Navigating How the FLSA Applies to Federal Contractor Employees

Joe Young: Good afternoon, and welcome to the August edition of the GovCon HR Round-Up podcast. I hope everyone's having a wonderful summer out there. Hopefully, maybe somebody is actually joining us from a beach somewhere. That would be nice. Hopefully, somebody is doing that for us.

Seth Berenzweig: Someone said they're bringing me a martini at some point.

Declan Leonard: When you hear today’s topic, you might need it.

Joe Young: It is August, so something with an umbrella would be appropriate.

Welcome, everyone. Thank you for taking the time to join us. My name is Joe Young. I am the president of GovConPay. As many of you know, we're the only outsourced payroll and HR company focused exclusively on servicing the government contracting marketplace. As always, we are joining you live from Tysons Corner, Virginia, here at the studios of BLC Digital Strategies under the production and leadership of producer Todd Castleberry.

They are the immediate affiliate of Berenzweig Leonard, LLP. Before I introduce my colleagues here, I want to shout out and start by thanking our sponsor, the folks from Berkshire Associates. For those of you who don't know, Berkshire are HR compliance experts with over 50 years of experience and focus on affirmative action planning, pay equity, and DEI services.

We welcome any Berkshire clients joining us today. So, thanks for being with us. And Berkshire, thank you for your ongoing support of the roundup. 

As always, I'd like to introduce our co-hosts for today: Declan Leonard and Seth Berenzweig, partners of employment law firm Berenzweig Leonard, LLP. Before we jump in, how about you introduce yourself and a little bit about your practice?

Declan Leonard: Absolutely, Joe, great to be here. Number eight, eighth one of the year. So that's great. We're on a good clip. We're on a good roll. I am Declan Leonard. I'm a managing partner here at Berenzweig Leonard, LLP. I also head up the firm's employment law practice.

Seth Berenzweig

And I'm Seth Berenzweig, I am the co-managing partner of the law firm. I head up our corporate and transactional practice. It's the perfect time of year to talk about FLSA - the end of summer, the start of football season. And I know what you're thinking. That means two things: pumpkin beer and FLSA.

Declan Leonard: And pumpkin spice lattes.

Joe Young: We are always so timely with our topics.

Declan Leonard: Yes, yes, yes.

Joe Young: You kind of teased our topic a little bit. As we're doing thanks and kick off the podcast here, I do want to thank my colleague Gwen Cooper, who's on the HR team. She really recommended this topic to me, as she's had numerous clients who have been struggling with it and asking questions about it.

So, we thought we would bring this to the roundup and discuss it today. That topic really is FSLA, but what are some of the unique applications and challenges that we see specific to the government contracting space? This is the GovCon HR Round-Up at the end of the day. So, before I kick it off with our first question, I want to remind everybody that we'd love this to be interactive.

So, if you're watching today and you have any questions, feel free to please put them in the chat. Our team is monitoring those, and we'll try to address them before we finish up today. But to kick us off, I'll start with you, Declan. 

Declan Leonard: You know, I think everybody thinks fair labor standards deal with hourly employees getting overtime. You know, why are we talking about this for government contractors, employees who many times are making low six figures? It seems like a disconnect.

Seth Berenzweig: Because it’s fun.

Declan Leonard: And for the record, I wanted to talk about the Olympics during this podcast. I was already to do my breakdancing demonstration. I've been watching the Australian Break dancers, and they're fantastic. So I thought I could really do a good job.

Seth Berenzweig: It was in the ‘68 Olympics.

Declan Leonard: I actually wasn't born then, so that's pretty cool. All right, so let's get to get down to business. The Fair Labor Standards Act. You're absolutely right. You know, this is probably going to be a bit eye opening for government contractors, who are who are watching this either live or as are watching it as it's been posted.

Because you're right, normally you think of the Fair Labor Standards Act, the FLSA. We'll try to keep our acronyms to a minimum, but it's the FLSA law that allows employees to get overtime for any hours that they work in excess of 40 hours, and it governs hourly employees. And it usually you think of it in retail and hospitality, and usually, it correlates with pay like, you know, it's usually if you're on a little bit on the lower end of the spectrum of pay, that's when overtime kicks in because, in fact, that's how the law actually operates.

