A spike in wage and hour claims brought blistering criticism on the Wage and Hour Division of the Department of Labor (DOL) from the U.S. House Education & Labor Committee. 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.

The DOL went on to identify the top 10 most common wage and hour errors employers make (see sidebar). We addressed the first five in part one. Now let’s take a look at how employers can address the last five errors on the list.

Avoid the Final Five ErrorsCostly wage and hour problems

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

There is an established set of criteria that determine when an employee can be considered employed by separate employers. The criteria have to do with ownership of the business. The company accountant and/or attorney are the source of information as to whether the separate establishments are considered to be the same employer. If the separate establishments are considered to be the same employer, then the hours worked must be added together and paid, including the overtime.

7. Making improper deductions from wages that cut into the required minimum wage or overtime.

Examples of this are shortages, drive-offs, damage, tools, and uniforms. This is a frequent and troubling issue and the examples are endless. Consider this situation. Joe borrowed $150 against his wages and then he quit. The employer may decide to deduct the money from the final paycheck. No way; don’t do it. The same answer is true if the employee who broke a computer or dented a company car and the employer expects to take it out of the paycheck. This is an especially serious issue when a deduction takes the employee pay rate below the rate of minimum wage.

Well-trained human resources professionals use a rule of thumb about employee pay. All employee earnings belong to the employee. The employer is only a steward of the money until the day the earnings are paid, which is payday. The employer must withhold taxes and court orders such as child support and garnishments. All other money must be given to the employee unless the employee has signed a written document that authorizes the money to be deducted from pay, such as insurance, retirement plan, credit union, etc. There will be no deduction against an employee’s pay without a written authorization. There are many state laws that also forbid unlawful deductions. Although the regulations look unreasonable, understanding that the wages are the property of the employee helps explain why the rules exist. It is an easy mistake to avoid and prevent with the correct documentation.

8. Treating an employee as an independent contractor.

The Fair Labor Standards Act (FSLA) applies whenever an employer-employee relationship exists. That relationship is described in the FSLA language. Unfortunately, some employers try to shortcut the system. They just pay a fixed amount of money and call the employee an independent contractor. They do not withhold taxes and they prepare and send the IRS Form 1099 at the end of the year. The IRS has a list of criteria that must be applied before a worker can be called an independent contractor. We who do this work, call it the IRS 20-Factor Test. It can be found on the Internet. If the employer misapplies the test, there are serious penalties.

9. Confusing federal and state law.

Early in your education you learned, in your civics or government classes, that all things not addressed by the federal government will be left to the state government to make a rule. If the federal government makes a law, we have to follow it unless the state law is stricter. If the federal government said, “No deduction can be made for breakage or shortage,” but the State government has no rules about deducting from employee pay, then we cannot deduct for denting the company truck. We have to follow the federal rules in this example.

10. Using compensatory time as pay for overtime.

Perhaps the most misunderstood issue throughout the country is the use of what we call compensatory or comp time. It is critical to know that an employee in the private sector cannot be paid overtime by giving the employee time off, unless the employee is given the time off in the same workweek. Comp time is a public sector (government) practice. Public sector employees receive comp time instead of overtime up to a maximum of 240 hours. That is not the case with private sector employers.

Let’s look at a frequent example of this mistake. The employee works eight hours of overtime, totaling 48 hours in the workweek. Instead of paying the employee time and one-half for the work, the employer allows the employee to keep a record of the eight hours somewhere, save it and, then take a day off later, whenever later is. This is a classic example of what is commonly seen and is a definite no-no. The employee must be paid for all hours actually worked. The wage and hour inspector will be looking for this problem and the employer can expect to pay all of these hours at time and one-half. Then, there is an argument that the company was deliberately trying to avoid the law and therefore will be charged a penalty, also called liquidated damages, equal to the back pay award. The company attorney will earn his/her fee trying to help avoid that penalty.

Top 10 wage and hour errors

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.

Frequent Complaint Review

Returning to the most frequent source of complaints, it is important to understand each one and how to avoid them. In providing information to you in this advisory my frame of reference is based on how we actually do the work in human resources. The goal is to always do it right to avoid moving the problem from an internal human resources issue to an external legal platform.

Below is a review of the most frequent complaints found in the first and second parts of this article.

A. Failure to pay overtime because the employee is misclassified as exemption from overtime.

B. Working an employee off the clock.

Forced, but unpaid, overtime can be a disaster. Some employers are known to tell employees to clock out and continue to work. Certain industries, such as restaurants/hospitality, have been targeted because of this abusive practice. The DOL has no patience with those who deliberately take advantage of employees.

C. Changing an employee time record to avoid paying overtime.

Although the employer should never alter an employee time record to avoid paying overtime, it is very important to make absolutely sure the time record is correct. If the employee fails to clock in or out or deliberately records incorrect time, fix it. Be sure to fix it quickly, make an edit note of why the record was changed, and initial the changes. Correcting a time record is not the same as altering a record to avoid paying overtime; it is a management responsibility.

D. Failure to give required breaks and lunch periods as required by state or federal law.

The federal requirement for those 18 and older is this: If a meal break is offered, it must be at least 30 minutes of uninterrupted time to be unpaid. However, many states have meal and break laws. Some of them are extremely restrictive. Kentucky has one of the most restrictive laws in the country. Failing to follow the state laws can be as costly as a federal FLSA violation.

E. Failure to pay accurately at termination.

Although most employees can be paid at the next regular payday, some states require final pay at the moment of termination. Federal law does not require employers to pay severance pay, vacation pay, holiday pay, etc. However, employers must pay employees all they have earned, accrued, or have been promised. Some employers express shock that their departing employee quits without notice and then demands all unused vacation pay and unused personal days (PTO).

When a claim for unpaid wages is filed, the employer is confused because vacation and personal days are not wages and not required by the FLSA. However, if we take a close look at the policy in the employee handbook it will often read something like the following. “Employee earns (or accrues) 3.9 hours of PTO each month, based on hours worked fulltime.” You can be certain that any policy that states that PTO is earned or accrued will be described as earned income and must be paid at separation of employment. Certain states require unused vacation to be paid at termination no matter what the policy states.

Consider This

According to the DOL, 70 percent of employers are out of compliance. The penalty can be three years of back pay and a damage award equal to the amount of the back pay award. A complaint that starts with one employee can spread to every employee in the company and can be a class-action suit quickly. Finally, keep in mind, there is nothing easier to scrutinize than the printed word. The records will speak for themselves.

The wage and hour investigator will immediately request the records and has the authority to speak privately with employees whom they choose to interview. You will not be in control of the investigation or the process. If the records are in order, you will hear them say, “thank you” as they leave. That’s the goal.

If you reach the end of this advisory and realize you are out of compliance, don’t panic. Don’t make any precipitous changes. Auditing and changing the way you pay your employees takes forethought and the understanding that pay practices have top-of-mind awareness for employees.