Reclassification Guidebook Planning & Managing Changes to Exempt Status Under the FLSA 2024 Edition
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook DISCLAIMER This Reclassification Guidebook contains guidelines and tools related to key decision points that we anticipate employers will confront as they determine, plan, and execute changes in response to the federal Fair Labor Standards Act’s revised executive, administrative, and professional exemption rule, whose first phase—increasing the EAP exemption’s salary level requirement from $684/week to $844/week (or $43,888/year)—took effect on July 1, 2024, and whose second phase—-increasing that threshold to $1,128/week (or $58,656/year)—takes effect on January 1, 2025. Of course, this Guidebook does not cover every possible issue an employer might confront, and it is not tailored to any one employer’s particular circumstances, needs, or goals. This Guidebook is not a substitute for obtaining legal advice. We hope you will not hesitate to contact your favorite Seyfarth lawyer to assist you with the planning and decisions that lie ahead. From evaluating potential reclassification decisions to tailoring communications and training strategies for impacted employees, our national team of wage and hour lawyers is well equipped to help. Likewise, if you plan to use these materials beyond their August 2024 publication date, you should seek counsel to ensure the laws on which these materials are based have not changed. Please note that this Guidebook concerns itself only with the FLSA. Some states have their own overtime laws that impose additional and stricter requirements on employers than the federal law. For access to current materials on the states’ overtime exemptions, Seyfarth clients can access our Survey Center platform. Please reach out to your Seyfarth attorney for additional detail. Employers should always account for applicable state law requirements when it comes to establishing how to classify and compensate employees.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | i TABLE OF CONTENTS Page Introduction ................................................................................................................................ 1 An Overview of the FLSA’s Revised Overtime Exemption Rule ................................................. 3 A. Changes to the Executive, Administrative, and Professional (“EAP”) Exemptions ..........................................................................................................3 B. Changes to the Highly-Compensated Employee (“HCE”) Exemption ...................3 C. The Duties Tests Remain Unchanged..................................................................4 D. Deadline to Comply..............................................................................................4 Reclassifying Employees to Non-Exempt Status........................................................................ 5 A. Potential Steps for Reclassifying Employees as Non-Exempt—Due to Salary Below the New Threshold .........................................................................5 B. Steps for Reclassifying Employees as Non-Exempt—For Reasons Other Than Salary .........................................................................................................6 C. Sample Workflows for a Strategic Review and Change Management Process ................................................................................................................ 6 D. Sample Task Allocation Chart ..............................................................................9 Determining Pay for Reclassified Employees............................................................................11 A. Deciding How to Pay Reclassified Employees ...................................................11 Determining Back Wage Payments (if Any)...............................................................................17 A. Steps for Calculating and Making Back Wage Payments, if Owed to a Reclassified Employee ....................................................................................... 17 B. Possible Data Sources to Use in Determining Overtime Hours for Back Pay Purposes ....................................................................................................18 C. Sample Back Overtime Pay Calculations and Considerations............................18 Updating Job Descriptions ........................................................................................................19 Eliminating Job Positions (if Necessary)....................................................................................23 A. Action Items for Positions Being Eliminated .......................................................23 Planning Your Communications ................................................................................................27 A. Communications Overview ................................................................................27 Understanding Psychological Factors Before You Communicate..............................................29 A. Psychological Factors: Concerns & Possible Resistance ...................................29 Sample Announcements and Communications .........................................................................31 A. Communication Plan Checklist...........................................................................31 1. Sample Internal Announcement .............................................................33 2. Sample Emails to High-Level Management ............................................33 3. Sample Email to Managers of Affected Employees ................................35 4. Sample Email to Employees Whose Salary Will Increase.......................36 5. Sample Email to Employees Being Reclassified.....................................38
