Despite revisions to the Fair Labor Standards Act in 2004, determining how to properly classify workers remains an ongoing struggle for many companies. That is evident from the amount of money the U.S. Department of Labor has collected from businesses that failed to properly compensate their employees for overtime. In 2006, the Employment Standards Administration’s Wage and Hour Division, part of the Department of Labor that enforces laws governing wages and working conditions, recovered more than $171.5 million in back wages for more than 246,000 employees. The agency concluded 31,987 compliance actions and assessed nearly $7.9 million in civil penalties in 2006. Employers that improperly classify workers to avoid paying overtime are putting themselves at serious risk.

“Among this department’s highest priorities is ensuring that workers are paid all the wages they have earned,” said Secretary of Labor Elaine L. Chao in November, after the department recovered $1.9 million in back wages from Allied Home Mortgage Corp., a Houston mortgage broker that failed to properly pay overtime to commission-only salespeople. Even the largest employers struggle with managing issues under the FLSA; in early 2007, Wal-Mart Stores Inc. was slammed with a nearly $34 million settlement over FLSA violations.

WHO IS COVERED BY THE FLSA?

The FLSA covers almost every employee in the United States; the Department of Labor estimates that includes more than 130 million workers. The Act establishes minimum wage, overtime pay, recordkeeping and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. It is important to note that the Act covers only employees - not independent contractors. However, there is no bright line legal test to guide employers in differentiating between the two.

According to the Department of Labor, “The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA.” Employers must consider a number of factors in determining whether a worker is a contractor or an employee, including:

• The extent to which the services rendered are an integral part of the principal’s business.

• Whether the relationship is permanent or temporary.

• Whether and how much the alleged contractor has invested in facilities and equipment.

• How much control over the work is exerted by the principal.

• Whether the alleged contractor has opportunities for both profit and loss.

• The degree of independent business organization and operation.

Other factors that may seem important are, in fact, immaterial, such as the place where work is performed, the absence of a formal employment agreement, the time or mode of payment and that an alleged independent contractor is licensed by the government.

Under the FLSA, non-exempt workers must be paid one and a half times the rate of regular pay for all hours worked over 40 in a single workweek. Numerous states also regulate overtime pay and, in some cases, the rules are different than under the FLSA. While the status and hours of many categories of employees, such as service and repair workers being paid hourly, are easy to track, it’s not nearly as obvious for many other types of workers. In order to ensure non-exempt employees are properly compensated, employers must be proactive and periodically review how they classify and pay employees under both the FLSA and any applicable state laws. When reviewing an employee’s status, employers must consider several factors, including:

• Don’t assume that “salaried” equals “exempt”
Some salaried workers still must be paid overtime. To determine which employees are exempt from overtime pay, the FLSA spells out specific exemptions for those in various positions, including executive, administrative, professional, or outside sales capacity.

The Department of Labor - in pages and pages and pages of documents - offers extensive guidelines on how to properly classify workers, and that information can be found at www.dol.gov/compliance/laws/comp-flsa.htm. Despite this extensive information, or perhaps because of it, the rules can be extremely confusing, and it is worth consulting with legal counsel when it is not perfectly clear whether an employee is exempt or not.

• Calculate hours on a weekly basis, not a biweekly one
Overtime kicks in when non-exempt workers log more than 40 hours in a single workweek, and each week stands alone. Following its settlement with the Department of Labor, Wal-Mart admitted that it used a biweekly period to calculate hours, rather than a single week.

• Carefully track all non-exempt employee hours
For companies with multiple locations, staying on top of the timecards or other weekly pay records of every employee in every office can be a huge headache. However, it is critical that supervisors at each location understand how many hours each employee can work before triggering overtime.

In 2006, Compass Bank in Birmingham, Ala., paid more than $1 million in overtime back wages after the Labor Department found that tellers, customer service representatives, and financial service representatives at branch locations routinely worked through lunch periods and after finishing scheduled work hours.

• Correctly figure the “regular rate”
Overtime is based on time and a half of an employee’s regular rate of pay. That rate can be higher than the hourly rate if an employee receives additional compensation such as prizes, awards, premiums, shift, and geographical differentials and some incentives. To properly determine overtime, companies must first properly calculate the correct regular rate of pay, typically the “average” rate of pay that the employee received during that period.

The price for failing to properly calculate overtime for non-exempt employees can be high. Not only can the Department of Labor force back wages for violations, states have that authority as well under their wage and hour laws. Plaintiffs’ attorneys have also figured out how complicated FLSA overtime requirements are, and many jurisdictions have reported surges in class and group action lawsuits for FLSA violations. Under the FLSA, employees who have been denied appropriate overtime have a mechanism called “collective action,” which allows for multiple claims to be considered at the same time, as long as the employees are “similarly situated.” Collective actions under FLSA have much less stringent standards for initial certifications than traditional class actions do, making them much easier to bring against employers.

As the costs for failing to pay overtime escalate, it is more important than ever for employers to properly classify and compensate their non-exempt employees.

Publication date: 12/17/2007