July 13, 2018
I. Hot Topics in Wage/Hour Compliance
One of the most complex legal areas for businesses and organizations to comply with regarding employees is the maze of state and federal wage/hour laws. It is safe to say that most employers are violating the Fair Labor Standards Act (or its state counterpart) in some fashion. As a result, employers need to be aware of the pitfalls and stay on top of recent developments to ensure that their business is protected.
The Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq, enacted in 1938, sets forth the requirements that employees be paid minimum wage, that overtime must be paid for hours worked in excess of 40 (usually) in a work week, and that youth employment be restricted. Employers with 2 or more employees who have an annual business volume of $500,000 are covered by the FLSA. It also covers hospitals, institutions that care for the ill or aged, and schools. 29 U.S.C. § 203(s). Alternatively, any employee who is “engaged in commerce or in the production of goods for commerce” is covered by the FLSA. 29 U.S.C. § 206(a), 207(a). This covers virtually all employees since the reality of the modern workplace involves communications out of state, ordering supplies from vendors out of state, and providing services and selling goods across state boundaries.
While the law may seem simple in concept, the reality is that many questions are raised as to whether an employee is exempt from the overtime laws or whether he/she has really “worked” 40 hours. Further, the laws are old; they have not kept up with the changing economy and realities of new flexible workplaces where employees work “any time/anywhere.” Despite some updates in 2004, employers are still forced to fit current workplace practices into laws that were developed for an industrial assembly-line workforce.
A. Independent Contractor vs. Employee – How to Minimize Your Risk
Many employers attempt to use independent contractors in an effort to avoid paying employment and unemployment taxes, to avoid providing benefits provided to employees, to avoid employment law concerns, and for administrative convenience. The IRS, however, has an incentive to classify workers as employees since it would rather have the employer collect taxes for them rather than rely on the individual to pay taxes.
The risks for an employer can be great in the case of a misclassification. An employer could be forced to retroactively pay the employer’s and employee’s share of employment taxes, pay unemployment taxes, and pay the income taxes that should have been withheld. A qualified benefit plan could be jeopardized too if all employees are supposed to be under the plan but one individual is misclassified. An employer could also owe interest on the unpaid taxes and have to pay for benefits for the individual previously treated as an independent contractor. Finally, the individual could be injured and claim that he/she should have been covered by workers’compensation.
There are several factors the IRS examines in determining whether an individual is an independent contractor or an employee. It is important to note that the facts will dictate whether a worker is an employee or an independent contractor.
Title is irrelevant. The following factors will be examined:
1. Instruction: A person who is required to comply with instructions about when, where, and how to perform work is usually considered an employee. If the employer has the right to require compliance, then the individual starts to look more like an employee.
2. Training: An independent contractor typically already has the skills needed to perform a job and receives no training from the person hiring him/her.
3. Integration into your company: The more integrated into an operation the individual is, the more likely that he/she is an employee.
4. Hiring, Supervising, and Paying Assistants. When the individuals hired actually hire, supervise, and pay their own workers, independent contractor status is more likely.
5. Continuing Relationship: A continuing relationship between an individual and the person for whom the services are performed is indicative of employee status. Typically, an independent contractor relationship involves a one-time arrangement to have work performed.
6. Set Hours of Work. The establishment of set hours of work is another factor indicating control and therefore an employment relationship. An independent contractor is a “master of his own time.” Similarly, a contractor is not typically required to attend staff meetings that are required of employees.
7. Full-Time Required. If the worker must devote his/her full time to the business of the employer, then the employer has control over the amount of time the worker spends on employment and restricts him/her from other employment. An independent contractor should be able to accept other jobs when and for whom he/she chooses.
8. Order or Sequence Set. If the individual hired must follow the order or sequence set by the employer, it shows the worker is not free to follow his/her own pattern of work.
