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Advanced Wage And Hour Issues In Executive Compensation Packages

Many employers and human resources (HR) professionals are familiar with the necessity of keeping a close eye on wage and hour issues for their entry-level employees to ensure that the company maintains compliance with state and federal regulatory requirements. However, businesses are in many cases less attuned to these issues when it comes to executive compensation packages. Read on to learn more about how executive compensation packages can sometimes raise unexpected wage and hours issues for regulatory compliance – and for help with more specific questions directly related to your own business needs, reach out to the New York business law attorneys at Schwab & Gasparini by calling any of our conveniently located offices: Albany (518) 591-4664, Syracuse (315) 422-1333, or Hudson Valley and White Plains (914) 304-4354.

Understanding Wage & Hour Issues: FLSA Compliance

Most wage and hour issues a business may face from a legal perspective (as distinct from an HR or workplace morale angle, each of which can sometimes raise separate concerns) relate on some level to the company’s compliance with the Fair Labor Standards Act (FLSA). While determining the specific requirements and exemptions that may apply in a given situation can be complicated, understanding the basic rationale behind the Act and the way it categorizes different types of workers and ages can go a long way toward simplifying the process.

Background: History of the FLSA

The Fair Labor Standards Act was originally passed in 1938. This historical moment places the Act’s drafting in the context of the latter years of the Great Depression, near the midpoint of the Franklin D. Roosevelt Presidency, and during a period of intense national interest in labor relations. This history also places the original text from 1938 squarely within a period in which most non-domestic labor was presumed to be male, and in which the physical contexts of work were often quite different from those today’s employees often experience. Unsurprisingly, then, the FLSA has been subject to a number of updates through the passage of amendments over the years to help ensure that the laws on the books accurately reflect, and productively address, the changing conditions of the modern workplace. By and large, however, the core functions of the FLSA have remained the same.

Core Provisions of the FLSA

Among those core functions, the FLSA:

• Defines a workweek
• Establishes minimum overtime pay requirements for covered employees who exceed a set number of hours within the statutory definition of the workweek
• Delineates the positions that are subject to, vs. exempt from, these “wage and hour” considerations

Where the provisions of the federal Fair Labor Standards Act differ from those of state law, the law most favorable to the worker will generally prevail. “Most favorable” may not always look the same to all parties, so if you have questions about the intersection of New York labor laws with federal wage and hour issues, consider scheduling a consultation with an experienced New York business and employment law attorney with Schwab & Gasparini to discuss the particulars of your unique business and situation.

Basic Wage & Hour Issues

The United States Department of Labor (DOL) defines a workweek as a “fixed and regularly occurring” set of seven consecutive 24-hour periods (a total of 168 hours). No specific “weekends” or weekly days off are required, and all employees at a company do not have to follow the same workweek – but any given employee’s workweek must begin and end on a consistent schedule.

Each employee’s new workweek begins where his or her previous workweek ends; “reshuffling” an employee’s workweek rotation is not typically allowed, and attempting to change these calibrations can be a red flag to federal regulators. Within any given workweek, an employee may work up to 40 hours at their regular pay rate. If a non-exempt employee works any time beyond those 40 hours within their designated workweek, they are entitled to no less than one and a half times their regular pay rate for each hour worked past the 40th.

Overtime Pay Regulations

The vast majority of employee positions are considered “non-exempt” for purposes of wage and hour issues associated with FLSA compliance. While it is common to speak of FLSA overtime pay calculations in terms of hourly pay, the actual regulatory requirement is “at least one and one-half times the employee’s regular rate of pay,” according to compliance assistance resources provided by the DOL. The Department of Labor’s employer reference guide for overtime pay computations provides examples across a number of distinct pay schedule scenarios, including not just hourly but salaried and “piece rate” – meaning that a non-exempt employee, even if he or she is typically paid by work-item completed and not by scheduled or expected hours on the job, is still entitled to overtime pay if he or she spends more than 40 hours on those work-items within a given workweek.

Understanding Exempt vs. Non-Exempt Employee Classifications

In order to understand the potential wage and hour issues that can arise in negotiating executive compensation packages, it is important to recognize how the FLSA determines categories of workers. Some of these distinctions also intersect with Internal Revenue Service (IRS) guidelines concerning employer tax liability, so tax compliance as well as wage and hour regulatory requirements may be involved in calculating the appropriateness of a specific compensation offer.

Workers Not Covered Under the FLSA

The wage and hour provisions of the Fair Labor Standards Act only apply to employees. Depending on the company’s business model and industry, day-to-day work may also involve a rotating cast of independent contractors, limited-time joint venture collaborators, and others who receive payment or a share of the profits from a specific endeavor, but who do not occupy a regular place on the organization’s roster.

These parties are not “exempt” for FLSA purposes; rather, they are not covered by the Act, and generally speaking their compensation is more likely to be a matter of contract law than of compliance with federal labor regulations. In some cases, tax laws may also come into play; misclassifying employees as independent contractors, for example, can lead to severe penalties from the IRS, so if your business maintains a working relationship with one or more independent contractor(s) you may wish to speak with a labor and employment attorney or tax professional in your area to make sure that all classifications in your organization comply with IRS guidelines.

