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Compensatory Time Top of Page
The Fair Labor Standards Act has many exemptions. Some exemptions are extremely broad, as in the case of exemptions from the definition of "employee". Others are narrower, such as various exemptions from overtime pay. Still other exemptions apply to two or more categories of protection normally afforded by the FLSA. The discussion on compensatory time which follows will focus only on the exemption categories involving overtime.
An extremely frequent misconception among private (non-public) employers is that it is permissible to pay non-exempt employees "comp time" in lieu of cash for overtime worked. Not only does the statute on compensatory time apply only to public employers (see 29 U.S.C. 207(o)), but many private employers compound the error by giving compensatory time on a straight-time basis.
If a public employer gives compensatory time to a non-exempt employee in lieu of cash for overtime worked, it must do so on a time-and-a-half basis, and non-public safety personnel are limited to a total of 240 compensatory hours before cash must once again be paid for overtime. Public safety personnel are limited to a total of 480 hours of compensatory time before they must be paid cash for overtime worked.
Alternatives to paying overtime hardly merit the appellation "alternatives". For instance, an employer can give an informal variety of compensatory time during the workweek simply by adjusting the hours worked so that they do not exceed 40 in the week. In addition, there is a little-known exception to the general rules on overtime known as the "time off plan". Buried deep within the Field Operations Handbook at Section 32j16b, this rule states that in the case of a pay period with more than one workweek, if the employee works overtime during one week and is given compensatory time off during a subsequent week or weeks within the pay period, no overtime as such must be paid if the total wages for the pay period equal what the pay would be if the overtime were paid and the other workweeks paid on the basis of actual hours worked. Since many employers are not often readily able to give time off, and since the time off plan does not apply in the situation of an employee paid a fixed salary for fluctuating workweeks (29 C.F.R. 778.114), this exception is practically useless (a more detailed discussion of the time off plan appears below).
How useless is the "time off plan", really? Top of Page
As noted above, the "time off plan" is not a viable option for most employers in most situations; the list of reasons follows below. Again, here is the Department of Labor's explanation of the "time off plan", quoted directly from its Field Operations Handbook:
§ 32j16b The time off plan. To comply with the FLSA and to continue to pay a fixed wage or salary each pay period, even though the employee works OT in some week or weeks within the pay period, the employer lays off the employee a sufficient number of hours during some other week or weeks of the pay period to offset the amount of OT worked so that the desired wage or salary for the pay period covers the total amount of compensation, including OT compensation, due the employee under the FLSA for each w/w taken separately. The plan may use a standard number of hours more or less that the applicable statutory maximum w/w. The employer does not pay for OT work in time off, nor does he average hours over a period longer than a week. Control of earnings by control of the number of hours an employee is permitted to work, not payment for OT in time off, is the essential principle of the time off plan. For this reason, a time off plan cannot be applied to a salaried employee who is paid a fixed salary to cover all hours he may work in any particular w/w or pay period.
Drawbacks of the "time off" plan include the following:
"Fixed wage or salary" means employers can forget about this for regular hourly workers who normally work variable hours and receive variable pay.
Since the Texas Payday Law requires non-exempt employees to be paid at least twice per month (section 61.011(b)), use of the time-off plan would be limited on a practical basis to a two-week pay period.
Since the provision calls for both overtime hours worked and time off to be in the same pay period, the only time an employer could take advantage of this plan would be if the overtime were worked in Week 1 of a two-week pay period, so that the time off could be granted in Week 2.
The time off would have to be granted at time and a half, not straight time.
Many employers do not have the luxury of being able to "lay an employee off" for any amount of time, much less for 1 1/2 times the amount of overtime worked in a previous week.
As the final sentence of 32j16b implies, even this limited option is unavailable to employers paying under the "fixed salary for fluctuating workweeks" method for calculating overtime pay (29 C.F.R. 778.114).
How much flexibility does a public employer have with compensatory time policies? Top of Page
For public employers, the basic authorization to pay compensatory time in lieu of cash for overtime appears in Section 207(o) of the FLSA, which provides the following in subsection (2)(A):
A public agency may provide compensatory time under paragraph (1) only-- (A) pursuant to-- (i) applicable provisions of a collective bargaining agreement, memorandum of understanding, or any other agreement between the public agency and representatives of such employees; or (ii) in the case of employees not covered by subclause (i), an agreement or understanding arrived at between the employer and employee before the performance of the work.
