These three words describe one of the most common problems that confront employers in managing today’s workplace: paying people properly. The failure to pay employees properly as required by the Fair Labor Standards Act (FLSA) and similar state wage and hour laws is the basis for the most frequently filed legal actions against employers. The FLSA has been in place since the darkest days of the Great Depression in the 1930s. In addition to mandating a federal minimum wage to combat a plague of sweatshops, it required overtime pay of one and one-half times for all hours over forty. It was also at least partially intended to create more jobs in response to massive unemployment. By requiring a hefty premium for working an employee more than forty hours, employers might find it cheaper to hire another employee to work those additional hours at straight time pay. Whether it actually had a significant effect on unemployment is not entirely clear. Today, the FLSA applies to virtually every workplace in America. Coverage is tied to interstate commerce. Given the realities of day-to-day commerce in the U.S., there is hardly any place in our economy where a service, product, or employee activity does not in some manner reach across state lines.
A primary reason why alleged FLSA violations are the subject of so many legal actions is that such lawsuits pay very well. An award of damages for a successful action normally includes liquidated (double) damages as well as payment of all attorney’s fees. In addition, the liability period can stretch back three years. Class actions involving unpaid overtime have resulted in multi-million dollar settlements and judgments covering thousands of employees.
Misclassification of Employees
Perhaps the single largest cause of liability for unpaid wages is the misclassification of employees as exempt from overtime. The so-called “white collar” exemptions set out categories of employees exempt from overtime. Those categories are executive, administrative, professional, computer employees, highly compensated employees, and outside sales. In order to be exempt, the employee must generally be paid the set minimum salary and perform certain specified duties. Both tests must be satisfied for exempt status to apply.
Currently the minimum required salary for exempt status is $455 per week ($23,660 annually). An employer is not required to pay overtime if an employee meets the salary threshold and duties within one of the exemptions. On September 24, 2019, the Department of Labor (DOL) announced a final rule that would increase this minimum salary to $684 per week ($35,568 annually). It is scheduled to become effective January 1, 2020. In 2016 when a similar rule was proposed, albeit with a higher threshold, it was challenged in court and a stay ordered. It proposed raising the salary threshold to $913 per week ($47,476 annually). The new rule would also raise the threshold of the highly compensated category from the current $100,000 annually to $107,432. Additionally, the rule allows employers to use nondiscretionary bonuses and commissions paid at least annually to satisfy up to 10 percent of the salary level.
The “computer employee” exemption has two separate minimum pay limits under different FLSA provisions. There is a minimum salary of $455 per week or an hourly rate of no less than $27.63 per hour. The “outside sales” exemption has no minimum salary requirement.
The required duties for the executive, administrative, and professional categories are relatively straightforward. There are no longer required percentages of time devoted to exempt and non-exempt duties. To be an exempt “executive,” the employee must have as their primary duties the management of the enterprise or a recognized department thereof, the direction of two full-time employees or their equivalents, and have the authority to hire, fire, promote, or to effectively recommend such action. To qualify for the “administrative” exemption, the person must have as their primary duty the performance of office or non-manual work directly related to management or general business operations. The person must also exercise discretion and independent judgment with respect to matters of significance. Exempt professionals generally fall into two primary categories: “learned” and “artistic” or “creative.” By far the most common are “learned” professionals. They must perform work requiring advanced knowledge in a field of science or learning which generally involves a prolonged course of specialized instruction. The advanced knowledge may also be attained through a combination of work experience and intellectual instruction. While the “computer employees” exemption does not require any specific duties, only computer professionals performing such high-level technical duties such as systems analysis, computer systems or computer program design, and similar specialized functions qualify. To qualify for the “outside sales” exemption, the employee must regularly be engaged in sales functions away from the office. Inside sales personnel do not qualify for the exemption.
In this age of Uber, Lyft, and countless gig economy jobs, the issue of who truly qualifies as an “independent contractor” is one of the most hotly contested issues in the workplace today. The issue has arisen with regard to Microsoft contract workers, Uber drivers, Fed Ex delivery personnel, and numerous others. The DOL has recently issued revised guidelines on who qualifies as an independent contractor. But, those rules are only one set among numerous variations applied by different agencies and the courts. In very general terms, the issue revolves around control. To the extent that an employer controls how, when, and where the work is to be done, the likelihood of “employee” status rises with the degree of control exercised by the employer. Under the various tests, there are a variety of factors to be considered. They include where the work is performed, control over the schedule to be followed, whose tools and equipment are used, whether the person is free to provide services to others, whether the work performed by the person is the same or similar to that of the entity for whom services are provided, and similar considerations. It has become increasingly difficult to prove independent contractor status. A finding of “employee” status carries with it liability not only for unpaid employment taxes and similar state and federal contributions, but also in many cases unpaid overtime.
Another common error that can result in overtime liability is the failure to pay for all hours actually worked by an employee. In most cases it involves preliminary or postliminary work that is actually part of the employee’s principle activity. It is not uncommon for a conscientious employee to engage in pre-work preparations before punching in. It could be setting up a machine, gathering needed supplies for the day’s work, or similar functions. Similar activity can occur at the end of the workday after the employee punches out. It could involve completion of production reports, a meeting with employees coming on shift about problem issues, or similar work-related activity. In addition, today, most business is conducted by use of e-mail, texting, and similar electronic communication. Reliance on iPads, iPones and laptop computers, can mean that work is never really done. If a non-exempt employee spends time responding to e-mails or texts after regular work hours, there is likely overtime liability being generated.
There has recently been an increase in the number of claims alleging failure to provide a “bona fide meal period.” While the FLSA does not require meal or rest breaks as some state wage and hour laws do, mealtime is not “bona fide” and must be paid if the employee is not totally free from any work duties. Employees frequently eat lunch at their desk. While doing so many complete paperwork, answer e-mails, texts, or the phone, or some similar work-related duty. Delivery drivers routinely respond to texts or e-mails about scheduled stops and similar information while they are taking their lunch break. The circumstances are as varied as there are workplaces. If work is performed, what is normally unpaid time could actually become paid time eligible for overtime. Employers can avoid overtime liability for off-the-clock work if they have a policy requiring employees to report all off-the-clock work and the employee ignores the policy, so long as the employer did not prevent or discourage employees from reporting. Such notices should be posted.
As is evident by the various examples discussed, the potential for improper pay is present in a wide variety of circumstances. Overtime claims are one of the most frequently filed legal actions that employers must confront. By adopting pro-active policies and closely monitoring when and what employees are doing, many of these types of claims can be avoided.