Wage and hour issues can be complicated for distributors and costly for their businesses. What rights do you as the employer have? In the first part of this two part series, Nancye Combs, human resources consultant with HR Enterprises Inc., explains wage and hourly solutions for your business.

One of the most troubling and expensive business problems today is complaints of unpaid wages. There were 30,000 Wage and Hour Complaints filed with the U.S. Department of Labor (DOL) Wage and Hour Division last year. This is a larger number than all other discrimination complaints combined. The number of wage and hour complaints has grown by 400 percent over the last five years and they are filed under The Fair Labor Standards Act. This act is old, circa 1938, cumbersome, and hard to apply to the modern workforce. Added to the number of federal complaints are the many thousands of complaints filed with the state DOL in each of the 50 states.

At the start of the recession, more than 600,000 employees became unemployed during one single month and only 1.5 percent quit. Many terminated workers filed complaints because of the economic times, each seeking to be paid any and all money they have coming to them. Other complaints are the result of the lack of the human touch when the employees were let go. Some employees felt wronged and looked for ways to pay back the employer they blamed for terminating them.

Seeing the spike in claims, the U.S. House Education & Labor Committee offered blistering criticism of the inept work of the Wage and Hour Division of the DOL. In response, the Secretary of Labor hired 150 new investigators to enforce the law and 100 new investigators to ensure that projects paid for with stimulus money comply with the wage and hour laws.


Although these may be startling statistics, it is even more troubling to learn that the DOL estimates that 70 percent of employers are out of compliance, including the HVAC industry.

What happens when a complaint is filed by an employee with the DOL? First, a wage and hour investigator conducts an investigation. If the employer is found to have failed to pay wages due, the back pay award can go back three years. If the employer’s actions are found to be willful, the employer can be assessed damages equal to the amount of the back pay, also called liquidated damages. To make matters even more complicated, these complaints can quickly spread into a class action lawsuit. Unlike most discrimination complaints, a wage and hour complaint is like a stone thrown into a lake. It ripples. The investigation spreads throughout the company and the result can be an economic disaster.


Most wage and hour complaints are for failure to pay overtime because the employee was wrongly classified. Other frequent complaints are: working an employee off the clock; changing an employee time record to avoid paying overtime; failure to give required breaks and lunch periods according to state or federal law requirements; and failure to pay accurately at termination.


To assist employers, the DOL has created a list of the 10 most common wage and hour errors employers make.

1. Assuming that all employees paid a salary are not due overtime.

2. Improperly applying an exemption.

3. Failing to pay for all hours an employee is suffered or permitted to work.

4. Limiting the number of hours employees are allowed to record.

5. Failing to include all pay required to be included in calculating the regular rate for overtime.

6. Failing to add all hours worked in separate establishments for the same employer when calculating overtime due.

7. Making improper deductions from wages that cut into the required minimum wage or overtime. Examples: shortages, drive-offs, damage, tools, and uniforms.

8. Treating an employee as an independent contractor.

9. Confusing federal and state law.

10. Using compensatory time as pay for overtime.


Let’s address each of these common errors so that distributors can avoid or fix them.

1. Assuming that all employees paid a salary are not due overtime.

When an employer says that an employee gets no overtime “because he is salaried,” there is an automatic “red flag.” Being salaried and being exempt from overtime are not synonymous. In fact, the DOL has very detailed descriptions of which jobs (not people) are exempt from overtime. The DOL only uses “exempt” and “non-exempt” when classifying those subject to overtime and exempts only “white collar” positions. All blue collar jobs, including all crafts positions - electricians, plumbers, drafters, HVAC and tool makers - are not eligible to be treated as “white collar” workers. Here are the basic criteria that must be met:

• Employee is paid a minimum salary of $455 a week, and

• Employee is consistently paid the salary of at least $455 a week without being docked, and

• Employee performs work that is called “exempt level” work, which is commonly referred to as a “white collar” exemption. (Blue collar, manual labor jobs, are not exempt and all hours worked by blue collar workers must be recorded and paid, including overtime, regardless of how much they are paid.)

All three conditions must be met. Some employers pay $455 a week, but they dock the employee by the hour for absence. Some pay the minimum of $455 every week but the employee performs work that does not qualify to be exempt. Never be deceived by title. The job title is never enough to convince the DOL. Every position is examined separately based on the exemption criteria.