Courts all across the country have for decades interpreted that provision as allowing public employers to simply dictate that employees will be paid for overtime with compensatory time. In other words, the agreement is formed by the public employer telling the employees they will be paid for overtime with compensatory time off, and the employees agree by staying employed, instead of quitting, as they would have a right to do. It is not really a choice for those who want to remain employed with that public employer.
The DOL's regulation interpreting that provision recognizes that reality, despite its indirect wording. 29 C.F.R. § 553.23(c) states in relevant part:
... The agreement or understanding to provide compensatory time off in lieu of cash overtime compensation may take the form of an express condition of employment, provided (i) the employee knowingly and voluntarily agrees to it as a condition of employment and (ii) the employee is informed that the compensatory time received may be preserved, used or cashed out consistent with the provisions of section 7(o) of the Act. An agreement or understanding may be evidenced by a notice to the employee that compensatory time off will be given in lieu of overtime pay. In such a case, an agreement or understanding would be presumed to exist for purposes of section 7(o) with respect to any employee who fails to express to the employer an unwillingness to accept compensatory time off in lieu of overtime pay. However, the employee's decision to accept compensatory time off in lieu of cash overtime payments must be made freely and without coercion or pressure.
What that boils down to is that a public employer may make acceptance of compensatory time a condition of employment, and the employee may not be coerced or pressured into accepting or keeping the job. Once continued employment is accepted, knowing that compensatory time will be paid, the agreement has been made and will apply.
In a landmark U.S. Supreme Court case, the Court stated: "Nothing in the FLSA or its implementing regulations prohibits a public employer from compelling the use of compensatory time." Christensen v. Harris County, 529 U.S. 576, 120 S.Ct. 1655, 1656 (2000). That was in the context of a policy requiring county employees to use their accrued compensatory time if the total accrued amount approached the 240-hour limit. If a city or county can require employees to use up their compensatory time, it can certainly make acceptance of compensatory time in lieu of cash for overtime worked a condition of employment.
Where a public employer can get into trouble is in the situation in which the non-exempt employee works overtime without having been told in advance or advised via a compensatory time policy or agreement that compensatory time will be paid in lieu of cash for overtime, and the employer simply gives compensatory time instead of paying for the overtime in the form of cash. That would be a problem under the law, since no prior "agreement" would have been made.
Before 1998, public employers were relatively limited in how they could control the accumulation and use of compensatory time by non-exempt employees who worked overtime. With exempt employees who were given compensatory time (an optional benefit, usually given on a straight-time basis), the public employer could control the use of the compensatory time any way it saw fit, since such compensatory time was not required by law. However, for non-exempt employees, compensatory time at the rate of time and a half is required if overtime is worked and if the employer does not want to pay cash for the overtime. A 1994 case from the Eighth Circuit, Heaton v. Moore, 43 F.3d 1176, 2 WH Cases2d 801, held that public employers can deny an employee's use of compensatory time only where such use would be "unduly disruptive" to the agency's operations; the ruling basically affirmed the DOL's regulation on that point in 29 C.F.R. §553.25(d). Put another way, a public employer cannot control a non-exempt employee's use of compensatory time, since it is the equivalent of cash -- just as an employer cannot specify how an employee spends cash earnings, the employer cannot determine how the employee will spend the compensatory time off.
That changed dramatically for public employers in the jurisdiction of the 5th Circuit Court of Appeals (Texas, Louisiana, and Mississippi), thanks to two 1998 court decisions. The first case was AFSCME Local 889 v. State of Louisiana, 145 F.3d 280, 4 WH Cases2d 1355 (5th Cir. 1998), basically stating that a public employer's policy requiring employees to use compensatory time before using vacation time does not violate the FLSA. In that case, the court distinguished Heaton and made an interesting comment about not necessarily being in agreement with the Heaton ruling, but seeing no need to directly address the Heaton question (i.e., can an employer require employees to use compensatory time when they approach a certain threshold?). In the second case, Moreau v. Harris County, 158 F.3d 241, 4 WH Cases2d 1697 (5th Cir. 1998), which was decided not quite four months later, the court called the 8th Circuit's reasoning in Heaton "flawed" and ruled that there is no FLSA violation if a public employer enforces a policy whereby it requires employees to take paid compensatory time off if their compensatory time balances approach a given threshold. The incentive for public employers, of course, is to do just what the Fifth Circuit's Moreau ruling allows: use up the compensatory time before the employee passes the 240- or 480-hour limit beyond which cash must be paid for overtime, and also keep the employee from using vacation time, which is often limited by "use it or lose it" policies or statutes that set maximum annual carry-over amounts. On May 1, 2000, the U.S. Supreme Court affirmed the latter ruling under a different case name, Christensen v. Harris County, holding that the FLSA does not prohibit employers from requiring employees to use compensatory time whenever their accrued balances approach certain limits.
