Are You Making Compensation Mistakes?

I frequently work with clients who are being investigated by the Department of Labor for violations of the Fair Labor Standards Act, the federal law that regulates the payment of the minimum wage and overtime compensation. I was recently reminded by a client that the FLSA requires many things that may be legal but certainly aren’t fair. This may be one of the reasons that the FLSA is so often violated: it sometimes makes no rational sense.

For example, the FLSA requires most bonuses to be included in an employee’s regular rate of pay for purposes of calculating overtime pay. So if you give your employees a performance bonus, an attendance incentive, a monetary gift every Christmas or almost any other kind of bonus, you will be required to pay those employees more in overtime pay because the bonus will increase their rate of pay in the pay period in which you provide the bonus. What this often means to an employer is that the regulations act as a disincentive to use bonuses to increase productivity or performance. This makes no sense from a business perspective, but it makes sense to the Department of Labor, which is charged with enforcing the FLSA.

These types of paradoxes of the FLSA mean that many employers violate the FLSA without knowing it and without any malice simply because the rational business brain cannot imagine that this law is as illogical as it really is. Here are some of the pitfalls that businesspersons often fall into with the FLSA:

  1. Failure to keep daily time records for “exempt” employees. If you are paying an employee a set salary regardless of how many hours they work, you may believe that requiring that employee to keep a time sheet is unnecessary. However, salaried employees are not automatically exempt employees. They may still be due overtime or minimum wage and once it is determined that they are due those wages, the number of hours actually worked becomes a huge issue. It is the employer’s responsibility to keep accurate track of the hours the employees work and if the employer fails to do this, any number of hours worked that an employee makes up may be enforced by the DOL.
  2. Believing that many employees are exempt from overtime or minimum wage laws. I use a very generalized, unscientific rule of thumb in many types of small businesses (less than 50 employees). If more than 10% of your employees are considered exempt, you have a problem. It doesn’t take that many executives, administrators, or professionals to run a company and classifying a lot of your employees as exempt means that you have waived a red flag in front of the DOL. Obviously, every business is different and the only way to be sure if you have classified your employees correctly is to have a knowledgeable HR person or employment lawyer review every job description as well as the duties actually performed by your workers.
  3. Meal break deductions. Many employers get tripped up by this one. In general, you have to pay your employees if their lunch break is less than 30 minutes long. You also have to pay them if they are not completely relieved of all duties during the break and free to leave their work area. If you assistant stays at her desk, eats her sack lunch and still answers your phone, you have to pay her for that “break”, even if she spends most of it reading a romance novel.
  4. Deducting items from an employee’s pay that take the employee below minimum wage for that pay period. Required uniform expenses, deductions to cover damaged or lost tools, deductions for poor performance, such as chargebacks for dissatisfied customers who return items, are all types of deductions that become illegal if they take the employee’s pay below minimum wage before taxes and other legal deductions are subtracted.
  5. Docking or withholding wages for hours actually worked. Anytime you determine as an employer that you are going to withhold an employees’ earned wages, STOP. You are making a mistake. For example, some employers refuse to pay an employee who routinely fails to clock in or out. This is illegal. You still have to pay the employee for the hours you reasonably think he worked that day. Then you can discipline him by written warning, suspension, or even termination for failing to follow the company rule about clocking in and out. But you cannot use his pay as a club with which to beat him. Same rule applies to an employee who works “unauthorized overtime”. Whether it was authorized or not, you still owe her pay for the hours she actually worked and time and one-half for the overtime hours. You may discipline her for failing to get authorization, but you can’t withhold the pay actually due to her.

Many employers don’t understand what the big deal is about violating some little FLSA rules and therefore pay little attention to the overtime and minimum wage requirements. But the regulations of this act allow the employer to be sued for twice the amount owed, going two years back, and automatically awards attorneys’ fees to the employee if he/she wins. In addition, not just one employee will sue. The court will probably allow the employee’s attorney to contact all of your former employees during the last two years to get them to consent to be part of the suit against you also. These rules can turn an otherwise minor violation into a very expensive mistake.

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