It is estimated that as many as 75% of Arizona contractors are not paying their employees overtime properly. If the U.S. Department of Labor ("DOL") conducts an audit, the results can be devastating to an employer. The Department has authority to conclude that the contractor failed to properly pay overtime to all of its employees and assess damages, fines, and penalties. What should Arizona contractors know about overtime claims and audits?

An Audit can be High Stakes for an Employer

The DOL can audit a company's pay practices at any time. They are currently focusing on contractors because their pay is complex, and overtime is often not paid properly. The DOL will subpoena all of the pay records including timesheets and will also interview selected employees.

If the DOL concludes that the employer is not paying overtime correctly, it will order the employer to pay all of its employees any unpaid overtime dating back for the last three years. There is a three-year statute of limitations on overtime pay. The DOL will also order the employer to pay two times the total amount of unpaid overtime as a penalty. The DOL will likely assess additional fines and penalties.

What Are the Common Problems?

There are many reasons why contractors run into problems with overtime.

A. Misclassification

Under the Fair Labor Standards Act ("FSLA"), a worker is deemed an employee if he or she is economically dependent on the contractor for their income. This means that if the worker is working close to full time, they are a very likely an employee who is entitled to overtime. Misclassifying a worker as an independent contractor can also have other ramifications, including failing to properly pay the IRS.

B. Language Barrier

There may be language barriers between the workers and management. Compliance with overtime law requires clear communication between the employer and the employee. If possible, the employer should have multi-lingual representatives.

C. Travel Time

Contractors also run into trouble with respect to travel time to and from the job site. The DOL has issued a memo giving guidance to contractors using real-life examples. As is evident from this memo, payment for travel can be a very complex issue.

D. Piece Rate

Many contractors pay their employees on a piece rate, meaning that the employee gets a flat amount for completion of a job. This isn't unlawful, but it does present problems when determining the employee's regular rate for purposes of overtime. Calculating a piece-rate employee's regular rate of pay for a particular week can get tricky and burdensome. Payment on a piece rate also presents difficulties in calculating the employee's regular rate for purposes of the Arizona paid sick time law.

E. Lunch Time

Employers also need to pay attention to lunchtime. Under the FLSA, employees are entitled to be compensated for their lunch time, unless all three of the following conditions are satisfied: 1) the employee is given 30 minutes or more of uninterrupted time; 2) the employee is not expected to perform any work during this 30-minute or longer period; and 3) the employee doesn't actually perform any work. An employee who is expected to answer phone calls, texts, receive shipments or other work during lunch, even if they don't, is entitled to be paid.

F. Exemptions

There are at least 45 different exemptions to the FLSA. Employers need to ensure that its exempt employees are actually exempt. Frequently, the employee doesn't meet all of the criteria.

How Do You Protect Your Business?

Arizona employers, especially contractors, should seek the advice of an experienced employment attorney. They should provide the attorney with detailed information about how they pay each category of employee and ask the lawyer to draft a memo confirming that they are paying everyone correctly.

In other words, contractors should ask an experienced employment attorney to audit their business before the Department of Labor conducts an audit. In many cases, contractors can bring their business into compliance with the law by making a few adjustments to their pay practices.