Underpayment of Wages at Local Charity

Advo Companies, Inc., a worthy local charity that trains and helps people with developmental disabilities find work, was recently investigated by the United States Department of Labor for underpayment of wages to 134 workers. The company had to repay $52,497 in back wages because, among other mistakes, it miscalculated the special wage rate allowed to be paid to their employees.

I don’t know the facts of this particular DOL investigation, but I know Advo Companies has been providing outstanding vocational services to disabled adults and operating group homes in Amarillo for more than 30 years. I seriously doubt that any of the wage problems discovered by the DOL were intentional underpayments. But Advo’s difficulties provide an example of how a very well-meaning employer can easily run afoul of the notoriously difficult Fair Labor Standards Act (“FLSA”) requirements.

For most employers, the Fair Labor Standards Act “simply” requires payment of minimum wage and overtime if an employee works more than 40 hours in any one workweek. But there are many ways for an employer to unintentionally break this law:

  • Paying an employee on salary (or by the piece, by the job or any other method) instead of hourly. The great majority of employees must be paid on an hourly basis. To pay any employee on salary, the employer must be able to demonstrate that the salaried employee works exempt duties, makes a high enough salary (which is going up July 1), and therefore meets one of the very narrow white-collar exemptions (most don’t) or one of very few industry exemptions. To pay an employee on a salary or on a piece or job rate or any other scheme, you should consult an attorney first.
  • Requiring employees to clock out for meal breaks, or automatically deducting 30 minutes or one hour for meal breaks, regardless of whether the employee actually takes the break. If an employee stays at her desk and answers a phone call, or replies to your email or text during lunch, that is work, so it is not a complete meal break and must all be paid.
  • Not tracking time worked by an employee accurately. If an employee’s time sheet says he worked 8-5 every day, you are not paying that employee correctly. No employee is that standardized. There are so many accurate apps and software that can now show that the employee actually started working at 8:08 am, but didn’t stop until 5:29 pm. Not using one of these accurate time-keeping methods is foolhardy, since it is the employer’s responsibility to assure that there is no underpayment of wages.
  • Paying an employee an attendance, production, performance or other bonus without calculating the increase in the hourly rate (and therefore the overtime rate) caused by the bonus payment.
  • Docking a salaried employee for missing four hours of work or taking a sick day. Deductions from a salaried employee’s weekly salary are very heavily regulated.
  • Averaging overtime over a whole pay period. Overtime is calculated each week on a standard seven-day workweek. Your pay period, whether it is biweekly or bimonthly is irrelevant. If the hourly employee works more than 40 hours during a seven-day workweek, you have to pay overtime.
  • Requiring that overtime be “approved” or it goes unpaid. Refusal to pay for work performed is illegal. Even if you have a policy that says overtime has to be approved before it is worked, you still have to pay for the unapproved overtime. Your remedy is to discipline, warn or even fire the employee who violated your policy, but you can never use the employee’s paycheck as a disciplinary tool.
  • Providing compensatory time off instead of overtime. Only governmental entities can utilize “comp time”. Your private company has to pay overtime in cash money at one and half times the hourly rate.
  • Failure to keep good records. The FLSA requires that certain records relating to hours worked and wages earned for non-exempt employees be retained for at least three years: total hours worked each work day and each workweek; total daily or weekly straight-time earnings; total overtime pay for the workweek; deductions from or additions to wages (and the written authorization from the employee to make the deduction); total wages paid each pay period; and the date of payment and pay period covered.  In addition, records that explain the basis for wage calculations (e.g., time cards, piece work tickets and work schedules) must be retained for two years.  Recordkeeping is solely the responsibility of the employer.

I have warned employers for 30+ years about the pitfalls of the FLSA and the underpayment of wages due. And my clients accidentally violate these regulations frequently. Sadly, your good intentions or innocent mistakes don’t make any difference to the DOL. You cannot score anything less than a 100 on this test or you fail it completely.

If your business is investigated and found to have made any compensation errors, especially paying a salary instead of hourly to an employee who is not legally exempt, your business can be on the hook for two years of back pay to the affected employees, plus “liquidated damages” in an equal amount, doubling your liability. The liquidated damages are considered an appropriate penalty for the errors.

The one thing that is clear about administering pay in your business: either someone at your business needs to become an expert on the legal requirements of employee compensation, or you need to put your employment lawyer on speed dial for any compensation decisions that you make.