9. Payment by Hour, Week, Month. Payment on a regular interval, such as weekly, hourly, or monthly, generally is indicative of an employment relationship. A true independent contractor generally charges one lump sum for the job. However, if the hourly payment is simply a convenient method of calculating the “lump sum,” then an employment relationship may not exist.
10. Payment of Business/Traveling Expenses. If the employer pays the worker’s business and/or traveling expenses, the individual is more likely an employee. Conversely, an independent contractor paid on a job basis is not reimbursed for such expenses since he/she is responsible for incidental expenses (and probably will build such costs into the fee charged). Further, an independent contractor typically carries his/her own workers’ compensation insurance.
11. Furnishing of Tools, Materials. The fact that an employer furnishes tools to its workers is an indication of an employment relationship. Independent contractors typically furnish their own tools.
12. Realization of Profit or Loss. If an individual can realize a profit or suffer a loss as a result of services provided, he/she is generally an independent contractor. If there is no difference in the amount paid to an individual, employee status is typical. In other words, an independent contractor is responsible for his/her own business enterprise.
13. Working for More than One Company at a Time. Independent contractors typically work for more than one company at a time, thus indicating that one company does not have sole control over the individual’s time.
14. Services Available to General Public. An independent contractor’s services are typically available to the general public. For example, an individual may hang out a “shingle,” hold business licenses, may be listed in business or phone directories, or may advertise.
15. Right to Discharge/Terminate. An independent contractor cannot be fired so long as he/she is meeting obligations under the agreement (he/she is not “at will”). Similarly, a contractor cannot quit without finishing the obligations. An employee, in contrast, can be fired at any time or simply quit.
In order to protect your business, you should have a written agreement with independent contractors which identifies the nature of the relationship with your company. You should also agree upon actual services to be performed (but leave the methods and details of performance up to the independent contractor’s discretion). Specify only that you are interested in the end result that is to be accomplished. Ideally, the independent contractor should be paid on a per-project or fee basis, and he/she should submit invoices periodically for payment. An agreement alone will not guarantee “independent contractor” status. The facts will govern.
B. Exempt vs Nonexempt – Common Misclassification Issues
The Department of Labor may investigate your work place for FLSA compliance as a result of a random audit or (more commonly) a complaint from a disgruntled current or former employee. Employees are either “exempt” or “nonexempt” from overtime laws. Unless an employee falls into one of the FLSA’s overtime exemption categories, the employee must be paid overtime. In cases involving intentional violations, a fine for triple the unpaid overtime can be assessed.
When considering an entire workforce, this can be extremely costly.
1. The Overtime Exemption Categories.
To be “exempt” from overtime requirements (i.e. paying an employee time-and-a-half his/her regular rate for hours worked over 40 in a work week), an employee must meet the definition of the “executive,” “administrative,” “professional,” high-end “computer employee,” or other miscellaneous exemptions.
Executive Exemption. To qualify as an exempt executive employee, the employee must meet all of the following criteria:
(1) Management. The employee must have a primary duty (generally 50% or more of his/her time) of managing an enterprise or department/subdivision. Management is defined by the FLSA regulations to include: interviewing, selecting, and training of employees; setting and adjusting rates of pay and hours of work; directing work; maintaining production or sales records for use in supervision; appraising productivity and efficiency for the purpose of recommending promotions or other job status changes; handling complaints and grievances and disciplining when necessary; planning the work; determining the techniques to be used to complete the work; apportioning work among workers; determining the type of materials, supplies, machinery, or tools to be used or merchandise to be bought, stocked, or sold; providing for the safety and security of the employees or property; planning and controlling the budget; and monitoring legal compliance measures.
(2) Supervision. The employee must customarily and regularly direct the work of two or more other employees.
(3) Authority. The employee must have the authority to hire or fire other employees, or alternatively, have his/her suggestions and recommendations as to hiring, firing, advancement, promotion, or any other change of employment status given weight.
