The Fair Labor Standards Act

The purpose of this article is to briefly educate Chinese companies with US subsidiaries, individuals interested in starting and operating a business in the United States, about the FLSA and how to maintain compliance with FLSA regulations. It is our goal to provide the best quality service for our clients and part of that involves helping our clients avoid expensive and costly litigation.

While this memo may be helpful to you in establishing your own company to prevent litigation, in the event of litigation, you should not rely on this memorandum and should contact an attorney immediately.

FLSA Overview

The FLSA is a United States Federal Law that imposes a number of obligations on certain companies. Specifically it deals with minimum wage, overtime pay, and recordkeeping. A company is required to follow the FLSA if it engages in interstate commerce (for example, by buying or selling goods and products from one state to another) and if it’s annual gross volume of sales is not less than $500,000.

If your subsidiary or US company does not meet these criteria, it may still be required to follow various State or City laws. Many States and Cities have laws that are similar to the FLSA and in fact may impose even stricter requirements than what is contained in the FLSA. If you have a question about your specific company, you may contact us to get more detailed information on a state by state basis.

Overtime Regulations and Risks

One of the biggest regulatory burdens the FLSA imposes on employers concerns overtime pay requirements. Under the FLSA, employees who work over 40 hours a week are to be paid overtime equivalent to 1.5 times their standard hourly wage. If your employee is not paid the required overtime and initiates a lawsuit against you, your damages would include (a) the unpaid overtime payments due, (b) liquidated damages that doubles the total payments, and (c) the employee’s legal fees.

For example, imagine if your company employs 4 individuals who work 50 hours a week over a 3 year period, making $800 dollars a week or an annual salary of $41,600 a year. If they bring a lawsuit against you for failure to pay FLSA required overtime, they would be entitled, each, to (a) unpaid overtime of $24,960 and (b) liquidated damages also of $24,960. That would mean total damages (for 4 employees) of $199,680, not counting attorney’s fees.

Additionally, it is not uncommon for plaintiffs to seek class or collective action. This means even if only one employee brings a lawsuit, if the class is certified, that one employee can sue and represent the interests of all similarly situated employees. Therefore, all it takes is one unhappy employee for your company to be exposed to potential liability in the hundreds if not millions of dollars depending on the size. Lastly it is important to note that the FLSA allows individuals to be sued, not just the corporate entity. Wherefore failure to abide by FLSA regulations could subject you personally to a legal action.

Exemptions to FLSA Overtime Requirements

There are various exceptions to the aforementioned general rule with respect to overtime requirement. These exceptions are governed pursuant to 29 U.S.C. § 213 and 29 C.F.R. § 541.

These regulations set up a two-part test for the exemption, generally referred to as the “salary basis” test and the “primary duty” test. See e.g. Padilla v. Rabin, 2016 BL 108359, 6 (E.D.N.Y. Apr. 06, 2016). An employer is not required to pay individuals who are paid on a salary basis, above a minimum threshold, and whose primary duties are executive, administrative, professional, outside sales or computer related, as defined by the aforementioned statutes and regulations.

Whether your employee qualifies for one or more of these exemptions must be determined on a case by case basis. If you have questions about whether your employees fall under the exemption, please contact our firm and we can evaluate the tasks and responsibilities of your employees and advise what you can do to minimize risk. It should be noted that if you assert that your employees are covered by these exemptions, the burden is on the employer meaning that you would have to prove that the employees in question are exempt. Such cases are highly fact intensive and proving that an employee is exempt often cannot be done until after a trial, meaning you would be subject to extensive legal fees. Wherefore if your employee is in a “gray zone” where they could go either way, it is our general recommendation that you treat them as if they are not exempt and operate accordingly, although we can assist through analysis of employees on a case by case basis.

New regulations adopted by the United States Department of Labor (“DOL”) on May 18, 2016 substantially expand FLSA overtime applicability by increasing the minimum salary threshold. These regulations went into effect December 1, 2016. For example, at present, pursuant to 29 C.F.R. § 541, an “employee employed in a bona fide executive capacity” whose primary duty is the management of the enterprise, or of a customarily recognized department, is exempt from overtime requirements if “compensated on a salary basis at a rate of not less than $455 per week.” The new rule, promulgated by the DOL increases the minimum compensation rate from $455 per week to $913 per week. See 2016/05/23/2016-11754/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and.

The significance of this change is that an employee who is paid less than $913 a week (or $47,476 a year), even if he/she is engaged in the “management of the enterprise or of a customarily recognized department”, will still be subject to FLSA overtime requirements. This applies whether or not the employee primarily engages in executive, administrative, professional, outside sales or computer related duties.

Another major overhaul is that unlike the 2004 regulations which simply increased the threshold, the 2016 regulations peg the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. The new regulations also establish a mechanism for automatically updating the salary and compensation levels every three (3) years to prevent the thresholds from becoming outdated. Wherefore it is recommended that you be mindful of what the pay threshold is at all times when dealing with compensation structures for employees.

Flowchart for Visualization

In order to assist with understanding the material, the following is a simplified, general flowchart that shows the decision making process when deciding whether to classify an employee as exempt or not exempt from FLSA requirements, specific for example to the executive exemption:

Does this employee takes less than $913 a week? –This first requirement concerns salary. If the employee’s salary is below this threshold, then the employee does not qualify.

Is his primary duty management of the enterprise?–This requirement is about if the employee’s primary duty involves management. An employee can have multiple tasks but to qualify for the exemption, management has to constitute his primary duty.

Is his primary duty management of a “recongnized department of subdivision”?–An employee in a large company may be considered exempt if he manages a “recognized department or subdivision” like “marketing” or “sales”. But such a department has to be recognized by the company.

Does he manage two or more other employees?–The two or more other employees requirement, after the salary, is a very straightforward concept. Thus you as the employer cannot game the system by appointing your employee the head of his own “subdivision”.

Are his suggestions and recommendations about hiring, firing, or promotion given “particular weight”?–This last requirement looks at the definition of “manage”. And in particular, if your employee has either the direct authority to hire/fire, or if his recommendations are given “particular weight”. This prevents employers from simply claiming that an employee is a “manager” when in actuality he has no managerial oversight of others.

Improving Compliance

The best way to improve compliance is to keep time records for all employees and to simply treat all employees as hourly employees paid on a per hour basis. Existing employees who are paid on a salary basis can easily be converted to a per hour basis by looking at their annual salary and calculating how much their hourly wage should be. It is also recommended to use professional payroll companies such as ADP Payroll Services or Paychex services.

It is also generally useful to have an employee manual that sets forth all the rights and responsibilities of employees, and specifically limitations concerning overtime. As an employer, you have the authority to specifically forbid employees from working overtime. If you as an employer are aware that an employee is working overtime, you are recommended to direct the employee not to work overtime. A paper trail showing you granting or denying employee requests for permission to work overtime will protect you against instances where employees allege that they worked overtime but were not compensated.

These are just some of the mechanisms your company could implement. In the end, the process is company specific and what steps your company adopts to ensure compliance should be discussed by and between our firm and you or your representatives and managers. In addition to providing legal services in the event of a litigation, we also offer informational materials, seminars, and legal documents such as employee manuals, to help prevent litigation.