Overtime Update: Top 10 FLSA Mistakes
The Fair Labor Standards Act (the “FLSA”) is among the trickier employment law statutes with which to comply. It’s old. Its terminology is arcane. And it provides for extensive penalties and attorney fee awards for successful plaintiffs and their lawyers. Add that up, and what do you have? A relatively high potential for significant, costly mistakes.
But never fear. These potential mistakes also present an opportunity for you to help your clients and business partners succeed where others have failed, and to impress your fellow HR or employment law counterparts with your knowledge of this complicated statute.
So here are ten FLSA mistakes that managers make. If your organization can avoid these mistakes, you’ll be well on your way to a wage-and-hour compliant workforce.
Mistake #10: Not paying overtime on incentive pay. Many employers do not realize that they must pay overtime on any commissions or bonuses the employee has earned. All commissions must be included in the employee’s regular rate of pay for purposes of calculating overtime. And only discretionary bonuses can be excluded from calculations pertaining to the employee’s regular rate of pay. To be exempt from the overtime calculation, both the fact that the bonus is to be made and the amount of the payment must be discretionary. So any bonus paid pursuant to a plan, policy, announcement or even a usual practice must be included in the employee’s regular pay rate and, therefore, is subject to overtime.
Mistake #9: Misclassifying Independent Contractors. Some employers mistakenly believe that they can control costs and head count restrictions by treating certain workers as independent contractors. This is a risky maneuver. The Department of Labor’s Fiscal Year 2013 budget includes $14 million to combat employee misclassification. Misclassification of workers as “contractors” can expose employers to liability for tax obligations and employee benefits, along with minimum wage and overtime violations. Calling someone an “independent contractor” does not make them one. Instead, courts often apply an economic realities test that evaluates the degree of control the employer exercises and the degree to which the workers are economically dependent on the business. Several factors are relevant to this analysis, including the extent to which the services provided are an integral part of the business and the permanency of the relationship.
Mistake #8: Leaving Money on the Table. Some employers mistakenly believe that all non-exempt employees who work over 40 hours per work week must always be paid hourly at a rate of one-and-a-half times the employee’s regular rate of pay. While that is certainly a common and accepted methodology, many employers may be able to implement a Fluctuating Work Week (“FWW”) method of payment whereby a non-exempt employee who works fluctuating hours is paid a salary and half-time for any hours worked above 40 in a week. Certain conditions apply, so consult counsel for advice on how such program could be implemented as a cost-saving measure for your business.
Mistake #7: Focusing only on the FLSA. When evaluating their wage and hour compliance, some companies look only to federal wage and hour law, the FLSA. This is another mistake. Employers must comply with state law as well as federal law—whichever one offers more protection to employees. Some states have laws that require daily overtime, have a higher minimum wage, require breaks after a certain number of hours worked, or have different rules regarding hours that minors can work. So employers should carefully check state and local wage and hour law for all the locations where their employees work.
Mistake #6: Providing compensatory time off in lieu of overtime. Private employers may not provide compensatory time off to non-exempt employees in lieu of overtime. But private employers can provide non-exempt employees with time off on a 1:1 basis in the same work week without incurring liability for overtime (unless they are in a state where daily overtime is required).
Mistake #5: Not tracking hours actually worked. Do your non-exempt employees’ timesheets consistently reflect time worked as “9 am – 5 pm”? If so, this should be a red flag. Time records must reflect actual hours worked, not just the employee’s work schedule. Often employees will get in the habit of simply writing down their work schedule, or managers will adjust an employee’s time report to exclude time that the employee clocked in early or left late. Employers must accurately track all hours worked, even if such work is unauthorized.
Mistake #4: Paying incorrectly for travel time. The FLSA has numerous, specific rules about when a non-exempt employee’s travel time is compensable. For example, regular commuting from home to work is not compensable. However, travel that is all in a day’s work is compensable. Further, traveling from home to work on a special one-day assignment in another city is compensable (but the employer may deduct the employee’s usual commute time). Travel out of town, however, is handled differently and whether it is compensable depends in part on whether the employee was traveling during his or her work hours, and whether the employee was driving, riding, or flying.
Mistake #3: Deducting from exempt employees’ pay. The FLSA also has very specific rules on when deductions can be made to exempt employees’ pay, which are summarized here. When an employer has a practice of making improper salary deductions, the employer may lose the right to classify the employee as “exempt” from the FLSA. Thus, making improper deductions is high on the list of potentially costly FLSA mistakes.
Mistake #2: Replacing employees with unpaid interns. Every summer, the DOL devotes significant energy to combating the use of unpaid interns who are performing the work of employees and should be classified as such. Several high-profile lawsuits brought recently by interns illustrate the potential consequences of this mistake. For more details, check out this edition of the Overtime Update, here.
Mistake #1: Misclassifying employees as exempt. This is arguably the biggest, most common, and potentially expensive FLSA mistake. Classifying employees as “exempt” may be attractive where the employer believes the employee is highly skilled, possesses a college degree, or otherwise fills an important, professional role with the employer. But none of those facts, standing alone, provides a basis to classify the employee as “exempt” and avoid paying overtime. The FLSA’s exemptions are not intuitive, but instead are technical and, at times, exasperating for their lack of clarity. When in doubt, consult with legal counsel before assuming that an exemption applies or classify the employee as “non-exempt,” which is the default classification under the law and generally the safer course of action.
For more guidance on wage and hour laws affecting your workforce, please contact a member of Troutman Sanders LLP’s Labor & Employment Team.
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