Pitfalls of Illegal Compensatory Time Top of Page
Employees who are paid with compensatory time, when they should be paid cash for overtime, could file wage claims under either the Texas Payday Law, the FLSA, or both. The payday law claim can only cover the 180 days preceding the date of the claim, so it would not cover compensatory time violations that occurred a year or two earlier. For the older violations, the FLSA could be used. Under either law, the employer would have to reckon with paying time and a half for each hour of overtime worked. In addition, under the FLSA, the employer may also have to pay an equal amount in so-called "liquidated damages", and possibly attorney's fees in the discretion of a court. If a court found that the employer had no reasonable basis for believing that it could give compensatory time in lieu of overtime pay, the FLSA claim could go back three years, instead of the usual two. An employer involved in such a claim should attempt to retroactively apply the principles of the "time off plan" noted above if the timing of the pay periods and reductions in hours coincided to the extent necessary to meet the requirements of that procedure.
Effect of Compensatory Time on the Salary Test for Exempt Employees Top of Page
What the DOL Says About Compensatory Time for Exempt Salaried Employees
The Department of Labor's position on compensatory time for exempt employees is that extra pay above and beyond the salary does not violate the salary basis for the exemption. Perhaps wanting to encourage extra pay for such workers, DOL states that as long as exempt employees receive a guaranteed salary free and clear of any reductions on the basis of quality or quantity of time worked, extra pay or extra leave time for extra work is permissible. 29 C.F.R. 541.604(a) provides that "An employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis. ... Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off." This same information is found in DOL's Field Operations Handbook, Section 22b01. In other words, an employer is allowed to pay exempt employees who work over a stated minimum number of hours (45, 50, or whatever) in a week will receive extra pay or compensatory time on a straight-time basis for each additional hour. Some companies that have a difficult time attracting and keeping qualified employees find that they must offer additional pay like that as an incentive to join and stay with the company.
Despite the above guidance from DOL, there are two potential problems with awarding salaried exempt employees extra pay or compensatory time on an hourly basis for hours worked beyond a certain minimum specified by the employer. First, some court decisions have declared that extra pay or compensatory time for "overtime" worked by such employees is inconsistent with the salary basis for the exemptions. An example of one such decision is Brock v. Claridge Hotel and Casino, 846 F.2d 180 (3rd Cir. 1988), which held in part:
Salary is a mark of executive status because the salaried employee must decide for himself the number of hours to devote to a particular task. In other words, the salaried employee decides for himself how much a particular task is worth, measured in the number of hours he devotes to it.
Adding to the confusion, there are also several court rulings that agree with DOL's stance on the matter.
Second, there is a problem that arises when an employer, instead of adding to an exempt employee's accrued compensatory time an hour or two at a time, deducts from the accrued "comp time" bank on an hourly basis. That indicates to some courts that the employer is too interested in the quantity of work performed; if an employee's pay or leave bank is reduced on an hourly basis, it looks like the employee is really an hourly employee, or so the thinking goes. An example of what can go wrong with a situation like that is found in an appeals court decision from the U.S. Second Circuit, Martin v. Malcolm Pirnie, Inc., 949 F.2d 611 (1991), cert. denied, 506 U.S. 905, 113 S.Ct. 298, 121 L.Ed.2d 222 (1992). However, the DOL has stated in an administrative letter ruling dated February 28, 1995 (BNA, WHM 99:8014) that such a practice does not violate the salary test:
...You state that your client wishes to establish a bonus plan to compensate its exempt, salaried employees for inordinate hours worked during seasonal business peaks. The plan would award exempt employees who work more than an average number of hours per week with additional time off (bonus time) or pay during the non-peak season...since they are occasionally called upon to work beyond their scheduled hours, this bonus time system was proposed for tracking and rewarding the employees.
