Wage & Hour Audit in California:
How to Identify and Correct Your
Biggest Compliance Risks
Presented by:
Marc Jacuzzi
Simpson, Garrity, Innes & Jacuzzi, P.C.
Tuesday, July 22, 2014
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Wage & Hour Audit in California:
How to Identify and Correct Your
Biggest Compliance Risks
Presented by:
Marc L. Jacuzzi
Simpson, Garrity, Innes & Jacuzzi PC
July 22, 2014
Enforcement Trends
Employee Reclassification Initiative for Independent
Contractors
y 2015 DOL Budget - Nearly $14 million to combat the
misclassification of workers as independent contractors, which
deprives them of benefits and protections to which they are legally
entitled and disadvantages employers who comply with the law.
Enforcement Trends
y Obama’s 2014 fiscal year budget stated:
y One of the “funding highlights” listed in the section of the
Budget covering the Department of Labor is to “Maintain
support for agencies that protect workers’ wages, benefits,
health and safety, and invest in preventing and detecting the
misclassification of employees as independent contractors.”
y The Budget includes approximately $14 million to combat
misclassification, including $10 million for grants to
States to identify misclassification and recover unpaid
taxes and $4 million for personnel at WHD [the Wage
and Hour Division] to investigate misclassification.”
Enforcement Trends
Employee Reclassification Initiative for
Independent Contractors.
• 2012 DOL budget included $25 million for a joint
Labor-Treasury initiative to strengthen and coordinate
federal and state efforts to enforce statutory
prohibitions, and to identify and deter misclassification
of employees as independent contractors.
The Misclassification Initiative
• This initiative includes $12 million for the WHD to hire 90 new
investigators who will specifically target “industries with
misclassification characteristics, such as construction.”
• In addition, the budget request separately includes a request for
$1.6 million and 10 additional attorneys for the Solicitor’s Office
“to pursue misclassification litigation, including multi-State
litigation to coordinate enforcement with States.”
The Misclassification Initiative
Con’t
y In FY 2012, the Department redoubled its efforts to combat
worker misclassification by investing $46 million for a multiagency initiative of OFFCP, the Wage and Hour Division,
OSHA, the Office of the Solicitor, and the Employment and
Training Administration, which funded state grants that
address worker misclassification within the context of the
unemployment insurance program. In 2012, the Gov’t said,
“This initiative will help level the playing field for employers
who abide by the law and provide employees with their
rightful pay and benefits”.
Federal Right to Know Rules
In 2010, the DOL’s Wage and Hour Division (WHD) announced its plans to
update the FLSA recordkeeping requirements. The announcement was made in the 2010
Spring Regulatory Agenda, but the agency has yet to transform its intentions into law.
The proposed rule considered by the DOL would require covered employers
to "notify workers of their rights under the FLSA, and to provide information regarding
hours worked and wage computation." Employers classifying any employees as exempt
would be "required to perform a classification analysis, disclose that analysis to the
worker, and retain that analysis to give to WHD enforcement personnel who might
request it." The DOL stated its aim is "to foster openness and transparency, to increase
awareness among workers, and to encourage greater compliance by employers.“ A/k/a
Plan, Prevent Protect.
Federal Right to Know Rules
The WHD has delayed the action several times over the last
three years. The 2010 Spring Regulatory Agenda stated that proposed
recordkeeping rules would be published in August 2010. This was later
changed to April 2011, and then again to October 2011. On January
20, 2012, the DOL’s the Unified Regulatory Agenda moved the "Right
to Know" rules from the category "Proposed Rules Stage" into the
"Long-Term Actions" category. "Long-Term Actions" refers to issues
for which no regulatory action is expected to occur within a year’s
time. There was no longer a target date assigned for proposing the
rules.
For An Overtime Exemption the Employer Might
Be Required To:
y Analyze each exempt job classification as well as each
independent contractor position, including in collaboration with
individual workers holding those positions;
y Document the employer’s justification for finding that the
workers are properly classified as exempt or independent
contractors, as applicable;
More…
y Maintain records demonstrating the
employer’s analysis of the classifications;
y Provide records to the employer’s
workers so that the workers can assess
whether they agree with the classification
analysis; and
y Perhaps management training.