ii | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com B. Sample Written Notices and Acknowledgements ...............................................41 1. Notice to Reclassified Employees Whose Duties and Pay Will Change ..................................................................................................41 2. Notice to Employees Whose Pay, But Not Duties, Will Change..............44 3. Notice to Employees Who Will Remain Exempt and Receive a Raise ...................................................................................................... 47 4. Back Pay Acknowledgement Form .........................................................50 Sample Agendas and Talking Points for Discussing the Changes.............................................52 A. Agenda and Talking Points for Meetings With Managers ...................................52 B. Agenda and Talking Points for Meetings With Employee Groups.......................54 C. Agenda and Talking Points for One-on-Ones With Employees ..........................55 Sample FAQs ...........................................................................................................................57 A. FAQ for Questions from Managers of Reclassified Workers ..............................57 B. FAQ for Questions About Overtime Eligibility and Calculation............................58 Legal and Budgetary Factors to Keep in Mind...........................................................................61 Evaluating Duties to Help Decide Between Raising Pay or Reclassifying..................................63 A. Option 1: Increase Base Pay, as Necessary, and Classify All in the Role as Exempt .......................................................................................................... 63 B. Option 2: Reclassify Employees as Non-Exempt ...............................................64
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 1 Introduction At Seyfarth Shaw LLP, we have closely monitored the U.S. Department of Labor’s (“DOL”) efforts to revise the overtime exemption rule under the federal Fair Labor Standards Act (“FLSA”). The new rule, which took effect on July 1, 2024, commands attention from employers. We have prepared this Guidebook to help inform the decisions that lie ahead. As readers of this Guidebook likely know, the DOL’s exemption regulations generally require that an employee satisfy a salary level test, a salary basis test, and a duties test in order to be classified as an exempt executive, administrative, or professional employee under the FLSA. From 2020 until 2024, the minimum salary to clear the first test had been set at $684 per week (equivalent to $35,568 per year). That changed on July 1, 2024. The DOL’s new rule entails a substantial, two-phased increase to the minimum salary level for an employee to be properly classified as an exempt executive, administrative, or professional employee. On July 1, 2024, employees now must receive a salary of at least $844 per week (or $43,888 per year), in addition to satisfying the long-standing “primary duty” requirements. Beginning January 1, 2025, such employees must receive a salary of least $1,128 per week (or $58,656 per year.) Moreover, the salary threshold will increase every three years. The total compensation threshold for the highly-compensated employee (“HCE”) exemption increased to $132,964 per year on July 1, 2024, and will increase to $151,164 per year on January 1, 2025. Recall, too, that employees classified as exempt under this “relaxed” exemption test must, as a general matter: be paid a salary on a weekly or less frequent basis that equals or exceeds the minimum salary threshold noted in the prior paragraph; must have total annual compensation at or above the new total compensation threshold noted in this paragraph; and must “customarily and regularly” perform at least one exempt duty. Drawing on our collective insights and expertise, we have developed this Guidebook to assist you as you plan and execute changes in response to the new rule. The Guidebook includes among other things, sample action plans, communication plans, meeting agendas, employee notices, and FAQs. These materials are intended to be guidelines to consider as you ensure your business complied as of the July 1, 2024, effective date, and—perhaps more importantly— for the more substantial increase effective on January 1, 2025. Of course, this Guidebook does not replace the role of an organization’s trusted legal counsel— one who understands the business and the DOL’s new rule, as well as any applicable state law requirements (which are not the focus of this Guidebook), and who can wield that knowledge to provide tailored legal advice. This Guidebook is not that. It is, however, a robust reference point that is the product of hundreds of hours of collaboration, forethought, and work. We are proud of it, and we hope you find it helpful. In addition, Seyfarth maintains a 50-state survey on overtime exemptions. For access to current materials on those state overtime exemptions, Seyfarth clients can access our Survey Center platform. Please do not hesitate to contact your favorite Seyfarth lawyer if you have any questions.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 3 An Overview of the FLSA’s Revised Overtime Exemption Rule A. Changes to the Executive, Administrative, and Professional (“EAP”) Exemptions The DOL’s Two-Phased Revision to the EAP Exemptions Will Result in a Salary Level Requirement that is More Than Double the Pre-2024 Standard Effective July 1, 2024, the minimum salary threshold for the executive, administrative, and professional exemptions increased from $684 per week to $844 per week (equivalent to $43,888 on an annual basis) paid on a salary basis (or a fee basis, where permitted) Effective January 1, 2025, the minimum salary threshold increases to $1,128 per week (equivalent to $58,656 on annual basis), paid on a salary basis (or a fee basis, where permitted) The minimum salary level will automatically increase every 3 years, starting in July 2027, based on a cost of living index Up to 10% of the minimum salary threshold may be satisfied through nondiscretionary bonuses, incentive pay, or commissions, if paid annually o If an employee does not earn enough in such payments in a quarter to retain exempt status, the employer may make a “catch-up” payment at the end of the quarter o The employer has one pay period to make up the shortfall (up to 10% of the minimum salary level for the preceding 13-week period) o Any catch-up payment will count only toward the prior quarter’s amount, not toward the salary in the quarter in which it is paid B. Changes to the Highly-Compensated Employee (“HCE”) Exemption The DOL’s Revision Also Increases the HCE Total Compensation Threshold Effective July 1, 2024, the total annual compensation threshold increased to $132,964 Effective January 1, 2025, the total annual compensation threshold increases once more to $151,164 Total annual compensation must encompass a weekly amount of at least the minimum salary level (i.e., $844 per week starting on July 1, 2024; $1,128 per week starting on January 1, 2025) paid on a salary basis (or fee basis, where permitted)—the 10%
