Tips for Becoming a Wage and Hour Champion

Legendary college basketball coach John Wooden said that “champions are brilliant at the basics.” The savvy HR professional knows that assuring compliance with wage and hour law will make a company a champion at avoiding potentially enormous damages.   

While the volume of wage and hour laws and regulations is substantial and the opportunities for inadvertent violations are many, experience shows that most wage and hour litigation claims focus on a few specific areas that frequently trip up employers of all sizes. By paying attention to the fundamentals in these basic areas, an employer can greatly reduce its potential exposure.   

Misclassification of Exempt Employees 

Misclassifying a non-exempt employee as exempt can result in heavy penalties, including up to three years of lost wages, an equal amount in liquidated damages and attorneys’ fees. While the Fair Labor Standards Act (FLSA) includes an array of exemptions from minimum wage and/or overtime requirements, most misclassification issues that land in court involve the “white collar” exemptions (executive, administrative, professional, computer, and outside sales).   

To appropriately fall within one of these exemptions an employee must satisfy a specific applicable “duties” test, and, for most of these exemptions, also be paid at least a minimum weekly salary. Common mistakes in this area include assuming that paying an employee on a salary basis (even a high one) automatically means the employee is exempt; relying on a job title or educational credentials rather than the employee’s actual duties; and not ensuring that job descriptions are accurate and up to date, reflecting what the employee is really doing on the job (as perhaps the duties have changed over time).   

Problems here can be avoided by intentionally and regularly reviewing job classifications to make sure they remain appropriate and that all applicable requirements for the exemption relied upon are met. 

Improper Deductions from an Exempt Employee’s Salary 

An otherwise appropriately classified salaried exempt employee can lose exempt status if improper deductions are taken from salary. The FLSA’s default rule is that a salaried exempt employee is entitled to full salary for any week in which the employee performs any work.  The consequence of improper deductions may be loss of exempt status for that employee and for any other employee in same class who reports to same manager or supervisor responsible for the inappropriate deduction.   

Limited exceptions for permissible deductions from salary include:  

• when an employee performs no work in the work week;  
• full day absences for personal reasons;  
• full day absences for sickness or accident in accordance with bona fide plan;  
• a good faith penalty for violation of safety rules of major significance;  
• disciplinary suspension for one or more full days for violation of written workplace conduct rules;  
• and FMLA leave (partial day deductions permissible).   

Also, although an employer cannot take a deduction for partial week absences for jury duty, witness appearances, military leave, the employer can offset against salary any fees paid by the court or military to the employee.  

To avoid problems in this area, employers should carefully evaluate the propriety of deductions in advance and ensure supervisors, human resources and the payroll department are aware of the rules. Also, have in place a written “safe harbor” policy as part of your employee handbook that provides a mechanism for an exempt employee to report and be compensated for an improper deduction and commits the employer to correcting any errors; doing so may prevent loss of exempt status for that and other employees. 

Employee Breaks  

The FLSA does not require meal or rest breaks be provided, but if breaks are offered then it does impose rules on whether those breaks must be paid for non-exempt employees. To be non-compensable, meal periods must be 30 minutes or longer and employees must be completely relieved of duties during that full time. If not, entire meal period is compensable. Similarly, rest periods must be 21 minutes or longer to be unpaid.   

Common mistakes include:  

• not providing breaks of the necessary duration;  
• allowing employees to eat in their work area;  
• not realizing that an interruption of the employee’s break may require paying the employee;  
• not having a mechanism known to employees by which to report and correct employee time records if a break is missed or interrupted;  
• and not training supervisors to be aware of these rules.   

Also, be aware that state or local laws may impose break requirements or rules beyond those of the FLSA. 

Rounding Time Worked 

While the FLSA does not prohibit rounding of non-exempt employee work time, the practice is fraught with potential for liability. The FLSA regulations allow employers to round employee time to the nearest quarter hour, the idea being that over a reasonable period the rounding will average out to fairly represent actual hours worked. However, an FLSA violation will occur  if the employer always rounds down.  

Instead, employee time from one to seven minutes may be rounded down, and thus not counted as hours worked, but employee time from eight to 14 minutes must be rounded up and counted as a quarter hour of work time.   

Even when these rules are followed, however, an employer can still be found in violation if in actual practice rounding tends to occur more frequently in a way that shorts employee time.  Carefully consider whether rounding is worth the risk incurred. If an employer decides to use rounding, regularly audit to make sure the appropriate rules are being followed and that the practice is not, over time, shorting employees. 

Regular Rate Calculation Errors 

Everyone knows that overtime must be paid at time and a half an employee’s regular rate of pay.  But “regular rate of pay” is a defined term under the FLSA and is often not the same as an employee’s base rate of pay. Instead, it is arrived at by dividing total amount owed to the employee for the workweek (except specific statutory exclusions) by total hours worked that workweek.  This means the regular rate may change from week to week based on hours worked or additional forms of compensation, beyond the base hourly rate, an employee earns.   

Examples of things that employers often forget to include in the regular rate calculation include: 

• premium pay for leadership roll or a shift differential;  
• on-call pay (whether or not on-call time is deemed working time);  
• bonuses tied to productivity, attendance, longevity, quality of work; or flat sums for working extra shifts.   

These are only examples, as “regular rate” includes all forms of remuneration an employee receives except for limited, specific statutory exclusions.  Failure to calculate “regular rate” correctly may result in overtime calculation errors for whole groups of employees, potentially leading to a collective action claim that exponentially increases damages.   

If an employer handles payroll in-house, it should be sure the payroll department is accurately including all required forms of compensation and calculating overtime pay accordingly. If payroll is outsourced, it is imperative that the provider be informed of all types and nature of “extra” compensation an employee receives so that all required payments can be appropriately included or excluded based on the statutory rules.   

One particular issue frequently litigated is whether a discretionary bonus (which can be excluded from regular rate) was truly “discretionary” under FLSA rules. Therefore, it is imperative to carefully review the nature and structure of any bonus programs to assure it is handled correctly. 

Paying attention to these five basic areas will not assure compliance with all aspects of wage and hour law, but it will go a long way toward making your company a champion at avoiding the most common sources of wage and hour lawsuits.