If you're below a certain threshold, you're automatically going to get overtime for any hours worked in excess of 40. So you would say, well, you know, most we're in that we're in the DC region. Most government contractors are doing IT work. They're doing sophisticated work. Most of them are earning in the six figures, oftentimes in the mid ones, mid to upper ones, or perhaps even higher than that.

So you'd say that's not what, like, you know, the FLSA was intended to cover, giving these people time and a half of their hourly rate. So, let's talk about why it is applicable to them and why people are surprised to learn that this is the case. In order to be exempt, meaning you don't get overtime. The FLSA is not does not apply to you as an employee. Two things have to happen. You have to fall under one of the exempt employment categories—professional, managerial, administrative, or highly compensated, which is kind of a catch-all category. And we're going to assume for today's purposes that the government employees and contractors we're talking about meet that prong of the FLSA exception.

So here's where the problem arises. Not only that's not the end of the analysis, but I also think a lot of companies get tripped up on that. They say, no, they do this kind of work, so they're exempt. They also have to be paid on a salaried basis, meaning for whatever work that they do during the week–they're supposed to get the same predetermined amount if they make it. You know, $144,000 a year; they should be making $12,000 a month.

They should be making roughly $3,000 a week. And it doesn't matter how many hours they work and things of that nature. So that's where it trips up government contractors, and that salary prong doesn't go away. The higher you're paid, it's always out there.

Joe Young: So as you said, with the obviously the highly compensated, IT professionals are working for, govcon’s are paid a salary. So, you know, where that that's kind of really where that confusion arises.

Declan Leonard: Yeah, exactly. I mean, I look at, you know, we represent a ton of government contractors in the area. I look at these offer letters all the time, and they always say, ‘here's what you're going to be paid’ and it usually is stated in terms of a salary. So you would think, okay, no problem. You know, they say they're making a salary, they're highly compensated, but they fall within one of these exceptions.

But that tension arises because of the nature of government contracting, specifically things like time and material contracts. In these contracts, the employee, no matter how highly compensated or complex their job is, also has to track their hours because their employers have to submit these pay stubs, sorry, these time records, to the federal government in order to get paid.

And so there's this tension because the Fair Labor Standards Act says if you're exempt, you should not be worried about how many hours somebody works. And yet the nature of government contracting, where you're working, where you have to account for your hours, it creates this tension. And so that's that's really where it emanates from.

Joe Young: So where can these billable requirements cause the problems in FSLA that that we're typically seeing?

Seth Berenzweig: Well, I think that the typical example of what we see here at the firm is that the government contractors and this is completely understandable, get in a mindset that they are billable on a project and that they work a standard of 40 hours a week. Therefore, they're typically building 40 hours a week of their time to the customer.

What we see happening in some instances is, let's say, someone has to take half a day off for personal reasons. Because they're salaried, they're still getting the same regular constant rate of weekly pay. But what the employer sometimes gets in the mindset is thinking, well, if that person is billing 36 hours for that week, and that's the time capture, and that's what the government is paying for. In order to be able to cover that overhead, I'm going to pay the employee for 36 hours versus the 40 hours. That's where the discrepancy and the tension come in. And they can't do that. The ability to be able to maintain the exemption is based upon maintaining that as a salaried employee. 

So if for any period during that time that you have a break in that practice where you're coming off of that salary basis because the government isn't paying for that, that's where you destroy the exemption.

This happens from time to time, and it makes perfect sense in the federal space. If you think that these are the folks who are getting paid for the work that they're doing at their applicable billable rate for the work under the federal government contract, that question comes up from time to time, and that's where the tension lies.

Declan Leonard: And one of the issues is, especially in the government contracting field, is a lot of government contractors out there are operating on thin margins. So if they're having to eat, you gave an example of having to eat for hours. You know, the the employee only is able to capture 36 hours on their thing. They can't capture 40 otherwise. That's time card fraud. 

