Top 10 wage and hour mistakes employers make

“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)
• Administrative
• Professional
• Computer
• 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.

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7. Improper rounding practices

Rounding occurs when an employer’s time-keeping system automatically rounds up or down when an employee clocks in or out. Although rounding is legally permissible, many employers still unintentionally engage in improper rounding practices. The general rule of thumb is an employer’s rounding practice cannot unfairly benefit the employer.

For instance, a rounding methodology that rounds up to the nearest 15-minute increment at the start of a shift yet rounds down at the end of the shift is unlawful, as this practice would unfairly benefit the employer every time the employee clocks out. Likewise, an employer who employs a rounding practice that rounds up at both the beginning and end of a shift but schedules end times to avoid rounding at the end of the shift would violate wage and hour laws. In other words, employers must ensure that their rounding method averages out in practice.

8. Neglecting to comply with both state and federal wage and hour requirements

Unless the employer receives the benefit of a specific exemption from one law, most employers are subject to both the FLSA and state law requirements. When an employer is subject to both state and federal laws, this inevitably means that employees will receive the benefit of the most generous law. For example, if the state minimum wage is $1 less than the federal minimum wage, the employee must be paid the federal minimum wage so long as the employer is subject to both laws.

9. Not including required compensation in the overtime calculation

Overtime payments to non-exempt employees are calculated by paying employees (at least) one-and-one-half times the “regular rate” for the employee. The regular rate means all forms of compensation except for certain payments specifically excluded by law. For example, a nondiscretionary bonus must be included in the calculation of the regular rate. The most common way to account for the bonus is to add the bonus to all other earnings of the employee (except statutory exclusions), then divide the total compensation for the week (in which the employee worked overtime) by the total hours worked. 

The concept of the regular rate is complicated. Knowing which forms of compensation may be properly excluded from the calculation versus which forms are included in the regular rate calculation requires a solid understanding of wage and hour rules. Employers who have any question as to whether their practice is compliant should always consult an expert.

10. Failing to retain required records

Record-retention periods for wage records vary depending on the law. Most employers retain such records for three years in accordance with the FLSA. The Lily Ledbetter Act of 2009 indirectly changed this standard. This act adopted what is commonly referred to as “the paycheck rule.” Under the paycheck rule, the time limit an individual has to bring a claim restarts each time that individual receives a paycheck (or other compensation) if the individual can show that his or her compensation was affected by a previous discriminatory decision. Since the paycheck rule would permit an employee to challenge the company’s pay practices dating back to the initial discriminatory decision (which could be as early as the employee’s hire), the best practice for employers is to retain payroll records and supporting records in perpetuity.

Yvonne Shorts Lind is an HR consultant at Associated Financial Group.

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