For most businesses, one of their largest expenses is labor costs. Many businesses try to control labor costs by limiting the amount of overtime they pay.
Unfortunately, some tactics used to limit overtime costs can backfire — costing the organization far more in the long run than they might have “saved” initially.
The Fair Labor Standards Act (FLSA) has been in effect for over 75 years. Still, organizations get tripped up because they don’t pay close attention to the provisions of the law. Here are three myths that can get you in trouble, and a three facts to help keep you safe:
MYTH #1: If an employee is paid a salary, they are automatically exempt from overtime
Some businesses think if pay employees a salary, they don’t have to pay overtime. This is not true.
The facts: for an employee to be exempt from overtime, the first step is that they must be paid a salary of at least $455 per week. Note that this salary level has not been revised for many years. The Department of Labor (DOL) has stated they will announce a proposed change later this year, so prudent business managers will keep an eye out for the announcement.
Sometimes determining if an employee is paid on a salaried basis turns out to be trickier than an employer might think. Recently, two welding operators launched a class-action suit against their employer for failure to pay overtime, saying they were improperly classified as exempt. In this case, the employees were paid enough to be considered “highly compensated,” and the employer contended they were salaried. So they should have been considered exempt, right?
However, a close reading of their offer letters revealed the workers would be paid a day rate of “$337.00/day worked.” In order for an employee to be salaried, wage payments cannot be variable and must be guaranteed regardless of the amount of time worked by the employee or the quality of their work.
Since the offer letter did not guarantee a specific amount of pay per work week, and the amount the employees were paid could vary with the number of days they worked in a pay period, the court ruled they were not paid on a salaried basis. They could not be classified as exempt.
Even after an employee has passed the salary threshold, though, the law generally requires a second step before the employee can be considered exempt from overtime. The employee must pass a “duties test,” which takes into account the work they actually do on a day-to-day basis. DOL has published a fact sheet that offers more information on the requirements for overtime exemption.
An important thing to note is that the duties test hinges on the actual day-to-day duties of the job, not the job title.
Many businesses have gotten into trouble with this issue. For instance, in a recent lawsuit, Covelli Enterprises, Inc. was charged with misclassifying restaurant assistant managers as exempt from overtime. According to the employee who brought the lawsuit, assistant managers in Covelli Enterprises restaurants do not exercise actual managerial authority. “Instead, among other things, these purported managers take customer orders, serve customers, cook food, work with the cash register, check inventory, clean the store, and perform other non-managerial duties,” she said.
According to the company’s spokesperson, “These are salaried employees, who our company is vigilant about paying fairly and in compliance with all wage and hour laws.”
If the activities enumerated in the lawsuit are accurate, it doesn’t matter if the employees were paid a salary — they would still be due overtime, because those job functions don’t pass the duties test.
MYTH #2: Employees can waive their right to overtime
Some employers try to have employees sign a contract stating that the employee will work as many hours as necessary during the week for a single flat-rate salary, or that they agree to work for straight time for all hours worked instead of paying time-and-a-half overtime as required by the law. They think as long as the employee agrees to the terms in a “contract,” it’s OK.
The facts: unfortunately for the employer, this is illegal. Under the terms of the FLSA, an employee cannot waive their right to overtime pay. The law assumes an employer usually has more power in wage negotiations than the prospective employee. To avoid having unscrupulous employers take advantage of desperate job-seekers, the law prohibits anyone from waiving their rights to fair pay under the law.
El Charro, a restaurant group in Sonoma County, California, and Vinny’s, a restaurant in Fairfield, Connecticut, both found this out to their chagrin. In both cases, the restaurant owners got workers to agree to work for straight-time only pay, regardless of the number of hours worked. The El Charro restaurants ended up owing their workers nearly $300,000 in back wages and damages, plus over $15,000 in government penalties. The owner of Vinny’s had to pay his workers nearly $245,000 in back wages and damages, plus almost $3,000 in penalties.
MYTH #3: You don’t have to pay for unauthorized overtime
Many employers require workers to get permission before working overtime. This is a good practice to help limit your overtime exposure. Some employers think if they require prior approval for overtime work, they can refuse to pay if an employee works unauthorized overtime. This is not true.
The facts: under the terms of the FLSA, employers are required to pay employees for all hours worked, regardless of whether the hours were formally approved. You cannot benefit from an employee’s labor without paying them for the time and work.
You are permitted to institute disciplinary action if an employee works overtime without permission. For instance, you can issue a written warning, place the employee on suspension, etc. — whatever is allowed by your standard disciplinary policies. Just be sure you apply disciplinary sanctions even-handedly in every instance, to avoid charges of retaliation or discrimination.
But what you cannot do is refuse to pay for overtime actually worked — even if it wasn’t approved.
FACT #1: You do have to pay for short breaks
In October 2017, the Third Circuit Court of Appeals upheld a decision that affirmed breaks of 20 minutes or less are compensable as a “bright-line rule” under the FLSA.
The DOL had filed suit against American Future Systems, claiming the company allowed employees to take a break whenever they wanted, but would only pay for breaks that lasted less than 90 seconds. If an employee was away from their desk for more than 90 seconds, they were not paid for any of the time.
The company argued that the FLSA regulation only applied to breaks that are for the benefit of the employer (by promoting employee productivity) and that they would have to perform an individualized assessment of each break to determine whether it was more for the benefit of the employee or the employer.
Both the District Court and (on appeal) the Third Circuit rejected both the company’s arguments. The courts cited decisions of other federal courts affirming this standard as a “bright-line” rule. They noted that such shorts breaks are typically for roughly equal benefit of the employer and the employee.
The courts noted an employer could set performance standards and institute disciplinary action when necessary to prevent employees from taking advantage of unlimited paid breaks during the day. (Again, make sure to impose any discipline even-handedly to avoid charges of discrimination, bias or retaliation.) But you cannot refuse to pay for short (under 20 minute) breaks.
FACT #2: Accurate and complete time cards / time sheets are crucial
In late 2016, an employee sued his former employer, Universal Used Pallets, Inc. in Florida, claiming he was owed unpaid minimum wages and overtime.
Fortunately for Universal, they were able to produce a complete set of time cards covering the period in question. Furthermore, each time card was signed by the employee. Universal pointed out the employee had signed each one without disputing its accuracy.
Unfortunately for the employee, he wasn’t able to produce any evidence to support his claim the time cards were inaccurate. He didn’t deny that he had reviewed and signed each card without challenging the accuracy of the card.
The court granted the employer’s motion for summary judgement and dismissed the employee’s case.
While the courts don’t require sophisticated biometric records, such documentation can go a long way toward proving hours worked when there is a dispute. However, even traditional paper time cards can provide sufficient proof, if you use them properly.
Simply recording on a paper sheet the total number of hours the employee supposedly worked each day will likely not be adequate. You need more to prove you are paying workers for all their hours.
At a minimum, your time records should show each employee’s arrival and departure times. If applicable, the records should show the time the employee left for lunch and the time they returned from the lunch break. Also, you should include a statement on the time card or time sheet to the effect that the hours recorded accurately reflect the actual hours worked and that the employee has performed no other work at home or off the clock — and have the employee sign the card.
Taking these few extra steps can save you significant liability under the terms of the FLSA.
FACT #3: Acroprint is here for you!
Acroprint can help you with traditional punch clocks using paper-based time cards, modern automated time tracking software, and even a sophisticated cloud-based workforce management solution, all of which will satisfy the requirements of the FLSA and provide strong proof of employee hours worked. Visit our online store to see all the options available and make sure your business is protected.
Did you find this article useful? Subscribe to our free email newsletter and enjoy informative articles like this every month!