(4) Compensation. The employee must be compensated on a salary basis at a rate of at least $455 per week ($23,660/year). 29 CFR § 541.100 et seq. There is also a “highly compensated executive employee” exemption which states that if an employee makes $100,000 or more per year, and he/she regularly and customarily performs one or more of the duties listed in the exemption, he or she will be considered exempt. 29 CFR § 541.601.
b. Administrative Exemption. To qualify as an exempt administrative employee, the employee must meet all of the following criteria:
(1) Duties. The employee must have the primary duty of performing office or non-manual work directly related to the management of general business operations of the employer or customers (for example: tax, accounting, budgeting, insurance, purchasing, marketing, advertising, research, human resources, employee benefits, computer network or database administration, legal and regulatory compliance).
(2) Discretion. The employee must exercise discretion and independent judgment with respect to matters of significance (employees who formulate or participate in the formulation of policy or who exercise a wide range of authority to commit their employer in a substantial manner financially or otherwise).
(3) Compensation. The employee must be compensated on a salary basis at a rate of at least $455 per week. 29 CFR § 541.200 et seq. The “highly compensated employee” exemption ($100,000 or more) outlined above also applies to administrative employees.
c. Professional Exemption. To qualify as an exempt professional employee, the employee must meet all of the following criteria:
(1) Duties. The employee must have a primary duty that involves the performance of work requiring knowledge of an advanced type in a field of science or customarily acquired by a prolonged course of specialized intellectual instruction. The duty must also include the consistent exercise of discretion and independent judgment.
(2) Compensation. The employee must be compensated on a salary basis at a rate of at least $455 per week. 29 CFR § 541.300 et seq.
Significantly, an employee does not qualify as a “learned professional” just because he/she has an advanced degree. Rather, the job which he/she is performing must actually require the use of the advanced knowledge. Additionally, the employee must exercise discretion and independent judgment and not engage in mechanical, routine, or repetitive work (i.e. a bookkeeper tabulating data is not exempt, even if the employee is an “accountant”).
Traditional professions of “science and learning” include: law, medicine, theology, accounting, engineering, architecture, and teaching. In the vast majority of cases, an advanced academic degree is required to satisfy the professional exemption. However, the professional exemption may also apply to an employee who obtained his/her experience through a combination of work experience and intellectual instruction.
d. Computer Employee Exemption. Many employees who work with computers may fall into the exemptions listed above. In 2004, the Department of Labor created a new computer employee exemption that can be applied if the employee does not fit into the executive, administrative, or professional exemptions. To qualify as an exempt computer employee, the worker must meet all of the following criteria:
(1) Duties. The employee must have a primary duty that consists of:
(a) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (b) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs based on user or system design specifications; (c) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (d) a combination of all the above duties.
(2) Compensation. The employee must be compensated at a rate of at least $27.63 an hour. Note: computer employees under the exemption can be paid hourly, unlike the executive/ administrative/professional exemptions where the employee must be paid a salary. 29 CFR § 541.400 et seq.
Employees manufacturing or repairing computers and help desk personnel will generally not meet the “duties” requirement of this exemption. Additionally, the exemption does not apply to employees using computer aided design (CAD) software to assist with their jobs (such as engineers) when their job is not computer systems analysis or programming. Unlike the “learned professions,” no official degree is required to fit under the computer exemption. Exempt computer employees gather their knowledgebase through both education and experience.
e. Outside Sales Employees. To qualify as an exempt outside sales person, the employee must meet the following criteria: (1) Duties. The employee must have the primary duty of making sales or obtaining orders or contracts for services or the use of facilities paid by the client or customer, and (2) Away. The employee is customarily and regularly engaged away from the employer’s place of business in performing the primary duty.
