Top Ten Wage and Hour Mistakes for Small Businesses

The other day, I took a quick look on the U.S. Department of Labor’s website and noticed an interesting trend:  in just January 2019 alone, the DOL’s investigations had resulted in no less than 24 companies paying significant back wages, liquidated damages, and penalties to employees for various violations of the Fair Labor Standards Act, including minimum wage, overtime, and failure to comply with recordkeeping requirements.  Two such companies were located in the middle Tennessee area. And these are not large companies. Thus, these kinds of investigations and subsequent orders can significantly affect the companies’ bottom lines, probably well more than the cost of complying with the FLSA in the first place.

Given this trend, I decided it was time for a Top Ten list of wage and hour mistakes for small businesses. Of course, these mistakes are not limited to small businesses – almost any business of more than one person can find itself the subject of a wage and hour investigation.

1. Treating employees as independent contractors.

No, you cannot avoid the costs of overtime, benefits, workers compensation, or unemployment claims merely by treating employees as independent contractors. Just because you give an individual a 1099 doesn’t mean the IRS or Department of Labor would treat that person as an independent contractor. Both the IRS and the DOL use tests based on an employee’s duties, such as whether:  

  • the work performed by the independent contractor is a core function of your business;
  • the independent contractor is a former employee (such as someone who just retired) who is performing the same type of work he performed as an employee;
  • the independent contractor is doing the exact same type of work as employees;
  • the independent contractor does not perform work for any other company;
  • the independent contractor has little to no control over how, when, or where he performs the work;
  • you train him on how to perform the work;
  • you provide or pay for his tools, equipment, or business expenses.

2. Classifying all salaried employees as exempt from overtime pay, no matter the job duties.

Just like with independent contractors, just because you call an employee “salaried” doesn’t mean that the employee is exempt from minimum wage or overtime requirements.   To qualify for the exemption, employees must generally be paid on a salary basis of not less than $455 per week (this amount is subject to change, as the DOL is undertaking rulemaking to revise its regulations) and meet certain tests regarding their job duties to establish they are employed as bona fide executive, administrative, professional, or outside sales employees.  But be careful! A job title does not a salaried employee make. The DOL looks at the employee’s actual duties to determine the employee’s classification.

3. Making deductions from salaries of exempt employees because of the quality or quantity of work performed.

Assuming your employees meet the definition of “exempt” employee allowing them to be paid a salary, your exempt employees must be paid a fixed salary each pay period.  It cannot be reduced because of the quality or quantity of work performed. In fact, the exempt employee must be paid her full salary for any week in which she performs work – even if she only works a few minutes or hours of work.  The employer need not pay her salary, however, in a week in which she performed no work at all.

The Fair Labor Standards Act does allow employers to make deductions of an exempt employee’s salary under the following specific circumstances:

  • When the employee is absent for one or more full days for personal reasons
  • When the employee is absent for one or more full days for sickness or disability if the employer has a plan that compensates the employee for lost salary
  • To offset the amount the employee receives from jury service, from witness fees, or for military pay
  • To impose a penalty in good faith for the violation of safety rules of major significance
  • For unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace rules of conduct
  • For unpaid leave under the Family and Medical Leave Act
  • During the first or last week of employment if the employee does not work a full week

4. Failing to include extra pay, such as shift differentials or on-call pay in the overtime pay calculation.

Employees are paid their regular hourly rate for the first 40 hours per week that they work, and then 1.5 times their regular hourly rate for any hours over 40.  But that calculation isn’t as simple as it looks.

The actual formula for calculating the overtime pay rate includes “all remuneration” the employee earned in a single week divided by all hours worked.  Thus, if an employee earns extra for working the graveyard shift, or for being on call, that compensation must be included in the overtime pay calculation.  For example, if an employee normally works the first shift at $15/hour, but picks up a co-worker’s graveyard shift one week and is paid an additional $5/hour, his overtime rate for the week is ($15 + $5) x 1.5 = $30.  

5. Failing to calculate bonuses or commissions earned into the overtime rate.

Non-discretionary bonuses (including weekly, monthly, and annual bonuses), commissions, piece rates, and even some non-monetary awards can also be considered “remuneration” to be calculated into the overtime calculation.  Thus, if a non-exempt employee earns a monthly bonus, she must be paid overtime on that bonus, using the following formula: (Bonus Amount / All Hours Worked in the Bonus Period) x 0.5 x Overtime Hours Worked in the Bonus Period.  