So they can only capture 36 hours, which means the government only pays for 36 hours. And yet they have to pay the full 40-hour salary to the employee, which starts to eat into what are otherwise already thin margins. That's the biggest dilemma. This is not just some esoteric legal issue. This is a real, real business issue for government contractors.

Seth Berenzweig: Yeah, and it happens all the time because we understand, and we won't spend a lot of time on it because it's already readily apparent. But government contractors are really under a lot of financial constraints to be able to run these projects at a margin. And and they're already running at a thin margin. So this is something that, again, could eat into the profit margins as they perform the government contracts more.

Declan Leonard: And one quick word of caution is, what happens sometimes is the company and Seth, you alluded to this, the company will look at the timesheet that the employee fills out for the week and just say, well, if that's the time she going into the government, that's the time sheet I'm using to pay. Right. Those are two very different things.

Seth Berenzweig: Disconnects.

Declan Leonard: Yes, exactly. When it comes to, like, the time that you're actually working, that is, you know, the federal labor laws have a very different definition than what you're putting on your timecard that is going to the federal government for billing purposes. So that alone is just a major mistake.

Joe Young: With all that said, are there certain situations when it is okay for a govcon to make deductions from salaried employees paycheck?

Declan Leonard: There are, and it gets very much in the weeds, but I'm going to stay pretty high level on this in terms of what you can do under the Fair Labor Standards Act in terms of making deductions from salaried employees' wages. Okay. So you can make full-day deductions if they're taking off for personal reasons. That's why the example of taking half a day off to go to Johnny's lacrosse game or whatever, you still have to pay for that because it's not a full-day absence for personal reasons.

You can also make less than a full day, like partial hourly deductions, for when they have sick or medical reasons, provided that the company has a sick or medical leave plan. They call it a bonafide plan. Most companies do have that. So that one's probably always going to be sitting out there. So if somebody takes 2 hours to go to a dentist appointment, you can substitute in paid, like, you know, part of their PTO to cover that 2 hours.

But remember, you still have to pay them the full salary for that week. So, you're still taking a little bit of a hit. You're just accounting for it by virtue of this PTO policy.

Joe Young: We touched on it a second ago: the disconnect between tracking hours for the purposes of billing the government in the contract versus the purpose of tracking hours for paying the employee. That kind of raises the question like, is there a problem that you should not be tracking hours for salary employees?

Seth Berenzweig: No, it's not a problem for tracking the hours. You should track the hours. And in fact, in this business, in the federal space, it's very typical that you do that. So, the issue isn't about tracking hours. You should do that. And in fact, if the hours are not tracked carefully and maintained in the regular course of the company's business, these are issues that we see come up quite frequently.

One scenario that typically occurs is that we get a letter from one of the handful of law firms that seems to love to bring these cases. And what they say is, ‘Billy worked all these hours, and he only got paid for X.’ So, what we would do is, among other things, we would have the company pull its time records.

It's sometimes surprising to see that not all companies keep their time records handy all the time, and they should. I think that's something that I would recommend circling back on because what sometimes happens in these cases is the attorney will come back and say, well, ‘Billy says that he also worked like, you know, 12 hours during the evening and did a, B, C, and D,’ and tracking hours means more than just keeping records. It's also staying coordinated with your employees and making sure that the records fit with reality and make sense. 

So tracking hours is fine. It's something that's expected. You need to keep an accurate record of those hours, and if there are any anomalies or discrepancies in those records, that's something that should be discussed sooner rather than later because sometimes we see these huge discrepancies, and when they come up, if they're not raised in real-time, it's something that can create an issue down the road.

Declan Leonard: Yeah.

Joe Young: Now, have clients ever come and said, you know, okay, with this being the case on the full day, has anyone asked, ‘Does it just make sense that the company has a policy that salaried employees can only take full-day absence?’ Would that kind of insulate them from the FLSA, you know, exemption?

Declan Leonard: So, from a pure legal aspect, yes. If you just had a policy that says, look, if you're taking any personal time off, you've got to do so in full-day absences, and you are not going to get paid for that day. Remember, it's okay to take full-day absences and still maintain the salaried basis.

So if someone takes a full day absence for personal reasons, one day that means they should get what, 4/5 of their salary in that particular week, and that's totally fine. 