Pres. Obama’s FLSA's “white-collar”
exemption – Changes?
y The initiative is expected to focus on tightening the
qualifications for workers to be classified as bona fide
executive, administrative, professional and outside sales
employees. These so-called white-collar employees are
currently exempt from the FLSA's general requirement that
workers be paid time and a half for all hours worked in
excess of 40 each week.
What to Expect?
y So what’s expected to change? Two things:
y The minimum salary. Many on Capitol Hill are predicting the DOL
will more than double the minimum salary an employee must be paid in
order to be exempt from overtime pay, taking it from $455 to nearly
$1,000 per week. Currently, an employee making $455 would earn
$23,660 — and “If you’re making $23,000 typically you’re not high in
management,” Obama said,.
y The duties test. Heavy modifications are expected for the FLSA’s
“white collar” duties test, which is used to determine if someone is
performing an executive, administrative or professional role that would
(along with exceeding the minimum salary threshold) exempt an
employee from receiving overtime compensation.
When to Expect It?
y Assuming the proposed rule changes are released this
November, it would still be some time before any final
changes are enacted.
y Here’s a timeline:
y A public comment period – typically at least 30 days
y DOL takes time to consider comments, and
y A final draft of the regulations would need to be written and
approved by the Office of Management and Budget’s Office of
Information and Regulatory Affairs. This can takes months.
y Bottom line: Next spring – if it moves quickly! spring.
Why Should You Do a Self-Audit Now?
y It is better to have done your audit before you are doing it with
employee supervision under DOL, DLSE, IRS, or EDD!
y Doing it now may afford legal shelter – you can do it under
mantle of attorney-client privilege.
y Without mantle of attorney-client privilege – it can be used against
you. No privilege for “self-criticism.”
y If you decide there are gray areas, you can make changes to
establish more secure legal bases for exemptions or change to
non-exempt.
Who Should Be Involved in Audit
Process?
y The Manager: What should the job look like?
y The Incumbents: What do they actually do?
y Human Resources: Consider Company Policy
y Legal Counsel: Apply the Legal Standards
Conducting a Self-Audit
Overtime Exemptions –
Not So Basic
Conducting a Self-Audit
y Salary basis? A fixed amount guaranteed per week, not subject to
fluctuation based on quality or quantity of work. Examine docking
practices and policies and ensure that docking is not weakening the
“salary” basis.
y Salary must be at least 2x CA State minimum wage per week
y Duties – How is time spent? Do not rely on the job description or a
listing of supposed responsibilities. Actual activities is what counts.
Interviewing employees is an important step in a complete audit of
duties – employees’ descriptions of their duties can be very
different that those the supervisor would provide.
Exemption
Misclassifications
9 Exemption = Not Subject to pay premiums for hours worked
in excess of 8/day or 40/week.
White Collar Exemptions
y Executive
y Administrative
y Professional
y Computer Professional
y Highly Compensated
Two Tests:
yCompensation (Salary Basis)
yDuties
Focusing Now on “Salary”
SHOW ME THE MONEY!!
Minimum Salary Requirement in
California:
y Two times minimum wage for full time employment.
y This means ($9.00 x 2) x 2080 =
y $37,440.00 per year, or
y $3,120.00 per month, or
y $720.00 per week.
y January 1, 2016, an annual salary of at least $41,600.
y Federal is $455.00 per week
California Computer
Professional Minimums
y Effective January 1, 2013, the DLSE announced a 1.2%
increase in the hourly rate for computer professionals, from
$39.90 to $40.45 per hour. The monthly rate increases
from $6,927.75 to $7,010.88 per month. Finally, the
annual salary increases from $ $83,132.93 to $84,130.53
per year ($7,010.88 monthly)
How Does a Salary Work?
y A salary is a minimum amount of guaranteed compensation that
does not fluctuate based on quality or quantity of production.
y When an employee is paid on a salaried basis, s/he is not paid based
on hours worked.
y Cannot be subject to impermissible deductions
y Costly Mistake: Failure to have clear,
y appropriate salary policy
More on Salary…
y An exempt employee is paid their fully weekly
salary for every work week in which they perform
any services, except:
y The Company can dock salary for whole days missed
due to personal illness, vacation, etc. if employer has
paid sick, vacation or PTO policy
y The Company can use accrued leave in increments of
less than a full day.
