Beware of these common wage and hour mistakes
Understanding the law, and the common mistakes many employers make, is one of the keys to avoiding such legal trouble.
January 6, 2014
Despite being 75 years old this year, the Fair Labor Standards Act (FLSA) is still one of the most befuddling regulations for employers—and one of the most expensive.
My organization receives more distress calls from employers concerning wage and hour issues than any other workplace issue. Legal statistics back up the trend reflected in our anecdotal evidence: Employee lawsuits regarding wage and hour issues, such as demands for overtime pay, hit a two-decade high in 2012, according to the Administrative Office of the U.S. Courts. Understanding the law, and the common mistakes many employers make, is one of the keys to avoiding such legal trouble.
A brief history lesson
The FLSA was enacted in 1938 as part of President Franklin Roosevelt’s New Deal. It established a minimum wage of 40 cents per hour and required employees to be paid overtime at time and one-half the regular rate for hours worked in excess of 40 in a week. Most employers are covered by the FLSA.
The FLSA, along with state wage payment laws, covers practically every aspect related to someone’s pay and work hours—including everything from minimum wage to overtime to meal periods, breaks, and the like. Wage and hour issues might not be flashy, but employers bump into them all day long. And violations can really sting because remedies often provide for two to three years back pay, plus interest, for each affected employee. Add wage and hour auditors who are very smart and tough, and a growing tendency toward class action suits, and employers’ potential financial risks are great. The bottom line: Wise employers need to be well versed in these issues.
First off, it’s important to keep in mind some things the law doesn’t do. The FLSA doesn’t require overtime on Saturdays, Sundays, or holidays; under the act, weekends and holidays are treated as any other day. Nor is vacation pay, sick pay, holiday pay, severance pay, or a discharge notice required. The act also doesn’t require time off for vacation or holidays.
Now let’s look at some of the more common FLSA mistakes that employers make.
Failure to classify workers properly
Failure to pay overtime is the most often cited violation for employers. Employees can earn overtime as long as they are not exempt from the FLSA. The current federal budget allocates $25 million to the U.S. Department of Labor for combating purported misclassification in two principal areas: (1) employees who are wrongly deemed to be exempt from overtime; and (2) “independent contractors” who, in fact, are “employees.”
Misclassification cases often arise because employers classify the job as exempt based only on the job title, or even the employee’s desire to be “salaried.” For example, not all accountants are exempt. Employers should carefully evaluate the actual job duties of accountants to see if they qualify for exemption. Whether the employee is paid hourly or is salaried has no bearing on whether a job is exempt or not.
Under the FLSA, an exempt position must pass both a salary (a minimum required salary of $455 per week) and duties test. There are four major categories of duties: (1) executive, (2) administrative, (3) professional, and (4) outside sales. Generally, duties that suggest the position is exempt include: directing and supervising the work of others; having the authority to hire, fire, and promote; exercising independent judgment and discretion; and having advanced knowledge in a field of science and learning through a prolonged course of instruction.
The administrative exemption is often a trouble spot for employers. Someone exempted as an administrator, for example, must do office or “non-manual” work related to “the management or general business operations” of the company. The worker’s primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”
White collar positions
Employers are increasingly being targeted by employees holding traditional “white collar” positions. The financial services industry is a case in point. Highly compensated loan officers, financial advisers, stockbrokers, traders, and similarly situated personnel have brought collective actions against their firms, claiming to have been misclassified as exempt administrative personnel or exempt “highly compensated employees.” These new plaintiffs frequently maintain that they merely perform production-type duties for the employer. They emphasize their lack of (or infrequent performance of) management duties or involvement in strategic decision-making or analysis. They assert that their work is performed under strict guidelines that limit their discretion. In the past few years, large settlements of such claims were agreed to by Morgan Stanley ($50 million), Wachovia ($39 million), and Prudential Financial ($11 million).
True independent contractors are exempt from the FLSA. However, it takes a lot more than a contract to make a worker an independent contractor. Independent contractor status depends upon the underlying nature of the work relationship. To determine whether an individual is an “employee” under the FLSA, courts look to the economic reality of the parties’ business relationship as a whole. The courts focus on whether the worker is economically dependent on the business he or she is working for—or, as a matter of economic reality, if he or she is in business for himself or herself.
Off-the-clock claims relate to situations in which employers force or pressure nonexempt workers to work outside of hours that are not clocked in. This issue raises an interesting question for professional services firms: Are employers required to pay nonexempt employees for checking email while at home? What if the employer didn’t directly ask them to do so? The technical answer is yes—employers are required to pay employees for this time. If an employer doesn’t want employees to work beyond quitting time, the employer needs to tell them. Many employers turn a blind eye to this type of behavior only to get burned later when the employee demands back pay for years of working at home. Other sticky areas include attendance at training sessions after work or on weekends.
Many companies believe that if they pay employees on a biweekly basis, an employee’s working time can be averaged over that pay period. But that’s not true for the majority of positions. For the purpose of calculating overtime, the FLSA considers each “workweek” on a standalone basis, and requires that overtime be paid for any hours worked in excess of 40 hours in that single (recurring) seven-day workweek.
Compensatory time (“comp time”)
Comp time cannot be awarded or paid out to private sector nonexempt employees in lieu of pay for the overtime they have earned. However, this does not prohibit the employer from scheduling time off during the “workweek” to avoid putting the nonexempt employee into overtime status.
Is your head spinning yet? As I said, wage and hour rules aren’t flashy, but they cover most aspects of the employment relationship and noncompliance can be costly. For more information, check out the fact sheets that the Department of Labor provides for many common wage and hour situations.
Doug Blizzard is the director of member development for CAI Inc., a human resource management firm with locations in Raleigh and Greensboro, N.C., that helps organizations maximize employee engagement while minimizing employer liability.