Here's the problem, though, and I mentioned it before, it this is where there's, you know, a confluence of both legal and business considerations because if you have that policy and somebody just needs to run down to a dental appointment for 2 hours and you say, hey, that's fine, or you got to go to a parent-teacher conference, because that's purely a personal reason for 2 hours, if you say you're off for the full day, what you're doing is you're in some way shooting yourself in the foot because you're ensuring that you're billing zero time for that employee. That employee's telling you that they're available for 6 hours out of the day, that you could be submitting an invoice to the federal government for their time. So it almost becomes a business decision on how you set these policies and where is the sweet spot for the company from a business standpoint in order to say, you know what, we're not going to let you take any more than 4 hours, because again, if somebody is looking for 6 hours and then only comes in for 2 hours, that's probably not going to be a big boon for the company in terms of billing. 

So it's a great question. From a legal standpoint, yes, from a business standpoint, it's going to be case by case. How much margin are you making off of these employees? And maybe you're making up for the fact that you have to pay them the full salary for those small absences.

Joe Young: And that also I mean, we're talking about the legal ramifications. We're talking about, you know, the strict financial implications. But then there's the whole culture implications. I mean, everybody's out there trying to create a culture of supporting their employees and retaining their employees. So you get into that area as well as, hey, we want to do right by our employees, and we want to create an environment where, you know, their family responsibilities.

Declan Leonard: Yeah, you’re penalizing them.

Joe Young: Yeah. So all these things have to be taken in. As we said, there's not kind of a hard and fast answer to this. You know, all these things need to be kind of thrown into the mix and say, from a business perspective, what's our culture, what's our policies, and what makes sense.

Declan Leonard: Exactly. That is a great point, Joe. I mean, it's not only legal and business, but it's actually the cultural aspect. If you're telling somebody, look, if you have to go to a parent-teacher conference for 2 hours, we're so unsupportive of that. We're saying, ‘Stay home for the rest of the day. We don't want to see your face in the office.’ And it's just like, wow, okay.

And then you start to explain why under the FLSA, and they're just like, seriously, you know, now I have a migraine, and I have to take two days off, you know, So anyways.

Seth Berenzweig: One of the things that I would raise also is the question of whether you have all of these scenarios coming down the pike. What are some things that companies can do to mitigate risk? That's something that I would suggest bringing up, and there are some things that can be done proactively in this space to really get ahead of the curve.

One of the suggestions that I would start the conversation with is to have good position descriptions. Not only to have position descriptions in place but to periodically check back and see whether the position descriptions are current. There are times when the roles for the position can change. There are times when the roles can be adjusted. I had a case not long ago where there was a question that was raised in a DOL investigation about some of the finer distinctions between a med technician or what they called a MedTech one and a MedTech two.

And the kinds of responsibilities were subtle but had some potential implications and then the company looked and realized that they didn't have a position description. One of the reasons for that was because the roles changed as there was scope creep and contract expanded. So take a look at whether or not you have position descriptions, but also ask yourself when was the last time that you revised or updated those position descriptions?

The other aspect we talked about is good recordkeeping. Do you have that handy? And is that something you might just proactively check for any anomalies? If you see something, it's better to ask proactively rather than reactively. Of course, having different kinds of effective policies and procedures in, for example, a simple handbook could also head off potential problems.

Declan Leonard: It looks like Rachel and Olivia are keeping track of questions coming in. See, I'm telling you, people love FLSA.

Joe Young: We've got some hot questions coming up in the press, and we love the interaction. So, thanks for submitting these. 

So the first is, can you deduct 4 hours from their PTO bank?

Declan Leonard: Absolutely, yes. Because what you're doing is so whether that's personal time, whether that's sick time, you absolutely can deduct 4 hours from the PTO bank because what you're doing is you're making sure that by deducting that, by putting those PTO hours in there, that they're getting paid their full salary. So there's no deduction to the salary that takes place there.

All you're doing is you're basically substituting in PTO time to get them to that full, let's just say, 40 hours or that full salary. So, yes, you absolutely can do that.

