on sales over and above a predetermined sales quota. • Straight commission without advances: Under this method of compensation the employee

is paid a flat percentage on each dollar of sales he makes. • Straight commission with “advances,” “guarantees,” or “draws.” This method of

compensation is similar to above except that the employee is paid a fixed weekly, biweekly, semimonthly, or monthly “advance,” “guarantee,” or “draw.” At periodic intervals a settlement is made at which time the payments already made are supplemented by any additional amount by which his commission earnings exceed the amounts previously paid.

• Some service companies compensate technicians on the basis of commissions which are

based on a percentage of the estimated labor charges to repair or replace faulty equipment. Such payments “represent commissions on goods or services” for purposes of set 7(i). The term “commissions or services” includes commissions measured by value as well as by sale of services and the value of such service is ultimately reflected in the price equipment handled. This partial exemption is available to any retail organization and position.

What is not a Commission? • No bona fide commission plan existed where the only true commission portion of the salaries

of an employer's service station managers and assistant managers were those amounts over a predetermined threshold level, and such amounts were not more than half of the employees' compensation.

• An employer was not entitled to claim an exception to FLSA's overtime requirements for

"bona fide" commissions where its employees' commissions only exceeded the statutorily guaranteed regular rate, on average, once a year and had no significant impact on their normal rate of pay, and, accordingly did not qualify as "bona fide commissions" within the meaning of the FLSA.

• Wage and Hour Field Operations Handbook (FOH) § 21h04(c), a commission for purposes

of section 7(i) “usually denotes a percentage of the amounts paid out or received,” and employees who receive flat fee payments “paid without regard to the value of the service performed . . . are considered to be paid on a piece rate basis and not on the basis of commissions.”

• A day rate plan where employees are paid a daily rate regardless of the number of hours

worked would not qualify under the prevision because such plan is not based on unit of measurement such as trips taken, miles driven, stops made, or units of goods delivered.

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• Another example of a commission plan which would not be considered as bona fide is one in which the employee receives a regular payment constituting nearly his entire earnings which is expressed in terms of a percentage of the sales which the establishment or department can always be expected to make with only a slight addition to his wages based upon a greatly reduced percentage applied to the sales above the expected quota.

Note: It is strongly recommended that should your organization consider the application of any of the white-collar exemptions, partial exemptions such as the Motor Carrier and especially the Retail Sales 7(i) exemption, that you consult with SESCO to ensure compliance as violations for non-compliance are significant and certainly disruptive to your business and employees.

Common Wage and Hour Violations Trap #1 – Misclassifying Non-Exempt Employees As Exempt Employees who are non-exempt must be paid overtime at one-and-one half times their regular rates of pay when they work more than 40 hours in one week. Employees who are exempt, on the other hand, are owed no overtime, regardless of how many hours they work. Employees who are exempt usually fall into one of two basic categories – executive or administrative. Other exempt categories cover professionals, such as lawyers and computer professionals. Outside salespersons occupy their own exempt category. Exempt executives and administrators must earn a minimum of $455 a week. Warning: Titles and job descriptions mean nothing when it comes to assessing whether employees are exempt. What counts: the duties these employees perform. To determine whether employees are exempt, compare their actual duties to the FLSA’s tests for exempt status. The executive exemption can be broader than you think. Assistant managers can qualify as executives, if they earn the requisite weekly salary and pass the duties test. The duties test mandates that an executive must: • have as a primary duty managing the enterprise, or a customarily recognized department or

subdivision (e.g., setting and adjusting employees’ pay rates and work hours, directing employees’ work, maintaining production or sales records, handling complaints and grievances, planning and controlling the budget, implementing legal compliance measures);

• customarily and regularly direct the work of at least two other full-time employees or their

equivalent; and • have the authority to hire or fire employees, or have particular weight given to suggestions

and recommendations regarding the hiring, firing, advancement, promotion, or any other change of status of other employees.

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Managers commonly lament that they’re not executives because almost all of their time is spent doing the same work as their subordinates. In fact, managers at various Starbucks locations took this lament to court, and lost. Rule: Otherwise exempt managers retain that status, even if they’re filling in for a non-exempt employee who is out sick or on vacation, helping out in emergencies, or lending a hand during a busy period. In addition, the routine performance of some nonexempt work generally won’t be enough to alter the status of an executive. The court in the Starbucks case concluded that the managers, who regularly poured coffee (a non-exempt duty), were training subordinates. Key: Who the decision maker is. Generally, executives decide to perform non-exempt work, and they remain responsible for the success or failure of the business or their department as they’re performing that work. Businesses have a considerable amount of trouble determining who are exempt administrators. Administrators work to support the primary business. Where executives can wear several hats, administrators usually wear only one – an HR hat, a marketing hat, an accounting hat, and so on. To qualify for the administrative exemption employees must: • have as their primary duty the performance of office or non-manual work that’s directly

related to the management or general business operations of the employer or the employer’s customers; and

• exercise discretion and independent judgment with respect to matters of significance,

including the authority to formulate, interpret, or implement management policies; carry out major assignments; and spend significant amounts of company money. Warning: Exercising discretion and independent judgment is more than using skill in applying well-established techniques, procedures, or specific standards that are described in manuals. Likewise, it doesn’t include clerical or secretarial work, recording or tabulating data, or other mechanical, repetitive, or routine work.

