2015 Tax and Legal Update Speech with Overtime …
2015 Tax & Legal Update
for Nonprofit Organizations
Presented by:
Elaine Sommerville, CPA
Sommerville & Associates, P.C.
(817) 795-5046 – telephone
(817) 795-5516 – facsimile
Elaine@nonprofit-
Elainesommerville.
and
Frank Sommerville, JD, CPA
Weycer, Kaplan, Pulaski & Zuber, P.C.
(817) 795-5046 – telephone
(800) 556-1869 – facsimile
fsommerville@
nonprofitattorney.
2015 Tax & Legal Update
for Nonprofit Organizations
IRS Planned Activities
a. The Federal General Accountability Office reported to Congress that the IRS EO audit selection process was severely flawed and resulting in targeting EOs for audit based on the political or religious points of view. July 23, 2015.
b. Z Street v. Koskinen, 791 F.3d 24 (D.D.C. 2015). Z Street can sue IRS for damages arising from delayed processing due to targeting due to political positions by the IRS.
Tax Exemption Issues
a. PLR 201541013 – Inurement/Private Benefit - Exemption revoked where the Foundation paid for the expenses of the founder’s telemarketing company and entered into an exclusive contract with founder’s telemarketing company for fundraising services. Additionally, the Foundation failed to conduct any exempt activities since its only activities were raising funds that were paid to the telemarketing company engaged.
b. PLR 201538026 – Inurement/Private Benefit - Exemption revoked for organization that was formed to provide “health, education and treatment, including a specific therapy, to the general public. Insider used funds from checking account for general purposes.
c. PLR 201534014 – Inurement - Use of funds to pay personal expenses of the organization’s president and comingled payment of expenses with another organization with the same president was inurement of benefit and the exemption was revoked.
d. PLR 201523022 - Inurement/Private Benefit - Organization formed for religious activities of a minister, including preaching engagements, revivals, Bible studies and worship services, not exempt because the true purpose was to support the minister's candidacy for office of bishop.
e. PLR 201516066 -- Inurement/Private Benefit - Art gallery not exempt because it promoted the sale of works by a local artists.
f. PLR 201505039 -- Inurement/Private Benefit - Organization did not qualify for tax exemption under IRC § 501(c)(3) because it was formed and operated to raise funds for the benefit of a designated individual. Private benefit ruling. See PLR 201519035 with same result, though the child benefitting from the organization was handicapped and needed substantial assistance that the family could not afford.
g. PLR 201522006 – Exempt Activities - Inactive organization not exempt though it had a written business plan to conduct exempt activities.
h. PLR 201503016 – Fundraising/Exempt Activities - Organization formed to enable online fundraising by charities is not exempt. No exempt purpose.
i. Zagfly v. Commissioner, 2015 U.S. App. LEXIS 10326 (9th Cir. 2015). – Fundraising/Exempt Activities - The donation of business profits is not an exempt purpose. Internet florist sought tax exempt status because it promised to donate profits from sales to charities selected by customers.
j. PLR 201539032 – Expenditure Responsibility - Exemption revoked for being a conduit for funds to go to foreign organizations. Service also deems unreported compensation payments a “nonexempt” activity. Funds transferred to foreign organization for tuition and for grants without expenditure responsibility.
k. PLR 201523021 – Political - Organization's mission to educate the public about political candidates not exempt because all its speakers for the "Meet the Candidate" forum came from the same political party.
l. PLR 201505042 – Political - Because the organization was formed to show how electronic communication enhanced good governance but its ideas and suggestions could become effective only by the enactment of legislation, the organization was an "action" organization under Treas. Reg. § 1.501(c)(3)-1(c)(3)(iv).
m. PLR 201503018 – Commercial Activities - Creation of taxable subsidiary does not jeopardize tax exemption.
n. PLR 201540019 – Commercial Activities - Exemption denied where the organization was formed to take over the operations of the founder’s sole proprietorship that had been operating at a loss. Activities held to inure to her benefit and were conducted in a commercial manner.
o. PLR 201535019 – Commercial Activities - Organization organized to provide various services to the elderly and veterans. Predominately these activities are the provision of consulting services to assist veterans’ hospitals. Exemption denied since a substantial part of the activities was operated in a commercial manner. The IRS also deemed a compensation system that included performance bonuses and revenue based payments to be private benefit.