4 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com allowance noted above does not apply to the minimum salary component of the HCE exemption Additional payments to satisfy the total annual compensation threshold can include the following amounts earned during a 52-week period: (i) commissions; (ii) nondiscretionary bonuses; and (iii) other nondiscretionary compensation o An employer may utilize any 52-week period as the year, such as a calendar year, a fiscal year, or an anniversary of hire year—if the employer does not identify some other year period in advance, however, the calendar year applies An employer may also count toward total annual compensation an end-of-year catch-up payment made during the last pay period or within one month after the end of the year C. The Duties Tests Remain Unchanged No Changes to the Duties Tests When it first proposed the new rule, DOL asked questions regarding the exemptions’ duties tests—particularly the primary duty test—but did not propose specific language In the final rule, DOL does not change the duties tests Just as before, there are no exceptions for part-time employees or employees of nonprofits (though depending on the circumstances, certain non-profits and their employees may not be covered by the FLSA) D. Deadline to Comply Phase one increase took place on July 1, 2024, and Phase two increase takes place on January 1, 2025. Any salary adjustments needed to meet the $844/week threshold must have been in place before the July 1, 2024, effective date to ensure continued exempt status Holiday schedules will need to be accounted for when planning for the second phase increase on January 1, 2025
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 5 Reclassifying Employees to Non-Exempt Status A. Potential Steps for Reclassifying Employees as Non-Exempt— Due to Salary Below the New Threshold An employer will confront a host of decision-points once it determines which exempt employees should be reclassified as non-exempt due to a salary level below the new threshold. In identifying and weighing each of those decisions, employers might consider the following steps: 1. Determine whether any of the employees’ duties should change (e.g., should any of their exempt duties be shifted to employees who will remain exempt; should any non-exempt job functions of employees who will remain exempt be shifted to those who will soon be reclassified as non-exempt). 2. Ensure that the job description for each position, whether reclassified or remaining exempt, accurately reflects the duties and responsibilities that incumbents will be expected to perform going forward. For a list of do’s and don’ts on job descriptions, click Do’s and Don’ts or turn to page 19. 3. Determine what the employee’s new rate of pay should be as a non-exempt employee. For a list of considerations in setting a method and rate of pay, click New Rate Determination or turn to page 11. 4. Develop a communication plan to explain to impacted employees that changes will be announced soon because of new government requirements. For a list of considerations around those communications, click Communication Plan or turn to page 31. 5. Provide written notice to employees who will be reclassified. For a suggested form of the written notice to use with employees whose duties will remain the same, click Notice of Pay Change or turn to 47. For employees whose duties will change, click Notice of Duties and Pay Change or turn to 50. Ensure the payroll department updates the employee’s itemized wages to report accurately the employee’s new rate of pay as well. 6. Equip your HR team and involved or impacted managers with sufficient information and understanding to answer questions that employees may ask after the announcement. For FAQs that could be used by your managers, click FAQ-Manager or turn to page 57. 7. Ensure that the reclassified employees have access to the timekeeping system and that the system can accommodate the increased number of timekeepers. 8. Train the reclassified employees and their managers on timekeeping policies and expectations, as well as other policies impacting non-exempt employees (e.g., overtime, meal/rest break), and the importance of adapting work habits to comport with those policies and practices.
6 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com B. Steps for Reclassifying Employees as Non-Exempt—For Reasons Other Than Salary With respect to exempt employees being reclassified for reasons other than salary level, employers might consider the same steps set forth above, though care should be taken in planning the messaging around the change. Employees will want to understand, at least at a high level, why they are being reclassified. One theme of the messaging could very well be that the business is responding to a complex, growing, and changing web of state and federal wage and hour laws and attempting to stay ahead of the curve. C. Sample Workflows for a Strategic Review and Change Management Process The following process maps depict potential workflows for an employer to assess its exempt workforce, determine changes necessitated by the new rule, and execute changes. Of course, every employer is different. You should consult with your Seyfarth counsel for advice on tailoring a process for your business and its unique philosophies, goals, constraints, and sensitivities.