The basic allegation administrators make in FLSA lawsuits is that they’re not exempt because they don’t use discretion and independent judgment, but rather apply facts to a predetermined formula or outcome. The essence of these claims is that their work doesn’t support the business, it is the business. So, for example, claims adjusters for an automobile insurance company alleged they weren’t exempt because their duties, which consisted of adjusting property damage and bodily injury claims, were the company’s product. The insurance company contended that they were exempt administrators because they produced no product and their work facilitated management. On the eve of trial, the insurance company settled with their adjusters to the tune of $120 million. Insurance underwriters, on the other hand, have been found to be administrators because they exercise independent judgment and authority to negotiate premiums and coverages. Trap #2 – Not Knowing What Is And Isn’t Considered “Work” Non-exempt employees must be paid for every hour they work. But not every minute employees spend on the premises is working time, and some of the time they spend not technically working is, nevertheless, counted as compensable working time. To sort everything out, it’s essential to have a good grasp of the full extent of non-exempt employees’ actual jobs, including knowledge of any pre-work prep or post-work wrap-up.

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The first set of problems – employees performing activities before their workdays begin or after they end – arise due to the Portal-to-Portal Act, which is an amendment to the FLSA. Under the Portal Act, activities performed either before or after the regular work shift are compensable, if those activities are an integral and indispensable part of the employees’ principal work activities. Factors used in making this determination include whether the activity: • is required by the employer; • is necessary for the employee to perform his/her duties; and • primarily benefits the employer. Most Portal Act problems can be avoided if managers emphasize to employees that they shouldn’t punch in until they are ready to start working. Eating breakfast, making coffee, and reading the newspaper should all be done before employees punch their time cards. Some situations require great sensitivity to potential Portal Act violations. Generally, employees who must power up computers or check e-mail at home prior to going out on the road would be considered to be working, as would employees who are required to change into elaborate protective gear prior to hitting the factory floor. Contrast: Employees who must go through government-mandated security checks aren’t considered to be working. A second set of problems arises during employees’ workdays. Take break time, for example. Employees need not be paid for their lunch breaks provided they’re completely relieved of their work duties while eating, or the time during which they spend eating is spent primarily for their benefit (minimal work-related activities are okay). Rest breaks, which usually last for no less than five minutes and no longer than 30 minutes, are compensable. There are at least four types of travel. The two simplest are normal commuting, which isn’t compensable, and travel between work sites during the workday, which is always compensable. The other two travel time situations continue to cause great confusion. Special one-day travel, where employees return home at the end of the day, is considered to be compensable working time to the extent that employees travel beyond their normal commuting time. If, for example, an employee attends a one-day seminar two hours away from her home, and her normal commuting time is 30 minutes, she must be paid for 90 minutes. Lastly is overnight travel. This time isn’t only hours worked during regular working hours on normal working days, but also during corresponding hours on non-work days. If, say, an employee normally works Monday to Friday, 8 a.m. to 5 p.m., flies on Tuesday at 12 p.m., and arrives at 7 p.m., the travel time after 5 p.m., which is outside the employee’s regular working hours, isn’t counted as compensable working time. Trap #3 – Not Paying For Off-The-Clock Working Hours Managers and employees can face excruciating pressure to work off-the-clock either at the beginning of the day (which could implicate the Portal-to-Portal Act), during the day (e.g.,

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working lunches), or at the end of the day, when employees are asked (or told) to punch out and return to work. The FLSA is strict – non-exempt employees must be paid for all of their working hours, including hours worked off-the-clock. You must pay an employee who works unauthorized overtime. Then, discipline the employee and, if necessary, that employee’s manager, to prevent a recurrence in the future. To prevent off-the-clock overtime, the best strategy is to proactively audit the time records of employees who arrive early or stay late: • Stress the need for managers to be conscious of employees’ hours. • Ensure that employees are aware of company policies that prohibit off-the-clock overtime. • Pay special attention to employees who routinely volunteer to continue to work at the end of

their shifts to finish assigned tasks or correct errors. • Keep an ear to the company grapevine. What to listen for: Employees griping about

managers who pressure them to stay late or come in early to complete work. • Investigate all complaints, written or oral, that employees make. • Monitor employees who routinely take laptops home. Trap #4 – Not Calculating Employees’ Regular Rates Properly Non-exempt employees who work more than 40 hours in one week must be paid time-and-a-half their regular rates of pay as an overtime premium. If employees earned a straight hourly wage, and nothing more, calculating their regular rates would be a snap: multiply that hourly rate by 1.5 and then multiply that figure by the number of overtime hours worked. Unfortunately, things are rarely that easy these days. For example, employees often receive vacation pay, incentive bonuses, suggestion awards, or holiday bonuses. The general rule is that any payment that’s based on employees’ productivity, work, efficiency, etc., must be included in the regular rate calculation. This applies to incentive and other non-discretionary bonuses, and to most prizes and awards. If a payment must be included in the regular rate calculation, it must be apportioned back over the periods during which it was earned. Upshot: This retroactive calculation increases both the regular rate calculation and employees’ overtime pay. Not every bonus, however, needs to be included in the regular rate calculation. And with some creative planning, retroactive recalculations can be avoided altogether: • Discretionary bonuses can be excluded from the regular rate calculation. A bonus is

discretionary if the employer retains sole discretion over the fact and the amount of the payment until quite close to the end of the bonus period.

