Dec 22, 201409:57 AMThe Bottom Line
with contributors from Associated Bank
Top 10 wage and hour mistakes employers make
(page 1 of 2)
“Seven-figure settlement arising from misclassification of independent contractors”
“Top retailer gets hammered for failure to pay overtime”
These are two headlines among many others in recent years describing significant wage and hour settlements and awards.
When an employer violates the Fair Labor Standards Act (FLSA) or runs afoul of state law, the violations can result in penalties and fines from the state or federal Department of Labor or damages and attorneys’ fees from lawsuits. When the oversight applies to the same group of employees, the employer is also more susceptible to a class-action lawsuit, resulting in costly litigation and high damages or settlements.
Be aware of these 10 common wage and hour mistakes so you can remedy the problem before it’s too late.
1. Misclassifying employees as independent contractors
Misclassifying employees as independent contractors is one of the most common wage and hour mistakes employers make. Many employers do not conduct an analysis to determine if “independent contractors” truly qualify as such. Generally speaking, if a company has behavioral and financial control over the worker (i.e., controlling the method and manner of work), the worker will be found to be an employee and not an independent contractor.
The IRS has the most comprehensive test. However, because the test varies from agency to agency, it’s not unheard of for a worker to satisfy one agency’s independent contractor test but fail another agency’s test. The implications of this type of misclassification are far-reaching, affecting payroll taxes, unemployment taxes, whether the worker has workers’ compensation available benefits, overtime pay, and eligibility for employee benefits. It can also raise questions about violations of wage and hour laws.
2. Misclassifying non-exempt positions as exempt
Employees who work for covered employers under the FLSA are divided into non-exempt and exempt categories. Non-exempt employees are those who are typically paid on an hourly basis and are entitled to overtime. Exempt employees are not entitled to overtime. In order to qualify as exempt, the position must meet specific criteria set forth under the FLSA. The common individual exempt categories are:
- Executive (i.e., managers)
- Outside sales
Each category has a duties test the position must meet, and most of these categories also require a “salary basis” (currently set at $455 per week). Most misclassifications occur because the position fails to meet the duties test for the exempt category. Misclassifying non-exempt positions as exempt can also have significant impacts on an employer ranging from overtime obligations (two to three years, depending upon whether the misclassification was intentional) to fines and penalties from the Department of Labor and exposure to lawsuits.
3. Failing to recognize which time is compensable
Generally, employers are required to pay non-exempt employees minimum wage (or better) for each hour the employee is “suffered or permitted” to work for the employer. An employer cannot ensure employees are paid properly without first determining hours worked each workweek. The most common mistakes in this area arise from confusion relating to travel and training time rules under state and federal law.
4. Not paying unauthorized overtime
It’s common for employers to have a written policy requiring permission prior to working overtime. Many employers go a step further and discipline employees who work overtime without permission. This practice is legally permissible. What employers can’t do is decide not to pay the employee overtime. In short, if the employee worked the hours, he or she is entitled to compensation. It is important to recognize that employers must comply with wage and hour laws regardless of whether the employee’s conduct subjects the employee to discipline.
5. Making improper deductions
Some employers advance paychecks or paid time off to employees. Employers who engage in this practice can get burned when an employee terminates (voluntarily or involuntarily) and the employee still owes the employer money. At that point, some employers attempt to dock the employee’s pay in order to recoup the money owed. This practice is prohibited by most state laws unless the employer obtained a signed, written authorization prior to making such deductions.
6. Disregarding final pay rules
Many states also regulate the timing of an employee’s final pay. In Minnesota, for instance, the timing is as short as 24 hours of the employee’s demand for involuntary terminations. State laws include penalties for employers who fail to issue the employee’s final pay in accordance with the law. Such penalties are typically one day of the employee’s daily wages up to a maximum penalty specified in the statute. Final pay laws also discourage employers from holding an employee’s final pay as ransom in exchange for the return of company property.