Many employers pay wages to employees without considering the laws they must comply with. Typically, employers are never “reminded” of these laws until they confront a Department of Labor audit or damages lawsuit from a disgruntled ex-employee.
The main law governing the payment of wages is the Fair Labor Standards Act (FLSA). The FLSA establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. The FLSA is enforced by the United States Department of Labor (DOL). Various states, including Arizona, have their own laws regarding the payment of wages. The federal minimum wage is $7.25 per hour, but in Arizona it is $7.90 per hour. If a company’s state has a higher minimum wage than the federal minimum, the company must pay the higher amount.
PAYMENT OF OVERTIME
Unless specifically exempted, employees covered by the FLSA must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rates of pay. The overtime requirement may not be waived by agreement between the employer and employees. An agreement that only 8 hours a day or only 40 hours a week will be counted as working time does not affect an employer’s obligation to pay overtime. An announcement by the employer that no overtime work will be permitted, or that overtime work will not be paid unless authorized in advance, also will not impair the employee’s right to compensation for overtime hours that are worked. In short, employers should advise employees they can only work overtime that is authorized in advance. If an employee violates this policy, an employer may discipline the employee up to and including discharge — but the overtime still must be paid.
EXEMPTIONS FROM PAYING OVERTIME
Certain employees are exempt from the FLSA’s overtime pay provisions. Exemptions are narrowly construed against the employer asserting them. Employers should always closely check the exact terms and conditions of an exemption in light of the employee’s actual duties before assuming that the exemption might apply. An employer that improperly categorizes an employee as exempt when, in fact, the employee does not so qualify can be liable for significant overtime pay, which may be doubled or tripled under the FLSA.
The most frequent FLSA exemption that confuses employers is the “administrative” exemption. The test to determine whether the administrative exemption is as follows: (1) the employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; (2) the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (3) the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
“Primary duty” means the principal, main, major or most important duty that the employee performs. “Directly related to management or general business operations” means an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation.
Wages may be determined on a piece-rate, salary, commission, or some other basis, but in all such cases the overtime pay due must be computed on the basis of the average hourly rate derived from such earnings. This is calculated by dividing the total pay for employment (except for the statutory exclusions noted above) in any workweek by the total number of hours actually worked.
Every employer covered by the FLSA must keep certain records for each non-exempt employee. Employers must keep records on wages, hours, and other information as set forth in the DOL regulations. There is no required form for the records. However, the records must include accurate information about the employee and data about the hours worked and the wages earned.
An employer that fails to maintain proper records exposes itself not only to DOL penalties and fines, but also to increased employee wage claims. For example, if an employer fails to maintain records and an employee claims that he or she worked significant overtime, the DOL is more likely to accept the employee’s word when the employer possesses no records to refute the claim. This can result in substantial exposure for back wages — even for time that was never truly worked.
The following is a list of the basic payroll records that an employer must maintain:
- Employee’s full name, as used for Social Security purposes, and on the same record, the employee’s identifying symbol or number if such is used in place of name on any time, work, or payroll records
- Address, including zip code
- Birth date, if younger than 19
- Sex and occupation
- Time and day of week when employee’s workweek begins
- Hours worked each day and total hours worked each workweek
- Basis on which employee’s wages are paid (e.g., “$9 per hour”, “$440 a week”, “piecework”)
- Regular hourly pay rate
- Total daily or weekly straight-time earnings
- Total overtime earnings for the workweek
- All additions to or deductions from the employee’s wages
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
Employers may use any timekeeping method they choose. For example, they may use a time clock, have a timekeeper keep track of employee’s work hours, or tell their workers to write their own times on the records. Any timekeeping plan is acceptable as long as it is complete and accurate.
Many employees work on a fixed schedule from which they seldom vary. The employer may keep a record showing the exact schedule of daily and weekly hours and merely indicate that the worker did follow the schedule. When a worker is on a job for a longer or shorter period of time than the schedule shows, the employer must record the number of hours the worker actually worked, on an exception basis.
CONCLUSION: FOLLOW THE LAW OR ELSE!
Failure to comply with the FLSA and state wage laws can result in severe penalties and other consequences. Private lawsuits often result in the payment of double or triple damages plus attorneys’ fees if the employer is found liable. The DOL uses a variety of remedies to enforce compliance with the FLSA’s requirements. When investigators encounter violations, they require changes in employment practices to bring the employer into compliance and demand payment of any back wages due to employees. In addition, willful violators may be prosecuted criminally and fined. A second conviction may result in imprisonment. For child labor violations, employers are subject to a civil money penalty of up to $11,000 per worker for each violation of the child labor provisions. In Arizona, a bad faith failure to pay wages to employees can expose employers to damages of three times the amount actually owed.
Periodically perform self-audits to make sure you have properly categorized employees and are keeping adequate records. When in doubt, consult with legal counsel to determine if an employee is truly exempt and how best to ensure that you do not do anything to jeopardize that exemption (e.g. docking an exempt employee an hour of pay when they are late forfeits the exemption; a poor job description can be used against an employer to establish a non-exemption).