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• Holiday bonuses and bonuses paid on other special occasions (e.g., a longevity or anniversary bonus) can also be excluded from the regular rate calculation if they’re modest in amount and aren’t measured by employees’ productivity (e.g., a two-week bonus paid every December).

• Suggestion awards can be excluded from the regular rate calculation if the awards are

geared to the value the company places on the suggestion; they result from additional effort or ingenuity unrelated to, and outside the scope of, employees’ customary duties; and employees voluntarily participate in the suggestion system.

But the general rule also works in reverse payments that aren’t based on employees’ work, productivity, efficiency, etc., can be excluded from their regular rate calculation. This means that in addition to some suggestion awards, vacation pay, sick pay, and other idle time pay can be excluded from the regular rate calculation. Trap #5 – Taking Improper Pay Deductions Almost every business experiences losses in the form of cash shortages, bad checks, equipment breakages, and overpaid wages. One of the most effective ways to recoup the loss, and ensure that it doesn’t happen again, is to take the amount out of employees’ pay. The FLSA allows deductions, but sets strict guidelines. Caution: State laws may not allow you to take these kinds of deductions. Again, there’s a general rule: Deductions for cash shortages, bad checks, equipment breakage, and the like are okay, provided they don’t leave non-exempt employees with less than the minimum wage or cut into their overtime pay. Bottom line: Employees’ regular rates must be calculated before loss-related deductions are taken. General rule aside, pay deductions aren’t likely to garner much support from employees. To head off a potentially disastrous employee-relations problem, a company policy should specifically allow loss-related deductions, and employees should understand how loss-related deductions will be calculated. Loss-related deductions from exempt employees’ pay can’t be made, since they must be paid a guaranteed salary – that is, their salary can’t vary depending on the quality of their work. Exempt employees’ bonuses, however, aren’t immune from these pay deductions, if a bona fide, written bonus policy states that bonuses will be reduced by losses attributable to individual managers; deductions for losses are limited to bonus payments only; and deductions are calculated using a preexisting formula that’s based on a department (or other business unit) achieving budgeted profits to calculate bonus amounts. Other deductions, including deductions for loans, pay advances, or wage overpayments can be made from non-exempt and exempt employees’ pay alike, even though the deductions would cut into non-exempts’ overtime pay or leave them with less than the minimum wage. Think expansively: Employees may be considered to have received a pay advance if they’re granted

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vacation pay prior to their anniversary date or the established date of entitlement, and they terminate before that date. Trap #6 - Improper or Incomplete Recordkeeping The FLSA puts the burden of proper recordkeeping squarely on employers’ shoulders. Inadequate recordkeeping is itself an FLSA violation. If recordkeeping is deficient, courts will often take employees’ word regarding their working hours or illegal pay deductions. Employees usually record their working time on time sheets or time cards. While it’s common for managers to make adjustments to employees’ time directly on their time sheets, managers should always have a valid reason for making adjustments, since any alteration of employees’ time records will raise red flags with DOL investigators. Employers must be vigilant in ensuring that employees accurately report their hours worked and managers accurately maintain time records. With that in mind, here are some tips for both: • Make sure the company has a time card policy that strictly forbids employees from allowing

someone else to mark their time sheet or punch their time card. • Put procedures in place that managers must follow when employees forget to punch out.

Consider having employees initial and date adjusted time sheets, so they can’t later claim that the change was made illegally to save on overtime costs.

• Also include steps for employees to take in case of a dispute over time records. They should

understand the proper way to request a change, and that they can’t make adjustments without management’s approval.

Records must include identifying information about employees and data about their hours worked and wages earned. Records must reflect weekly hours and wages, even if employees aren’t paid weekly. Most of what’s required for recordkeeping is payroll data, which the IRS already requires companies to collect, so the FLSA’s recordkeeping requirement isn’t quite as burdensome as it seems. The following is a list of the basic records you must maintain: 1. Employees’ full names and Social Security numbers.

2. Employees’ addresses, including ZIP codes.

3. Employees’ sex and occupations.

4. The time and day of the week employees’ workweek begins.

5. Employees’ hours worked each day.

6. Employees’ total hours worked each workweek.

7. Employees’ birth date, if younger than 19.

8. The basis on which employees’ wages are paid (e.g., $8 an hour, $300 a week, piecework).

9. Employees’ regular hourly pay rates.

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10. Employees’ total daily or weekly straight-time earnings.

