The Fair Labor Standards Act (FLSA) costs both big and small employers billions each year. Yes, billions.
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How can one law cause businesses so much trouble?
Well, the FLSA is stale.
Congress enacted the FLSA during the Great Depression to combat the sweatshops that had sprouted up across the country. In the 80-plus years that have since passed, the law has evolved into a maze of rules that even the best-intentioned business owner can have trouble following.
Yet, it is the law with which we are stuck.
As an employment lawyer, I know that it’s way easier—and way cheaper—for a small business to be compliant from the beginning. Otherwise, you’ll have to scramble when an employee brings it to your attention through an expensive lawsuit or a Department of Labor investigation.
It doesn’t have to be that way. These are the most common wage-and-hour pitfalls that can potentially wreak havoc in your business—and my advice on how to avoid them.
Mistake #1: Misclassifying employees as independent contractors
Courts and agencies are all over the map on the employee vs. contractor issue. But they seem to have found some consensus around the issue of control.
If your worker has more control, they’re more likely to be an independent contractor. If you as the employer have more control, your worker is more likely to be an employee.
So ask yourself: Who controls your worker?
You can also think through the factors below, which generally indicate how a worker could be classified. (Please note, however, that these are general guidelines and may not apply to your situation.)
|How, when, and where is the work done?||On-site||Off-site|
|How is your worker paid?||Hourly or salary||Project-based|
|Does your worker provide tools and other items to perform the work? Or do you?||You provide the tools||They provide the tools|
|Can your worker not only make a profit from their work, but also suffer a loss?||Profit only||Profit and a loss|
The test is difficult to meet, and when in doubt, it’s best to speak to your lawyer before you risk a misclassification.
Mistake #2: Misclassifying non-exempt employees as exempt
The FLSA has many classifications for exempt employees. I’m choosing to focus on one because it happens to be the one that’s litigated most often—the administrative exemption.
Despite its name, it does not apply to administrative employees like office managers and executive assistants. Instead, it only applies to the limited set of white-collar workers who can make independent decisions that significantly impact the companies they work for.
It’s not about the job title, it’s about the control they have.
So if you think your employee might qualify for the administrative exemption, make sure they actually do.
Mistake #3: Not using a workweek to calculate a non-exempt employee’s overtime
Under the FLSA, an employee is entitled to an overtime rate that’s 1.5 times their regular rate. There are a couple more details to this:
The overtime rate should equal time and one-half (1.5x) of your employee’s regular rate of pay for any hours worked beyond 40 in any workweek.
That’s a lot of words. But the key here is workweek.
Mistake #4: Classifying all salaried employees as ineligible for overtime, regardless of what they do
To be exempt (or excused) from overtime under the FLSA, an employee must be paid a salary of at least $455 weekly. That salary, however, is only half of the test.
Your employee must also meet the duties, or rules, of the specific exemption they seek (see Mistake #2 above).
Employees that fail the duties test are considered non-exempt and therefore, they’re entitled to overtime. All a salary does, in this case, is alter how an employer calculates their employee’s weekly hourly rate.
Mistake #5: Illegally docking your exempt employees’ pay
Generally speaking, it violates the FLSA to dock (that is, take a deduction from) the salary of an exempt employee’s pay.
Under the FLSA, an exempt employee earns their entire salary for a workweek as soon as they work even one minute during that week. (That doesn’t mean you have to pay them immediately, which is instead tied to your state’s individual payroll laws.)
The logic is simple. Once you start deducting from an exempt employee’s salary for minutes or hours not worked, you aren’t treating that employee as salaried, but as hourly. Deductions in fractions of time aren’t consistent with the idea of a salary.
And, hourly employees aren’t exempt. Therefore, if you don’t pay an exempt employee their entire salary for every workweek where any work is performed, then you’re treating them as hourly and they aren’t exempt.
There are, however, seven limited exceptions that allow you to deduct money from an exempt employee’s weekly salary:
- When your exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability.