y If employee exhausts PTO, no partial day deductions
Deductions From Salary
y An employee is not paid on a salary basis if deductions from the
predetermined salary are made for absences occasioned by the
employer or by the operating requirements of the businesses
y If the employee is ready, willing and able to work, deductions
may not be made for time when work in not available
26
Permitted Salary Deductions
Seven exceptions from the “no pay-docking” rule:
•
•
•
Absence from work for one or more full days for personal
reasons, other than sickness or disability
Absence from work for one or more full days due to sickness or
disability if deductions made under a bona fide plan, policy or
practice of providing wage replacement benefits for these types
of absences
To offset any amounts received as payment for jury fees, witness
fees, or military pay
27
Permitted Salary Deductions
Seven exceptions from the “no pay-docking” rule:
•
•
•
•
Penalties imposed in good faith for violating safety rules of
“major significance”
Unpaid disciplinary suspension of one or more full days imposed
in good faith for violations of workplace conduct rules
Proportionate part of an employee’s full salary may be paid for
time actually worked in the first and last weeks of employment
Unpaid leave taken pursuant to the Family and Medical Leave
Act
28
Improper Deductions - Examples
y Deduction for a partial-day absence to attend a parent-teacher
conference
y Deduction of a day of pay because the employer was closed due
to inclement weather
y Deduction of three days of pay because the employee was absent
from work for jury duty, rather than merely offsetting any
amount received as payment for the jury duty
y Deduction for a two day absence due to a minor illness when the
employer does not provide wage replacement benefits for such
absences
29
Effect of Improper Deductions
y An actual practice of making improper deductions from salary
will result in the loss of the exemption:
y During the time period in which improper deductions were made
y For employees in the same job classifications
y Working for the same managers responsible for the actual improper
deductions
y Isolated or inadvertent improper deductions, however, will not
result in the loss of exempt status if the employer reimburses the
employee
30
Actual Practice
• Factors include, but are not limited to:
▫ The number of improper deductions, particularly as compared to
the number of employee infractions warranting discipline
▫ The time period during which the employer made improper
deductions
▫ The number and geographic location of both the employees whose
salaries were improperly reduced and the managers responsible
▫ Whether the employer has a clearly communicated policy
permitting or prohibiting improper deductions
31
Safe Harbor Provision
Federal law: If you make an improper deduction from pay of an exempt
employee, you will not lose the exemption IF you
y Have a “clearly communicated” policy prohibiting pay deductions disallowed
by the federal regulations, that includes a complaint mechanism
y Should be in Employee Handbook
y Promptly repay the employee upon receipt of
a complaint/discovery of error
y Make a good faith commitment to comply in the future
California DLSE: If employer makes an unauthorized deduction
inadvertently or erroneously, but in good faith, the exemption won’t be lost
if:
- The employer reimburses the employee upon discovering the error; and
- The employer agrees in writing to comply in the future.
DLSE Manual 51.6.22.2
Additional Payments
Additional payments to an exempt employee will not destroy exempt
status.
y Bonuses, commissions, even voluntary overtime, won’t effect
exempt status.
y Overtime payments for hours worked in excess of the standard need not
be at time and one-half, but may be at straight time, at one-half
time, or flat sum, or on any other basis.
California DLSE will generally consider additional hourly payment to
be valid if paid for working > 8 hrs/day or > 40 hrs/week. If
employer proves that industry practice is to work a lesser number of
hours, employer may pay for hours in excess of that standard w/o
destroying the employee’s exempt status.
Attendance For
Exempt Employees
y You can require exempt employees to record their time.
y Advantage: shows exactly how many hours were worked
y Disadvantage: morale issues
y You can require them to work a certain number of hours per week,
and to make up time missed.
y You can require their presence at the worksite during certain hours.
y You can discipline or terminate them for failing to abide by your
attendance policies.
y But exercise care as perception is important—are you treating them
like non-exempt employees?
y Exempt employees are paid to get the job done, not based on time worked.
Tips For Maintaining
Salaried Basis of Payment
y Make sure employee’s pay is same every week,
y
y
y
y
regardless of the hours worked.
Use non-monetary means of disciplining exempt
employees for attendance or performance problems.
Deny discretionary bonuses, rather than salary.
Never dock the pay of an exempt employee for a
partial-day absence.
Avoid policies or practices of making deductions based
on lack of work.