Determining Exempt Status for FLSA Wage and Hour Regulations

As the DOL’s guidelines make clear, most employees are entitled to overtime pay whenever their hours worked within a single workweek exceed the statutory 40 set out by the FLSA, regardless of how their pay is calculated an even regardless of whether the employer typically considers the number of hours worked in determining regular pay schedules or setting contractual expectations for job performance and fulfillment of responsibilities. However, there are a few specific situations in which the Department of Labor explains that federal wage and hour regulations do allow for certain positions within a company to be classified as “exempt” for the purpose of overtime pay calculations, minimum wage calculations, or both.

Jobs rewarded with executive compensation packages may not always fit into the “exempt” category, but in general those positions are more likely to meet the criteria for exempt status under DOL guidelines than are most skilled labor or middle management posts. Understanding these criteria can put companies in a position to negotiate competitive executive compensation packages that nonetheless offer the business opportunities to save substantial costs in overtime pay, under the right circumstances.

Exempt Status Wage and Hour Issues

Federal guidelines allow for employees who do certain types of work to be classified as exempt when their overall compensation structure meets certain criteria. Workers employed in these roles will not be considered exempt if their compensation does not align with regulatory requirements, and employees whose primary job responsibilities fall outside the categories specified by the Fair Labor Standards Act may not be exempt with respect to federal wage and hour issues, even if their compensation meets or exceeds the statutory minimum requirements.

Exemptions Applicable to Executives

Generally speaking, the exemptions most likely to apply to positions for which executive compensation packages would be appropriate are those outlined in Section 13(a)(1) of the Fair Labor Standards Act, which according to the DOL exempts employees in certain “executive, administrative, professional, and outside sales” roles from both overtime pay and minimum wage requirements. An employee may be classified as exempt only if their job duties meet “certain tests,” and the employee is paid:

• By salary, subject to a “fee basis” exception for “Highly Compensated Employees,” per the Department of Labor
• At or above a regularly-updated weekly minimum (a DOL Fact Sheet from 2019 lists $684)

The DOL’s Fact Sheet provides additional guidance for each type of position, including specific job duty requirements for a “highly compensated employee” overtime pay and minimum wage exemption.

Important Job Responsibility Expectations for Exempt Positions

Many positions categorized as “executive” within a company’s organizational chart may also be constituted as potentially exempt, subject to minimum compensation, under the FLSA. Many of these positions also come with the expectation of long hours, often on an unpredictable schedule. While the phrase “executive compensation packages” easily conjures images of high-salaried individuals in expensive suits holding forth in richly-furnished corporate boardrooms, in many cases the key consideration for wage and hour compliance may lie in the word “packages.”

Upper-level executives in many companies are not simply paid a predictable amount, on a regular schedule, to show up at contractually agreed-upon times and fulfill their designated job responsibilities to minimum standards or the best of their abilities. Instead, these workers – frequently responsible for choosing important directions for the company, and for devising and implementing plans for moving the business down each chosen path – often receive their compensation via a composite structure whose total value may vary to reflect the relative excellence or insufficiency of their perceived job performance. The composition of executive compensation packages, especially in combination with their frequent variability, can lead to compliance wage and hour issues, if not carefully managed.

Composition of Compensation: The Significance of Salary

The federal guidelines describing exemption criteria for executive, professional, and administrative positions directly reference salary. Thus while overtime pay calculations apply to most employees in most positions regardless of how their pay is scheduled, only salaried positions (and the limited “fee basis” exceptions for highly-compensated employees) are accounted for in the criteria for FLSA dual minimum wage and overtime pay exemptions.

Executive Pay Structure Wage and Hour Issues

Because many executive compensation packages are weighted heavily toward bonuses, stock options, and other incentives outside the “regular” employee pay structure, it is possible – although not particularly common – for a business to inadvertently find itself required to pay some of its top executives overtime under federal guidelines. Depending on how compensation packages are negotiated, in some instances high-earning decision-makers might earn very little in salary or even “fee-basis” payments, resulting in a situation in which a company is required to pay out bonuses and other expensive forms of compensation under the terms of its contract with an executive employee, while still needing to pay the same employee one and a half times his or her “regular rate of pay” for any hours worked in excess of 40 during a single workweek.

Negotiating Executive Compensation Packages for Mutual Benefits

These strategic miscalculations during the negotiation phase that is often an important part of the executive employee hiring process can be devastating to a company’s bottom line, especially for smaller businesses looking to hire high-level executive talent as they enter their next stage of growth. A business law and contract attorney may be able to review your offers for executive compensation packages in advance to help you avoid any pitfalls.

Seek Assistance From Our New York Business Law Attorneys

The wage and hour issues involved in devising competitive, yet cost-effective, executive compensation packages can be complex. As you approach the hiring or contract negotiation process, consider working with a business law attorney from a firm with a strong background in FLSA compliance support. Contact Schwab & Gasparini at one of our four New York offices today to discuss your needs. Reach us in Albany at (518) 591-4664, in Syracuse by calling (315) 422-1333, and in Hudson Valley or White Plains at (914) 304-4354.

 

Sun Nov 3 2024, 12:00am