29 CFR § 541.500 et seq. Outside sales employees may be paid on a salary, fee, commission, or bonus basis. They do not have to be “salaried,” as with the executive/administrative/professional exemptions.
f. Combined Exemptions. An employee may not fit neatly into just one of the exempt categories listed above but may in fact, considering all of his/her duties, fit multiple categories at different times. In these cases, the stricter salary requirement governs (i.e. “outside sales” has no salary minimum while the executive exemption requires the employee to make at least $455/week).
The regulations also provide a little more latitude for executive employees. An executive employee’s status will not be jeopardized if he/she performs non-exempt work, so long as the other criteria (primary duty is management, supervising two or more employees, and authority to hire/fire/etc.) are otherwise established.
2. Salary Basis.
In order to be covered by the executive, administrative, and professional overtime exemptions, the employees must be paid on a “salary basis.” This means that he/she regularly receives pay each pay period for a predetermined amount as all or part of his/her compensation. Exempt employees cannot be paid by the hour and their pay cannot be reduced because of variations in quality or quantity of the work performed. Exempt employees must also receive full pay for any work performed in a week, even if the employee missed partial or full days of work.
There are a few exceptions when the employee does not need to be paid for work in a week:
- the employee is absent for one or more full days for personal reasons (other than sickness or disability);
- the employee is absent for one or more full days because of sickness or disability (including work accidents) and the deduction is made as part of a policy where the employee receives compensation for loss of salary;
- the employer imposes, in good faith, a penalty for safety rule violations of major significance;
- the employer imposes, in good faith, unpaid disciplinary suspensions of one or more full days for violations of certain workplace conduct rules (i.e., sexual harassment, violence, drug or alcohol violations, or violations of state/federal laws);
- the employee takes FMLA leave (even if taken incrementally); or
- the employee is absent for an entire work week or performs no work during an entire work week. 29 CFR § 541.602. Employers can remedy an improper deduction through the use of a “safe harbor” policy. The policy must be in writing and inform salaried-exempt employees of their need to provide notice of an improper deduction from their salary. CFR § 541.603(d).
It is worth noting that just because an employee is paid a salary, the employee is not “exempt.” Rather, the employee must still meet the criteria set forth in at least one of the exemption classifications set forth above. An employee who is paid a salary but who is not exempt must be paid overtime for hours worked over 40 in a week. The “regular rate” (see definition below) for overtime purposes would be the employee’s salary divided by the number of hours the salary is intended to cover. That rate would then be multiplied times 1.5 to determine the overtime rate for hours worked over 40.
C. Hours Worked and Regular Rate of Pay
1. Definition of “Hours Worked.”
Overtime must be paid for hours worked over 40 in a work week for nonexempt employees (or the 8/80 rule may be used for employees working in hospital and residential care establishments—i.e., overtime is paid for hours worked over 8 in a day and 80 hours over 14 days). While this seems self-explanatory, many employers fail to include certain activities as “hours worked” and therefore are not paying their employees enough money. “De minimis” activities are not included in “hours worked.” Generally, if the employer benefits from the employee’s work, the time must be compensated. The overtime regulations specifically address the following trouble areas: waiting time (usually compensable if the employee is on the clock and the time belongs to the employer); on-call time (compensable if the time is not his/her own but not compensable if the employee can go home); break periods (compensable if 20 minutes or less); and meals (compensable if still doing work or not relieved of duties). 29 CFR §§ 785.15-19. Sleep time is also counted as “hours worked” if the employee is “on duty.” 29 CFR § 541.602. Attendance at lectures, meetings and training programs is not compensable if the attendance is outside the employee’s regular working hours, attendance is voluntary, the matter is not directly to the employee’s job, and the employee does not perform any work while in attendance. 29 CFR § 785.27.
Travel time presents a host of issues for employers. While travel from home to work and back is not compensable (unless the travel is to a special assignment in another city), travel throughout the work day is compensable. Travel en route to a destination outside of normal work hours is not “hours worked” (ie, an airplane ride after hours). 29 CFR . 29 CFR §§ 785.33-41.