Tips on Re-Classifying Misclassified Employees
y Tie it to an event
y
y
y
y
y
Re-alignment of duties
Analysis following RIF or reorganization
Re-evaluation after changed process
Re-evaluation after revised job descriptions
Re-evaluation with changed personnel
y New position – exemption status gray area
y Never say misclassified!
y To ensure greatest protection to the employees
y Can still be salary
y Positive spin –
y Potential more compensation w/ OT.
Proactive Strategies To Improve Compliance
• Appoint compliance manager
• System to audit violation and show premium pay payments
• Establish system for employees to
report violations
• Educate managers
• Make managers “own” the problem
• Impact on manager’s payroll budget
Proactive Strategies To Improve Compliance
• Revise/update employee handbooks and policies
• Train associates and hourly supervisors
• Have cash register system or email system issue reminders
• Yearly payroll stuffer or letter
• Sign-offs on time keeping system
• Have internal administrative payroll
policies
An Easy Error
y Trainees or entry level positions will rarely, if ever, exercise
sufficient independent judgment and discretion to be exempt.
Outside Sales Employees
Under CA Law
y Employees who are 18 years of age or older and spend
more than 50% of their working time away from the
employer’s place of business selling tangible or intangible
items, or obtaining orders or contracts for products,
services or use of facilities.
y Outside salespersons are not required to meet the “salary
basis” test.
Recordkeeping for CA Commissioned
Salespeople
y Employers of commissioned salespeople in California must prepare a
written document containing information on how commissions are
computed and paid. Employers must provide a signed copy of the
agreement to the employee and obtain a signed receipt for the contract
from each employee.
y In the case of a contract that expires and the parties continue to work
under the terms of the expired contract, the contract terms will remain in
full force and effect until the contract is superseded or employment is
terminated by either party.
Recordkeeping for CA Commissioned
Salespeople
The term “commissions” under this law means compensation paid to
any person for services rendered in the sale of the employer's property or
services and based proportionately on the amount or value of the sale.
Commissions do not include short-term productivity bonuses paid to retail
clerks; temporary variable incentive payments that increase, but do not
decrease, payment under the written contract; or bonus and profit-sharing
plans, unless there has been an offer by the employer to pay a fixed percentage
of sales or profits as compensation for work to be performed.
Conducting a Self-Audit
y Non-Exempt
y Hours worked recorded? Record start time, time out for meal,
time in from meal and time out at end of day. How is this
maintained? Who records hours.
y Breaks and Meals (Brinker Case: Provide!)
y Overtime Premium Payment
CA Wage Theft Protection Act
Requires employers to provide notice to non-exempt new hires, and within seven days
to employees who have been reclassified, regarding:
1. The employee’s rate or rates of pay and basis thereof
2. Allowances, if any, claimed by the employer as part of the minimum wage, including
meal or lodging allowances
3. The employer’s regular payday
4. The employer’s name including all “doing business as” names
5. The physical address of the employer’s main office
6. The employer’s telephone number
7. The name, address and telephone number of the employer’s workers compensation
carrier
8. Any other information the Labor Commission deems material and necessary
CA Wage Theft Protection Act
Notices provided by temporary services employers
must also include the name, the physical address of the main
office, the mailing address if different, and the telephone number
of the entity for whom the employee will perform work. The
notice may also have to include any other information the labor
commissioner requires.
These requirements do not apply to a security services
company licensed by the Department of Consumer Affairs that
provides only security services.
Conducting a Self-Audit
9 Benefits -Vacation accrual can be capped but not forfeited –
Vacation or PTO = wages
9 Final Payment
9 Timing (Upon termination if fired or w/in 72hours is quit)
9 Notice (at-will?)
9 No deductions unless by written agreement at the time final pay
is given to employee
9 No deductions for breakage for failure to return equipment
unless culpably negligent
Records to Review
y Position Descriptions – only a Guideline
y Performance Evaluations
y Corporate Organization Charts
y Policies and Procedures
y Performance Evaluations for Incumbents
y Memoranda Regarding Work Assignments/ Instructions
y Records of Hours Worked
Strategies for Getting Accurate
Information About Work Activities
y Time and motion study
y Evaluate work product
y Interview incumbents
y Interview subordinates
How Often Should You Reconsider?