Payroll Issues
a. Treasury Inspector General Report –TIGTA has determined that 3.8% of tax exempt organization owed approximately $875 million in payroll tax debts as of June 2012. More than 1500 organizations owed more than $100,000 each. The GAO also determined that more than 1200 organizations with unpaid payroll and other taxes received more than $14 billion in direct Federal grants in Fiscal Years 2005 and 2006.
b. IRS contract labor settlement program still available. See Form 8952.
c. DOL proposes to raise minimum compensation requirements for exempt employees to $50,440 effective date to still be determined. More than 200,000 comments have been submitted to the DOL.
d. DOL Technical Release 2013-03 and IRS Notice 2013-54 clearly state that an HRA that is not integrated with other health coverage that meets the unlimited dollar amounts for certain benefits fails to qualify as a qualifying health plan. Therefore, the employer is subject to the $100 per day/per employee penalty. As of July 1, 2014, this effectively ends the practice of reimbursing employees for health insurance that is obtained in the open market as an individual policy.
Charitable Contributions
a. Issued September 16, 2015, proposed Regulations under Section 170(f)(8)(D) and (E) regarding filing of charitable contribution receipts with the IRS by the charitable recipient (church). The IRC provides that the taxpayer does not need a receipt from the recipient (church) if the recipient files with the IRS a confirmation of the donation. This provision has been on hold because IRS did not provide a way for the recipient organization to confirm with the IRS. The proposed regulation directs the IRS to develop a form (like a Form 1099) that the recipient may file with IRS by February 28 of each year. The form will contain all the information currently required in the charitable contribution receipt. Comments can be received until December 17, 2015.
b. Wesley v. Commissioner, T.C. Memo 2015-200. Receipts Issues – Taxpayer acknowledged that he has manufactured the receipts in 2014 rather than receive them timely in 2011. Also, one of the donations listed a contribution for an item paid for with a ministry credit card rather than the Taxpayer’s credit card.
c. Howe v. Commissioner, T.C. Summary Opinion 2015-26. Receipting Issues --Charitable contribution (cash and noncash) deductions denied due to receipts lacking the "no goods or services" statement.
d. Kunkle v. Commissioner, T.C. Memo 2015-71. Noncash Receipting Issues --Noncash contributions of $37,315 denied because the taxpayer lacked a qualify receipt and no appraisal of items that the exceeded a value of $500.00. They had qualifying noncash contribution receipt from their church for some items, but not others. The church did not report to the donors the disposition of the noncash items.
e. Smith v. Commissioner, T.C. Memo 2014-203. Noncash Receipting Issues --Court denied deduction for $27k in noncash contributions because the signed, blank receipts provided by AMVETS did not satisfy the receipt requirements of Section 170. Noncash receipts must contain a detailed description of the items being donated. The detailed lists prepared by the taxpayer were not adequate because the recipient organization must have prepared the detailed list for the receipt.
f. Isaacs v. Commissioner, T.C. Memo 2015-121. Value Issues -- Donation of fossils not deductible because taxpayer did not submit a qualifying appraisal.
Scholarships
a. PLR 201516077 -- Types of Education -- Scholarships to study horsemanship, including paying expenses to attend horse shows and competitions, approved. Exempt purpose was to support public educational programs about horses.
b. PLR 201504019 -- Types of Education -- Scholarship program awarding scholarships to students who intend to study agriculture approved.
c. PLR 201501021 -- Charitable Class Issues -- Foundation formed to award scholarships to members approved. To be eligible, an applicant had to be a church member in good standing who planned to attend, or was attending, a school of divinity or an institution of higher learning.
d. PLR 201537028 – Charitable Class Issues -- Scholarships to former athletes for grad school is approved and will not constitute taxable expenditures. Tax free to the recipient if used for tuition and related expenses under Section 117.
e. PLR 201536026 – Charitable Class Issues -- Grants to former unpaid interns allowed as long as the interns worked at organizations that further the foundation’s exempt purposes. Grants will not represent taxable expenditures. The amounts will be taxable to the recipients unless the grant qualifies as a scholarship under Section 117.
f. Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. v. United States, 2015 U.S. Dist. LEXIS 85477 (D.D.C. 2015). Charitable Class Issues -- Scholarship foundation for family members not tax exempt. The Foundation was funded through one charitable bequest and the donor’s family controlled the operations and was the only recipients of the awards.
