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We recently reported on the new USDOL proposed rule on overtime that among other things would increase the minimum salary level for the executive, administrative, and professional exemptions from $455 per week—$23,660 annually—to a salary not less than $970 per week, annualized to $50,440. We will be keeping a close eye on this proposal and will alert you as things change.
Whether this proposal becomes law or not and it what form, the wise employer will take this time to make sure they are well versed in wage and hour issues and in compliance with at least the major tenets of the law. Below I review the more common mistakes employers make with FLSA, one of the biggest being thinking that wage and hour only applies to "blue collar" or "hourly" types of positions. But first, let's review the foundation...
The Fair Labor Standards Act (FLSA) was enacted in 1938 as part of President 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 and additionally most states also have wage payment laws. Despite being over 75 years old, the FLSA is still one of the most befuddling regulations for employers and one of the most expensive. Lawsuits by U.S. workers contesting wages and hours, including demands for overtime pay, reached a 20-year high in 2013 according to the Administrative Office of the U.S. Courts.
The FLSA, along with state wage payment laws, covers practically every aspect related to someone’s pay and work hours including minimum wage, overtime, travel pay, home-to-work pay, child labor, on-call time, wage deductions, bonuses, independent contractor issues, meal periods, breaks, and the like. I’ll grant you that talking about wage and hour issues might not be flashy, but you bump into it all day long with employees. And violations can really sting since remedies often provide for two to three years back pay plus interest for each affected employee. Add above average wage and hour auditors, and a growing tendency towards class action suits, and the potential financial risks to your business are great, more likely, and much greater than most of the other HR/Employment laws.
Before I dive into the most common and costly mistakes, let’s review what’s not covered. The FLSA doesn’t require overtime on Saturday’s, Sundays or holidays as such. 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.
With that, here are six of the most common and costly wage and hour mistakes companies make. If any of these areas make you feel uneasy, call our Advice and Resolution team immediately and we'll help you craft a solution that works for your business.
Classify workers properly. Failure to pay overtime is the most often cited violation for employers and the provision that is targeted in this most recent USDOL proposal. Employees who deserve overtime would be those that are not exempt from the FLSA, hence the term “non-exempt. The most recent federal budget dedicated $25 million to task the United States Department of Labor (“DOL”) to combat 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, all accountants are not exempt from the FLSA. You should carefully evaluate the actual job duties of your accountants to see if they qualify for exemption. And again, whether you pay them hourly or salaried has no bearing on whether a job is exempt or not.
Under the FLSA, in order to classify a position as exempt, that position must pass both a salary and duties test. In addition to the salary test (a minimum required salary of $455 per week currently, proposed $970), there are four major categories of exemptions: (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 in which highly compensated loan officers, financial advisors, 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 fact, massive settlements of such claims were recently agreed to by Morgan Stanley ($50 Million), Wachovia ($39 Million), and Prudential Financial ($11 Million).
Independent Contractors. 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 focus here is whether the worker is economically dependent on the business he or she is working for, or, as a matter of economic reality, is he or she in business for himself or herself.
Off-the-Clock Claims. Off-the-clock claims relate to situations when an employer forces or pressures non-exempt workers to work outside of hours that are not clocked in. For a professional service firm, for example, this issue raises an interesting question: Are employers required to pay non-exempt employees for checking email while at home? I mean you didn’t ask them to do so directly. The technical answer is yes you are required to pay them for this time. If you don’t want them to work beyond quitting time then 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.
Pay frequency. I find that many companies believe if they pay employees on a bi-weekly basis, an employee’s working time can be averaged over that pay period. Not true for the majority of positions. For the purpose of calculating overtime, the FLSA considers each “workweek” on a stand-alone 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 non-exempt 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 non-exempt employee into overtime status.
Is your head spinning yet? Like I said earlier, wage and hour isn’t flashy but it covers most aspects of the employment relationship and non-compliance can be costly. Tune in next month when we discuss employee compensation strategies.
I've just touched the tip of the iceberg when it comes to wage and hour compliance. If any of these areas make you feel uneasy, call our Advice and Resolution team immediately and we'll help you craft a solution that works for your business.