11. Employees’ total overtime earnings for the workweek.

12. All additions to or deductions from employees’ wages.

13. Total wages paid to employees each pay period.

14. The date of payment and the pay period covered by the payment.

15. The amount or nature of payments that are excluded from employees’ regular rate of pay (e.g., discretionary bonuses).

No particular form of recordkeeping is required. The FLSA doesn’t require you to keep records in any format; they may be stored on paper, on microfilm or microfiche, or in some other form. But if your records are a jumble, DOL investigators may obtain a court order requiring you to put your records in a useable format for inspection. Trap #7 – Misclassification of Independent Contractors

Some instances of independent contracting are very obvious. For example, if a business opens up the yellow pages, finds a listing for an individual in a recognized trade or profession, contracts with that individual for a discrete project, and the individual continues serving other clients, that individual is most likely an independent contractor. However, many situations are not clear cut and the legal classification of workers as independent contractors or employees becomes a difficult issue. The issue is significant because tax and employment laws typically define employees—who are covered—to exclude independent contractors. Thus, if a worker is an independent contractor, the business need not withhold income taxes, pay FICA taxes, or comply with many employment laws. Although most employment law statutes define "employee," three factors may make it extremely difficult to determine whether a worker is an independent contractor or an employee: • Most of these definitions were written long before the current explosion in use of contingent

workers and independent contractors. As a result, they fail to address the realities of today's workplace.

• Most laws have their own unique definitions expanded on by court rulings under that

particular law, with the result that an individual worker can be an employee under some laws and an independent contractor under others.

• The definitions, expanded through court cases, tend to involve a facts-and-circumstances

analysis. This means that courts recite the facts of the individual's working relationship and then conclude the worker is or is not an independent contractor. Such rulings make it difficult to assess whether, in different circumstances, an individual is an independent contractor.

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Simplifying worker classification has become a major business demand and Congress has considered, but not passed legislation. Common law test. Under common law (law developed through judicial decisions rather than decreed by statute), the key to a worker's status involves determining whether the worker is subject to the control of the employer with regard both to what must be done and how it must be done. Basically, the common law test examines whether the employer has the right to control and direct the worker who is performing the services. If the employer directs only the results of what is being accomplished—not the means by which those results are to be achieved—then the worker may be an independent contractor (Bartels v. Birmingham, US SupCt, 1947, 332 US 126). The focus of the common law test is whether the employer has the legal right to control the "what" and "how" of the worker's services, not whether the employer ever actually exercises control. As long as the employer has the right to control the results, ways, and means of the worker, even if it never actually exercises that right, the common law test is satisfied. Whether the right does or does not exist is determined by reviewing the circumstances in the particular situation.

IRS' 20-Factor Test

The Internal Revenue Service (IRS) also bases independent contractor status on the business's right to control how work is to be performed. However, in its so-called "20-Factor Test," the IRS has provided significant guidance on determining whether a worker is an independent contractor for purposes of payroll taxes. The IRS has become more aggressive in its review and audit of employers that claim the use of independent contractors. To help determine whether a worker is an employee or an independent contractor for withholding purposes, the IRS has developed a 20-factor control test based on common law principles (Rev Rul 07-41, 1987-1 296). The factors indicate the degree of employer control over the worker that is sufficient to establish an employer-employee relationship. The relative importance of each factor varies depending on the occupation and the facts involved. The 20 factors are intended to be only guidelines on the question of whether a worker is an employee or an independent contractor.

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The 20 factors are as follows: 1. Instructions. A worker who is required to comply with another individual's instructions

regarding where, when, or how work is done is generally deemed an employee. Instructions can be evidence that an employer had the right to and actually did direct and control how work is performed, indicating employee status. Instructions that would support independent contractor status would generally focus on the desired results rather than the means to accomplish those results.

Guidance from the IRS training manual. The requirement that a worker obtain approval before taking certain actions is an example of instructions, according to the manual. However, the manual distinguishes between direction as to what must be done (by itself not indicative of employee status) and how the job must be done (indicative of employee status). The more detailed the instructions a worker must follow, the more likely the worker is an employee.

Example. An independent truck driver can be told to pick up cargo at a certain time and deliver it to a certain address within two days; this is instruction as to what must be done. However, if the driver reports to the company everyday, is told what deliveries must be made, how to load the truck, what route to take, and the order of deliveries, the driver gets employee-like instruction on how the work is to be done.

2. Training. Training an individual to perform services in a particular manner reflects the

employer's desire to control the way the work is being accomplished. An employer is more likely to train an employee than an independent contractor. In most instances, an employer should be cautious about requiring an independent contractor to train with an experienced employee, to work with that employee, or to attend meetings. The employer should avoid providing training to independent contractors at periodic and frequent intervals.