Charitable Solicitation Registration
If communicating with any donor in any state review the rules for registration. There are 40 jurisdictions that require registration. While just an internet presence does not trigger registration in most jurisdictions, direct communications with a donor can.
Employment Cases
a. Rogers v. The Salvation Army, 2015 U.S. Dist. LEXIS 61112 (E.D. Mich. 2015). Ministerial Exception -- Ministerial exception applies to substance abuse counselor.
b. Preece v. The Covenant Presbyterian Church, 2015 U.S. Dist. LEXIS 52751 (D. Neb. 2015). Ministerial Exception -- Youth minister not ordained by the church was a minister for the ministerial exception. Youth minister fired because he filed for divorce.
c. Conlon v. InterVarsity Christian Fellowship, 2015 U.S. App. LEXIS 1871 (6th Cir. 2015). Ministerial Exception -- Ministerial exception prevents court from considering suit when employee fired for seeking a divorce.
d. Bohnert v. The Roman Catholic Archbishop of San Francisco, 2015 U.S. Dist. LEXIS 130519 (N.D. Ca. 2015). Title VII and Ministerial Exception -- Teacher at all boys Catholic high school could sue the church for the sexual harassment by students who took upskirt pictures and created a website dedicated to her photos. The school failed to address adequately her complaints. No minister exception applied because she did not have spiritual responsibilities
e. Kane v. Roman Catholic Church of St. Raymond, 2015 U.S. Dist. LEXIS 91398 (S.D. N.Y. 2015) Title VII -- School counselor at church school suit is dismissed because she failed to complain to the school administration about sexual harassment. She also failed to file a timely complaint with the EEOC.
f. McIver, et al, v. Imani Christian School, 2015 U.S. Dist. LEXIS 128550 (W.D. Pa. 2015). Title VII -- School that separated from its church was no longer eligible for the religious exemption from Title VII.
g. Belloni v. Archbishop of the Diocese for San Francisco, 2015 U.S. Dist. LEXIS 1653 (N.D. Ca. 2015). Title VII and AGEA -- Parish secretary's suit for Title VII and AGEA (race, gender, age) survives motion for summary judgment. The 30 year tenured secretary was fired because she was telecommuting as approved by previous pastor. New pastor required her to be present in office 5 days a week. No negative performance reviews in 30 years.
h. Puckette v. The Board of Trustees of the First Baptist Church of Gainesville, GA, 2015 U.S. Dist. LEXIS 19319 (N.D. Ga. 2015). ADA -- Church's motion for summary judgment denied in ADA case brought by janitor who was fired by the church for insubordination. The janitor presented testimony from psychiatrist that he was schizophrenic. Church could be held liable though the diagnosis occurred after termination and had no knowledge of whether he was mentally ill. The church did nothing to determine whether his behavior was caused by mental illness.
i. Greater Fairview Missionary Baptist Church v. Hollins, 160 So. 3d 223 (Miss. 2015). Ecclesiastical Abstention Doctrine -- Mississippi Supreme dissolved TRO issued by lower court preventing the church from removing its pastor from office. This was internal church dispute and the court had no jurisdiction to issue TRO. The church had voted to dismiss the pastor, but the TRO prevented church from removing him from office.
j. Hillenbrand v. Christ Lutheran Church of Birch Run, 2015 Mich. App. LEXIS 1744 (Mi. App. 2015). Ecclesiastical Abstention Doctrine -- The court cannot hear pastor's appeal from termination by a church due to the Ecclesiastical Abstention Doctrine. Further, the church's withdrawal from the denomination made the Synod's opinion advisory and not binding on the local church. The local church was not required to pay damages to the former pastor as suggested by the denominational panel.
k. Walker v. Interfaith Nutritional Network, 2015 U.S. Dist. LEXIS 91418 (E.D. N.Y. 2015). FLSA -- Soup kitchens with homeless shelters in 23 locations in New York were not subject to overtime because the plaintiff did not allege that the kitchens were engaged in either enterprise or individual interstate commerce.
