You don.t have to pay overtime to your salaried employees. Right?
Not so fast.
Many myths surround the federal Depression-era law known as the Fair Labor Standards Act (FLSA) and its state law counterparts, which govern questions of overtime pay. But the biggest myth may be that FLSA issues are simple, low-risk decisions for employers. In fact, even large, sophisticated businesses often make the wrong call on overtime questions and wind up paying a heavy price. Consider the following recent examples:
- U.S. Bank agreed to pay $3.8 million following a federal Department of Labor (DOL) audit in which the DOL determined that the bank had mistakenly classified personal bankers . the salespeople who help customers open checking and savings accounts or apply for loans . as exempt from the FLSA.s overtime pay requirements.
- Nabisco, Inc. agreed to pay over $5 million as part of a settlement with the DOL based on an audit that uncovered Nabisco.s misclassification of retail representatives as exempt from the overtime provisions of the FLSA.
- Albertsons, Inc. announced last year that it had set aside $37 million to cover back pay claims arising out of a lawsuit in which workers alleged that the company forced them to work off the clock and then retaliated against them when they complained about not being paid overtime.
The price tag for FLSA mistakes can include back pay, interest, punitive damages, civil penalties, and for flagrant offenders, even criminal prosecution. And FLSA claims are rarely limited to a single employee or a single location. One claim often triggers a ripple effect that results in hundreds or thousands of claims across entire categories of employees . usually through expensive, high-risk class action litigation.
Indeed, plaintiffs. lawyers are increasingly filing FLSA class action lawsuits against employers. A recent article in the National Law Journal cited the notable example of a class action against Enterprise Rent-A-Car, seeking payment of back wages for as many as 12,000 management assistants. Last year, a California court certified a class of 1,500 managers who alleged that the Denny.s restaurant chain unlawfully denied them overtime pay. In January of this year, claims questionnaires were mailed to 14,000 current and former Taco Bell employees in Oregon, who allege in a class action lawsuit that they were required to work off the clock and denied overtime pay. These are just a few examples of the many class action cases brought under the FLSA.
Truth or Consequences
So why is this happening? Why are employers facing increasingly complex, and potentially costly, FLSA problems? Blame it in part on the new economy. With businesses focused on higher productivity in a tight labor market, they often apply old misconceptions about wage and hour laws to new workplace dilemmas.
And don.t think this is someone else.s problem. Before you conclude that your own organization is fully compliant, take the following .true or false. quiz:
- You don.t have to pay overtime to your salaried employees.
- You can offer comp time instead of paying overtime.
- Your exempt employees can be docked pay for partial day absences.
- You can deny overtime pay if your employee didn.t request approval in advance.
- You can avoid the FLSA altogether by reclassifying employees as independent contractors.
The answers? All false.
Consider the first statement on the list. The FLSA makes an important distinction between .exempt. and .non-exempt. employees. Unless employees are .exempt,. they are entitled to overtime pay. Many employers believe that simply paying an employee a salary rather than an hourly wage makes the employee exempt from overtime. It isn.t nearly that simple.
For the most common exemptions . the so-called .white-collar. exemptions . employees must not only be paid a salary, but they must also hold .executive, administrative, or professional. positions. A fancy title doesn.t count. Instead, DOL regulations establish specific criteria to determine whether the duties and responsibilities of a position fall into one of the three exempt categories. Exemptions are narrowly construed . and if the exemption for a position is challenged, the burden rests with the employer to prove that the exemption applies.
Common Misperceptions
Behind the problem of exemptions lurk a wide variety of other FLSA issues, many of which are often misconstrued by employers. Let.s look at some of the other myths listed above:
- .Comp time. is a common employment practice, but with some very limited exceptions, it.s not allowed under the FLSA. You can.t escape paying overtime, even by offering time off with pay at .time and a half. rates.
- Employers sometimes hold exempt employees accountable for partial day absences by docking their pay for the time they are gone. But if an exempt employee works any time at all during the work day, you must generally pay the employee his or her salary for the full day. Partial day salary deductions can invalidate exemptions and expose you to retroactive overtime liability.
- Employers commonly require authorization in advance for any overtime work. But if an employee works overtime anyway . without authorization . you still have to pay them for it. You may have cause to dismiss an employee who doesn.t adhere to policies, but you can.t refuse to pay them for the work they do.
The question of independent contractors is even more complex and has been the subject of considerable litigation. While true independent contractors are not subject to the provisions of FLSA . since they are not employees of the organization . many employers have found themselves on the wrong side of the FLSA on this issue.
Just calling someone an independent contractor isn.t enough. There is no single rule or test that determines whether an individual is an employee or an independent contractor. Instead, courts will look at the entire employment scenario, including the extent to which the services provided are crucial to the organization.s business; whether the relationship is effectively permanent; whether the contractor pays for his or her own facilities and equipment; and how much independent business acumen is required. With technology professionals in particular, there is often a fine line between contractor and employee.
Counting To 40
Even when dealing with non-exempt employees, where there isn.t any question about the requirement to pay overtime, employers often face difficult FLSA questions. While the basic formula is simple (you must pay one and one-half times the employee.s regular hourly rate for all hours in excess of 40 in a given work week), the implementation of the formula often runs into complex business realities.
What counts as hours in a work week, for example? If an employee is on-call, does that time count as working hours? Does travel time count? What about lunch hours? Depending on the specific circumstances, the answer to any of those questions could be yes or no. When it comes to the FLSA, there are rarely absolutes, which is what makes many of these issues challenging for employers.
Similarly, if an employee works more than 40 hours in a work week, what rate is used for calculating time and a half? Must commissions be factored into calculations of an employee.s regular hourly rate? What about performance or other incentive bonuses? What if an employee works two different jobs at different rates of pay? What if state law differs from the FLSA on a given issue?
Too often, employers don.t recognize the complexity of these issues and run the risk of making mistakes by not asking the right questions.
Staying Current
As the economy has changed, new FLSA problems have emerged. The recent controversy over the DOL.s position regarding stock options is a classic example. Last year, the DOL issued an opinion letter stating that the value of an employee.s stock options must be factored into the calculation of the employee.s regular rate of pay for overtime purposes.
Early this year, the DOL position received a significant amount of publicity, and employer groups were up in arms over the issue . criticizing the DOL for being out of step with today.s incentive-based compensation structures. This outcry from the business community has quickly led to bipartisan legislative proposals that would exclude stock option profits from regular rate and overtime calculations. Until that happens, however, it.s still a live issue.
The more the traditional workplace changes, the more we will see unique questions raised by the FLSA. As employers strive to be flexible to accommodate new employee needs, and to do business in a new technology environment, they will inevitably bump up against new interpretations of questions they have faced for years: Who is exempt? Who is an employee? What counts and does not count toward overtime calculations?
These are not questions that should be answered lightly. With class action lawsuits on the rise, and more companies facing multi-million dollar settlements, businesses need to audit their payroll practices carefully and take steps to correct any problems before the DOL comes knocking on their door.