Giving Employees One More Reason to Complain
~The new FLSA white-collar regulations~
By Howard B. Hoffman

Recently, the United States Department of Labor (DOL) issued its final revisions to the white-collar exemptions under the federal Fair Labor Standards Act (FLSA). Included is a new and important incentive for all covered employers to maintain a written policy encouraging exempt employees to complain about improper pay deductions.

Under the previous FLSA white-collar exemptions, in order to claim one of the white collar exemptions (i.e., executive, administrative or professional), an employer was required to satisfy not only the “duties” test but also demonstrate that it paid a true salary. In other words, it also had to satisfy the “salary” basis test. The failure to satisfy either of these two tests resulted in the exemption being lost and the employer being held for potential minimum-wage and overtime payments.

Whether a wage payment satisfied the “salary” test was the subject of significant regulations and considerable litigation. Prior to the new FLSA regulations, if improper salary deductions were actually made or if there was even a “significant likelihood” that such improper deductions could be made, then the salary basis test could be lost for the entire tenure of the employee (damages limited only by any applicable statute of limitations). This was true, even if the employer made an improper salary deduction for only one pay period. This obviously created a trap for the unwary employer.

The new FLSA white-collar regulations seek to eliminate this trap. The regulations contain two very significant changes to the salary basis test. First, if an “employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.” This significantly reduces the potential monetary exposure in unpaid overtime.

Second, the new FLSA white-collar regulations create a “safe harbor” provision to the salary basis test. This provides a new affirmative defense for employers. Basically, if an employer has a clearly-communicated policy that prohibits improper pay deductions, includes a complaint mechanism, reimburses the employee(s) for any improper deductions and makes a good-faith commitment to comply in the future, an employer will not lose a claimed exemption unless it willfully violates its policy by continuing to make improper deductions after receiving employee complaints.

This safe harbor provision essentially allows the employer to repay the employee for the improper deduction and still maintain the exemption – even for the time period in which the improper deduction occurred.

According to the DOL, the “best evidence of a clearly-communicated policy is a written policy that was distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.”

The DOL explained in its preamble to the new FSLA white-collar regulations that the safe harbor provision encourages employers to adopt “proactive management practices”. Citing the Supreme Court cases of Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth, the DOL stated that the safe harbor provision is “generally consistent with trends in employment law”. The DOL emphasized that while “a written policy is not essential,” the policy “must be communicated to employees prior to the actual impermissible deduction”.

It is important to note that after receiving a complaint, an employer must evidence its good faith commitment to complying with the FLSA in the future. According to the DOL, this could include but is not limited to any of the following: “adopting or re-publishing to employees its policy prohibiting improper pay deductions; posting a notice including such a commitment on an employee bulletin board or employer Intranet; providing training to managers and supervisors; reprimanding or training the manager who has taken the improper deduction; or establishing a telephone number for employee complaints.”

In sum, the new FLSA white-collar regulations encourage employers to give their employees one more reason to complain. Employers who have not adopted an employee handbook or have not had competent counsel revise their employee handbook for some time should do so. Attorneys involved in reviewing and drafting employee handbooks and counseling employers’ with respect to their obligations under the FLSA should review these new regulations carefully.