Top Ten Wage and Hour Traps (US)

By Cary G. Palmer, Esq., Jackson Lewis LLP

The Department of Labor's (DOL) Wage and Hour Division estimates that 72 percent of all employers violate the Fair Labor Standards Act (FSLA). The consequences for wage and hour violations can include federal or state agency audits, and potential liability and penalties for collective and class claims. This article highlights ten of the most frequent wage and hour traps.

1. Misclassification of Exempt Employees

Misclassification claims continue to be the number one trap for employers. Job titles mean little; actual work performed by the employee is determinative. Courts and administrative agencies construe exempt employee classifications extremely narrowly. Some employers operate under the misapprehension that employees are exempt because they are paid more than market or perform important work; obviously, neither of these reasons is valid. A careful analysis of actual and regular job duties is required. Employers would be well served to conduct a vulnerability audit of all exempt positions to ensure strict compliance with the FLSA and state laws.

2. Misclassification of Independent Contractors

The misclassification of independent contractors is currently a national enforcement priority for the DOL, and for many state agencies and tax authorities. The DOL budget for 2011 reportedly contained an additional $25 million for a "misclassification initiative." Employers should not control the means, methods or instrumentalities (tools) of the work; independent contractors generally should not be paid by hour, but rather paid to complete a particular job, should enjoy the benefit of generating potential profits for the project, and be at risk for potential losses. Bona fide independent contractors typically complete unique, non-recurring projects, rather than perform recurring duties and/or work central to the employer's primary business. Companies who use independent contractors to do the core business of the company often are targets.

3. Preliminary and Postliminary Activities

Preparatory activities are generally not compensable under the FLSA, unless they are an integral and indispensable part of an employee's principal duties or required by the employer. However, employees' activities preparing for work, such as donning and doffing of protective gear or required clothing, may be compensable if the activities are essential to the job. Employers must require employees to report all time worked, and employees should be compensated for all required activities. One hot topic relates to record-keeping technology, such as time spent logging into work terminals, time clocks or computers, and time spent traveling from time clocks to employees' work locations.

4. Controlled On-Call Time

Employees need not be paid for "on call" time if they can use the time as their own for normal activities outside of work. The relevant factors often include the requirement to remain on the employer's premises, excessive geographic restrictions on the employer's premises, the frequency of calls or if the response time is unduly restrictive, the employee has the ability easily to trade his or her on-call responsibilities with other employees, and whether and to what extent the employee is able to engage in personal activities. Recent technological advances have improved employers' abilities to predict staffing needs, requiring some employees to be subject to immediate or short calls to work; these types of systems must be carefully analyzed to guard against on-call claims. Technological advances can improve operations and employer/employee productivity, but also give rise to potential on-call traps.

5. Improper Deductions from Exempt Employee Salaries

Exempt employees generally must be paid their full salary, without deductions, for any workweek in which they performed any work; no minimum number of days or hours must be worked. Improper deductions can lead to an exempt employee losing his or her exempt status, and becoming entitled to overtime pay, interest and penalties. Under federal law, deductions should not be made if the deductions would bring the employee's earnings below the minimum wage for any pay period. Deductions from salary generally can be made for full-day absences for personal reasons, other than sickness or disability, and full-day absences due to sickness or disability only if the deductions are made under a bone fide play, policy or practice of providing wage replacement benefits for these types of absences. Deductions can also be made for unpaid FMLA leave, including partial and full-day absences. Deductions can also generally be made to offset amounts received as payment for jury duty leave, witness fees or military pay. State laws are often much more restrictive and complicated.

6. Failure to Calculate Regular Rate Properly

Employers often miscalculate overtime owed because of additional earned compensation. Overtime must be calculated and paid based on the employee's "regular rate of pay". An employee's "regular rate" often changes. The regular starts with the base hourly straight-time rate, but must also include shift differentials, stipends, production bonuses, incentive pay, commissions, and any form of earned compensation. Employers should carefully analyze the components of, and mathematical calculations for, determining the regular rate of pay for overtime. Little gray area exists with miscalculations.

7. Tips, Service Charges and Tip Pools

Tips, service charges and tip pools can also be problematic. Issues can arise where businesses charge automatic gratuities to customers. Under federal law, tips are amounts presented as gifts in recognition of service where the amount, the recipient, and whether to leave any tip at all, are in the sole discretion of the customer. Proper characterization of payments as tips or service charges has significant effects on the availability of tip credit. If the payment is mandatory or automatic, it is a service charge and property of the employer. If the payment is genuinely a tip, it is the property of employees. State laws often impose different requirements. Participation in tip pools also is an issue when managers and supervisors are in the pools. Federal law generally allows employees who customarily and regularly receive tips to participate in tip pools, including wait staff, counter personnel who serve customers, bussers, and service bartenders. Federal law, however, does not generally allow janitors, dishwashers, chefs, cooks or managers to be in tip pools. Much litigation and uncertainly currently exists under federal and state laws. A careful assessment is critical.

8. Travel Time

Regular commute time is non-compensable, but application of the rules for paid travel time is complex. For example, where an employee is called back to a place of work (such as a customer's facility) because of an emergency, the travel time in the call-back is compensable. Further, if the employee is required to report to a particular place (i.e., office, dispatch center, etc.) at the start or end of a work day, the travel time between the place of reporting and the actual work site is compensable. Special rules for out-of-town travel also exist under federal law, but not under some state laws. Under the FLSA, generally any travel that takes place during normal hours of work must be paid, even if the travel occurs on a day the employee is not working. Employers with a significant amount of travel by non-exempt employees should carefully review their practices. Time spent waiting while traveling, and the distinction between required travel, and travel for personal pursuits/errands, also creates traps.

9. Meals Periods, and Auto-Deduct Practices

Non-exempt employees must be paid for all time "suffered or permitted" to work under the FLSA. Breaks of less than 20 minutes are compensable under the FLSA. Meal periods of ordinarily one-half hour or more, where the employee is completely relieved of all duties, generally are non-compensable under the FLSA. State laws generally impose additional requirements, widely vary, and are unforgiving. Auto-deduct meal period practices should be eliminated. The employer has the burden to prove time records are accurate, and proving accuracy with auto-deduct practices is near impossible. During the provisional certification stage of FLSA collective actions, courts often focus on whether the policy could result in repeated violations. Auto-deduct policies provide plaintiffs easy means for demonstrating "similarly situated" employees, and obtaining provisional class certification.

10. Inadequate Record Keeping

Improper record keeping is one of the most pervasive wage and hour issues, and often implicated in other top wage and hour traps. A surprising number of employers have informal or inadequate means of properly recording hours worked by non-exempt employees. Some employers rely on the honor code, or on a presumption that employees work a set schedule, and do not require employees accurately to record actual work time. The existence of electronic time clocks, and time stamps in electronic data, make such practices highly suspect. Where the employer does not have adequate or accurate records, or if the records are unreliable, the employees' estimates often control unless proven otherwise by the employer. Employers should proactively conduct vulnerability audits, and remedy potential problems.