So, for example, if an employee worked 160 regular hours and 20 overtime hours in a month and received a $400 monthly bonus, she would be owed another $22.22 in overtime pay, calculated as:  ($400/180) x 0.5 x 20 = $22.22. It doesn’t sound like a lot, but it adds up quickly per employee, per pay period, especially if penalties for failing to pay correctly get added on top.

6. Making automatic deductions for rest breaks or meal periods.

Under the FLSA and state law, short rest breaks (10 or 20 minutes) must be paid.  Meal periods of 30 minutes or more can be unpaid. If the meal period is interrupted, however, the employee must be paid for the entire 30 minutes.  Some employers use timekeeping systems that allow the employer to automatically deduct an unpaid meal period from the employee’s work time. But what happens when the employee claims that her meal period was interrupted or she never took one at all?  These claims can be hard to disprove without contemporaneous time records, and significant time spent poring over those records as well. The easiest fix is to require employees to clock out and back in for any unpaid meal periods.

7. Paying non-exempt employees by their scheduled shift instead of actual hours worked.

Employees must be paid for all hours actually worked, not just the shift for which they were scheduled.  Employees can easily claim that they performed work both before or after the shift and were not paid. The best way to avoid this type of claim is to ensure employees clock in when they begin working and clock out when they are done, rather than rely on defaulting to their normal shift time.

8. Failing to pay employees for pre- or post-shift activities.

Employees must be paid for all work “suffered or permitted” by the employer, even if the employer doesn’t require that work or even request it.  Work includes all activities within a workday from the employee’s first principal activity to the last. A “principal activity” is any activity considered an integral and indispensable part of the work.  That can be time spent changing into (or out of) work clothes, attending shift change meetings, or – especially relevant now in the age of email and smart phones – checking emails, taking calls, texting, or doing any other work outside the office.  

Employees normally need not be paid for their standard commute time, but that could potentially change if they have already started working by checking their emails before getting in the car or are taking a conference call in the car (additional liabilities related to cell phone use while driving notwithstanding).

9. Failing to pay non-exempt employees for travel time or time spent in meetings or training.

Employees need not be paid for time spent in their normal commute, defined as driving from home to the first work location at the beginning of the day and from the last work location back to home at the end of the day.  But employees must be paid for all other time spent traveling for work.

If a non-exempt employee who normally works at one location is sent to a different location for a special assignment, the time spent traveling to the new location must be paid.  State law varies on whether employers can deduct the normal commuting time from that amount (for example, if the normal commute is 30 minutes and the commute to the special assignment is 45 minutes, some states would allow the employer to pay only for the 15 minute difference).  

These payment requirements also come into play when a non-exempt employee is sent on an assignment that requires an overnight stay.  Some states require payment of all travel time, and others require payment only for the travel that occurs during the employee’s normal work hours.  Check your travel policy and make sure it complies with both the federal and your applicable state laws.

Likewise, when it comes to meetings or trainings, whether or not travel is required, non-exempt employees must be paid for time spent attending them unless all four of the following requirements are met:  (1) attendance is outside the employee’s regular working hours; (2) attendance is strictly voluntary; (3) the meeting or training is not job-related; and (4) the employee does not perform any productive work during the training.

10. Failing to keep accurate records or meet state and federal posting requirements.

Not only do inaccurate records prevent employers from being able to defend themselves against wage/hour claims, but they can also cause the employers to rack up penalties on their own.  Under the FLSA, employers must keep certain records for at least three years:

  • Hours worked each day
  • Total hours worked each workweek
  • The basis on which employees’ wages are paid (e.g., $15/hour, $750/week)
  • Regular hourly pay rate
  • Total daily or weekly straight-time earnings
  • Total overtime earnings for the workweek
  • All additions to or deductions from wages
  • Total wages paid each pay period
  • The date of payment and pay period covered by the payment

These records may be kept at the place of employment or in a central records office.  In addition to these recordkeeping requirements, both the federal and state laws include mandatory posting requirements.  Check your state laws to determine what wage-related posters must be posted at your workplace.

Emily Hunter Plotkin is an employment law attorney and mediator based in Tennessee. Emily welcomes inquiries about her services, which include counsel on workplace rights and obligations and manager and employee training on legal compliance, employee management, and workplace conduct.

Emily Hunter Plotkin

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Employment law attorney Emily Hunter Plotkin has spent her professional career developing strategic solutions for employers to ensure workplace compliance and to prevent or resolve workplace disputes.

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