Joe Young: Great. And another question just came in. I think we chatted about this beforehand. 

If an employee's start date is not at the beginning of a pay period, is it acceptable to pay them hourly for the first period, then transition to salary following the next full pay period and beyond?

Declan Leonard: Okay, so. The question is kind of. Okay, so you do not have to pay. So let's just let's take a real life example. Somebody the pay period starts on a Monday, but the employee starts on a Wednesday. You do not have to pay for those first two days. The reason why I said that the question was kind of is because you're not really paying them hourly.

You're just paying them for the days that they work, the full day's work. Yeah. And the same thing works. So, yes, you do not have to pay because the way salary works is you're supposed to pay for any work that somebody works in a given workweek. But if they're starting in the middle of the pay period, you do not have to pay them for the beginning.

Conversely, at the end of the employment, if the pay period ends on a Friday but they leave on a Wednesday, you don't have to pay for those last two days either. So that's a very good question.

Joe Young: On the flip side of this, another question that we had is: Can I pay my salaried employees extra pay if they work more than 40 hours in a week? Is doing so without an issue under the FLSA?

Declan Leonard: Yeah. So, let's give an example. Someone is getting paid their salary, and there's no issue about deductions or salary. They've made their 40 hours, and in fact, on their time cards to the federal government, they actually recorded 48 hours. Okay. And you want to reward them for working hard and everything. You pay them their full salary, and you can do whatever you want.

Beyond that, you can pay them for 8 hours of straight time. You do not have to pay time and a half. This is not considered overtime. So you can pay them 8 hours and give them 8 hours of comp time, meaning they can use that as vacation time down the road or something like that. 

So yeah, doing that, paying them above and beyond, because again, we're not dealing with deductions; they're paying them above and beyond, and it is considered a reward, and it does not destroy the salary basis test.

Seth Berenzweig: What if you bonus them just out of the goodness of your heart? What if you bonus them $1,000 but you determine retroactively for someone who's nonexempt that you actually owe them $2,000? Can you give do you get an automatic credit on the $1,000 that you paid, or is that not counted towards the $2,000 open?

Declan Leonard: So, are they exempt or nonexempt?

Seth Berenzweig: They're nonexempt.

Declan Leonard: Okay. So that means they're entitled to overtime. And this is a great point, Seth because it illustrates the draconian aspect, I believe of the Fair Labor Standards Act.  What a judge would do in that situation is take that thousand dollars and add it to your hourly rate of pay so that when you're computing your time and a half, so it's no good deed goes on.

Seth Berenzweig: So not only do you not get credit for it, you get penalized.

Declan Leonard: Yes. Yes. I had a case like that where somebody was getting $100 extra just as a bonus. And what the judge did was put that and add it to their other otherwise hourly rate. So, yeah. And this is why, you know, from an enforcement standpoint, this is why these cases would be very attractive to some of the folks that we know in town that really concentrate in bringing employee-related FLSA claims. Because a lot of these FLSA claims that we see, therefore, hourly employees that are, you know, sometimes in the $15 or $20 range, and so time and a half for $20 is what, $30?

I'm good at math, so that worked out perfect. But when you're talking about the salaries of people like that, let's just say if you're making $150,000 a year, $72 an hour time and a half is $108 an hour if you've got sizable overtime.

Seth Berenzweig: Multiplied over time.

Declan Leonard: Multiplied over time. And remember, under the FLSA and under most state wage and overtime laws, you not only can get the overtime that's owed, you also get triple the amount of that overtime that's owed. Plus, you're guaranteed to get your attorney's fees. So it really takes, like, what is maybe a small amount, and it balloons it into the hundreds of thousands.

Seth Berenzweig: And that's why the plaintiff's bar loves these cases because, first of all, it's math. They're thinking, you know what? Why play chess when I can play checkers? Let's just do the math. Plus, you get statutory attorney's fees. So when you get the letter, basically implicitly in the letter from opposing counsel is, you know, hey dude, you know, my clock is ticking. And if they have a strong case, it's in the company's interests to try to resolve it. Of course, reasonably. Of course. Reasonably. But do it in a way that is done efficiently because what a lot of these lawyers do, not all of them, but some of them, is they really run the clock, and then they just see it as a mini lottery ticket.