Specifically, you state that if an exempt employee works more hours than expected in a given week, his/her accumulated bonus time will be increased in direct proportion to the extra hours worked that week. If an exempt employee works fewer hours than expected, his/her accumulated bonus time will be reduced in direct proportion to the hours below the expected hours for that week. ... If the employee should ever work fewer hours than expected in any given week and not have enough accumulated bonus time to offset the shortage, the accumulated bonus time will be reduced as a negative quantity. ...
Where an employer has proposed a bona fide bonus time benefits plan such as the one described in your letter, it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, even if it is less than a full day, without affecting the salary basis of payment, if by substituting or reducing such leave the employee receives in payment an amount equal to his/her guaranteed salary. Payment of an amount equal to the employee's guaranteed salary must be made even if an employee has no accrued benefits in his/her bonus time plan account, and the account has a negative balance, where the employee's absence is for less than a full day.
...it is our opinion that your client's proposed bonus time plan for its exempt employees appears to meet the requirements outlined in the Regulations...
The Malcolm Pirnie Case Top of Page
The employer in Malcolm Pirnie maintained a practice of docking exempt employees' salaries or leave balances for partial-day absences. When notified by the DOL that it could not do that, it changed its policy to allow such employees to charge partial-day absences to an "overhead" account (also referred to by the company as a "comp time bank") and reimbursed the employees for the deductions that had been made in the past. The "overhead" account consisted of accumulated compensatory time that the exempt employees had earned on a straight-time basis. The Court ruled that since the employer had deducted amounts from the employees' salaries and leave bank on an hourly basis, the employees were not really "salaried", but rather "hourly". That meant they could not be considered exempt employees and that the employer owed them back overtime pay for overtime they had worked in the past. The Court focused on the definition of "salary", stating that generally, an exempt employee "must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked". According to the Court, "an employer that maintains the discretion to reduce an employee's compensation as a result of the employee's hours...may not consider the employee to be paid on a salary basis." (Malcolm Pirnie at 949 F.2d 615.) Further, the fact that the employer's policy required exempt employees to either make up partial-day absences or charge them to personal leave time was, in the Court's opinion, proof that the employees were not salaried, but rather hourly. It is clear from the ruling that the Malcolm Pirnie court considered leave time, whether vacation, sick, or compensatory leave, to be part of overall compensation and thus part of the salary.
How to safely reward extra work by exempt salaried employees? Top of Page
In view of the unsettled state of the law, i.e., the debate between some courts and other courts and/or DOL, it may be safest to find alternatives to awarding compensatory time or extra pay on an exact-correspondence, hour-by-hour basis. One alternative is to simply recognize that the truly exempt employees are generally the best and most reliable employees whom a company can count on to work whatever hours are needed to do a quality job. (Just think: how do exempt employees reach their positions in the first place?) With that in mind, adopt an attitude that it does not matter if an exempt employee misses a few hours here or a few hours there, because it is certain that those missed hours will be made up, and then some, in the future. In other words, if the nature of the job permits, let such employees enjoy flexible schedules and not be subject to the normal timekeeping documentation that other types of employees might need to worry about. Another way to reward those who consistently put in long hours for their salary is to increase their pay. That might seem obvious, but it is often the obvious solution that escapes notice. Short of a pay increase, perhaps the benefits package could be sweetened for such workers. For example, salaried exempt employees may have to work long hours for the agreed-upon salary, but they might also accrue vacation and sick leave at a higher rate than non-exempt employees (that is completely legal). They might also get first choice at vacation dates, or other "perks". Yet another method might be to award a certain amount of compensatory time off for a range of extra hours worked, i.e., avoid a one-to-one correspondence between the extra time worked and the compensatory time given. Finally, perhaps the highest-risk route, despite recent DOL guidance to the effect that reducing compensatory time balances on an hourly basis does not violate the salary test, would be to utilize a policy that reduces salary or compensatory time banks on an hourly basis; the court decisions are simply too diverse for that to be entirely safe. The foregoing are only a few of the ways for a company to recognize and reward those employees who might otherwise feel like their salary/hourly equivalent rate barely makes their jobs worthwhile, and thereby minimize compensatory time troubles.
