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Don’t Be a Victim of Good Intentions: Overtime Rules Complicate Workplaces, Ignorance Could Prove Costly
Wage & Overtime Law Pitfalls: If you think that you are safe because your workers are paid based on piece-rate or are indendent contractors, think again; check your policies against these ideas to determine compliance.

By Chaille Brindley
Date Posted: 6/1/2008

   Like many well-intentioned federal government rules, wage and overtime laws are a mixed bag of benefits, pitfalls and drawbacks for all involved. Developed to protect workers, these laws also complicate the workplace for employers and employees.

   Many companies in the pallet and lumber industries think they are exempt from overtime requirements because they pay based on piece rate or fit an exemption category, but that may not be true. There are a number of exceptions and special rules that could cost your company big time if you are ever challenged by a disgruntled employee or a government agency.


Federal Law Overview

   Federal wage and overtime rules are outlined in the Fair Labor Standards Act (FLSA), which Congress overhauled in 2004. Employers are required to pay employees one-and-a-half times the individual’s hourly rate for all hours worked over 40 in any work week period. There are some exceptions, which are covered in detail later in the article. Many states have even stricter overtime policies. For example, California, Colorado, Nevada and Connecticut have daily overtime standards, which require overtime if an employee works more than a set number of hours in a day.

   You should check with your state department of labor to find out what local standards exist that go beyond the federal requirements.

   According to the Department of Labor, the FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest. Overtime provisions apply on a workweek basis, which is a fixed and regularly recurring period of 168 hours or seven consecutive 24-hour periods. Different work schedules may be established for individual employees or groups with different start and stop days of the week. Averaging hours over two or more weeks is not permitted. Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned.

   The regular rate of pay cannot be less than the minimum wage. The current federal minimum wage is $5.85 per hour. That rate will increase to $6.55 per hour on July 24, 2008 and to $7.25 on July 24, 2009.

   Payments which are not part of the regular rate include pay for expenses incurred on the employer’s behalf, premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays, and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special occasions, and payments for occasional periods when no work is performed due to vacation, holidays, or illness.

   Some employees may be exempt from overtime laws. This includes executives, independent contractors, administrators, professionals, certain computer employees, and outside sales people. Each exemption category has a long list of rules that must be followed. Visit www.wagehour.dol.gov and/or call 866-487-9243 for wage policy guidance from the Department of Labor.


Piece-Rate Rules

   Earnings 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 the exclusion described above) in any workweek by the total number of hours actually worked. If an employee in a single workweek works two or more different types of work for which different straight-time rates have been established, the regular rate for that week is the weighted average of those rates.

   All the requirements that apply to hourly employees also are applicable to piece rate employees. At the end of the workweek, the employee must receive at least the minimum wage for all hours worked despite slow production days or performance issues. Employers can require employees to redo or fix their work without extra pay as long as they receive the minimum wage for all hours worked in that payroll period.

   Piece-rate employees are entitled to premium pay for overtime hours, although the calculation is different than the process for hourly employees. The regular rate is calculated by adding all the pay in that week and dividing by the total hours worked. Overtime amounts to half of the regular rate for every hour worked over 40 hours. For example, if a pallet recycler pays workers 50 cents per repair and an employee works 50 hours in a week. During that pay period, the employee earns $781.50 by repairing 1,563 pallets. The regular rate is $781.50 divided by 50 hours ($15.63 per hour). Overtime would be half of the regular rate times 10 hours, which amounts to $78.15. A similar approach is used if the employer pays workers based on a combination of hourly rate and piece-work bonus.

   Employers paying on the basis of piece-rate must calculate the regular rate for each week for each employee that works over 40 hours per week. This requirement adds to the paperwork burden required for this type of payment approach. Employers cannot use a weighted average or estimate from a number of work periods.


Problem Scenarios

   Some employees may be exempt from overtime requirements. But determining this status is a lot harder than just figuring out who is salaried.

   • Managers or foremen may or may not be exempt from overtime requirements even if they are paid based on a salary. The real measuring stick is duties, autonomy and hiring/firing authority not titles. If an “executive employee” does not have the authority to hire/fire those under their charge or establish business policies, they generally don’t have the independent authority required to qualify for an executive exemption.

   • To qualify for the executive employee exemption, all of the following tests must be met: compensation on a salary basis at a rate not less than $455 per week; primary duty must be managing the enterprise or a department; direct the work of at least two full-time employees; must have change of status authority over other employees or have considerable weight in influencing those decisions. Business owners with at least 20% ownership interest are exempt if actively engaged in the management of the company.