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© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 9 D. Sample Task Allocation Chart The following task allocation chart depicts potential roles and responsibilities for key stakeholders and partners involved in a comprehensive review and reclassification process. Of course, every employer is different; this chart, like other materials in this Guidebook, is merely intended as a sample. You should consult with your Seyfarth counsel for advice on tailoring a process for your business and its unique needs. Normalizatio n of Job Titles & Descriptions Identify Jobs for Review Salary Level Analysis Evaluate Current Classification Determine Future Classification Change Management Sub-Task 1 Pull job titles and job descriptions Review prior job analyses Review jobs that fall under new salary threshold Review job descriptions, training, evaluations, and other documents reflecting duties and expectations Review law firm analysis Develop communications for relevant stakeholders Accountable Professional Internal Resource Seyfarth and Company (Legal) TBD TBD Company (Legal) Seyfarth and Company (Legal/HR) Sub-Task 2 Eliminate extinct jobs and identify identical jobs under different titles Determine which jobs remain in scope by cross checking with current job inventory Confirm that “upstream” and “crossstream” jobs are included in scope Conduct stakeholder interviews Evaluate each recommendation through an appeal process Develop communications and training for affected employees Accountable Professional Internal Resource Seyfarth and Company (Legal/Comp/ HR) Seyfarth and Company (Legal/Comp/ HR) Seyfarth and Company (TBD) Seyfarth and Company (Legal/Stakeholder s) Seyfarth and Company (Legal/HR) Sub-Task 3 Match job descriptions to remaining jobs— for any without a description, place in queue for development Identify new jobs under $55,068 that have questionable exempt vs. non-exempt duties Determine potential overtime costs (Seyfarth can model this) Prepare job content summary describing factual findings about the job Identify jobs for restructuring or reclassification Develop and conduct training for relevant stakeholders Accountable Professional Internal Resource Seyfarth Seyfarth or Company Seyfarth Seyfarth and Company (Legal/Stakeholder s) Seyfarth and Company (TBD) Sub-Task 4 Comport new job list to list of jobs reviewed under prior audit, if any Select jobs for further review Preliminary analysis of proper classification Confirm jobs for salary level increase Confirm timekeeping and pay practices can accommodate new non-exempt employees Accountable Professional Internal Resource Seyfarth and Company (Legal) Seyfarth Seyfarth and Company Seyfarth and Company (Legal/Comp/HR) Sub-Task 5 Develop/revise job descriptions, but do not publish as final— keep as draft Accountable Professional Company (Legal/HR) Company DURATION ____________ __________ __ ___________ _ ____________ ____________ ____________
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 11 Determining Pay for Reclassified Employees A. Deciding How to Pay Reclassified Employees In reclassifying employees, an employer will need to decide how to pay the impacted employees, as well as whether any changes should be made to their duties. Below are few among many considerations an employer could take into account in this process. 1. How do you want to pay the employee? Though most non-exempt employees are paid an hourly rate, the FLSA does not require this. Non-exempt employees may be paid via a weekly salary, a day rate, a piece rate, or in a number of other ways. Note: Regardless of the basis on which the employee is paid, the FLSA requires that their earnings be converted into a “regular rate” of pay— which is an hourly rate calculated by dividing non-excludable compensation for the week by hours worked—upon which the overtime rate is based. Most amounts paid to an employee are non-excludable and must be included in the regular rate calculation. 2. If you decide to pay a reclassified employee a salary, how many hours should the salary cover? This question is important because there are three different ways to calculate overtime pay for salaried non-exempt employees: (i) time and one-half (i.e., 1.5x) for all overtime hours; (ii) half-time (i.e., 0.5x) for all overtime hours (commonly referred to as the “fluctuating workweek method”); and (ii) a hybrid of half-time for up to a preset amount of overtime hours and time and one-half for any hours beyond that. Which calculation applies depends on the number of hours the salary is intended to cover. Time and One-Half for All Overtime Hours: This method applies if the employee’s salary is intended to cover 40 hours per week, or some number less than 40. Note, however, that if the employer and employee agree that the salary covers some number of hours less than 40 per week, the employee will be owed additional straight-time pay for any additional hours worked up to 40. The following examples illustrate the distinction between a salary that covers 40 hours and one that covers less: If an employee receives an annual salary of $40,000 (i.e., $769.23/week) that covers 40 hours, and if she works 45 hours in a particular workweek, then her total compensation for the week would be $913.46, which is equal to her weekly salary (i.e., $769.23) plus her overtime pay (i.e., $769.23 40 hours = $19.23 regular rate x 1.5 = $28.845 overtime rate x 5 overtime hours = $144.23). If the employee’s salary instead covers 35 hours, then her total compensation for a week in which she works 45 hours would be $1,043.96, which is equal to her weekly salary (i.e., $769.23) plus straight-time pay for hours worked between the intended 35 and 40 (i.e., $769.23 35 hours = $21.978 regular rate x 5 additional straight-time hours = $109.89) and time and one-half pay for hours in excess of