Same Sex Marriage Issues
Obergefell v. Hodges, 115 AFTR 2d 2015-2309 held that the government must recognize same sex marriage as a fundamental right. Besides the employee benefits discussed earlier, this decision impacts the church into areas: employment and facilities use.
a. Employment Law. After this decision, the EEOC announced that it would follow this decision in its enforcement of Title VII. If a church discriminates against an applicant or employee because they are married to someone of the same gender, they have violated Title VII's prohibition against discriminating on the basis of marital status. The church could be liable for damages for unlawful discrimination. No exception exists for churches, though the ministerial exception applies for ministerial positions.
b. Defensive Measures. If a church sincerely believes that employing an individual who is married to someone of the same gender, then it must demonstrate that it's sincerely held religious beliefs overrule the EEOC's interpretation of the statute. The church should adopt a Statement of Faith incorporating its major theological doctrines, including its doctrine on marriage. The church should require that all applicants and employees sign a statement that they agree to conduct themselves within the requirements of the Statement of Faith. Annually, employees should be required to affirm that they have not changed their mind. Ideally, the Statement of Faith should be incorporated into the bylaws of the church and the employee handbook.
c. Facilities Use. After this decision, if a church sincerely believes that it cannot allow its facilities to be used to host a same-sex marriage ceremony or celebration, its facilities use policy must reflect this sincerely held religious belief. Also, many state and local laws prohibit discrimination on the basis of sexual orientation or sexual perception in public accommodations. If the church allows any outside groups to use its facilities, then it may be covered by a public accommodation statute. Substantial fines may be imposed for violating the public accommodation statute, including the loss of property tax exemption.
In some states, the church must prohibit all outside use to avoid adverse consequences due to the public accommodation laws. In other states, the church must prohibit the use by any organization that cannot further the church's exempt purposes. Texas does not include sexual orientation or sexual perception in its public accommodation statute, but city ordinances in Dallas, Fort Worth, Austin and San Antonio include sexual orientation and sexual perception in their public accommodation ordinance. Houston is voting on its public accommodation ordinance in November 2015. All Texas city ordinances exclude churches from their coverage. The Texas Pulpit Protection Act also prohibits any state or local government official from making an adverse decision involving a church prohibiting same-sex marriage.
d. Defensive Measures. If a church sincerely believes that it cannot allow its facilities to be used to host a same-sex marriage ceremony or celebration, it must avoid being classified as subject to the public accommodation statute. Churches should enact a written facilities use policy and written wedding policy. It should require every outside organization using church facilities to recognize the church's Statement of Faith. It should require that those being married agree with the Statement of Faith as well. In Texas, churches may still allow government entities, such as schools, to use its facilities without requiring the government entity to recognize the church's Statement of Faith. Every church should check with its local attorneys to determine its rights under state or local laws.
NEW PROPOSED OVERTIME RULES
By Frank Sommerville, JD, CPA
fsommerville@
Since virtually all churches are subject to overtime rules, these proposed regulations will require many organizations to amend their policies and procedures on overtime pay if made effective. If your state’s overtime rules mandate overtime pay, the state rules apply even though a federal exemption may apply.
The 2015 proposed rule changes represent the first attempt to index the minimum salary to inflation. The new proposed rules seek to cause the overtime rules to apply as they were intended when first enacted in 1938. The minimum salary level is set at the proposed level of the 40th percentile of average full-time employee salaries, while the 2004 regulations set it at 20th percentile and was not indexed to inflation.