Deferred Compensation Top of Page
Deferred compensation is a common benefit offered to employees by many companies. To determine how to treat deferred compensation under the wage and hour laws, one must look at the basic definitions in the FLSA and its accompanying regulations. The main question, of course, is whether deferred compensation must be included in a non-exempt employee's "regular rate of pay" for overtime calculation purposes. In 29 U.S.C. 207(e), the definition of regular rate includes "all remuneration for employment paid to, or on behalf of, the employee", and deferred compensation is not one of the listed exclusions from that definition. A DOL opinion letter dated January 27, 1969 stated that deferring compensation until a later date would not affect the regular rate calculation. Thus, deferred compensation must be included with the employee's other compensation to determine the regular rate of pay applicable to a workweek in which the employee works overtime.
Student Interns / Trainees Top of Page
There is no FLSA exception as such for "student intern". The term "intern" appears only once in the FLSA itself, in section 203(e)(2)(A), which exempts Congressional interns from the definition of "employee"; and only once in the regulations, in 29 C.F.R. 541.304(c), where it is explained that medical interns do not have to be paid on any particular basis, just like the situation is with doctors, attorneys, and teachers, as long as they have graduated with a medical degree necessary to practice medicine, i.e., they are no longer "students", except perhaps in a post-graduate program.
To have a better understanding of how student interns are treated under the FLSA, one has to realize that such workers are in essence "trainees". Based on a 1947 U.S. Supreme Court case (Walling v. Portland Terminal Co., 330 U.S. 148), the DOL has a fairly extensive set of rulings and other guidance on "trainees", as explained in the paragraphs below.
Certain types of trainees are completely excluded from FLSA coverage. However, the requirements for such total exclusion are quite stringent. In an administrative letter ruling dated February 22, 1974 (WH-254, BNA WHM 99:1152), the DOL stated that if a person is considered a "trainee", that person is not considered an "employee" and does not have to be paid minimum wage and overtime. The letter gave the following six criteria for the designation of a person as a trainee; commentary on each criterion follows in italics:
The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school.
The closer it is to a classroom or educational setting, the easier it will be to consider the individuals to be trainees. The arrangement might also result in a training certificate that could be listed as a job qualification on subsequent job applications. It would also help if the individual and the entity providing the training could first develop an individualized training plan that would be tailored to help the individual qualify for a specific job or range of jobs with a variety of companies via the training course.
The training is for the benefit of the trainees.
This would be an easy argument to make in the case of individuals participating in welfare-to-work programs, but also in any training or internship programs that tend to increase their "hireability" in the open job market.
The trainees do not displace regular employees, but work under close observation.
This would also be an easy argument to make, especially in the case of a training "academy" run by a company, but also for a work experience program sponsored by a governmental entity. In the latter case, the government agency would be able to show that were it not for the work experience program, the activities in question would not be taking place. In a true training environment, the trainees are not going to be trusted to do much actual work for the company; the actual production would presumably be done by regular employees, who of course are already trained.
The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion his operations may actually be impeded.
This goes hand-in-hand with item # 3 above. It would be important here to document the training process and the before and after figures for comparison. Again, the actual productive work will be done by regular employees; any productive work done by trainees would have to be insubstantial in nature and amount and secondary to the training process.
The trainees are not necessarily entitled to a job at the completion of the training period.
Again, this is related to #3 above. The work would not be done at all, or at least certainly not on the schedule that exists, were it not for the existence of the training school or program under which the individuals receive training. The courts find it important to have a written agreement to the effect that trainees have no expectation or guarantee of employment upon completion of the training.
The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.
The courts find it important that there be a written agreement to the effect that payment for the services is neither intended nor expected.
The ruling went on to note that since the trainees' work products were sold by the employer, a vocational-technical school, and thus benefited the institution, and since the work done by the trainees limited the employment opportunities of regular employees who would otherwise be producing those goods, the students were not "trainees" and were thus covered by the FLSA.
These six criteria also appear in the DOL's Field Operations Handbook in section 10b11, and are mentioned in other letter rulings from DOL, two of which are excerpted below, one dealing with security guard trainees and the other dealing with training programs that last 18 months and work performed by mental hospital patients. Government-sponsored employment development programs are addressed in Field Operations Handbook section 10b11a. DOL issued Fact Sheet #71 dealing with this issue in April, 2010 - it may be downloaded at http://www.dol.gov/whd/regs/compliance/whdfs71.htm.