   • Classifying workers as independent contractors is another way that employers have gotten in trouble. Independent contractors tend to work for more than one company, set his/her own hours, work outside of the office, do not receive benefits, has the authority to decide how to go about accomplishing tasks, pays the employee share of Social Security withholding, is paid according to a contract and does not receive overtime compensation, and works relatively independent of the client’s direct management on a daily basis. If a worker does not meet these general guidelines, he/she generally doesn’t qualify as an independent contractor.

   • Overtime compensation must be based on an hourly rate and not a flat fee. A lump sum paid for work performed during overtime hours without regard to the number of overtime hours worked does not qualify as an overtime premium even though the amount of money paid is equal to or greater than the sum owed on a per-hour basis.

   • If a work agreement provides for a rate of pay and a specific number of hours to be worked, the entire amount must be included in regular rate calculations even if the employee does not work all the allotted time.

   • Employers cannot avoid overtime pay for non-exempt employees by simply setting workweeks that are longer than 40 hours and paying the person a flat sum.

   • Overtime pay cannot be waived by an agreement between the employer and the employee. Simply stating a policy that no overtime work will be permitted, or that overtime work will not be paid for unless authorized in advance doesn’t negate an employee’s right to overtime pay based on hours that are worked.


Rules to Remember

   Here are some rules that you will need to know to keep from making a costly mistake when it comes to overtime and fair pay laws.

   • Employees must make over $455 per week to be able to qualify for an overtime exemption even if the person would otherwise be exempt.

   • Many companies mistakenly categorize executive assistants because they have access to high level managers. But these people may not qualify for the executive exemption unless they generally have change of status authority over at least two other employees.

   • Employers can establish any length workweek, but they must pay non-exempt employees overtime for every hour worked over 40 hours in a week.

   • Federal law does not allow non-exempt employees to work extra now in anticipation of paid time off later.

   • Stock options do not necessarily count as pay according to the FLSA. If employees agree to defer compensation in exchange for stock, they could later fight for back pay if they would have otherwise been entitled to it.

   • Even high-priced employees or managers may qualify for overtime pay if they do not fit an exemption category. A six figure income is not enough to exempt an employee.

   • Any whistleblower is protected from retaliation by federal law and may be entitled to financial damages if the employer takes any retribution.

   • Exempt employees have to be paid a set amount each pay period regardless of the quantity or quality of work. If an employer docks a worker’s pay for any reason, the law could interpret the action as reason to classify the employee as non-exempt.

   • Be careful when making any reduction in salary or docking a worker’s pay for any reason. Employers may take partial day deductions from an employee’s leave bank, even if the deduction results in a negative leave balance; however, an employer may not dock an exempt employee’s salary for a partial day absence. Employers may take deductions from employees’ leave accounts for partial day absences. Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

   • A common mistake that employers make is that they assume workers paid a salary are automatically exempt from overtime requirements. This is not true unless the worker fits one of the exemption categories. Additionally, if you call an employee’s wages a salary but dock the worker for days or time missed, the employee would actually be considered an hourly employee by law.

   Although designed to protect workers, the FLSA has its critics. In the age of compressed workweeks comp-time and flextime, the law makes it difficult for both employees and employers to respond to changes in society. Overtime pay raises costs for companies. This leads to strict limits that keep employees from working over 40 hours per week. Employees have to get second jobs if they want more money. At the same time, the FLSA makes it difficult for employers and employees to have the flexibility they both want. Federal overtime laws have not been overhauled since 2004.

   The most important thing for an employer to remember is to have set policies in place that have been reviewed by a competent labor attorney. These policies should be applied fairly across the board. All employees should be notified about the policies, and managers should act to enforce them.

   Documentation is also important to show the hours worked and compensation given for each employee. Accurate records can provide a company the defense it needs to fend off legal challenges. Documentation can be a two-edged sword though because labor officials have used electronic records, such as phone and e-mail information, to justify overtime compensation for commuters and others that tend to work after the office is closed.

   The first step is to examine current policies and to make changes that meet both state and federal laws. You might be surprised at all the little nuances of the law that you overlooked. Most companies that are violating the overtime law are doing so out of ignorance. But that defense won’t stand up in court if labor officials or employees bring legitimate claims. Take proactive action now to protect yourself from legal challenges in the future.

   Editor’s Note: The publisher does not guarantee the fitness of the above article to apply to your specific situation. Please review your policies with a competent labor attorney because laws can change from state to state and application of federal statutes can vary depending on your circumstances.

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