The Fair Labor Standards Act (the statute that mandates minimum wage and overtime) applies to all enterprises that (1) have employees engaged in commerce or (2) in the production of goods for commerce and (3) have an annual gross volume of sales made, or business done, of at least $500,000; or are engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, or individuals with intellectual disabilities who reside on the premises; a school for intellectually or physically disabled or gifted children; a preschool, elementary or secondary school, or an institution of higher education (without regard to whether such hospital, institution or school is public or private, or operated for profit or not); or are engaged in an activity of a public agency. There are two ways an employee may be covered by the provisions of the FLSA: (1) enterprise coverage, in which any employee of an enterprise covered by the FLSA is covered, and (2) individual coverage, in which even employees of non-covered enterprises may be covered if they are engaged in interstate commerce or in the production of goods for commerce, or are employed in domestic service.
TYPES OF EXEMPTIONS
In the original statute, workers had to meet three tests to be exempt from overtime: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).
The new regulation retains the familiar exemption names. The workers are classified as exempt if they are (1) an executive (sometimes called the management exemption), (2) an administrative worker, (3) a worker in a recognized profession, and (4) computer worker exemption.
The biggest change relates to the minimum salary required to be exempt from overtime pay. No new effective date has been formalized but many expect them to go into effect during 2016, unless Congress intervenes. The effective date is expected to be within 60 or 90 days of the publication of the final rule. Tammy D. McCutchen, former administrator of the U.S. Department of Labor’s Wage and Hour Division (WHD), told an HR conference to expect that the new rules will be in effect by January 1, 2016. The Department of Labor received nearly 200,000 comments on the proposed rules.
Minister Exception
Before discussing the specific exemptions, I should note that ministers are not listed in the statute as exempt from overtime rules. They are mentioned in footnote 49 of the proposed rules announcement ("Workers not covered as employees by the FLSA and/or the Department’s regulations include: members of the military, unpaid volunteers, the self-employed, many religious workers, and most federal employees."). It further states: "Religious workers were excluded from the analysis after being identified by their occupation codes: ‘clergy’ (Census occupational code 2040), ‘directors, religious activities and education’ (2050), and ‘religious workers, all other’ (2060)."
Historically, the courts have excepted ministers from overtime rules because of the legislative history. During a Congressional debate, the sponsor of the overtime bill told Congress that overtime rules did not apply to ministers because they were not considered employees. Of course, this was also the position of the Internal Revenue Service (IRS) at the time. A judicially created ministerial exception prevents the Department of Labor from applying the overtime regulations to ministers.
Salary Basis Test
This test requires that workers be paid on a salary basis, that is, a pre-determined amount that cannot be reduced because of variations in the quality or quantity of the employee’s work. This means that the employer may not dock an employee for absences of less than one day. (An employer may provide for paid time off that is excluded from this test. The paid time off benefit may be utilized by the employee in any increment selected by the employer.)
Salary Level Test
The new rule expects to raise the minimum wage for an exemption from $455 per week (about $24,000 per year) to $970 (about $50,440 per year). The proposed regulation uses $921 but dates that as of 2014. The final number will likely be between $921 and $970. If the amount is set at $970, workers who earn less than $970 per week must receive overtime pay even if they may qualify for an exemption. Also, the proposed rule adjusts the highly compensated exemption to $122,148. Further, the proposed rule indexes the $970 weekly rate and the $122,148 annual rate to inflation and will be adjusted annually. Salaried workers not subject to the salary test include teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales workers.
The EAP Exemptions
The statute includes executive, administrative and professional exemptions ("EAP Exemptions") from overtime. The proposed rules do not include specific changes but the Department of Labor is seeking comments from the public regarding ways to make them simpler and easier for employers to apply.
Executive Exemption
The executive exemption requires that the worker meet the following tests:
• Their primary duty must include managing the organization or some distinct department or division of the organization, and they must meet the minimum salary requirement mentioned above.
• They must direct the work of at least the equivalent of two full-time employees.
• Either they have the authority to hire or fire employees, or their input on a decision carries significant weight.
Please note that volunteer supervision is not included in the test. If the hiring and firing decisions are made by a committee, then the organization should amend its committee charge to name the positions whose input is needed in any employment decisions.
Administrative exemption
The administrative exemption requires that the worker meet the following tests:
• Their primary duty must be to perform office work or non-manual labor related to the management of the organization, and they must meet the minimum salary requirement.
