IT’S WAY PAST TIME TO PAY ATTENTION TO HOW YOU PAY FOR TIME
Judging from statistics, you have a greater chance of being sued right now for a wage and hour violation than for any other employment-related issue. Lawsuits filed under the Fair Labor Standards Act, the federal law that governs wage and hour, have risen by about 15 percent a year over the last several years. Collective action lawsuits under FLSA, which are claims brought on behalf of a group of claimants, now outnumber all other employment-related class actions combined.
In addition to the lawsuit threat, you also have a greater chance of being the target of an investigation by the federal Department of Labor than ever before. Since 2008, the DOL has hired hundreds of new investigators. It also has commissioned a new “jingle,” which you can hear in the series of public service announcements the agency is broadcasting around the country informing workers how to bring wage claims against their employers.
Wage and hour laws are technical, and therefore easy to violate. The DOL finds violations in about 80 percent of its investigations. Far and away the most common violation identified in FLSA lawsuits and DOL investigations involves the failure to pay overtime in compliance with the law. Misclassification claims, where an employer is accused of improperly classifying an employee as exempt and failing to pay him or her overtime, are among the most common. For many years now, we have preached to our clients about the critical need to review wage and hour classification decisions and make certain employees are correctly categorized under FLSA.
But even where employees are correctly classified, there are plenty of tricky FLSA requirements that can fool even the most careful employers. One of those issues involves the calculation of an employee’s “regular rate” for purposes of overtime.
Employers are well aware of FLSA’s requirement that most non-exempt employees must be paid time-and-a-half their regular rate if they work more than 40 hours in a workweek. What is easy to miss about that requirement is that an employee’s “regular rate” can include more than just his or her normal hourly wage.
Under FLSA, an employee’s “regular rate” – the rate that must be paid at time-and-a-half for overtime hours – includes not only the employee’s normal hourly wage, but also most other non-discretionary payments the employer pays to the employee. For example, if you promise to give your employees a bonus for good attendance, accuracy of work, or the like, you must allocate that bonus over the period during which it was earned and include it in the employee’s “regular rate” for overtime during that period. If the employee worked overtime during the bonus period and the bonus increases his or her regular rate, you then have to recalculate the overtime pay for the period and pay the employee the difference.
Many types of compensation paid to non-exempt employees on top of their hourly wages are includable in regular rate. Examples of payments that the DOL or courts have required employers to include in regular rate calculations include on-call pay, non-discretionary bonuses like longevity, attendance, quality or production-incentive bonuses, contest prizes, and shift differentials. Payments that may be excluded from regular rate include bonuses that are purely discretionary, contributions to qualified pension, profit-sharing, thrift, and savings plans, severance pay, most types of payments for vacation, sick leave, bereavement, or jury duty, health and disability plan contributions and payments, and reasonable uniform allowances.
The FLSA regulations contain detailed instructions about how regular rate must be calculated in different circumstances. Calculation methods are provided for traditional pay arrangements as well as many less common pay schemes, such as piece rate work or situations where an employee works at two or more hourly rates during the same workweek.
The regulations also remind employers that regular rates and overtime pay must be calculated before any permissible deductions from wages are made. For instance, if you have an employee with a court-ordered garnishment and who has authorized a regular deduction for a donation to a charitable organization, you must calculate that employee’s regular rate for overtime purposes before those deductions are made.
If you are using an automated payroll system, make certain that your system properly handles regular rate calculations and other departures from normal payroll transactions. We have seen cases where an employer has strayed from compliance with the wage and hour rules simply because it failed to properly administer its computerized payroll applications.
One of the biggest problems with wage and hour claims is that FLSA and other wage laws provide for severe penalties, but give little regard to whether an employer intended to violate their mandates. If you trip up on a wage and hour issue, you often find yourself with a big liability and very few valid defenses.
We encourage you to give special attention to your pay practices now. Make sure you are treating your employees’ wages with the same elevated status and attention that the law accords them. Wage and hour is truly an area where an ounce of prevention is worth a pound of cure.
As you know, this letter is for informational purposes only, is not intended as legal advice and is not a substitute for independent legal analysis and advice on a particular issue. Please contact an attorney in Steptoe & Johnson’s Labor Department if you would like further information on these matters.