20-Factor Test Applied Less Rigidly

The IRS has begun lessening its emphasis on rigidly applying the 20-question common-law test as the best way to determine whether a worker is an independent contractor or an employee. IRS Training Manual. The IRS has issued a new manual for training its agents and employment tax specialists on the employee vs. independent contractor issue that may indicate a willingness to deal more evenhandedly with worker classification. The manual stresses that in determining a worker's status the key question is whether the business has the right to control the worker. IRS warns that under no circumstances can the manual be used or cited as authority for setting or sustaining a technical position. However, the manual does contain some useful guidance and examples that may help employers. Guidance on key points from the manual is inserted in the following discussion of the 20-factor test (IRS Pub Employee or Independent Contractor? IRS Training Manual, 3320-102, 7/96). Categories of evidence. The IRS also uses a related method based on "categories of evidence." This method, which incorporates most of the 20 common-law factors, is discussed in IRS Publication 15-A, Employer's Supplemental Tax Guide. See Section 2 of the 1997 version.

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3. Services rendered personally. When the worker's services are of a type that cannot be delegated, and an employer has a substantial interest in how the work is being accomplished and the results of the work, control is reflected.

4. Hiring, supervising, and paying assistants. If an employer hires, supervises, and pays a

worker's assistants, this factor demonstrates control over the worker. If a worker hires, supervises, and pays his or her own assistants, with the worker being required to supply the materials and held responsible for the results, this indicates the worker is an independent contractor.

5. Integration. If the worker's services are being integrated into the operations of the

business and the continuation or success of the business depends on the worker's services, then the worker may be placed under the control and direction of the employer. However, this factor is inherent in most situations where a business uses outside workers to perform core business functions. In addition, determining whether the success of the business depends on the worker's continued services may be a difficult determination to make. Guidance from the IRS training manual on business identification. The manual tells auditors that wearing a uniform or placing a company logo on a truck does not necessarily indicate that the worker is an employee. If the nature of the work requires the person to be identified with the business for security purposes, then these types of business identification do not, by themselves, establish an employment relationship.

6. Continuing relationship. If there is a continuing relationship between the business and

the worker, the inference is that an employer-employee relationship exists, unless a continuing relationship is customary for independent contractors performing that type of work. For example, attorneys are often retained on a continuing basis as independent contractors. The relationship may be continuing if the work is being performed at frequently recurring but irregular intervals. When a worker's contract ends on completion of the task at hand, independent contractor status is indicated.

Guidance from the IRS training manual on financial control. The manual says that a worker's economic dependence on the business for which services are performed is not an appropriate factor for use in analyzing worker status. IRS stresses to its agents that "this analysis has been rejected by Congress and the Supreme Court as a basis for determining worker classification."

7. Set hours of work. Employees generally have structured or established hours of work, but

an independent contractor has greater freedom to schedule time away from the jobsite. 8. Full time required. An employee typically works for the employer full time, which

demonstrates that the employer has control over the employee's time. An employer generally cannot require an independent contractor to be on the jobsite for a minimum number of hours during the day or a minimum number of days during the week.

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9. Doing work on employer's premises. Control appears to be present when the work or services being performed by the worker is done on the employer's premises. Work accomplished off the employer's premises indicates some degree of freedom from control. The importance of this factor depends on the nature of the services involved and the extent to which an employer would require performance of similar services on its premises.

10. Order or sequence set. Control by an employer can be inferred if the worker is required

to perform services in a particular order or sequence that is established by the employer or if the employer has the right to set the order or the sequence of the services to be performed.

11. Oral or written reports. If a worker is required to present regular reports to the employer,

such a requirement indicates control by the employer. 12. Payment. If the worker is paid by the hour, the week, or the month, the presumption is

that the worker is an employee, unless that method of payment is standard for the trade. Payment of a flat fee by the job tends to indicate that the worker is an independent contractor.

13. Furnishing of tools and materials. If the employer furnishes sufficient tools, materials,

and other equipment to perform the services, this tends to show the existence of an employer-employee relationship. The employer should require an independent contractor to supply his or her own tools, materials, supplies, and equipment necessary to provide the contracted services.

14. Significant investment. Where the worker does not invest in supplies, materials,

equipment, and other items necessary for the performance of services, but relies on the employer for such things, the lack of investment indicates dependence on the employer. Control can be inferred and the worker is probably an employee. If the worker invests in the facilities he or she uses in performing services, this factor tends to indicate that the worker is an independent contractor.

15. Payment of business or traveling expenses. If the employer pays a worker's business or

traveling expenses, the worker may be an employee, on the theory that an employer that can control expenses also generally retains the right to regulate and direct the worker's business activities.

Guidance from the IRS training manual. The manual points out that companies often pay the business or travel expenses of both employees and independent contractors. Auditors are therefore encouraged to focus on unreimbursed expenses since independent contractors are more likely than employees to have unreimbursed expenses.

16. Realization of profit or loss. If the worker cannot realize a profit or loss from performing

services, and does not receive payment directly from the business's customers but only through the employer, then the worker is in an employer-employee relationship. If the risk

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of loss or the realization of a profit as a result of performing services is possible for the worker, this generally indicates an independent contractor relationship.

17. Working for more than one firm at a time. If the worker performs services for more

than one firm at any given time, or has the discretion to do so, then that worker is probably an independent contractor. However, the employer should be aware that a worker who performs services for more than one employer may be an employee for each of the employers involved.