• The primary duty must include the exercise of discretion and independent judgment with respect to matters of significance to the organization.
This exemption will apply to workers with decision making authority, but do not have the same amount of worker supervision the executive exemption requires. The administrative exemption would typically apply to a worker who supervises many volunteers and their activities.
Professional Exemption
The professional exemption requires that a worker meets the following tests:
• Their primary duty must be performing work that requires advance knowledge; the work must be primarily intellectual in character and requires consistent exercise of discretion and judgment; and the worker must meet the minimum salary requirement.
• Their work must be in a recognized science or field of advanced learning.
• The knowledge they acquired must be from an extensive, specialized intellectual instruction over a long period of time.
• If the field of advanced learning relates to a creative profession, such as music or art, then the work must be characterized by imagination, creativity, originality or exceptional talent.
The regulation contains specific examples of jobs that meet or fail this test including, health care professionals, and teachers. This regulation generally requires a four-year college degree or its equivalent.
Computer Professional
The computer worker exemption requires the worker to meet the following tests:
• They must earn at least $921 per week, or $27.63 per hour if compensated on an hourly basis.
• They must work as a systems analyst, programmer, software engineer, or similar position.
• Their primary duty must consists of application of systems analysis; design development; creation, testing or modification of systems or programs; testing design, development or creation; or modification of operating systems.
This exemption will apply to managers of IT departments, but not to those maintaining the organization’s networks.
Outside Sales Professional
Outside sales employees paid at least $921 per week also may be FLSA exempt if their primary duties are one of the following:
• Making sales or
• Obtaining orders or contracts for services or use of facilities for which a consideration will be paid by the customer and
• Who are customarily and regularly engaged away from the employer’s place or places of business while selling or obtaining orders or contracts for services.
OVERTIME AND COMPENSATION ISSUES
1. All exempt employees must be compensated by a weekly salary that is guaranteed regardless of the number of hours actually worked. A worker cannot be compensated using an hourly rate and still be exempt from overtime.
2. An exempt employee cannot be docked for missing work in any week where the employee worked at any time. For paid time off, the employee must utilize paid time off in daily increments. For disciplinary purposes, an exempt employee can be docked in one half day increments.
3. An exempt employee cannot perform non-exempt duties more than 20% of the time they work.
4. If the nature of the work changes over time, the overtime exempt status must be reviewed to determine the correct status.
5. At all times the weekly salary must equal minimum wage regardless of the number of hours worked.
6. Comp time must be utilized during the same work as the overtime was worked.
WHEN IS AN EMPLOYEE ON THE CLOCK?
1. When Does Travel Time Count as Overtime Work?
Generally, travel time conducted for work during work hours is compensable whereas ordinary home-to-work travel is not. Set forth below are some different travel circumstances:
• Working While Traveling: Time spent working while traveling is compensable. For example, in the federal government travel time while driving a government vehicle, at least outside of the employee’s regular commute, is considered compensable work time.
• Travel on Weekends: Travel on weekends is compensable even if no work is performed so long as the work hours cut across the administrative workday for the employee. For example, if the employee’s administrative workday is 7:00 a.m. to 5:00 p.m. and the employee travels on a weekend during those hours, the travel time is compensable.
• Emergency Travel from Home to Work: This time can be compensable depending on the circumstances. For example, if a worker is called in the middle of the night and ordered to return to work. Interestingly, the Department of Labor takes no position on the compensability of this time.
2. When Does Training Time Count as Overtime Work?
Attendance at training, meetings and lectures must be counted as work activities unless all four of the following criteria are met:
• Attendance is outside the employee’s regular work hours;
• Attendance is voluntary;
• The course is not directly related to the employee’s job; and
• The employee does not perform any productive work while attending the lecture.
Attendance is not voluntary if the employee is led to believe that his or her present employment would be adversely affected if he or she did not attend.
Certain DOL approved apprenticeship training programs are exempt from the FLSA.