2. Improperly applying an exemption.

Understanding the exemptions based on scope of work is confusing. First, it is important to understand that you will always examine the job content and never the person. When a position is examined there is an assumption the job is vacant. Certain white collar jobs are exempt if the scope of the work meets the exemption qualifications. There are five white collar categories: Executive, administrative, professional, sales, and computer.

Each of these categories has detailed criteria (www.dol.gov/esa/whd/). The process is difficult and confusing but it is mandatory. Any employer that gives the criteria a cursory review and makes a cavalier decision will regret it. Those of us who do this every day agree on the errors we see employers make. Here is how we actually do it.

The executive exemption is not too difficult. We quickly identify all the white collar types that pay over $100,000 in cash compensation. They are automatically exempt.

The professional exemption is reasonable. There are two kinds - creative and learned. Creative professionals include all the musicians, artists, writers, and sculptors. Learned professionals are those jobs that require an advanced degree or equivalent learning. It includes doctors, lawyers, certified accounts, chemists, and others who need to be what we would call academically learned.

The administrative exemption is a constant source of problems. It is also a place you can expect the Wage and Hour investigator to look when there is an audit, either random or complaint. Administrative assistant is a target job for audits. One of the reasons is the use of the nebulous term “judgment and discretion.” Those in administrative positions must use significant judgment and discretion. The DOL lists many examples of what is called the use of judgment and discretion, but it is up to the employer to decide if the job matches the description. When the DOL disagrees with the employer decision, they can issue a citation. There are many positions that can be examined under the administrative exemption, but each must be considered carefully.

The sales exemption applies to outside sales. Clearly the exemption applies to those who work away from the offices/building of the employer. They must truly be outside sales employees. This exemption does not apply to inside sales. Inside sales positions are non-exempt. In fact, I have rarely ever seen an inside sales job that can qualify to be called exempt. Frequently, employers argue they believe the job is exempt. Remember, the employer can exempt the position if they choose; however, there are consequences when they are wrong.

The computer exemption is not especially difficult for experienced evaluators. A computer exemption can be met if the position requires high-level computer work like with programmers, network administrators, etc. It can also be met by paying the employee $27.63 an hour. Helpdesk and computer operators do not meet the exemption criteria, based on the job content.

The penalty for failure to pay overtime to employees who are wrongly classified is back pay for up to three years and a punitive damage award (liquidated damages) equal to the back pay award. Time spent defending the claim and legal fees are costly. If the DOL cites you, you need really good legal counsel that understands Wage and Hour Law. This is our motivation to get it right in the first place. The exemption criteria based on scope of work is difficult. Although some jobs are easy to make a decision about, many are not.

3. Failing to pay for all hours an employee is suffered or permitted to work.

Some employees work overtime when they are told not to work without approval. Some work at home and turn in hours, which create a workweek over 40 hours. Employers react in many different ways. An angry employer says, “I am not going to pay him. I did not authorize the work and I won’t pay.”

In my years of experience, I have never known the DOL to buy that argument. Their position is based on whether they feel the employer knew the employee worked or allowed the employee to work. They write it up in legal terms, but the bottom line for those of us who do the work is not whether we feel we should pay but whether we knew about the work or should have known about it. If so, we pay. The DOL will probably say, “Use discipline to correct the problem; don’t withhold pay.” This is a growing problem because of email, personal electronic devices, cell phones, and those who work at home.

4. Limiting the number of hours employees are allowed to record.

Employers with automatic punch in and automatic punch out can expect to be challenged. When an employer controls what hours an employee can record, there is a question of whether the employer actually paid for all hours worked. There are questions about rounding time. If the DOL finds that the employer rounded to the quarter hour and it was always in favor of the employer, it creates a flag regarding whether all the time was paid.

5. Failing to include all pay required to be included in calculating the regular rate for overtime.

Many employers have bonus programs that range from perfect attendance awards to very formal productivity bonus programs. The most frequent problem I observe with bonus programs is the failure to count all non-discretionary income in the overtime rate. An example of a non-discretionary bonus is a $100 bonus for an accident free quarter. If the employee meets the criteria, the bonus is guaranteed. That is a non-discretionary bonus. If the employee earns overtime during the week the bonus is paid, the total hours of work must calculated and the bonus added to the gross before the overtime rate is calculated. Non-discretionary bonuses are always earned wages and included in the overtime calculation. It is easy to avoid this problem without forfeiting the opportunity to reward your employees. It depends on how the bonus program language is written.

To be continued…June 2013