As a final matter, private sector employers may not use “comp time” to avoid paying overtime (i.e. giving an employee future time off for hours worked over 40 hours in a week). While an employer is certainly free to offer this time off in the future, it still must pay overtime for hours worked over 40 in a work week.
2. Definition of “Regular Rate.”
Many employers believe that non-exempt employees are entitled to receive 1.5 times their hourly rate for overtime. This is a misconception. In reality, employees are entitled to receive 1.5 times their “regular rate” for hours worked over 40 in a week. That amount may just be the employee’s straight hourly rate. However, it also must include “all remuneration paid for employment,” including bonuses tied to production, efficiency, or attendance and shift premiums. 29 USC § 207(e). Thus, 98 bonuses paid at the end of a time period (which are non-discretionary) technically need to be prorated over a time period and added back into an employee’s hourly rate to determine the proper “overtime rate.”
D. How to Go About Fixing Potential FLSA Problems in Your Workplace
The first step in ensuring compliance with the FLSA in your work place is to assess the job assignments actually given to your employees (ie, perform an audit of all the jobs in your work place that you are treating as exempt from overtime requirements). If an employee is being paid a salary and treated as exempt from overtime requirements, he/she must fit one of the categories outlined above. If an employee is in a “grey” area, you should seek legal assistance in making a determination if that employee really is exempt from overtime requirements (especially if the employee works overtime). Many employers mis-classify employees as exempt under the “administrative exemption.” Careful attention should be paid to that category in particular. Additionally, if you do use independent contractors, you need to assess whether they are in fact contractors (or employees, who are entitled to overtime and other benefits).
Once an audit has been done, the employer must also ensure that employees are recording all time they actually work. Employees should evaluate break times, lunch times and travel time carefully. This task is particularly challenging in today’s work place where an employee might quickly check email or work from home (sometimes without the employer even knowing about it).
Employers should adopt policies for time keeping (making it clear that employees must record all time worked) and, if limiting overtime is desired, require employees to obtain permission prior to working overtime (but keep in mind that if the employee fails to obtain permission and works the time, the proper remedy is disciplining the employee; they still must be paid for the overtime). Adhering to policies and disciplining employees for not following them will ensure that you properly track and compensate for time worked.
An employee can enforce the FLSA by either filing a lawsuit directly against a company or by taking his/her claim to the Department of Labor, which will investigate the matter on its own and take action if needed. An employee who was improperly denied overtime payments will receive backpay for all the wages he/she should have received plus, in many instances, liquidated damages equal to the backpay—in other words, the employee can receive double-backpay.
An employee can collect wages going back three years if a willful violation has occurred. If the employer can demonstrate that it had reasonable grounds for believing that it was complying with the law in good faith, the court may limit backpay damages to only two years. Multiply this backpay effect by all employees in a workforce and the damages could be catastrophic for a company. A successful employee can also collect his/her attorney’s fees accumulated in prosecuting the action.
E. Recordkeeping Requirements
Under the FLSA, employers must have non-exempt employees keep time records. Records may be maintained manually, with a time clock, or through a computer system. In addition to regular identifying information common in most personnel files, the FLSA requires that employers maintain records of the employee’s regular hourly rate of pay for any workweek in which overtime compensation is due (along with the basis for the regular rate and any exclusions) as well as hours worked each workday and a total for the work week. The records must also reflect total daily or weekly straight-time earnings and total overtime hours.
If detailed records of hours worked are not maintained, the Department of Labor will simply believe the employee as to the number of hours he/she worked in order to establish an overtime claim. An employer trying to claim that an employee did not work overtime (or worked less overtime than claimed) will have no defense if it does not have time records. Employee time-keeping records should be maintained for at least three years since FLSA actions can stretch back 3 years. Additionally, records of sales and purchase records should be maintained for the same time period. 29 CFR § 516.5. As a final note, employers should have a FLSA poster posted in a conspicuous place visible to all employees.