12 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com 40 (i.e., $769.23 35 hours = $21.978 regular rate x 1.5 = $32.967 overtime rate x 5 overtime hours = $164.84) Hybrid Method of Half-Time for Some Overtime Hours, and Time and One-Half for the Rest: If the employee’s schedule usually requires more than 40 hours per week, the employer could choose to pay the employee a salary meant to cover all regularlyscheduled hours, rather than just 40 per week. In this case, the regular rate is determined by dividing the employee’s weekly salary by the number of hours the salary is intended to cover, paying additional half-time pay for the overtime hours up to the number of regularly-scheduled overtime hours, and paying time and one-half only for overtime hours in excess of regularly-scheduled overtime hours. The following example demonstrates this hybrid overtime calculation method: If the employee receives a salary of $40,000 (i.e., $769.23/week) that is intended to cover 45 hours per week, and if she works 40 hours the first week, exactly 45 hours the second week, and 50 hours the third week, then the employee’s total compensation in these three weeks would be as follows: Week 1 (40 work hours): Most likely, $769.23.* Note: Depending on the business’s policies regarding non-exempt employees’ time off, and also depending on the documentation and communications around what the salary covers, it may be technically legal to reduce the employee’s salary for working fewer than 45 hours. There are, however, administrative and practical concerns with such deductions. This topic, like other decision-points, would justify consultation with legal counsel. Week 2 (45 work hours): $811.97, which is the weekly salary (i.e., $769.23), plus half-time for the 5 overtime hours (i.e., $769.23 45 hours = $17.094 regular rate x 0.5 = $8.547 overtime rate x 5 overtime hours = $42.74). Week 3 (50 work hours): $940.18, which is the weekly salary (i.e., $769.23), plus half-time for the first 5 overtime hours (following the same calculation as set forth for Week 2) and time and one-half for the additional 5 overtime hours (i.e., $769.23 45 hours = $17.094 regular rate x 1.5 = $25.641 overtime rate x 5 overtime hours = $128.21). Fluctuating Workweek Method: If the employee’s work hours fluctuate week to week, then the employer and employee could agree to a set salary intended to cover all hours worked each week, whether few or many. Under this arrangement, the employee would be owed only half-time for any overtime hours worked, and their regular rate of pay would fluctuate by week because it would be determined by dividing the weekly salary by all hours worked in that week. The following examples illustrate how the overtime rate of pay would vary: Note: The hybrid and fluctuating workweek methods are not allowed in all states. They should not be used, for example, in California, New Mexico, or Pennsylvania. This is not an exhaustive list. Consult with your Seyfarth lawyer to determine permissibility in your state.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 13 If the employee’s salary is $40,000 (i.e., $769.23/week) and she works 35 hours in the first week, 45 hours in the second week, and 50 hours in the third week, then her total compensation in each of these three weeks would be as follows: Week 1 (35 work hours): $769.23, because the salary is guaranteed and cannot be reduced in weeks that the employee works fewer than 40 hours. Week 2 (45 hours): $811.97, which is the weekly salary (i.e., $769.23), plus halftime for the 5 overtime hours (i.e., $769.23 45 hours = $17.094 regular rate x 0.5 = $8.547 overtime rate x 5 overtime hours = $42.74). Week 3 (50 hours): $846.15, which is the weekly salary (i.e., $769.23), plus halftime for the 10 overtime hours (i.e., $769.23 50 hours = $15.384 regular rate x 0.5 = $7.692 overtime rate x 10 overtime hours = $76.92). Compared to the other methods of pay, the fluctuating workweek method has both more benefits and risks: The benefit to the employee is that, despite a variable work schedule, she receives a predictable salary even in weeks where she works less than 40 hours. The benefit to the employer is that it only owes the employee the additional half-time premium for any hours worked in excess of 40 per week. Also, because the overtime rate of pay decreases as hours worked increases, this method disincentivizes employees from creating work solely to increase overtime pay. The risks are that the employee may feel: (i) punished for working more hours to complete work; and (ii) incentivized to cut corners to finish work in fewer hours. CAUTION: There are a few hurdles to using a fluctuating workweek plan under the FLSA, including: (i) the employee’s hours must fluctuate week to week, which some courts interpret to mean above and below 40; (ii) the employer and employee must have a “clear mutual understanding” that the salary is fixed pay for all hours worked each week, which makes it a best practice to explain the pay method in writing; and (iii) the types of additional compensation that the employee may receive on top of the salary and any overtime pay are more limited than for employees paid by other methods. Also, as noted above, the fluctuating workweek method is not permissible in some states. 3. Could a day rate or a piece rate method be used to pay the reclassified employee? A day rate provides a flat rate of pay for each day the employee works (regardless of the number of hours worked in the day), while a piece rate is based on the number of pieces or units completed. At a high level, under either method, overtime hours may be paid at a half-time rate, as the day- or piece-rate wages are deemed to provide straight-time pay for all hours worked. But the calculation can be trickier where additional types of compensation are paid to the employee, as well as depending on state law nuances. In assessing these methods under the federal law, it is important to remember that neither undoes the need to track actual hours worked and ensure that the employee’s