3. When Does an Employer Have to Pay for On-Call Time, Waiting Time and Break Time?
Break Time is Compensable Unless the Breaks are Really Long
Although there is little case law on the issue of whether breaks are compensable, the U.S. Department of Labor’s rule is that if a break or rest period is twenty minutes or less, the break time is compensable. Longer breaks, including meal breaks, may be compensable, as well, depending on the circumstances.
Waiting Time is Often Compensable
Time spent waiting while on-duty is compensable, particularly if it is on the employer’s premises, is unpredictable and/or is of relatively short duration. For example, a restaurant worker who is required to report to work at a certain time, though he does not have to bus tables until a certain number of customers are present, is probably entitled to compensation for his waiting time.
In addition, in certain occupations employees are hired to be "engaged to wait" for something to occur. For example, fire fighters and emergency workers are hired, in part, to be available to respond immediately to emergencies. Some people are hired to be available to immediately repair expensive machinery. Some truck drivers are hired to wait until assignments come in so that they can leave immediately. All of these employees have been found to be "engaged to wait" and, therefore, their waiting time has been found to be compensable.
When church workers attend a children or youth camp, they may be considered on duty 24/7 unless this is addressed with the employee. Further, some states have special rules that apply to camp employees.
4. Must an Employer Pay Employees for On-Call Time?
Some employees are required to remain available at home or on the employer’s premises during meal periods to respond to calls in person, or through a telephone or pager. Clearly, the time spent responding to calls, including time spent at home on the telephone or computer responding to calls or email, is compensable. With regard to waiting time, however, there is no bright line rule as to whether or not on-call time is compensable or not.
In determining whether on-call time is compensable, the factors that courts have viewed include:
• the average number of calls the employee responds to during the on-call period;
• the required response time: in other words, the amount of time in which the employee has to be at the work site after being called in;
• whether an employee is subject to discipline for missing or being late to a call-back;
• the extent to which an employee is able to engage in other activities while on-call; and
• the nature of the employee’s occupation (in some jobs, it is the nature of the job to be paid to be available to respond immediately to a situation).
Based on these criteria, fire fighters and emergency medical personnel have been found to be entitled to overtime pay for the entire on-call period where the on-call period was spent at home.
5. Are meal periods and/or sleep time counted as overtime hours?
Meal periods and sleep time spent on the employer’s premises are compensable under certain circumstances. Employers who require employees to remain on the employer’s premises and to respond to calls and interruptions during an employee’s meal periods and sleep time are required, in most circumstances, to pay the employees for their meal periods and sleep time.
On-Duty Meal Periods are Compensable
The Department of Labor’s regulations require that meal periods be counted as compensable work time unless the employee is "completely relieved from duty for the purposes of eating regular meals." Thus, employers who impose work-related restrictions on employees during their meal periods, such as answering phones or responding to work related requests should pay employees for their meal periods.
An example of how this test is applied is a case involving telephone line installation workers. Their employer required them to eat lunch at their worksite and to remain there throughout the meal period to ensure that the expensive equipment that they used was not stolen. The entire lunch period was found to be compensable work time.
Some courts apply a different test than the Department of Labor’s meal period test. These courts have applied what is called the predominant beneficiary test. Under the predominant beneficiary test, courts determine whether the employer or the employee is the predominant beneficiary of the meal period. Under this test, employees who are required to remain on the employer’s premises in a place which is not a dining room, or some other area which is not an eating facility, are usually found to be entitled to compensation for their meal periods. In these circumstances, the employer has been found to place substantial restrictions on the employee during the meal period for the employer’s benefit.
For example, in cases in which police officers and fire fighters have been required to monitor their radios and to remain on the employer’s premises during a meal period, the employer is usually considered to be the predominant beneficiary of the meal period and the employer must pay the employees for their meal periods. These cases are particularly strong if the police officers receive 1 or more calls on average during each meal period.
On-Duty Sleep Periods are Compensable under Most Circumstances
As a general rule, employers must count on-duty sleep periods as compensable work time. On-duty sleep periods are occasions in which an employee is required to sleep on the employer’s premises and may have his or her sleep interrupted by some type of incident to which the employee must respond.
