Business owners are often trying to find more efficient ways to pay employees. However, many small business owners don’t realize that the Fair Labor Standards Act (“FLSA”) drastically limits the flexibility most small businesses have in regards to how they pay employees.
The FLSA is the federal law which sets a national minimum wage and establishes overtime requirements, and it applies to most businesses. For businesses that fail to comply with the FLSA, the government can require that the business pay all back wages owed to employees and can impose civil fines. For willful violators, the government can seek criminal fines and even prison sentences. Therefore, small business should make sure that their payment practices comply with the FLSA.
Here is a short list of common FLSA mistakes sometimes seen by our firm:
1. Improper Work Week
The FLSA requires businesses to pay employees at one and one-half times the employee’s regular rate of pay for all hours worked over forty in a workweek (commonly referred to as “time and a half”). There is no requirement regarding when a business’ workweek must start or that it must coincide with a regular calendar week. However, the workweek must be seven consecutive 24-hour periods. If an employee works more than forty hours during that workweek, the employee is due time and a half for the hours worked over forty during that workweek.
One mistake that business’ make is not having a clearly set workweek. A business might shift overtime hours onto the following workweek where the employee may have worked fewer hours in order to avoid overtime. That practice is an FLSA problem. Because employees are not clear regarding when the workweek starts and when it ends, they are not clear what hours should be paid at time and a half.
Another similar mistake are businesses that establish an eighty hour two-week work period where the business only pays time and a half to employees who work more than eighty hours during that eighty hour work period. Once again, this allows business to adjust hours and adjust schedules in order to avoid overtime. In either case, the business is violating the FLSA by not paying employees the correct overtime wages.
2. Failing to Consider Bonuses When Calculating Overtime
A common mistake by business owners is failing to consider bonuses and commissions when paying overtime to an employee. The FLSA requires that most bonuses and commissions be included when calculating an employee’s regular rate of pay. If an employee works more than forty hours during a workweek and receives a bonus or commission during that workweek, the business must add the bonus or commission to the total wages received by the employee in order to determine the employee’s total pay. The total pay is then divided by the total hours worked by the employee during a given workweek to produce the employee’s regular rate of pay. The business would pay and time and a half at this regular rate of pay.
For example, an employee is paid $10 an hour and works 50 hours during a given workweek. During that workweek, the employee received a bonus of $100. The employee’s overtime would be determined as follows:
$10 multiplied by 50 hours worked = $500 wages
$500 wages plus $100 bonus = $600 total pay
$600 total pay divided by 50 hours worked = $12 regular rate of pay
$12 regular rate of pay divided by half = $6 overtime premium
$6 overtime premium multiplied by 10 overtime hours = $60
Under this example, the employer would pay the employee $60 extra for all overtime hours worked instead of the $50 extra overtime (half of $10 an hour).
3. Assuming that Salaried Employees Do Not Receive Overtime
Some business owners have the incorrect belief that if they pay an employee salary, then the business does not have to pay the employee time and a half for the hours worked over forty during a workweek. However, there is no blanket exemption for salaried employees. Employees must meet the requirements of a specific exemption in order to be exempt from the overtime requirement. The common exemptions are the executive exemption, administrative exemption, professional exemption, computer-employee exemption, and outside sales exemption. Each exemption has different requirements and the employee must clearly meet the requirements (which is beyond the scope of this blog entry). For the executive exemption, administrative exemption, and professional exemption, the employee must be paid a weekly salary of at least $455 a week.
If a salaried employee is not exempt from overtime laws, then the salaried employee is owed time and half at that employee’s regular rate of pay. To determine an employee’s regular rate of pay, the business would divide the employee’s normal weekly salary by the hours worked by the employee during that workweek. This regular rate of pay would be the rate used to calculate time and half for all hours worked by an employee over forty during a given workweek. One issue that business owners have with this calculation is that it does not take into consideration weeks were the employee works less than forty hours during a given workweek but still gets paid a full salary. Unfortunately, the FLSA does not give businesses the ability to offset amounts paid during those weeks against weeks were the employee is due overtime. Because of the complexity of the overtime calculation and the requirement to track salaried nonexempt employee’s hours, it is advisable to not pay employees a salary unless the employee clearly qualifies for an exemption from overtime times.
Automatically Deducting Meal Breaks
Many small business owners know that Tennessee law requires businesses to give employees a thirty minute meal break. Instead of requiring employees to clock in and out for meal breaks, many businesses just automatically deduct the meal break from the employee’s wages each day that the employee works. Unfortunately, this can cause a business trouble.
Under the FLSA, if an employee works through a mandatory break, the business is required to pay the employee for that period. Worse, employees who routinely work through breaks which are automatically deducted may actually be due overtime if the improperly deducted time actually causes the employee to go over forty hours during a workweek.
The simple solution to this problem is to require employees to clock in and out for breaks thirty minutes or longer. If employees refuse to take breaks, businesses should implement disciplinary measures designed to force employees to take required breaks.
These are only a handful of common mistakes that business owners sometimes make when calculating wages for employees. There are other mistakes not included in this article. Therefore, it is always a good idea for business owners to periodically have a business or employment attorney review their pay practices in order to ensure that the business is paying its employees correctly.