18. Making services available to the public. Control by an employer can be inferred if the

worker is not free to promote his or her services to the general public on a regular or consistent basis.

19. Right to discharge. If the employer has the right to fire a worker without cause, then an

employer- employee relationship can be inferred. 20. Right to quit. If the worker terminates the relationship with the employer but could

remain liable to the employer because a specific job or service was not completed, then independent contractor status probably exists. An employee can terminate his or her relationship with the employer without incurring any such liability.

Liability for Taxes and Penalties

If a worker is legally determined to be an employee, then the worker's wages are subject to federal income tax withholding requirements. Generally, this means the employer is responsible for withholding and depositing federal income tax from the employee's wages in the amount determined by the employee's pay, withholding status, and number of withholding allowances (IRC §3402(a)(1); IRS Reg §31.3402(a)-1(b)). A worker who is determined to be an independent contractor must make estimated income tax payments quarterly, but the employer has no responsibility to withhold income tax for an independent contractor. The Treasury Department estimates that over $1.5 billion per year is lost in revenue from workers being misclassified by employers as independent contractors. Not surprisingly, the increasing popularity with employers of contracting out work to independents, combined with the difficulty of classifying certain types of workers for tax purposes, has had the effect of drawing the closer scrutiny of the IRS to such work arrangements. When independent contractors are reclassified as employees by the IRS, the consequences in interest and penalties can be severe, especially if the IRS believes the misclassification was deliberate and fraudulent. Even though the lost revenue can come from under- reporting by the contracted individual of income and self-employment taxes in accordance with the Self- Employment Contributions Act (SECA) of 1954, the IRS focuses on the employer, realizing that compliance from that direction in withholding taxes for workers is a more direct and effective way of clearing up the problem of lost revenue.

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The potential consequences for violation of the independent contractor vs. employee classification cannot be overstated. The worst case scenario can involve a fine and prison sentence for the employer. At the least, if an employer is found to have misclassified workers as independent contractors, the employer can be assessed for income taxes that were not withheld, and both the employee and employer's share of FICA. The employer will also be liable for FUTA. Another risk is the disqualification of qualified pension and profit sharing plans. This happens when independent contractors who are not covered by an employer's qualified plan are reclassified, so that the plan then fails to cover the correct percentage of employees (IRC §§410(b), 401(a)(26)). Misclassification penalties. If the IRS reclassifies an independent contractor as an employee, the employer may be liable for a penalty, in addition to back taxes and interest. • If the IRS finds no intentional misclassification on the part of the employer, and the employer

filed the necessary information returns, the penalty against the employer is:

– 1.5 percent of the wages paid to the employee and – 20 percent of the amount that should have been withheld from the employee's wages for

FICA, but was not, due to the misclassification (IRC §3509(a)). • If the IRS finds that the employer failed to file the necessary information returns, then,

except when the failure is due to reasonable cause and not willful neglect, the penalties double (IRC §3509(b)).

• The penalties for intentional misclassification are more severe. Two categories of statutory "nonemployees" exist under the tax code; these statutory nonemployees have been determined to be self-employed for purposes of federal income tax withholding and for Social Security, Medicare, and federal unemployment taxes as well. This classification applies even if the workers otherwise could be classified as "employees" under the common law right-to-control test. The two categories of statutory nonemployees are direct sellers and licensed real estate agents who meet specific criteria (IRC §3508). FICA and FUTA. If a worker is classified as an employee, the federal tax code imposes the following requirements on the employer, in addition to withholding federal income tax: • FICA taxes. Social Security and Medicare tax are imposed on the services of an employee

under the Federal Insurance Contributions Act (FICA). The employer must withhold and match the employee's tax (IRC §3121).

"Employee" is defined as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of 'employee'" (IRC

25

§3121(d)). If the worker is classified as an independent contractor, then the worker pays his or her own Social Security and Medicare tax as a self-employment tax under the Self-Employment Contributions Act of 1954 and the employer has no FICA responsibility.

• FUTA taxes. The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal unemployment tax on behalf of employees, but not independent contractors (IRC §3306).

Certain categories of workers are defined as employees by statute for FICA and FUTA purposes. Provided they meet certain requirements, the following are "employees" for purposes of FICA: corporate officers; drivers who deliver groceries, produce, bakery products, beverages, or laundry; life insurance salespeople; home workers; traveling salespeople; and other salespeople who perform services for pay for any person (IRC §3121). For purposes of FUTA, the definition of "statutory employee" is basically the same as under FICA, except that the provisions under FICA that include certain home workers and life insurance salespeople do not apply under FUTA (IRS Pub 937 Employment Taxes).

Advance IRS Guidance

Employers that wish to ascertain if they have established a legitimate independent contractor relationship for payroll tax purposes can use IRS Form SS8, obtainable from any IRS office and reprinted in the following "Forms and Checklists" chapter, to get an IRS ruling on the individual business circumstances. While a favorable ruling is not a foolproof defense in the case of an audit, particularly if the employer is found to have later violated the business circumstances stated to exist on the SS8 form, its proper use can help bolster an employer's claim of having established an independent contractor relationship.

