By Carol R. Merchant
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards for employees. Its provisions are enforced by the Wage and Hour Division (WHD).
The FLSA requires that most employees in the United States be paid at least the Federal minimum wage (currently $7.25/hour) for all hours worked, and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, outside sales employees and certain computer employees.
So, what are the hot buttons that trigger the interest of the WHD and private-action attorneys? A few immediately come to mind:
Deductions (other than legally required deductions) from the salaries of exempt employees;
A high percentage of employees considered exempt (probably more than 25%), particularly if a significant number are being considered exempt administrative employees;
Time records that do not show variations in hours worked;
Time records that always show exactly 30 minutes for meal periods;
Workers paid as independent contractors; and
Payment of commissions, bonuses and other similar payments without including such payments in the regular rate for computing overtime.
It may be that none of these hot buttons apply to your business and that you are actually in complete compliance with the FLSA, but if you recognize any of them as being characteristic of your business, they are issues that leave you vulnerable to allegations of noncompliance.
I. COMPUTING OVERTIME
It is amazing that some otherwise quite sophisticated employers misunderstand that almost all bonuses, commissions and shift differentials must be included in calculating the basic hourly rate for overtime.
An employee’s “regular hourly rate” includes all remuneration for employment except seven specified types of payments: (1) truly discretionary bonuses, (2) gifts and payments in the nature of gifts on special occasions, (3) contributions by the employer to certain welfare plans, (4) payments made by the employer pursuant to certain profit-sharing, (5) thrift and savings plans, and (6) certain kinds of premium pay.
Few bonuses are deemed “discretionary” because that definition excludes incentive systems which induce employees to perform better. Bonuses which do not qualify for exclusion from the regular rate must be added in with other earnings to determine the regular rate on which overtime pay must be based.
Bonuses which do not qualify for exclusion from the regular rate must be added in with other earnings to determine the regular rate on which overtime pay must be based. These include production bonuses, attendance bonuses, longevity bonuses and virtually all commissions.
EXEMPTIONS
Section 13(a)(1) of the FLSA provides an exemption from overtime for certain employees employed in an executive, administrative, or professional capacity. The current minimum weekly salary for exemption is $684. However, the Wage and Hour Division has just published a proposed rule that would increase that to $1,089 per week. At this point, this is just a proposed amount. It will likely be sometime in 2024 before we know the specific amount that will be required.
To qualify under the executive, administrative or professional exemptions, an employee must be paid on a salary basis rather than on an hourly basis, but merely paying an employee on a salary basis is not enough to constitute an exemption. The salary basis requirement means an employee must receive a full salary for any workweek in which any work is performed without regard to the number of days or hours worked, with some limited exceptions.
Additionally, there are strict duties tests for each of these exemptions which need to be considered carefully.
HOURS WORKED
The definition of “employ” in the FLSA is “to suffer or permit to work.” Any employer who tolerates employees working is liable under the Act to compensate them for the time worked. There is no such thing as “voluntary” time, and it is not recognized by the Department of Labor in any circumstances. If an employee works “unauthorized” time and you let him or her do so, you must pay for those hours.
Among the most expensive potential liabilities under the FLSA are a series of situations in which employers do not measure “hours worked” properly, including:
1. Making automatic 30-60 minute deductions for “lunch periods” when employees remain on duty of some sort during the “break”, or take the period in several segments so that less than a 30 minute “uninterrupted” break is involved. Meal periods must usually be at least 30 minutes to qualify as non-compensable time. The employee must be completely relieved from duty for a meal period to be deducted. Allowing employees to work through lunch or eat at their desks automatically creates problems. Under the FLSA you are liable to pay employees if you “suffer or permit” them to work — not just when you make them work. Even “catching the phone” or checking e-mails while eating will render the period compensable.
2. Deducting for an “unpaid break” of less than twenty (20) minutes. Don’t attempt to reduce payroll costs by “docking” employees for short break or meal periods. This practice frequently leads to FLSA violations. Short rest periods (between 5 and 20 minutes) are compensable time and may not be offset against other working time.
3. Not understanding how to calculate “travel time” as “hours worked”, particularly if it is away from the plant or office. Some travel time is compensable under the FLSA, and some is not. The ordinary commute is not compensable, but an employee who is called away from home on an emergency basis or who travels after the work day has begun must be compensated. For example, an employee who takes a company vehicle home at night does not have to be compensated for the time spent traveling to the first assignment of the day. However, problems may arise when an employee who regularly works at one location is required to work at another for a short time, or when travel is an integral part of the day’s work. If the employee has to do any work at all before the travel commences (such as going by the shop or plant to pick up supplies), the travel time is compensable.
4.. Not understanding that time spent making/answering cell phone calls or accessing e-mails or other work materials outside of working hours via smartphones, virtual private networks or other similar electronic devices will almost always have to be counted as hours worked and included as compensable time.
IV. INDEPENDENT CONTRACTORS
The difficulty here occurs when an employer fails to understand that it takes a lot more than a contract to make a worker’s status that of “independent contractor” rather than “employee.” Independent contractor status does not depend upon the existence of a contract specifying that the worker is an independent contractor, or upon what the parties might call the relationship, but rather on the underlying nature of the work relationship. There is no way to contract around an employment relationship; no piece of paper and no amount of explanation will overcome the evidence of an employment relationship if the Department of Labor or the Internal Revenue Service examines the situation.
There is no single test that determines whether a worker is an employee or independent contractor under the FLSA, and different regulations have been issued to govern this situation under every president over the last 10 years. Most Courts use a 6-factor “economics realities” test. These 6 factors are described below. None of these factors, standing alone, is dispositive. A key point is whether the individual is economically dependent on the business to which he renders service as an employee or is, as a matter of economic fact, in business for himself as an independent contractor. The weight of each of the 6 factors depends on the light it sheds on the alleged employee’s dependence (or lack thereof) on the alleged employer:
1. The degree of control exercised by the alleged “employer” over the alleged “employee.”
2. The degree to which the “employee’s” opportunity for profit or loss is determined by the employer.
3. The relative investments of the alleged employer and “employee.”
4. The degree of skill and initiative required in performing the job.
5. The duration or permanency of the working relationship.
6. The extent to which the “employee’s” work is an integral part of the alleged employer’s business.
If there is any question of whether your practices are in compliance with the Fair Labor Standards Act or State law, always remember that an audit of your pay practices by legal counsel is a good idea and can identify problem areas and solutions before you have an unwelcome visit from the Department of Labor, or the even more unwelcome experience of being the subject of private litigation.
Carol R. Merchant, Consultant
Wimberly Lawson Wright Daves & Jones, PLLC
cmerchant@wimberlylawson.com
www.wimberlylawson.com