y Often! Once is Not Enough
y Processes Change
y Duties Evolve
y Incumbents Change
y Performance Fluctuates
y Ideal Time is at Annual Performance Review
y Note in the evaluation if the employee is not meeting your
expectations for assuming responsibility
Oh, No! You’ve Discovered Problems!
y Don’t Make Any Non-Privileged (Atty-Clt) Admission -- “Any
thing you say can and will be used against you in a court of law.”
y The Worst Admission You Should Make is That This is a “Gray
Area”
y Calculate Potential Back Wages
When to Make Changes
y In conjunction with a reorganization
y In conjunction with a reduction in force
y In conjunction with new technology
y When the team size is increased
Why is This So Hard?
Exemption is an affirmative defense to be claimed by an
employer, and the burden of showing exemption ultimately lies
on defendant.
DOL Audit
9 Documents you may be required to produce 9 Payroll records
9 Timesheets/cards – computer tapes
9 Sign-in sheets
9 Other records of hours worked
9 Certified payroll records
9 Payroll journals
9 Payroll check stub detail and/or itemized pay stubs
9 State law requirement?
9 Proof of Workers’ Compensation
9 Articles of Incorporation
DOL Audit, con’t
9 More documents you may be required to produce –
9 Written job descriptions
9 Job titles of exempt employees
9 Salaries of all exempt employees
9 Commission information
9 List of all employees (DOH, names & phone #)
9 List of former employees (DOH, DOT, names & phone numbers)
9 Name of corporate officers or partners, including titles
9 Federal/State tax payer ID #
9 I-9 Employment Eligibility Verification forms
9 Affirmative action information (AAP and supporting data, EEO-1,
Vets-100)
DOL Audit, con’t
9 Still more documents you may be required to produce –
9 Check register, canceled checks, bank statements
9 General ledger
9 Financial Statements
9 W2’s
9 1099’s for contract labor
9 Federal Income Tax Returns
9 Injury and accident reports
Vacation Policies
9 Names and DOB of minors, works permits
PROACTIVE STRATEGIES TO IMPROVE
COMPLIANCE
9 Appoint compliance manager
9 System to audit violation and show premium pay
payments
9 Establish system for employees to
report violations
9 Educate managers
9 Make managers “own” the problem
• Impact on manger’s payroll budget
PROACTIVE STRATEGIES TO IMPROVE
COMPLIANCE
9 Revise/update employee handbooks and policies
9 Train associates and hourly supervisors
9 Have cash register system or email system issue reminders
9 Yearly payroll stuffer or letter
9 Sign-offs on time keeping system
Disclaimers
y These materials have been prepared by Simpson, Garrity, Innes &
Jacuzzi, P.C. for informational purposes only and do not constitute
legal advice.
y Transmission of the information is not intended to create, and receipt
does not constitute, an attorney-client relationship.
y Anyone viewing this presentation should not act upon this
information without seeking the advice of professional counsel.
© Copyright Simpson, Garrity, Innes & Jacuzzi, P.C.
601 Gateway Blvd., Suite 950, South San Francisco, CA 94080
Telephone: 650-615-4860, Facsimile: 650-615-4861; website: www.sgijlaw.com
Marc L. Jacuzzi, Esq.
Simpson, Garrity, Innes & Jacuzzi, PC
2175 N. California Blvd, Suite 710
Walnut Creek, CA 94596
http://www.sgijlaw.com
(925) 322-8889
[email protected]
Disclaimers
*This webinar is designed to provide accurate and
authoritative information about the subject matter
covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or
other professional services.
*This webinar provides general information only and does
not constitute legal advice. No attorney-client relationship
has been created. If legal advice or other expert
assistance is required, the services of a competent
professional should be sought. We recommend that you
consult with qualified local counsel familiar with your
specific situation before taking any action.
Marc L. Jacuzzi
Attorney Marc L. Jacuzzi is a shareholder in the law firm
of Simpson, Garrity, Innes & Jacuzzi, P.C. where he
advises clients regarding all aspects of the
employer/employee relationship including hiring and
termination, wage and hour requirements, employee
classification, civil rights and discrimination issues,
employee investigations, commission plans,
employment contracts, employee handbooks and
policies, confidential information agreements,
reductions in force, leaves of absence, employment
audits, M&A employment issues, violence in the
workplace, and international employment issues.