Complete Human Resource Staff and Services for Quality Service Contractors of the PHCC-National Association

As a member of Quality Service Contractors of the PHCC-National Association your organization receives the following services at no charge: • Telephone Consultation – The SESCO professional staff is available on a priority basis to provide,

without charge, unlimited telephone consulting to eligible members of Quality Service Contractors for the purposes of preventing and solving human resource management problems and complying with federal/state employment regulations.

The SESCO professional staff is “on call” daily to assist Quality Service Contractors members on a priority basis.

• Employee Handbook Reviews – SESCO will review Quality Service Contractors members employee

handbooks for a flat fee of $200 per review. The review will be followed-up by a thorough report providing the Quality Service Contractors member with an overview of their employee handbook to include compliance to federal and state employment regulations as well as suggested policies to ensure that the employee handbook is an effective communications document as the cornerstone of the employer-employee relationship.

• Monthly Newsletter – SESCO will distribute in electronic format, The SESCO Report, monthly to all

Quality Service Contractors members. Simply contact SESCO to be placed on their mailing list. • Discounted Consulting Services – The SESCO staff is available to provide consulting services as

requested which include:

- Human Resource Compliance Assessments

- Organizational Development/Family Business Consulting

- Employee Handbooks - Policies and Procedures Manuals - Federal and State Compliance Posters - Personnel Forms

- EEO and Wage-Hour Representation

- Performance Management Systems

- Team Development - Conflict Resolution - Online Recruitment Tools

- Employee Benefit Statements - Wage and Hour Compliance - On and Offsite Management

Training (Online – Tele-Seminars) - Screening and Hiring Systems - Employee Retention Systems - Strategic Planning

Please call for a full description of SESCO’s professional services or utilize the Fax Request Form on the backside of this brochure.

P.O. Box 1848 Bristol, Tennessee 37621 (423) 764-4127 (423) 764-5869 (Fax)

web site: www.sescomgt.com e-mail: sesco@sescomgt.com

P.O. Box 1848 Bristol, Tennessee 37621 (800) 764-4127 Fax: (423) 764-5869

Web site: www.sescomgt.com E-mail: bill@sescomgt.com

Please FAX this form to: (423) 764-5869 Attention: Bill Ford

Yes, I would like to find out more about how SESCO’s systems and services can assist in managing my organization’s human resources, thereby contributing to our people management goals and profitability. Please send me information on the following SESCO service(s): • Leadership Development

SESCO Leadership Series Vital Learning Training Vital Online/E-Learning Audio Seminars Customized Training Development Train the Trainer EEO

• Human Resource Management Systems

Customized Employee Handbooks Compensation Systems Performance Management/Appraisal Career Pathing/Succession Planning Criteria-based Job Descriptions

• Workplace Culture

Culture Assessments/Identification Satisfaction Surveys/Benchmarking Transition Plans Diversity Awareness Training Change Management

• Forms and Publications

Personnel Forms Employment Kits Federal and State Posters “Human Resources Guide for the Industry” Compliance Manuals

• Employment Law Compliance Compliance Assessments Representation Before Department of Labor and

EEOC Required Training (Sex Harassment) Wage-Hour Investigations Affirmative Action Programs

• Recruitment and Retention

Turnover Analysis Screening and Hiring Systems/Training Industry Specific Applicant Assessment Tools Employee Satisfaction Surveys (On/Offsite) Retention Strategies

• Organizational Development

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Page 1 of 3

U.S. Department of Labor Employment Standards Administration Wage and Hour Division Washington, DC 20210

June 23, 2006 FLSA2006-22 Dear Name*: This is in response to your request for an opinion on behalf of your client, a franchisee association. A number of association members have stated they have experienced problems with the application of the section 7(i) (copy enclosed) exemption of the Fair Labor Standards Act (FLSA). The association maintains that this exemption eliminates the requirement to pay overtime to many of its members’ service technicians. You are requesting clarification as to the application of the 7(i) retail and service exemption to association members if they can produce the appropriate supporting documentation of eligibility for this exemption. You state that the following facts are common to the majority of association members, unless otherwise noted: • Each association member has a franchise agreement with a corporation under which a member may

use the corporate marks in connection with plumbing repair services and pipe inspection services, and may utilize licensed plumbers or secure licensing as plumbing contractors for the limited purpose of performing plumbing repair services;

• Association members do not install bathrooms, kitchens, or laundry rooms in new construction or

remodeled construction; • Most customers contact association members on an as-needed emergency or other basis, with no

contract in place at the time of the call to the association member; • Service technicians provide manual labor (such as opening clogged drains using specialized

equipment) and sell corporate products (such as drain cleaners) to customers. The mix of sales/service varies on a job-to-job basis;

• Although the mix of customers served varies among association members, the bulk of the members’

customers are residential customers, who are the final users of sewer, drain, and pipe cleaning services, as well as septic tank cleaning services, plumbing repair services, and pipe inspection services;

