Wage-Hour Laws Create Risks

100 Dollar roll tightened with red rubber band.

Federal investigators with the Labor Department’s Wage and Hour Division (WHD) routinely look for companies and organizations with illegal pay practices.

The WHD enforces the federal minimum wage, overtime pay, record-keeping, child labor and other requirements of the Fair Labor Standards Act. When investigators uncover violations, employers must pay back wages, as well as penalties.

It’s a good time for employers to ensure they are in compliance with the complex Fair Labor Standards Act. Here are 14 ways employers can get tripped up by wage-and-hour violations.

1. Failing to correctly classify non-exempt and exempt employees. This is the mistake investigators often target first. Determining employees who are legally exempt from the wage-and-hour laws can be complicated.

Here are the basic rules:

  • Covered nonexempt employees must receive overtime pay for hours worked over 40 per workweek at a rate not less than one and one-half times the regular pay rate. (A 40-hour workweek is defined as any fixed and regularly recurring period of 168 hours over seven consecutive 24-hour periods.)
  • There’s no limit on the hours that employees 16 years or older can work in a week as long as they are paid overtime.
  • The FLSA does not require extra pay for working weekends, holidays, or nights, unless overtime is involved.

2. Failing to calculate overtime pay correctly. This can occur when an employer doesn’t include all earnings in the base, earned hourly pay.

For example, let’s say non-exempt employees earn mandatory bonuses over a period of time. An employer fails to recalculate the employees’ hourly earnings for the period to include the bonuses. Mandatory bonuses earned for factors related to hours worked and length of employment are considered earned wages under the wage-and-hour laws.

3. Misclassifying employees as independent contractors. According to the WHD, the “misclassification of employees as independent contractors is an alarming trend, particularly in industries such as construction that often employ low-wage, vulnerable workers.”

Often, the WHD adds, “workers are deprived of overtime and minimum wages, forced to pay taxes that their employers are legally obligated to pay and left with no recourse if they are injured or discriminated against in the workplace.”

When the WHD finds cases of misclassification, it may refer the cases to state agencies and the IRS.

4. Failing to pay for work during missed meal and rest periods. Wage-and-hour laws require employers to pay non-exempt employees for all time worked — whether or not it was authorized by an employer or supervisor. So if employees continue to work through meals and breaks of 20 minutes or less, employers are required to pay for the time. And when the extra time results in an employee putting in more than 40 hours in a workweek, the employer also owes overtime pay.

5. Failing to pay for certain on-call time. If an employer engages an employee to wait to be put to work, the individual must be paid for the on-call time.

6. Deducting an exempt employee’s pay for poor performance. This violates one of the basic rules for determining employee status. An exempt employee must be paid the agreed-on salary without regard to the quality or quantity of the individual’s performance during the pay period. When an employer takes money out of an exempt employee’s salary for poor performance, it can result in permanently changing the employee’s status from exempt to non-exempt.

7. Not paying for employees to work electronically after hours. Many employees carry and use cell phones, laptops and other devices throughout their waking hours.

Employees often get involved in work-related tasks on these devices. For example, a manager may tell a non-exempt employee to check in regularly on her cell phone while on vacation. Or an employee may use his laptop at night and on weekends to keep a project going.

The basic rule: When a non-exempt employee engages in work-related activities that benefit the employer (even voluntarily), the time is compensable.

8. Failing to pay for time spent at after-hours meetings. When attendance at a meeting outside normal work hours is required and the subject and activity at the meeting is work-related, the employees’ must be paid for the time.

9. Failing to keep required records. Federal law requires employers to keep time-worked records. So if there is a dispute with an employee about hours and pay and the employer is unable to show accurately recorded time records, courts will favor the employee’s claims and records.

10. Treating exempt employees as if they are non-exempt employees. When an employer treats an exempt employee as if he or she is an hourly paid non-exempt employee, the employer risks losing that employee’s exempt status. Even worse, if the employer treats an exempt employee like an hourly paid non-exempt employee, the employer may also lose the exempt status of all other employees in the same job classification working for the same managers responsible for the wrong treatment.

How do employers treat otherwise exempt employees like hourly paid non-exempt employees? By improperly basing their pay on hours worked (or not worked) rather than on a daily, weekly, or monthly salary.

For example, let’s say an exempt employee paid a salary begins coming to work two or three hours late on Mondays. The boss deducts amounts from the employee’s paycheck for the hours not worked. By treating the employee like an hourly paid non-exempt employee, the employer has changed the individual’s status.

11. Substituting comp time for overtime pay. Under federal law, compensatory time off or comp time in place of receiving overtime pay is generally only legal for government employees. Federal law generally requires that employees get paid overtime for all hours worked over 40 in a seven-day workweek established by the employer. (Note: Some states require overtime pay for hours worked over eight in a day.)

12. Taking unauthorized deductions from paychecks. An employer can only legally deduct from an employee’s earned pay the amounts required or authorized by law (such as Social Security, income tax deductions, and court-ordered garnisheed amounts) as well as deductions authorized by the employee (such as deductions for insurance premiums and loan payments).

Examples: An employer cannot deduct amounts from an employee’s pay to cover damages to the organization’s equipment. And an employer cannot withhold a departing employee’s final paycheck as a way of collecting an amount the individual owes on a loan previously obtained from the employer — unless the employee has given authorization in advance.

13. Not paying minimum wage when required. The WHD investigates employers who violate requirements to pay covered employees at least the federal minimum wage.

For example, the WHD found more than 100 employees of a clothing manufacturer were paid on a piece-rate basis without regard for the minimum wage and overtime requirements. Investigators also found weekend work was not recorded on employee time cards.

See the right-hand box for frequently asked questions about minimum wage.

14. Failing to abide by state laws. States may have their own version of federal wage and hour rules. So employers need to be aware of and comply with the laws in the states where they have employees.


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