Declan Leonard: Yeah, one other thing I'll throw out there. I think that this could be, in some respects, too acute, but I've heard of this as a potential alternative because so many salaries are set based on a 40-hour workweek. And so, you know, you take, like I gave my example, 150,000 really comes down when you divide it by 40-hour workweeks, it comes down to $72 an hour.

Some companies set their salaries based on 35 hours a week. Okay, so it builds in a little bit of leeway in case a situation like this happens. So, let's just say somebody does take a personal half-day off. Well, I'm not really losing money because I set their salary based on 35 hours. If they work the full four, I can even pay them more than that.

But as long as I pay them the same pre-determined salary each week. So the illustration is that maybe you don't get so wedded to a 40-hour knowing that there needs to be a little bit of leeway.

I think sometimes that gets a little complicated, and it would be hard to explain to an employee that, well, wait a second, I work 40 hours. You're paying me for 35, and you're like, Yeah, well, I'm doing that because of the FLSA.

Joe Young: Well, in the time we have remaining, I think one other interesting question that we kind of had was, I was we're talking all about situations where there's no question of whether it's an employee or not. These are things we need to deal with. I think what we see in our space a lot of times is the misclassification of nonexempt versus exempt.

I think that's where a lot of people ask, "Hey, is this person really a nonexempt employer?" You know, what are some of the things that people can do to correct and maybe get in front of those issues?

Declan Leonard: Yeah, this is really, really tricky. Seth and I have dealt with this for a number of clients. You know, it goes to Seth’s point earlier looking at position descriptions, looking to make sure that in practice those position descriptions are actually accurately implemented, things of that nature. And so this is a tough one because you don't just go back, I mean because remember, the statute of limitations for most of these laws is two years or three years if it's a willful violation.

So, again, under the category of no good deed goes unpunished, if you go to that employee and say, you know what, we think we had it all wrong. You should have been getting overtime all along. You really have to do these things a little bit more insular. You have to look at it and see, okay, how much overtime are we talking about here?

Are we talking about de minimis, where you can then make a change? It's a message. It's almost like a PR issue more so than a legal issue. How you thread the needle of changing somebody over from a misclassified to, you know, to actually come into compliance with the law.

Seth Berenzweig: It gets sensitive when you're also talking about groups that are performing work within government contracts because typically you'll have one person coming in, that becomes an issue, and then management thinks this person has six colleagues in the group and that's something that could bleed over into the other people. So they need to jump in there and assess it and to just resolve it becomes even that much more filled with pressure.

Declan Leonard: Yeah, it's really a one-off, unlike discrimination claims, where mostly it's going to be one person claiming discrimination, very individualized. These things. I had a class action one time with 200 employees impacted. It just, you know, it's hard to wrap your head around like, okay, what do we do? Because not only do we have to correct it going forward, but how do we account for the mistakes that we say we made in the past?

So, it's not an easy issue. You have to work closely with HR and counsel. It's a messaging issue more than anything else.

Joe Young: So, who said we couldn't make FLSA fun?

Declan Leonard: I know. I saw Seth sometimes, like a twinkle in his eye at the end of the was like he was, like, scribbling down stuff. Let's go. This is more exciting than any Fox or CNN appearance this guy's done lately. I'm telling you, this is the highlight.

Seth Berenzweig: Yeah.

Joe Young: Well, we hope our audience out there had as much fun today with this as we did. As always, we hope we brought some content to you that can help in your practice. Maybe think about some things you didn't think you weren't thinking of in our effort to try and obviously bring best practices to all of our clients, listeners, and friends out there.

Again, thank you for joining us on behalf of Seth, Declan, and our whole team. We look forward to hopefully having you join us next month. This one seems like it was quick with the 15th. We were back to back, so we're coming back here on our normal third Thursday of the month, September 19th. Next month, we are going to address recruiting and retention for top talent, something we know everybody is dealing with every day.

We look forward to that topic. Please enjoy the rest of your summer, and we look forward to seeing you next month. Take care.