14 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com regular rate of pay equals or exceeds the minimum wage. Timekeeping and sound recordkeeping is a must for any non-exempt employee, regardless of pay method. Some drawbacks to the day-rate method are that: (i) the employee must receive the full day rate even if she works only a partial day; (ii) the employee cannot receive any other forms of compensation for their services; and (iii) the calculation is more complicated in states with daily overtime requirements, like California. Specific drawbacks to the piece-rate approach are: (i) it is more complicated in states where daily overtime is required; and (ii) in some states, like California, the piece rate cannot be deemed to cover waiting time or other non-piece work—instead, an hourly rate must be paid for any non-piece work performed. And when an hourly rate is paid alongside piece rates, overtime pay calculations become more complex. 4. If you prefer to use an hourly rate of pay, what should the hourly rate of pay be? It is of course acceptable, and most common, to pay non-exempt employees via an hourly rate of pay. In deciding what hourly rate to pay a formerly salaried exempt employee, the following two options are most common: Option 1: Divide the employee’s pre-reclassification salary by 2,080 hours—i.e., 40 hours per week x 52 weeks per year—and use the resulting rate as the employee’s hourly rate. For instance, if the employee was earning a salary of $40,000 per year, then her new hourly rate would be $19.23 (i.e., $40,000 2,080 hours). The benefit of this approach is that it is simple for the employer to calculate and fairly straightforward for the employee to understand. The risk is that this approach does not account for overtime, which could cause total labor expenses to increase drastically. Option 2: Structure an hourly rate that approximates the employee’s former salary, inclusive of anticipated overtime hours and accounting for the fact that there are weeks in which the employee likely will work fewer than 40 hours. One way to do this is to approximate the number of weeks worked during the year and average hours during those weeks. To illustrate, assume you are reclassifying an employee who was earning $40,000 per year. Assume that you expect the employee to work an average of 45 hours per week and 50 weeks per year going forward. This would equate to 2,000 non-overtime hours (i.e., 40 hours x 50 weeks) and 250 overtime hours (i.e., 5 hours x 50 weeks). The first step under this approach is to determine “adjusted total hours” by adding anticipated non-overtime hours (i.e., 2,000 hours) and 150% of anticipated overtime hours (i.e., 375 hours). Then divide the employee’s old salary by the adjusted total hours. Building on the example above, the adjusted hours total is 2,375 hours (i.e., 2,000 non-overtime hours + 150% of 250 overtime hours), and the hourly rate would be $16.84 (i.e., $40,000 2,375 hours). The benefit of this approach is that it will keep in check the potentially larger labor costs caused by the reclassification.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 15 The risk is that this approach could hinder morale by enhancing the employee’s feeling that something has been taken away from her and/or that she has been demoted and “pinned to the clock.” In the example above, if the employee worked the projected 2,000 non-overtime hours but did not work any overtime, then her wages would total $33,680—a steep drop-off from the $40,000 salary she was previously earning. It is only by working the 250 overtime hours, which equates to about $6,315 in overtime pay, that she approaches her old salary. Ultimately, how you decide to pay reclassified employees should be driven by factors and motivations unique to you and your business. The most important thing to recognize is that there are, in fact, a range of options to consider before you make the decision.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 17 Determining Back Wage Payments (if Any) A. Steps for Calculating and Making Back Wage Payments, if Owed to a Reclassified Employee If the employer determines that a reclassified employee should receive back overtime wages for a period during which the employee had been treated as an exempt employee, then it might consider the following steps in calculating and making the payments. Note, however, that back wage payment processes are inherently thorny and present myriad technical and legal angles to account for. Employers should seriously consider engaging legal counsel to assist. 1. Determine the period for which back wage payments should be made. This will turn on the employee’s unique circumstances, employer’s goals and risk tolerance, and relevant statutes of limitations (which under the FLSA is two years for a non-willful violation, though longer periods apply under some state laws). 2. Determine the potential sources through which the overtime hours worked by the employee may be estimated, and decide which of the sources should be used, alone or in combination with one another, to approximate the overtime hours the employee may have worked. For a list of possible sources, click Possible Sources or turn to page 18. 3. Present the employee with an estimate of past overtime hours. In doing so, remain receptive to hearing a different hours estimate from the employee if the employee disagrees with the employer’s estimate. 4. Reach an agreement (through negotiation, if need be) with the employee as to the number of overtime hours for which back wage payments will be made. 5. Decide whether to calculate back wages using a time and one-half or half-time computation. For sample calculations using each method, as well as a list of factors to consider in deciding which method to use, click Sample Calculations or turn to page 18. 6. Explain to the employee the amount of back wages the employer has determined should be paid and the method used to calculate that amount. 7. Present the employee with a letter summarizing the parties’ understanding regarding the hours and method of calculating overtime pay and enclosing a back pay acknowledgment form for the employee to consider and, if acceptable, sign and return. For a suggested letter and form, click Letter and Acknowledgment or turn to page 50. 8. Deliver the back wage payment to the employee, minus any required withholdings and applicable deductions (e.g., taxes, contributions to a stock purchase plan, contributions to a 401K plan or other retirement account). Deductions should not be made for health insurance benefits or any other benefits where the amount of the deduction is the same for each pay period irrespective of the amount of earnings.