• Some association members also provide services to commercial locations such as restaurants or

apartment buildings; • By virtue of the nature of the sales and services provided, none of the sales and services by service

technicians are for resale; • Association members advertise their services to the general public in a variety of ways, including, but

not limited to, billboards, radio spots, telephone books, and participation in televised events such as the Tournament of Roses Parade;

Page 2 of 3

• Service technicians are generally paid on a commission basis for service provided and for sales of product. More than one-half of their compensation comes from commission payments;

• The equivalent hourly rate of pay computed from such commission payments exceeds one and one-

half times the minimum hourly wage of $5.15 per hour; and • Most association members meet the 75% of volume test, but acknowledge that individual members

must provide appropriate documentation to prove they are meeting the test.

Section 7(i) of the FLSA provides an exemption from the overtime pay requirement for any employee of a retail or service establishment if: 1. The regular rate of pay of such employee is in excess of one and one-half times the minimum wage,

$5.15 per hour; and, 2. more than half of the employee’s compensation for a representative period (not less than one month)

are from commissions on goods or services. A “retail or service establishment” is defined as “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.” 29 C.F.R. § 779.411. A retail or service establishment is one which sells goods or services to the general public and serves the everyday needs of the community in which it is located. See 29 C.F.R. § 719.318(a). It “performs a function in the business organization of the Nation which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process . . . It provides the general public its repair services and other services for the comfort and convenience of such public in the course of its daily living.” 29 C.F.R. § 779.318(a); see also Wage and Hour Opinion Letter November 9, 2004 (copy enclosed). Additionally, the regulations state:

Certain business establishments engage in the retail sale to the general public, as goods are delivered to purchases at a stipulated price, of items such as certain plumbing and heating equipment, electrical fixtures and supplies and fencing and siding for residential installation. In addition to selling the goods they may also install, at an additional charge, the goods which are sold. Installation which is incidental to a retail sale (as distinguished from a construction or reconstruction contract to do a building alteration, or repair job at a contract price for materials and labor required...) is considered an exempt activity. By way of example, if the installation for the customer of such goods sold to him at retail requires only minor carpentry, plumbing or electrical work (as may be the case where ordinary plumbing fixtures, or household items such as stoves, garbage disposals, attic fans, or window air conditioners are being installed or replaced), or where only labor of the type required for the usual installation of chain link fences around a home or small business establishment is involved, will normally be considered as incidental to the retail sale of the goods involved (unless, of course, the transaction between the parties is for a construction job at an overall price for the job, involving no retail sales of goods as such).

29 C.F.R. § 779.321(d). Thus, while construction contractors, plumbing contractors, and other similar contractors lack a retail concept, companies that provide general repair services for the public (such as auto repair shops, household refrigerator repair shops and clock repair shops) can qualify as retail or service establishments. See 29 C.F.R. §§ 779.317-.321. Such repair services may qualify under section 7(i) even when they are sometimes performed for a commercial user rather than a homeowner, so long as

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the commercial repair services do not require the use of specialized facilities or equipment and the services are not different services than those provided for the general consuming public. See 29 C.F.R. §§ 779.318(b), .329; Wage and Hour Opinion Letters July 14, 1982 and October 19, 1981 (copies enclosed). The information you have provided indicates that many association members are service companies rather than plumbing contractors. The members are providing plumbing services that serve the everyday needs of the community. Plumbing contractors, on the other hand, are primarily engaged in home construction and remodeling projects involving major structural or installation work. The types of services your members provide are more akin to a repair shop than a plumbing contractor. See 29 C.F.R § 779.314. Therefore, if 75% or more of a particular member’s annual dollar volume of sales of goods and services is not for resale and constitutes retail sales or services, the member would meet the definition of retail or service establishment for purposes of the section 7(i) exemption. The section 7(i) exemption may thus be applied to employees of such members if the employee’s regular rate of pay is in excess of one and one-half times the minimum wage, $5.15 per hour, and more than half of the employee’s compensation for a representative period (not less than one month) represents commissions on goods or services. Whether the employee’s earnings will, in fact, qualify as commissions within the meaning of section 7(i) of the FLSA will, of course, depend upon the details of the compensation plan, and an evaluation of the employee’s compensation over a “representative period.” This opinion is based exclusively on the facts and circumstances described in your request and is given based on your representation, express or implied, that you have provided a full and fair description of all the facts and circumstances that would be pertinent to our consideration of the question presented. Existence of any other factual or historical background not contained in your letter might require a conclusion different from the one expressed herein. You have represented that this opinion is not sought by a party to pending private litigation concerning the issue addressed herein. You have also represented that this opinion is not sought in connection with an investigation or litigation between a client or firm and the Wage and Hour Division or the Department of Labor. Sincerely, Alfred B. Robinson, Jr. Acting Administrator Enclosures Wage and Hour Opinion Letters November 9, 2004 Wage and Hour Opinion Letters July 14, 1982 Wage and Hour Opinion Letters October 19, 1981 * Note: The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C. § 552(b)(7)