U.S. Department of Labor Issues Opinion Letters on the Retail or Service Establishment, Highly Compensated Employee, and Professional Exemptions, as Well as Vehicle Reimbursements and Fluctuating Workweek

At the end of August, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) issued four new opinion letters addressing various issues arising under the Fair Labor Standards Act (“FLSA”).  The topics covered include the retail or service establishment, highly compensated employee, and professional exemptions; reimbursing non-exempt employees for required use of a personal vehicle; and the fluctuating workweek method of calculating overtime pay.  These opinion letters offer a helpful overview of key FLSA principles and may answer fact-specific questions common to a number of employers.

FLSA2020-11

In Opinion Letter FLSA2020-11, the WHD addresses whether truck drivers who earn a 27 percent commission on gross revenue received by the private oilfield service company for each truck they drive to transport fluid waste from customer oilfields to disposal facilities in specially equipped trucks qualify for the FLSA’s retail or service establishment exemption.  These truckers work approximately 60 hours per week, scheduled as 12-hour shifts five days each week, and receive earnings exceeding one and one-half times the federal minimum wage.

The FLSA’s retail or service exemption applies to any employee (1) who works for a retail or service establishment, (2) whose regular rate of pay exceeds one and one-half times the federal minimum wage, and (3) whose earnings in a representative period of not less than one month consist of more than fifty percent commissions.  29 U.S.C. § 207(i).  To qualify as a “retail or service establishment,” a business must “engage in the making of sales of goods or services”; 75 percent of its sales of goods or services, or of both, must be recognized as retail in the particular industry; and not over 25 percent of its sales of goods or services, or of both, may be sales for resale.  29 C.F.R. § 779.313.

Because the truckers’ regular rate of pay meets the exemption threshold and their pay consists solely of commissions, the key issue is whether a private oilfield service company is a retail or service establishment within the meaning of the regulations.  The WHD ultimately concluded that the company may qualify as a retail or service establishment if its waste removal services are the same as those furnished to the general public and its services are recognized as retail within the waste-removal industry.  On the latter point, the WHD highlighted that on May 19, 2020, following numerous court challenges, the Department withdrew from its regulations a list of establishments that categorically could not qualify as a “retail or service establishment” under any circumstances because they lacked a retail concept, which had included “waste removal contractors.”  Going forward, the WHD made clear that the same retail concept analysis applies to all establishments—i.e., whether the establishment “sells goods or services to the general public,” whether it “serves the everyday needs of the community,” whether it “is at the very end of the stream for distribution,” whether it “dispos[es] in small quantities [its] products or skills,” and whether it “does not take part in the manufacturing process.”  29 C.F.R. § 779.318(a).

FLSA2020-12

As background, the FLSA requires covered employers to pay nonexempt employees at least the federal minimum hourly wage—“free and clear”—for all non-overtime hours worked in a workweek.  A employer violates the FLSA when it fails to reimburse an employee’s business-related expenses and the amount of the expense is sufficient, when treated as an indirect wage deduction, to drop the employee’s wages below the federal minimum wage.  29 C.F.R. §§ 531.35, 531.3(d), and 531.36(b).  A reimbursement to cover expenses incurred for the employer is sufficient if it “reasonably approximates the expenses incurred.”  In the context of required use of a personal vehicle, a reimbursement amount based on IRS guidelines, including the annual standard mileage rates, “is per se reasonable.” 29 C.F.R. § 778.217(a), (c).

In Opinion Letter FLSA2020-12, the WHD addresses the following questions: (i) whether employers comply with reimbursement requirements by reimbursing drivers for their actual expenses or a reasonable approximation thereof; (ii) whether the IRS’ annual standard mileage rates are the sole means to determine the “reasonably approximate expenses for business use of the driver’s personal vehicle; and (iii) whether employers may reimburse drivers who use their personal vehicles for deliveries only for variable expenses (e.g., gas, oil, and routine maintenance and repairs) or must also reimburse fixed vehicle expenses (e.g., registration fees, license fees, etc.) as well.

The WHD ultimately advised:

• WHD regulations permit reimbursement of a reasonable approximation of employee expenses. 29 C.F.R. § 778.217(a), (b)(3).
• The IRS business standard mileage rate, which is itself only an approximation of the expenses incurred to operate a vehicle, is optional, not required. 26 C.F.R. § 1.274-5(g), (j)(2); 29 C.F.R. § 778.217(a), (c)(2).  Other ways to approximate employees’ expenses for reimbursement are allowable as long as they reasonably approximate employees’ actual expenses.
• Employers must reimburse employees for fixed vehicle expenses only to the extent that the employee uses the vehicle primarily for the benefit or his or her employer. (As noted above, the obligation to reimburse business expenses at all under the FLSA depends on whether the unreimbursed expenses would cause a minimum wage violation.  State wage and hour laws or contract principles may, of course, require reimbursement even in the absence of an FLSA violation.)  When an employee uses a vehicle for both personal and business purposes, an employer’s reimbursement obligation extends only to the variable expenses attributable to the employee’s use of the vehicle for the employer, such as the cost of gas, periodic maintenance, and depreciation of the vehicle attributable to the employee’s trips for the employer.

FLSA2020-13

Opinion Letter FLSA2020-13 addresses four discrete questions regarding the applicability of the learned professional exemption and the highly compensated employee test to part-time employees who provide corporate-management training and whose pay consists of a day rate plus additional hourly compensation.  The employees’ “delivery” work, which was almost exclusively part-time and paid at a flat daily rate of $1,500, primarily involved presenting an executive education program to clients, operating the program’s interactive models, and evaluating the results of participants’ activities.  The employees also occasionally performed “development” work creating new content and interactive models, for which the company paid them $50 per hour.  The employees received pay only during weeks in which they performed work.