18 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com B. Possible Data Sources to Use in Determining Overtime Hours for Back Pay Purposes The sources of data for estimating overtime hours worked by an employee depend on highly individualized factors such as the employer’s business and systems, the employee’s work and work setting, and other unique considerations. Below is a list of potential sources of data that an employer could draw upon to estimate hours worked, depending on its unique circumstances. 1. Logs of electronic key/badge swipes showing when the employee entered and exited the building or worksite 2. Logs showing the time that a building or work area alarm was armed and disarmed 3. Phone log on/off times 4. Volume of calls or emails if position spends substantial time communicating via phone or email 5. Computer log on/off times 6. Email records 7. Work schedules 8. Manager observations 9. PTO or leave of absence records. 10. Amount of work completed by the employee if the employer knows how many hours it takes for most employees holding that position to complete similar work C. Sample Back Overtime Pay Calculations and Considerations Assume that an employee earns a weekly salary of $860 and, over the course of two years without any whole weeks off, has worked an average of 4 overtime hours per week. Here, back overtime pay using a half-time method would be $4,065.45, calculated as follows: ($860 per week 44 hours per week) x 0.5 x 4 overtime hours x 104 weeks Back pay using a time and one-half method would be $13,416.00, calculated as follows: ($860 per week 40 hours per week) x 1.5 x 4 overtime hours x 104 weeks Whether to apply a half-time or time and one-half method is an important decision. There is ample case law supporting use of the former in cases involving misclassified employees who received a predetermined salary for all hours worked. The approach is not without complexity or risk, however, and there are some states where half-time is not allowed. Employers should consult with legal counsel before undertaking any back wage payment process, including (but not limited to) the decision how to calculate back wages.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 19 Updating Job Descriptions A job description can serve various goals, such as: (i) delineating tasks that should be performed as part of the primary duty that justifies the job’s exempt status; (ii) identifying the essential job functions that an employee must be physically and mentally able to perform (with or without a reasonable accommodation); (iii) establishing expectations by which performance will be evaluated and by which an applicant’s fitness will be determined; and (iv) confirming prerequisite education, skills, and experience. The following list of job description best practices have been designed with all of the above in mind: DO state the primary purpose or key function of the position near the top of the job description. This primary purpose or function will be the one by which exempt status will be determined. While it need not be a function performed the majority of the time, it needs to be the most important or key function of the position. If, for example, the position is that of a manager over a particular department or subdivision, the primary purpose may be to manage the operations of and personnel within that department. DO list the specific duties and tasks that an employee in the position is expected to perform in fulfilling their primary purpose or key function. DO organize the list of specific duties and tasks that an employee is expected to perform in order of priority or importance with the most important duty or task listed first and the least important listed last. DO ensure that either (i) the list of duties is limited to those that are essential to fulfilling the key function of the position, or (ii) there is a separate section of “essential” job duties that the employer expects all employees in the position to be mentally and physically able to perform with or without reasonable accommodation. The list of essential job functions is critical to a determination of whether an employee or applicant with a disability can be reasonably accommodated in the position absent undue hardship. Essential functions include those tasks that are fundamental to the job while non-essential functions are marginal tasks that can be distributed to others. In identifying the essential functions, focus on the time spent, frequency, importance of the function, consequences of failing to perform the function, and the availability of others to perform the task. Non-essential or “other” functions that are still important can be listed in a separate section of the job description. DO focus on specific duties and tasks rather than broad concepts or generalized responsibilities. By way of example only, it would be better to describe a task as “advise client on which default and custom rules to include in timekeeping system,” rather than “provide timely and reliable advice to clients” or “apply critical thinking and problem-solving skills to help develop solutions for clients.”
20 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com DO NOT list every single task that an employee in the position may or may not possibly be required to perform from time to time. By way of example only, it is unnecessary to note in the description that employees in the subject position may help with the duties of a subordinate in the case of a rare staffing shortage, or may “assist with special projects as assigned.” DO NOT list basic tasks that are expected of nearly everyone in any position. By way of example, there is rarely need to state that employees in the position should adhere to company policies, follow instructions, or be responsive. DO list the positions that directly report to the subject position if an executive exemption may be claimed. DO NOT list the same positions as direct reports in the job descriptions for different level managers or supervisors within the same hierarchy. By way of example only, if a consultant is a direct report of a lead or assistant manager, that consultant should not also be listed as a direct report of the manager, or vice versa. DO ensure that the job duties listed in one job description do not conflict with those listed in another. By way of example only, if one of the duties of a lead or assistant manager is to advise on hiring and firing decisions, the duties of the manager above that lead or assistant manager should include “considering the hiring and firing recommendations of” that lead or assistant manager rather than suggesting that the manager makes hiring and firing decisions alone or after consultation solely with HR. DO ensure that the job descriptions are detailed enough that similar positions in different departments sound like different positions despite their analogous roles. DO limit the number of non-exempt duties or tasks included in the job description if the position is one for which the employer intends to claim an exemption. DO, if possible, describe the types of recommendations or decisions on significant matters that may be expected of employees in the position (beyond hiring, firing, and other personnel changes) if the position is one for which an exemption may be claimed. By way of example only, it may be appropriate for a job description to note that employees in the position are expected to develop a recommended budget and then manage the budget for their department, team, or projects. It may be also appropriate to say that the position makes or recommends changes to particular types of policies or procedures. The scope or nature of the budget, as well as the types of policies and procedures, should be specified id possible.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 21 DO have a section for qualifications and job requirements that: (i) lists the particular level of education required of employees in the position; (ii) specifically identifies any particular licenses or certifications required; (iii) notes, if applicable, the number of years of experience in the industry in general, or with the employer in particular, that are required; and (iv) includes other necessary skills, like communication skills, mechanical aptitude, math skills, or other specific requirements or standards. DO include an accurate list of physical requirements to complete the essential functions of the position (such as the amount of weight that employees will regularly need to be able to lift, the amount of time that will be spent sitting or standing, etc.). Be sure to include any pertinent environmental conditions such as heat, odor, dampness, dirt, fumes, dust, oil, grease, noise, or vibration. Note whether exposure will be occasional, moderate, frequent, or continuous. Also note if any protective devices are required. DO NOT add unnecessarily to the list of physical requirements to cover non-essential functions or potential but unlikely scenarios, such as the ability to perform physical duties of the subordinates in instances of unusual, extended periods of staffing shortages.
