Wage and Hour Assessments are an essential function you should perform for your business at least once a year, or hire someone to do this for you (your accountant, attorney or a qualified HR consultant are often good people to perform this important function).
Such assessments are an essential component of good business management, to help ensure that you are not inadvertently violating the law, and perhaps exposing yourself to some very stiff monetary penalties which can run into thousands of dollars, even for a small business.
Some businesses think they can escape this exposure because they arrange to not have any employees. How? By labeling or defining everyone as an independent contractor (or so they think!).
Wrong! (often)
How you label the people who perform the work of your company is only one part of the equation. The government defines who is an employee and who is an independent contractor. Their rules count for a lot more than your own definitions.
Here is a sobering statistic: employers are about three times more likely to be sued for violations of the Fair Labor Standards Act (FLSA), the federal law regulating wage issues, or the comparable state wage and hour laws (which in California can be substantially more onerous than the federal laws), than they are for discrimination or harassment.
That fact, when combined with stepped up enforcement by the Federal Department of Labor (DOL), or the California Division of Labor Stands Enforcement (DLSE, often referred to as the “Labor Board”), should prompt you to conduct periodic internal wage and hours audits, to make sure you are complying with applicable law in your relations with your employees. We suggest legal counsel assisted audits be done at least once each year, and perhaps even twice annually if you have high labor turnover or a workforce where
such audits may be more complex. Your attorney should be contacted whenever there is a significant change in the law affecting employment or in the number of company employees; when independent contractors are hired; and whenever the nature of the business’s employees’ work changes.
Here is a quick checklist of the most significant issues that are routinely encountered and of which every employer should be aware:
1. Classification Of The Company’s Workers
(a) Employee Versus Independent Contractor
Workers are classified by criteria set by an Internal Revenue Service (IRS) test and by other Federal and State tests. Preliminarily determine whether your workers are really “employees” for wage and hour compliance purposes. The FLSA does not apply to true independent contractors.
If you hire independent contractors updated written agreements that clearly define the relationship are imperative but, by themselves, are insufficient. The actual interaction between your business and these workers will define your relationship irrespective of the contract language.
Thus, in your review, ask how much control or direction do you have over the contractor’s work? Is the contractor realistically economically independent from your organization? If you are uncertain about your response to either of these questions, seek legal advice.
Misclassification of these workers can result in a steep back tax bill, among other consequences, if you’re audited. It can also result in significant hourly wage issues that involve heavy penalties.
(b) Exempt Employees
A second classification to review is that of “Exempt Employees.” These are usually salaried employees that have been classified as exempt from the FLSA’s and DLSE’s timekeeping and overtime requirements. You must support each position your business claims to be
exempt by applicable exemption criteria.
This requires identification of the exemption that your business claims applies to the position. After you have identified what you believe to be the applicable exemption consider the position’s compensation rates and job duties. Some exemptions for salaried
positions can be jeopardized by improper wage deductions. Review organizational charts, salary ranges, and job descriptions, in addition to informational exchanges between exempt employees and their supervisors.
This can be time consuming and can call for the most difficult judgment calls. It is the employer’s burden to show that an exemption applies. Therefore, when in doubt, seek counsel, but err toward non-exempt employee reclassification. Consider that the cost saving or other benefit derived from exempt classification may not be worth the risk of a misclassification claim.
Misclassified workers are entitled to back overtime for up to three years in addition to liquidated damages and attorneys’ fees should the matter go to court. To top it off, California’s “waiting time penalties” can be a very major cost to you.
(c) Non-Exempt Employees
Non-exempt employee classification requires review of your current timekeeping method to assure it accurately captures all work hours for non-exempt employees and that it is being used correctly. Supervisors should not alter time records without employee
approval or verification. Question time records that appear too uniform, or areas where overtime has dropped though there are no new hires or declines in productivity. Scrutinize all employee activities to make sure all work time is being recorded and no work is “off the clock.” Issues to consider are whether work is performed before or after the employee clocks in and out, travel time, break time, and mobile work or work from home.
Non-exempt employees must be paid at least minimum wage for all hours worked. Specific state and federal laws speak to how it must be calculated. Analyze any deductions from pay. Although some deductions are permitted, many are not. Check with legal counsel before making any deductions.
The FLSA requires overtime be paid at one and one half times the employee’s regular hourly rate. However, some State and local laws may impose a different calculation. The overtime requirements apply irrespective of whether the nonexempt employee is hourly, salaried, commissioned, piece rate, or any combination thereof. Note that there are also some State laws that prohibit piece rate or commission work for certain types of workers. If you have any employees who live in or regularly work in another state, which can apply in many cities near a state border, the neighboring state’s employment laws may apply.
Failure to include bonuses, commissions, and other incentive payments to nonexempt employees when calculating the overtime rate is a common potentially expensive error. Also ensure there are no illegal “comp time” arrangements. A private employer may not provide
employees with compensatory time off (“comp time”) rather than overtime, unless expressly permitted by law.
2. State and Local Laws
In addition to Federal wage and hour laws, many states, including California and localities, such as San Francisco, Oakland and Los Angeles, have minimum wage and overtime rules that are more burdensome than federal law. California law also regulates the timing of paychecks and issuance of paychecks on termination.
3. Written Policies
Review your written wage and hour policies. Determine how they would look to a court or to the DOL or DLSE. How clear do they communicate the company’s rules? Do they explain how time is recorded, how break times work, and where employees can go with any questions? Is the intention to comply with all laws and prohibition of “off the clock” work clearly conveyed? Employment Manuals are not static documents. They need to be reviewed and updated. If your internet or phone use policy is longer and more detailed than your wage and hour policy, you could probably use an update.
4. Supervisors
Your organization is responsible for wage and hour mistakes made by supervisors. Individual managers and owners can be individually liable for FLSA or DLSE violations. Consequently managers and supervisors should be required to undergo periodic formal training in the basics of wage and hour law, including how to handle complaints or questions about hours or pay, and that working off the clock is never allowed.
5. Employment Practices Liability Insurance
If you don’t have this kind of policy in place, please at least take the time to talk with your insurance agent about it. All it takes is one claim a decade, of the type covered by an EPLI policy, to justify the expense.
Most EPLI policies do not cover wage and hour-related lawsuits. Therefore, we suggest legal counsel or an HR compliance consultant be brought in on the same periodic basis to provide this training. It is a few hours of preventative care that can save tens of thousands of dollars in claims.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