As background, employees who qualify as “learned professionals” exempt from the FLSA’s overtime and minimum wage requirement must satisfy a three-part test:

1. Salary Basis Test: The employer must pay the employee on a salary or fee basis, meaning that each pay period the employee must receive a fixed and predetermined amount that is all or part of the employee’s compensation, on a weekly or less frequent basis, that is not subject to reduction because of variations in the quantity or quality of work performed.  29 C.F.R. § 541.602(a).
2. Salary Level Test: The salary must meet a specified minimum amount, e., at least $684 per week.  29 C.F.R. § 541.300(a)(1).
3. Duties Test: The employee’s primary duty must be to perform work that requires either “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction,” or “invention, imagination, originality[,] or talent in a recognized field of artistic or creative endeavor.” 29 C.F.R. § 541.300(a)(2).

As an alternative to this three-part test, an employee may qualify as an exempt “highly compensated employee” if he or she customarily and regularly performs at least one exempt executive, administrative, or professional duty and receives total annual compensation of at least $107,432, part of which includes a weekly salary or fee of at least $684.  29 C.F.R. § 541.601(a)-(b).

Applying these tests to the facts, the WHD concluded as follows:

• Question 1: Are the employees’ primary duties those of learned professionals under 29 C.F.R. § 541.301?
  • Answer: Yes, the employees’ primary duties likely satisfied the duties test.  The job qualifications included advance knowledge in business finance and adult education; a master’s degree and/or Ph.D. in finance, accounting, adult learning, or “business discipline”; at least 10 years of practical business experience in an executive leadership role; and deep hands-on experience in various computer-based functions.
• Question 2: Do the company’s flat day rate payments for delivery work satisfy the salary basis requirement of 29 C.F.R. § 541.300(a)(1) for the learned professional exemption?
  • Answer: No, because the payments for delivery work were not a predetermined amount calculated on a weekly or less frequent basis.  Instead, they fluctuated based on the number of days an employee performed delivery work, whereby an employee could earn $1,500 by working one day in one week and could earn over $10,000 by working seven days in another week.  The WHD referenced a Fifth Circuit case that addressed a similar question, in which the court held that the salary basis test requires that (1) an employee know the amount of his or her compensation for each weekly pay period before working that week, and (2) the employee must receive the full salary for any week in which he or she performs any work without regard to the number of days or hours worked.  The facts presented in the opinion letter satisfy neither of these requirements.
• Question 3: Assuming the employees were otherwise exempt from the FLSA’s overtime pay requirements, would the hourly compensation for development work affect their status?
  • Answer: No, as long as the employee otherwise qualified as an exempt learned professional (e., he or she satisfied the salary and duties tests) without considering the development work payments, additional payments for each hour of development work on top of a fixed salary would not change the employee’s status.  (Here, however, the employees were not paid on a salary basis and therefore did not satisfy the premise of this question.)
• Question 4: Can a part-time employee qualify as exempt if the employee’s pay for the number of weeks worked is proportional to the minimum annual amount required under the highly compensated employee test under 29 C.F.R. § 541.601?
  • Answer: No, because neither of the two components of the highly compensated employee test varies based on an employee’s part-time or full-time status.  The regulations governing the highly compensated employee test do not include any exception for part-time employees.  An employee may satisfy the test only by meeting the full weekly and annual compensation (e., at least $684 per week and $107,432 per year).

FLSA2020-14

In FLSA2020-14, the WHD addresses whether employees’ hours must fluctuate above and below 40 hours per week to qualify for the fluctuating workweek method of calculating overtime pay set forth at 29 C.F.R. § 778.114.  In short, the WHD opined that they do not; it is sufficient that the employees’ hours fluctuate only above 40 hours per week for an employer to use the fluctuating workweek method of calculating overtime pay.

Federal regulations set forth five criteria for use of the fluctuating workweek method of computing overtime pay owed to a nonexempt employee under the FLSA:

1. The employee’s work hours fluctuate from week to week;
2. The employee receives a fixed salary that does not vary with the number of hours worked;
3. The amount of the fixed salary satisfies the applicable minimum wage rate for every hour worked in those workweeks in which the employee works the most hours;
4. The employee and employer have a clear and mutual understanding that the fixed salary is compensation for the total hours worked each workweek regardless of the number of hours; and
5. The employee receives, in addition to the fixed salary and any bonuses, premium payments, commissions, and other additional pay, compensation for all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek.

29 C.F.R. § 778.114(a)(1)-(5).

The WHD explained that the plain language of the regulation makes clear that there is no requirement that an employee’s hours vary both above and below 40 per week to come within the rule; rather, it only requires that the hours fluctuate from week to week.  See 29 C.F.R. § 778.114(a)(1).  Further, section 778.114(d) states that the fixed salary “does not vary with the number of hours worked in the work, whether few or many,” supporting the conclusion that an employee’s weekly work hours could be more than or less than 40 hours, or both.  In addition, the WHD cautioned that an employer using the fluctuating workweek method may not deduct from an employee’s salary for absences, except an employer may take occasional disciplinary deductions for willful absences or tardiness or for infractions of major work rules, provided the deductions do not cut into the minimum wage or overtime pay.  29 C.F.R. § 778.114(d).

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