Exempt Employee Notification Requirements

Employers are very concerned about a proposal the U.S. Department of Labor is expected to issue concerning recordkeeping rules that would require employers to provide a written legal justification to employees who are treated as exempt from the wage and hour laws.  We strongly recommend that before promulgating this rule, the Department take a broader look at the FLSA, enacted in 1938, and seek to address its fundamental disconnect with the 21st Century workplace.

One of the most difficult problems for employers under the wage and hour laws is determining which employees are exempt—and can be paid a salary that does not vary based on their hours worked—and which are nonexempt and must keep track of their time to ensure that they are paid any overtime due.  The distinction does not of itself determine how much employees are paid, but how they are paid.  Many employees prefer exempt status because of the flexibility in not having to keep track of their hours and the general certainty of the amount of their paycheck.  In addition, being exempt is often viewed, rightly or wrongly, as a status symbol which many employees aspire to achieve.  However, employee preference is not a factor in determining whether an employee is exempt or non-exempt.
Yet, the rules governing the exemptions are riddled with ambiguities and imprecision’s that employers, the courts and even the Department of Labor struggle with in applying them to a real workplace.

For example, the FLSA regulations state that to be an exempt professional (such as an accountant or an engineer), an employee must perform work involving the “consistent exercise of discretion and judgment.” Often, as new graduates start their first jobs, they exercise very little discretion or judgment. Instead, they follow the highly complicated rules and principles of the profession and/or directions from those to whom they report, until they acquire sufficient experience on the job. The quandary faced by the employer is determining at what point new engineers and accountants who, by every other standard—including lucrative starting salaries—would clearly be considered a professional, cross the threshold into the blurry FLSA definition of a professional.  Even the Department of Labor, which enforces the FLSA, has trouble distinguishing between who should be exempt and who should be nonexempt, as demonstrated by a recent action brought against the Department involving the exempt status of more than 1,900 employees.

Meanwhile, the private bar has taken advantage of the law’s lack of clarity by pursuing highly lucrative class actions against employers who struggle to ascertain what is required.  Thus, the number of FLSA lawsuits has quadrupled from about 1,500 per year in the early 1990s to over 6,000 in 2009, and this does not count the number of cases brought under state laws which often vary from the federal law.  Faced with the uncertainties of the law, companies often settle these cases, with a median settlement cost of $7.4 million for federal cases and $10 million for state cases.

Thus, in the face of this disconnect between the law, the regulations, and today’s workplace, instead of moving forward with the proposed rulemaking, the Department should work closely with employers and other stakeholders on all sides of the issue to explore ways to update the Fair Labor Standards Act to reflect the workplace reality of the 21st Century.  The key is to ensure that the law and the resources being devoted to its enforcement are being focused on the mistreatment of employees under a set of principles and regulations that fit the contemporary workforce. Once that has been achieved, the goals of the recordkeeping regulations being considering would be far better served.