Common Mistakes and How to Avoid Them in FLSA Compliance

The Fair Labor Standards Act (FLSA) of 1938 was a monumental piece of labor legislation that forever changed the face of business in America. For one, it established a national minimum wage (25 cents) for the first time. For another, it mandated the payment of overtime wages for most employees who do not fall under certain exempt categories. Finally, it regulated child labor on a nationwide basis, another first.

In fact, that legislation spawned the appearance of mandated labor law posters in the workplace. Then, as additional labor and employment laws were passed over the decades, including the landmark Civil Rights Act of 1964 and then the Occupational Safety and Health Act (OSHA) in 1970, the posters began multiplying, and soon an entire labor law poster compliance industry was born, spearheaded in large part by Personnel Concepts in California, to this day still the industry's premier provider.

While in the early days of the FLSA only businesses trafficking in interstate commerce, even in the loosest sense, were affected, as the decades have gone by, more and more businesses have fallen into the interstate commerce category and thus must abide by the standards of the FLSA and subsequent labor laws. (Family business operations that rely solely on direct family members are exempt.) Today, if you own a small business in Peoria, or anywhere, and you use the Internet or telephone to order supplies or deal with customers, you're an interstate entity. (The FLSA kicks it at $500,000 in revenue, but states cover the rest.) Tweet that you're offering a service, and the FLSA has you provided you're not a family operation. So who's exempt? For the most part, these days only domestic service workers can escape the clutches of the law-and even then it's a questionable exemption that Congress is currently working to eliminate.

For some reason, many employers unwittingly run afoul of the FLSA just by carrying out what they deem to be commonsensical approaches to managing their employees. Need an employee to stay an extra hour or two so you promise that person equal "comp" time off, forget it-you've probably just committed wage theft by not paying overtime. Let's examine some common mistakes like this one that employers make.

Misclassifying employees as exempt when they are actually non-exempt and subject to overtime pay. Employers often think that just by paying someone a salary, you can make that person exempt from overtime and avoid paying for hours worked beyond 40 a week. Paying a salary, according to the FLSA and the clarifying Fair Pay Overtime Rules of 2004, however, is just one part of the equation in granting an employee an overtime exemption. First, the employee must be paid a minimum salary a week, which currently stands at $455. Then, the employee must pass a "duties" test in prescribed executive, administrative, professional, and outside sales classifications. Someone who just answers a phone or files paperwork is not going to survive the duties test.

To illustrate that the distinction between exempt and non-exempt is sometimes so fine a line, even the Equal Employment Opportunity Commission (EEOC) was busted by the Department of Labor (DOL) in 2009 for violating overtime pay rules. Large employers such as Wal-Mart have been taken to court and ordered to pay back overtime wages-or they've opted to settle before a court decision to avoid costly legal expenses. Wage theft in all forms, including the avoidance of overtime pay through misclassification, is in the DOL's crosshairs, so this is a particularly important area of labor law compliance to self-audit your firm on.

Offering comp time instead of paying overtime wages. Many employers assume that they can reward employees for working overtime with subsequent compensatory time off with regular pay. If the employee is truly exempt, this is a fine practice because salaried employees must be paid the same no matter how little or how much they work. However, for everyone else, the FLSA forbids this practice and insists on overtime pay. One exception: If your company is not in a state that mandates overtime pay after eight hours of work in any given day (which is the law in California and elsewhere), it is permissible to adjust an employee's working schedule within the same pay period so that total hours worked don't exceed 40. You can thus avoid paying for overtime, but your firm must be sure to retain positive records on file indicating the hours worked should the DOL come calling. The best practice overall is to avoid comp time except for salaried employees if you want to stay FLSA compliant-and sleep at night.

Classifying as exempt anyone who works in sales or is paid on a commission. The FLSA allows for salespersons to be classified as exempt only if they are engaged in "outside sales" at customers' places of business. The exemption does not apply to anyone who makes sales at any of the employer's places of business or conducts sales by mail, telephone or Internet. Likewise, the FLSA considers employees who are paid on a commission basis generally to be non-exempt and thus subject to overtime pay except when they receive more than half their compensation in the form of commissions at a "retail or service establishment."

Tellingly, an ongoing court controversy has surrounded the practice of labeling as exempt those pharmaceutical representatives who go from doctor's office to doctor's office explaining and introducing medications but not selling them per se. Some courts have ruled these reps to be non-exempt while other courts have found them to be exempt. If the controversy continues, it may take the Supreme Court to settle the issue once and for all.

Calculating overtime pay based on hourly wages only. In calculating overtime pay, an employer must take into account all forms of compensation during the pay period, including hourly pay, commissions and nondiscretionary bonuses. Thus in an example, an employee works 50 hours one week and earns $400 in hourly wages ($8 an hour) and $100 in commissions. Adding things together and dividing by hours worked, that person has earned $10 an hour overall ($400+$100=$500 divided by 50=$10). Since this employee has been paid regular pay for the 50 hours, she or he is owed 10 hours of overtime at one-half the computed hourly figure, or an extra $50 for a total paycheck of $550. This might sound confusing, but the computation of what's called the "regular rate" already includes everything except the half-time portion of the time-and-a-half for overtime.

The DOL is cracking down on all wage and overtime violations and has been awarded an increased budget to enable it to add Wage and Hour Division (WHD) field investigators to carry out the task. Thus this is no time to be lax and approach compensation issues from a "commonsense" perspective. It's time to learn all the requirements of the FLSA and apply them to both the classification and the compensation of your employees. And for their part, employees are being increasingly aggressive in seeking back pay-especially those whom you may have let go during the current recession. The WHD will investigate claims of wage violation and may interview other employees to see how widespread the suspected practice may have been.

To put things in perspective, in 2009 the 10 largest private wage-and-hour settlements totaled nearly $364 million, 44 percent more than the 10 biggest settlements in 2008. States with the most significant growth in wage-and-hour litigation are California, Florida, Illinois, New Jersey, New York, Massachusetts, Minnesota, Pennsylvania, and Washington, according to law firm Seyfarth Shaw's annual report on workplace class action litigation.

Even more troubling for employers is the rise in private class-action lawsuits related to wage-and-hour issues. In 2009, Wal-Mart settled an FLSA suit for $11 million; Lowe's forked over $29 million; and Wachovia paid $39 million. These suits are often fact-intensive, and employers stand little chance of succeeding on a motion to dismiss claims brought under the FLSA. Further, the FLSA's attorney fee provision for plaintiffs who prevail results in increased monetary liability for employers.

What to do?

To protect against adverse legal and regulatory actions, employers should make sure that their workers' classifications are reviewed and updated regularly. Employers also should make sure they have workplace due process procedures in place so workers can bring their grievances to the attention of managers. Employers should promptly investigate and respond to all grievances because that can generally help ward off further action. If employees feel someone will listen to their concerns and act on them, they are much less likely to file a grievance that can lead to all sorts of regulatory and legal hassles.

Lastly, we at Personnel Concepts have researched, compiled and made available informative and easy-to-follow tools to help you comply. Two that are truly essential should be on everyone's shopping list. The first is the FLSA Overtime Rules Compliance Kit, and the second is the FLSA Salary Basis Compliance Kit. Get your copies today and master how to stay in full FLSA compliance.

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