Many of us have heard the adage “the only constant is change,” and nothing could be truer of employment laws and regulations. With a seemingly countless number of new laws and amended regulations, even the most diligent employers can quickly become overwhelmed. I hear it from employers all the time: “We’re in business to [insert company focus here], not to be HR experts. How are we supposed to keep up with all the regulations and still have time to run our business?”
In the world of employment laws and regulations, the most important rule is the one you’re breaking. “Since you’re in compliance with every employment law except the Fair Labor Standards Act, I’m going to overlook all your overtime violations,” said no wage and hour investigator ever! So, it’s important to not only be in compliance with the new rules as they become effective, but also ensure you are in compliance with the longstanding rules, like the Fair Labor Standards Act (FLSA).
Signed into law on June 25, 1938, the FLSA covers nearly all U.S. workplaces. Yet, employers of all sizes and industries regularly commit FLSA violations. The reasons for noncompliance vary — lack of knowledge, assumptions about what’s “fair” vs. what’s required, and even a calculated challenge to existing Department of Labor (DOL) interpretations of the statute — but the results are often the same: payment of back wages and liquidated damages. For example, in 2017:
MetLife — The insurance giant paid $50 million to settle a class action suit for misclassifying long-term disability claims specialists as overtime-exempt salaried employees.
TGI Fridays — This restaurant chain paid a $19.1 million settlement for minimum wage and overtime violations, and misappropriating tips.
Walgreens — In addition to paying $13.5 million to settle a class action suit for continuing to misclassify assistant store managers as exempt, in violation of a 2009 settlement agreement reached for denying overtime to the same class of employees, the company paid the plaintiffs’ attorneys $4.5 million in legal fees and $246,864 for related costs and expenses.
For many corporate giants, these seemingly staggering payouts often amount to little more than a footnote in their financial statements. But, for a small business, even a relatively small amount can be catastrophic.
What is the lesson to be learned from these errors? Know and follow the rules.
Exempt vs. nonexempt
This is a perennial favorite for employers of every size to get wrong. It’s also an expensive error. Just ask MetLife and Walgreens. Although there are numerous obscure exemptions on the books (i.e., homeworkers engaged in the making of wreaths composed principally of natural holly, pine, cedar or other evergreens are exempt from minimum wage and overtime requirements), the most common are referred to as the white-collar exemptions — executive, administrative and professional.
For a white-collar exemption to be applicable, three tests must be met: 1) The employee must be paid on a salary basis (paid a preset amount each week, regardless of hours worked or quality or quantity of work); 2) The employee must be paid at least the minimum salary amount; and 3) The employee’s primary duty must meet the requirements of the executive, administrative or professional exemption. One of the most common issues I see is the mistaken belief that paying an employee a salary, regardless of their job duties, means there is no need to pay them overtime.
Breaks and meal periods
Although the FLSA does not require breaks and meal periods, the statute does address when these breaks must be paid. Breaks of 20 minutes or less taken by nonexempt employees must be treated as time worked. For meal periods to be unpaid, the break must be uninterrupted and last at least 30 minutes, with the employee relieved of all duties. The meal period must be paid if the employee performs any work during that time.
Employers must ensure nonexempt employees are paid for all time worked, including time spent working before/after a shift, work-related travel time, and any other time spent on the employer’s behalf. Further, with cell phones, tablets and other tools enabling employees to stay connected 24/7, there are more opportunities than ever for off-the-clock to occur. The most common issues include time spent checking/responding to texts or emails, completing training or performing any work. The bottom line is, if an employer knows, or should know, nonexempt employees are not being paid for all time worked, it is a violation of the FLSA.
Hiring a worker as an independent contractor is not itself a violation of the FLSA. However, misclassifying a worker as an independent contractor may lead to an FLSA violation. Over the last several years, the DOL has increased its focus on (and enforcement actions against) employers misclassifying workers as independent contractors. With no single factor determining a worker’s independent contractor status, the DOL applies the economic realities to determine whether a worker is “economically dependent” on an employer.
However, as a general point, the more control the employer exercises over the worker and the longer the contractor relationship is in place, the more likely the DOL will determine the worker is an employee, not an independent contractor. When that occurs, the employer may face significant liability under the FLSA for back wages and/or overtime, as well as possible liabilities for things like unpaid taxes, back benefits and even liquidated damages.
While it’s tempting to ignore wage and hour skeletons, that high-risk approach may have devastating results. The DOL makes it clear that a lack of knowledge is no excuse by holding employers accountable when they “knew or should have known” about FLSA violations. To protect the business, employers should develop plans to identify and address wage and hour issues, as well as avoid all FLSA issues going forward. Although it may be necessary to engage subject matter experts to ensure the complexities of FLSA compliance are properly addressed, the investment will likely pale in comparison to the costs of DOL penalties or litigation.
Frank A. Cania is president of driven HR, a Pittsford, New York-based human resource consulting firm. He concentrates on wage-and-hour, FMLA, ADA, Title VII, and Form I-9 compliance, as well as workplace investigations.