With the above criteria in mind, it would probably be important, in any publicity or discussions about the training school, to describe it as a type of school or "academy" that is meant to prepare individuals for entrance into an industry, i.e., any company in an industry, rather than as an orientation period for becoming an employee of a specific company. If the training is part of a government program, it would be important to bill it first and foremost as a benefit to hard-to-place or first-time workers and as a way to help them bridge the gap between government assistance and work, rather than as a way to get public works done that may have been on the back burner for a time due to lack of funding or other resources. Put another way, any productive work done by the individuals is more like a serendipitous by-product of training programs for difficult-to-place individuals, than a primary goal of the program.
The court decisions regarding this issue always use one or more of the above criteria to justify a ruling that certain individuals are not employees for purposes of the FLSA. One court decision found that the persons were trainees during the first part of a training program, but not during the second half, since the first part stressed classroom-type learning under close supervision, but the second half dispensed with the focus on classroom activities and close supervision and stressed activities that were basically indistinguishable from those of regular employees.
A landmark case in this area is that of Donovan v. American Airlines, Inc., 686 F.2d 267, 25 WH Cases 901 (5th Cir. 1982). The case involved a well-known training academy run by American Airlines for flight attendants and other airline personnel; the students received no pay for the training they received both in the classroom and in airplanes. Further, any work they did was secondary to the training program. Importantly, the airline was not obligated to hire the graduates of the program, and other airlines generally considered the training to be a good qualification for hire.
A Fifth Circuit case, Atkins v. General Motors, Inc., 701 F.2d 1124 (5th Cir. 1983), ruled that people who participated in a state-sponsored training program that included hands-on experience and was designed to provide the company with a trained pool of workers were not employees, but rather trainees.
The courts seem to find that the most important determinant is the question of who primarily benefits from the arrangement. If the employer is the primary beneficiary, the individuals will be considered employees, but if the individuals are the ones who primarily benefit from the work experience, they will be considered trainees.
Some illustrative letter rulings in the area of trainees include:
Admin. Op. WH-162, May 3, 1972 (BNA, WHM 99:1087):
This is in reply to your letter of March 31, 1972, concerning compensable work time of security guard trainees who will receive 40 hours of training required by a services contract before they are allowed to perform work pursuant to the contract...
...Whether time spent in training is compensable is discussed on pages 7 through 9 of the enclosed pamphlet, Hours Worked. Under the six criteria given on page 9 for determining the employment relationship of trainees, we would view the security guard trainees as employees. The training is oriented in terms of "company practices, policies, and rules", and is required under the terms of the contract before any employees are permitted to perform work pursuant to the contract. This indicates that the employer derives an immediate advantage from the training. The training is given to persons who will work on the contract, and the employer can fulfill the contract only by employing such specifically trained employees.
Additionally, the training time is not excluded from consideration as hours worked under any of the standards discussed on pages 7 and 8. Therefore, ...the employee should be paid for all time spent in learning his job. Hours worked generally includes the time spent in initial indoctrination and training as well as time devoted to subsequent training...It is not lawful to compensate only those who complete the training and are "hired"...
Admin. Op. WH-229, June 29, 1973 (BNA, WHM 99:1131):
1. If all six of the criteria listed on page 3 of the pamphlet, Employment Relationship, are met, the trainees are not employees within the meaning of the Fair Labor Standards Act. The monetary requirements of the Act do not apply where there is no employment relationship.
These tests were derived from two cases adjudicated by the Supreme Court in 1947. These cases involved voluntary participation in training programs. See Walling v. Portland Terminal Co., 330 U.S. 148 [6 WH Cases 611], and Walling v. Nashville, Chattanooga and St. Louis Railway, 330 U.S. 158 [6 WH Cases 615].
2. The phrase you quote concerning persons who "may work for their own advantage on the premises of another" was taken from the Portland Terminal case and must be read in context with the other criteria. There is no single rule or test for determining whether an individual is an employee under the Act. The purpose and the manner in which an individual enters a training program are among the factors to be considered in determining whether there is an employment relationship. Whether participation is voluntary is considered in context with the other enumerated criteria. If the work-training activity is voluntary and all six criteria given are met, the trainee would not be considered an employee under the Act. We would need more information to assess the situation given in part (b) of your question concerning a mentally retarded individual whose participation in a training program may not be "voluntary".
3. We would need more information to respond fully to this question. In general, a program of 18 months of work-training in which the trainee does productive work would not appear to fit under the six criteria. The cases cited above, from which the criteria were taken, involved training programs of seven or eight days' duration. Additionally, other criteria may be used in situations that are different from those in the Portland Terminal case. For example, we have departed from that case with respect to tasks performed by patients in mental hospitals who are required to remain under treatment for extended periods when the tasks they perform have been determined, as a matter of medical judgment, to have therapeutic or rehabilitative value in the treatment of such patients.