© 2024 Seyfarth Shaw LLP | www.seyfarth.com Classification Guidebook | 23 Eliminating Job Positions (if Necessary) A. Action Items for Positions Being Eliminated If the employer determines, as part of its classification review, that some job positions should be eliminated and/or some employees separated, there are a myriad of employment law considerations. The below list captures some of these issues. Some steps will not be necessary in all circumstances, and the applicability of certain steps will largely depend on the number of impacted employees. Should the employer deem it necessary to eliminate positions, Seyfarth can provide more specific and tailored advice and can develop templates for addressing many of the issues raised in the list below. 1. Determine the number and location of employees and positions that may be impacted and then: Consider alternatives to terminations, including transferring employees to other open positions for which the employees impacted may be qualified. Consider the impact of attrition, hiring freeze, hours reductions, and pay cuts. Document steps taken to avoid a reduction in force and/or reasons alternatives are not viable. 2. Review all policies, practices, handbooks, collective bargaining agreements, and any other materials concerning end of employment issues, including practices concerning selection criteria, transfer, seniority, retirement, termination, exit interviews, severance pay/benefits, releases, and recall rights. 3. Consider developing/updating an ERISA Voluntary Separation Pay Plan (VSP) and an ERISA Involuntary Separation Pay Plan (ISP). 4. Determine the anticipated timetable for implementing the position eliminations, and prepare a written planning document that (i) identifies specific job functions to be eliminated/reduced/merged/restructured, (ii) the total hours savings, and (iii) based on these facts, the number of positions to be reduced. Note: It is important at this stage to identify only affected job functions, not persons. 5. If multiple employees will be impacted, determine whether the WARN Act or state miniWARN laws may be applicable. If so, comply with all notice obligations. Please contact counsel for further legal advice. 6. Consider and plan for impact on H-1B Visa holders, employees receiving sponsorship, and other immigration issues. 7. Create a Review Committee to make final decisions on individual terminations and to ensure a uniform, objective, and thorough review. When selecting the Committee, ensure a diverse representation (including individuals over 40, minorities, and females). Depending on the scope of position eliminations, include top operational and H.R.
24 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com representation and consider who would make a strong potential witness. The Committee should be exposed only to relevant data. They should keep notes of the actual decisions, but not deliberations. 8. If not all employees in a single job category will be eliminated, develop selection criteria for the reduction in force. Consider the following when developing the criteria: Use objective criteria first Use only work-related criteria Give credit for experience Use seniority where ability is relatively equal Identify/develop selection criteria information sources, like performance appraisals, productivity measures, and supervisor rankings Emphasize uniform application Consider affirmative action issues 9. Depending on the scope of the position eliminations, consider conducting an adverse impact analysis for protected groups. If such analysis is needed, it should: be conducted at the request and direction of legal counsel to protect it from disclosure; include an age/race/sex workforce profile as of the final selection date; and involve multiple analyses of the data, including, by way of example, analysis by position, department, job groups, salary grade, and age bands. 10. Determine whether severance will be offered in exchange for a release of all claims and whether early retirement or other voluntary incentive programs will be offered. If severance will be offered, prepare a termination release agreement, and for employees over 40 years of age, ensure that the release agreement is compliant with the Older Workers Benefits Protection Act (OWBPA). If two or more employees are being terminated, the OWBPA requires additional provisions for a valid release of age claims, including a 45-day consideration period and a separate disclosure list, which must provide information regarding the decisional unit, eligibility/selection criteria, time limits, and job titles (not names) and numeric ages (not dates of birth) of all eligible/selected employees and non-eligible/non-selected employees in the same job classification or organizational unit. 11. Provide internal job opportunity information to selected employees. Ensure that postnotification placements are pursuant to an open, valid, and competitive job posting procedure.
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