Employers can avoid paying for on-duty sleep periods only if the employer has an express or implied agreement to exclude such periods, the employer has furnished adequate sleeping facilities and the employee’s work day is 24 hours or longer. In addition, under no circumstances may an employer avoid paying for on-duty sleep time if the employee has not had the opportunity to receive 5 or more hours of sleep. Under no circumstances can an employer exclude more than 8 hours of on-duty sleep time per 24 hour shift when computing employees’ overtime pay.
Missions Trips
Overtime rules apply unless the nonexempt employee works outside the United States for the entire 7 day work week. The FLSA does not apply to workers outside the United States.
State Rules
Some states have overtime and minimum wage rules that differ from the federal rules. The rule that favors employees more applies. This means that if the state has a more employee favorable rule, that rule will apply in that state.
SAFE HARBOR FOR EMPLOYERS
When the DOL rewrote the overtime labor laws, it created a “safe harbor” defense for employers that unintentionally make improper deductions from exempt employees’ salaries. That provision allows you to correct improper-deduction mistakes without losing an employee’s FLSA exempt status.
To use that defense, you must adopt a policy that bans improper deductions and provides an avenue to raise complaints.
If a question is raised about an employee’s exempt status, it pays to act fast and be able to show good cause why you classified them as exempt in the first place.
The FLSA allows employees to collect double (or “liquidated”) damages unless you can show your mistake was made in good faith and you honestly intended to classify the employee correctly.
To head off such complaints, host an annual classification review. Have a team compare all employees’ job descriptions (and actual duties) against the FLSA exemption regulations. (Some states set their own rules. Get a legal opinion if you’re stumped about an employee’s status.)
If any positions should be switched to hourly, make the change as soon as possible and start paying overtime. Then, do your best to calculate what you owe for past unpaid overtime.
If an employee files an overtime suit, your annual classification audit would likely be enough proof of your good-faith efforts to ward off double damages.
RECORDKEEPING REQUIREMENTS
1. Exempt Employee Recordkeeping
The FLSA’s record-keeping requirements for exempt employees differ from those for nonexempt workers. Because you don’t pay exempt employees by the hour, you shouldn’t track the exact number of hours they work on a daily basis. Doing so could make it seem to a wage-and-hour Labor auditor that you are indeed basing pay on the number of hours worked, which might raise the question of whether the employee is truly exempt.
However, just because a worker is exempt doesn’t mean your company is freed from keeping records on him or her. With exempt employees, you should keep records that describe the workweek and the wages paid for that period.
Specifically, you should keep these records on FLSA exempt employees:
• Personal information, including name, home address, occupation, gender (for equal pay laws), birth date for workers under age 19 (for child labor laws) and the person’s workplace identification number.
• Time of day and day of week when the employee’s workweek begins.
• Total wages paid each pay period.
• Date of payment and the pay period covered by each payment.
Your records for exempt employees can also track which days are used for sick days, vacation days or personal days.
2. Nonexempt Employee Recordkeeping
Every covered employer must keep certain records for each non-exempt worker. The Act requires no particular form for the records, but does require that the records include certain identifying information about the employee and data about the hours worked and the wages earned. The law requires this information to be accurate. The following is a listing of the basic records that an employer must maintain:
a. Employee's full name and social security number.
b. Address, including zip code.
c. Birth date, if younger than 19.
d. Sex and occupation.
e. Time and day of week when employee's workweek begins.
f. Hours worked each day.
g. Total hours worked each workweek.
h. Basis on which employee's wages are paid (e.g., "$9 per hour", "$440 a week", "piecework")
i. Regular hourly pay rate.
j. Total daily or weekly straight-time earnings.
k. Total overtime earnings for the workweek.
l. All additions to or deductions from the employee's wages.
m. Total wages paid each pay period.
n. Date of payment and the pay period covered by the payment.
3. Retention and Destruction of Employment Records
Each employer must preserve, for at least three years, payroll records, collective bargaining agreements, sales and purchase records. Records on which wage computations are based should be retained for two years, i.e., time cards and piece work tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages. These records must be open for inspection by DOL auditors, who may ask the employer to make extensions, computations, or transcriptions. The records may be kept at the place of employment or in a central records office.
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