1. Classification of Employees Chris Jozwiak & Cassie Navarro Baillon Thome Jozwiak & Wanta LLP Penelope Phillips October 2015 1

2. The Fair Labor Standards Act (“FLSA”) Requires Employers To: Pay the minimum wage for each hour worked Pay time and one-half the regular rate for hours worked in excess of 40 per week Keep records Observe minimum age requirements 2

3. Who is covered by the FLSA? Employees: Individual employees who, as a part of their job, engage in interstate commerce. Employees on Payroll (vs. contractors) Unpaid workers (interns, trainees) if the business is the primary beneficiary of their work. 3

4. Definition of “Employee” FLSA defines employee as “any individual employed by an employer.” Covered employment includes arrangements in which one party “suffers or permits” another person to work. “Economic Reality Test” – whether the worker is, as a matter of “economic reality,” dependent upon the putative “employer.” 4

5. Economic Realities Test for Determining Employee Status 1) Degree of control over the manner in which the work is performed; 2) Worker’s opportunity for profit or loss; 3) Worker’s investment (equipment, materials, or assistants); 4) Whether the service requires a special skill; 5) Degree of permanence; and 6) Whether the service is “integral” to employer’s business. 5

6. Excluded from Coverage Under the FLSA Volunteers: No promise or expectation of compensation May not receive benefits rather than cash Less than full-time occupancy Services typically associated with volunteer work Trainee or Student: Training or similar to school No regular employee displaced Employer derives no immediate economic advantage No guarantee of job No wage is paid 6

7. Interns Internships in the “for profit” private sector will most often be viewed as employment. However, if the following criteria are met, there is no employment relationship and the intern is not entitled to compensation. The internship is similar to training which would be given in an educational environment; The internship experience is for the benefit of the intern; The intern does not displace regular employees, but works under close supervision of existing staff; The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; The intern is not necessarily entitled to a job at the conclusion of the internship; and The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship 7

8. Independent Contractors Minimum wage and overtime rules under the FLSA do not apply. Before you determine how to pay a worker, you must first know if they are an employee or independent contractor. The IRS has set up their own guidelines or “IRS Test” for determination of this. 8

9. FLSA Exemptions No minimum wage or overtime pay requirements for employees who perform certain duties and receive a qualifying salary. No time records need to be kept. 9

10. FLSA Exemptions The most common FLSA minimum wage and overtime exemption – often called the “541” or “white collar” exemption – applies to certain: Executive Employees Administrative Employees Professional Employees Outside Sales Employees Computer Employees 10

11. Salary Basis Regularly receives a predetermined amount of compensation each pay period (on a weekly or less frequent basis). Right now the current exception is based on employees earning $455/week ($23,660/year). The compensation cannot be reduced by improper wage deductions. Must be paid the full salary for any week in which the employee performs any work. Need not be paid for any workweek when no work is performed. 11

12. Salary Basis, cont. Impermissible Wage Deductions: Performance Discipline Partial Day absence Work is unavailable for employee Safe Harbor Rule: If an inadvertent deduction is made, the 29 C.F.R. 541.603 pay save the exempt status if employee is promptly reimbursed. 12

13. Duties Test An employee who meets the salary level tests and also the salary basis tests is exempt only if s/he also performs exempt job duties. Primary duty (principal, main, major or most important duty) of employee must fall under category of exempt duties. Time spent on primary duty is not the only factor. If primary duty is the reason for employment, may meet this test even if majority of time is not spent on that duty. 13

14. Exemptions from the FLSA Administrative Performing office or non-manual work, which is directly related to management or general business operations of the employer of the employer’s customers; A primary component of which involves the exercise of independent judgment and discretion about matters of significance. 14

15. Exemptions from the FLSA Executive Regularly supervises two or more other employees; Has management as the primary duty of the position; and Has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments). Professional Primary duty of performing work requiring knowledge of an advanced type in a field of science or learning. Must involve discretion and independent judgment. 15

16. Exemptions from the FLSA Creative Endeavor Exemption Primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. THIS INCLUDES ACTORS & ACTRESSES 16

17. Calculating the Regular Rate of Pay for Overtime Includes: Shift differentials Commissions Production, incentive, sales, or attendance bonuses Excludes: Discretionary bonuses Payment to employee benefit plans Premiums for overtime, work on weekends or holidays if 1.5 times the regular rate of pay Call back pay On call pay Vacation, sick leave, holiday pay 17

18. Regular Rate of Pay Is determined by dividing the total earnings in the workweek by the total number of hours worked in the workweek For example: Employee earns $10 per hour at Job 1 Employee earns $15 per hour at Job 2 (same employer) Employee works 30 hours at Job 1 and 20 hours at Job 2 Employee earns $600 for 50 hours of work (30 x $10 = $300; 20 x $15 = $300) Employee’s regular rate of pay is $12 per hour ($600/50 = $12) Employee’s OT premium is 0.5 of $12 = $6 Employee earns additional $60 (0.5 x $12 x 10 OT hours worked = $60) 18

19. Bonuses Included in regular rate of pay if: Rewarded for hours worked, productions, or efficiency Bonuses excluded from regular rate of pay if: Fact of payment Amount of payment Are within employer’s discretion AND Payment not made under contract, agreement, or promise 19

20. Special Considerations for Youth Employees Under Minnesota law, no youth under the age of 14 can be employed Youth under the age of 16 cannot work during school hours Youth under the age of 16 cannot work more than 40 hours per week or more than eight hours in any 24-hour period BUT, there is an exception to the age restriction for minors employed as actors. 20

21. MN Department of Employment & Economic Development (DEED) Guidelines for Worker Classification 21

22. Discussions About Compensation Among Employees 22