4. Work done in activities centers by resident patients of mental institutions has always been considered as being performed pursuant to an employment relationship between the patient and the institution. Whether the product worked on or produced by the employee is destined for purchase by a profit-making or a charitable organization would have no effect on the determination of employment relationship as such.
Liability Under the Fair Labor Standards Act Top of Page
Any employee or former employee may file a complaint with the DOL's Wage and Hour Division that an employer failed to meet its obligations under the FLSA. The DOL has the authority to investigate and make a ruling, and if it determines that the employer owes the employee back wages, it may enforce the ruling by a variety of methods:
conciliation - if the DOL can persuade an employer to cooperate, it may supervise a settlement of the claim between the employee and employer, in which case the employer may be able to escape with only liability for back pay (Section 216(c);
civil action for back pay and damages - the DOL may sue on an employee's behalf to recover back wages and liquidated damages (Section 216(c);
injunction - the DOL may apply for an injunction to restrain further violations by the employer or to restrain the sale or transfer of goods produced with labor that was compensated in a way that violated the FLSA (Section 217);
criminal action - under 29 U.S.C. 216(a), the U.S. Department of Justice may bring a criminal action against an employer in the case of a willful violation of the FLSA; and
civil actions by employees - employees have the right to file suit in a court of competent jurisdiction to protect their rights under the FLSA (29 U.S.C. 216(c)).
If the DOL determines that there is no merit to the employee's claim, it will issue a "right to sue" letter under 29 U.S.C. 216(b) (a "216(b) letter") notifying the employee of his or her right under that provision to file a civil action in court to recover any amounts that might be due. As a practical matter of enforcement, due to limitations on agency resources, DOL will often issue "216(b) letters" even to those wage claimants who have valid FLSA complaints.
Dealing with FLSA Claims or Audits Top of Page
Without a doubt, the FLSA is full of potential trouble spots for an employer, and the law gives the DOL enough teeth to be tough when investigating wage claims and enforcing the FLSA. It is good to be prepared with strategies for handling wage and hour investigations involving your company.
A wage claim or DOL audit is never a trifle. Even if you have a solid legal position, you must treat the situation as if you may end up having to pay extra money to employees or ex-employees. While there is no guaranteed formula for success, there are certain things you can do to encourage the wage and hour investigator to at least not view you or your company as a burden:
Present the requested information in a timely, concise, and organized manner. That will not only make things easier for the investigator (remember, you want the investigator out of there as quickly as possible), but also make your company look more credible and as if it has nothing to hide.
Do not make charges, allegations, or assertions to the investigator that either have nothing to do with a wage and hour situation, or else deviate too much from standard wage and hour law principles.
Treat the investigator as respectfully as possible. DOL procedures leave investigators a surprising amount of discretion in the areas of regular rate calculations, pay method determinations, and hours worked, so it is worth an employer's while to be pleasant, cooperative, and informative.
Be familiar enough with the wage and hour laws to know a good deal when the investigator offers it. Be careful - stonewalling, demanding, or asking for too much can easily backfire! Knowing when to say "OK" is a real art.
Consider hiring an experienced wage and hour law attorney. This is especially important in case the investigator has signaled a ruling against your company and is only concerned with calculating the amount, or in case the ruling has already gone against your company and you are trying to decide whether a settlement offer from the DOL makes any sense.
Recommendations for FLSA Compliance Top of Page
While court decisions do not lay out an express road map for avoiding corporate or personal liability under the FLSA, those decisions, as well as court rulings involving other types of employment laws, offer some strategies for minimizing the risk of claims or lawsuits:
Educate yourself about the intricacies of wage and hour law.
To the extent possible, train other managers and payroll department staff the same way.
Do not hesitate to call the DOL and your state's wage payment law enforcement agency for help, advice, and training if possible.
If you become aware of wage and hour violations, correct them as soon as possible, even if it means extra work for staff.
If higher-ups hinder your efforts at wage and hour compliance, remind them in a diplomatic but clear way that personal liability can extend to anyone who had a hand in the allegedly illegal pay practice.
If all else fails, document your wage and hour advice to senior management and advise them of the possible consequences, thus putting yourself on record on the "right" side of the law and arguably removing at least yourself from the liability loop.
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