- For absences of one or more full days caused by sickness or disability.
- While you can’t deduct pay for exempt employee absences for jury duty, attendance as a witness, or temporary military leave, you can offset any money received by an employee through jury fees, witness fees, or military pay against their salary for that particular week.
- For penalties imposed for infractions of major safety rules.
- For unpaid disciplinary suspensions of one or more full days for infractions of workplace conduct rules. (You need to have a written policy and it needs to apply to all of your employees.)
- For any time not actually worked during the first or last week of employment.
- For any time taken as unpaid FMLA leave.
Mistake #6: Requiring employees to take unpaid rest breaks, or not paying them for working during an unpaid lunch period
The FLSA doesn’t require an employer to grant meal periods and rest breaks to any employees. It does, however, talk about whether meal and rest breaks are counted as “hours worked.”
This distinction is important. If an employee’s time is counted as “hours worked,” it goes into the calculation of time worked, and whether that person has crossed the 40-hour limit for overtime pay.
- Rest periods, which are considered breaks of 20 minutes or less, are counted as hours worked regardless of whether the break is paid or not. Rest breaks are usually paid, and if they need to be counted as work hours, they probably should be paid for.
- A bona fide meal period, however, is not considered hours worked. To be considered a bona fide meal period, the employee can’t do any work at all during that time. If time during a meal period is spent doing something for the employer’s benefit, meaning that the employee worked on any substantial duties, it is considered working time and needs to be compensated as such.
Mistake #7: Failing to pay non-exempt employees for off-the-clock work
Under the FLSA, if an employee “suffers to work” (hey it’s the statute’s language, not mine), the employee must be paid for all time spent, well, suffering. 😉
“Suffers to work” simply means doing anything that’s essential to the employee’s job. So in other words, if you know that your employee is working, you must pay them for that time. There is no such animal as unauthorized overtime under the FLSA.
Your remedy as a business owner is to discipline or fire employees who work unauthorized overtime, not to refuse to pay them for it. The only caveat is if you have a policy requiring employees to report overtime in writing. In that case, courts will allow you to not pay employees for unreported time.
You should, however, check with your employment counsel to make sure that your overtime policy permits this.
Mistake #8: Offering “comp time” instead of overtime
Unless you’re a state or local government, it’s illegal to provide “comp” time instead of time-and-a-half for hours worked beyond 40 in a workweek.
Yet, to save on wages, some employers provide overtime as “comp” time to employees. That means instead of paying an employee time-and-a-half for overtime worked, they would be paid their regular base rate, and receive an additional half-hour of paid time off to be banked and used in the future.
Under the FLSA, this practice is illegal for private employers like startups and small businesses. This is because it interferes with an employee’s right to be paid their overtime premium.
Mistake #9: Leaving out other types of compensation in the overtime calculation
An employee’s overtime premium is calculated based on their “regular rate” of pay. Many business owners, however, assume that a regular rate is simply their employee’s base hourly rate, like $40/hour, for example.
Instead, the regular rate includes most payments earned by an employee in any given week:
- Base wages
- Premium pay for early or late work shifts
- Certain bonuses
- Piece rates
- Many allowances for lodging and meals
- Other compensation your employee may earn
Mistake #10: Not holding on to employee records
Every FLSA-covered employer must, for three years, keep certain records for each covered, non-exempt employee.
There is no required form for the records, but the records need to include up-to-date information identifying who the employee is (like a Social Security number), and data about the hours they worked and the wages earned.
It can be kept in any form—even on a cocktail napkin—but a formal place (like payroll and HR software) is certainly preferred.
Don’t let these preventable mistakes take your business down. The risk not only lies in the unpaid overtime, which can double as liquidated damages to an employee, but legal fees to your lawyer and the plaintiff’s lawyer.
While the FLSA is outdated, staying compliant doesn’t have to be. Remember, it’s a lot easier to get things right from the start instead of trying to fix them down the road.