Six Common (and Costly) FLSA Mistakes

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Wyrick Robbins Yates & Ponton LLP

The Federal Fair Labor Standards Act, 29 U.S.C. § 201, et seq., was created as a part of the “New Deal” to help our nation recover from the Great Depression. The law had three primary goals: to assist lower wage workers by establishing a fair minimum wage; to promote fair competition among the states by creating consistent wage and hour standards; and to create jobs through the establishment of overtime pay and thereby encourage employers to hire additional workers. When first enacted, this law called for a minimum wage of 25 cents an hour and required overtime pay for nonexempt workers after 44 hours of work in a workweek.

Today the FLSA continues to provide important protections to workers in terms of their pay and hours worked. The law also presents challenges to employers in their understanding of the many regulations and court cases interpreting the FLSA since 1938 and how those rulings apply to our current workforce, especially in light of the changes in the 2020 workplace cause by the COVID-19 pandemic. Let’s explore a few of the most common FLSA mistakes made by employers today and will look at some of the special issues raised by the impacts of COVID-19.

ERROR #1: MISCLASSIFIED EXEMPTIONS

The single most common and costly mistake made by employers relative to the FLSA is the misclassification of employees as being exempt from the overtime provisions of the law. To be exempt in most circumstances, an employee: (1) must be paid a salary equal to at least $684 per week, without any reductions for the quantity or quality of work performed; and (2) must perform duties that fall within the criteria for an executive, administrative or professional employee. The duties tests for these so-called “white collar” overtime exemptions focus not on the employee’s job title but on his actual primary duties. Each of the tests also requires that the employee have a certain level of authority in the organization and/or exercise a significant amount of discretion and independent judgment. “Relaxed” duties tests are available for highly-compensated employees, defined as those making at least $107,432 per year. There are also different exemption tests for workers in advanced computer-related fields and for outside sales employees.

As businesses reopen and workers gradually return to work following COVID-19 shutdowns, employers should be mindful of how much non-exempt work is being performed by employees classified as exempt. Especially in retail and hospitality workplaces, supervisors may be called on to perform work that was previously performed by non-exempt workers. While the FLSA provides no precise percentage of exempt job duties that must be performed by an exempt employee, a store manager whose primary duties become stocking shelves and running a cash register would likely be non-exempt and eligible to receive overtime pay.

A misclassified employee would be entitled to back overtime pay for the previous two years, or three years in the case of a willful overtime violation, plus a penalty equal to the amount owed and attorneys’ fees. The Department of Labor can also impose penalties of up to $1,100 for each violation.

One of the biggest challenges employers face in misclassification cases is that they often have no record of the employee’s hours actually worked. Because the burden of proof is on the employer in such situations, the overtime calculation is often based only on the employee’s recollection of overtime hours worked unless the employer can produce contrary proof.

ERROR #2: SALARY PAY DEDUCTIONS

In order to be classified as exempt from the overtime provisions of the FLSA, in addition to meeting a duties test, described above, for most exemptions, the employee must also be paid on a salary basis. The salary basis criteria is very strict: the employee must receive his same salary for every week in which he performs any work without any deduction based on hours worked or based on the quality or quantity of work performed. There are some very narrow exceptions to this rule, such as for full day deductions for absences from work for personal reasons; full day absences for illness or injury where the employer has a plan, policy or practice of providing paid sick leave or other compensable time off; full day disciplinary deductions for violations of workplace conduct rules; disciplinary deductions (which may be less than a full day) for infractions of safety rules of major significance; deductions for partial weeks of work during the initial and final week of employment; and deductions for partial or full days for absences covered by the Family and Medical Leave Act. An exempt employee need not be paid his salary for any week in which he performs no work.

Measures taken by employers to reduce costs due to COVID-19, such as reductions in salary, reductions in hours and furloughs, can lead to overtime exemption problems. While an employer may reduce an exempt employee’s salary prospectively, that salary should not drop below the threshold of $684 per week (or $107,432 per year if the employee is exempt under the highly-compensated relaxed duties test). A reduction in pay that is tied directly to a reduction in hours may be interpreted as an hourly rate of pay, rather than a salary. And employers may not reduce costs through the use of staggered furloughs within work weeks for exempt employees; those employees must be paid their full salary for any work week in which they perform any work.

Employers may require exempt employees to use available accrued paid leave to make up for time off work in the case of an office closure or furlough due to COVID-19 so long as the exempt employee receives his or her full guaranteed weekly salary. This paid time off may count for all or a portion of the exempt employee’s salary for that work week. However, if an employee has no available paid leave, the employee must be paid his entire salary for any week in which he performs any work in order to maintain his exempt status.

Violation of the salary basis rules for an otherwise exempt employee can have serious consequences. Under Federal Regulations, if the facts demonstrate an employer has an actual practice of making improper deductions from the salary of any exempt worker, the exemption will be lost for the period in which the improper deductions were made, not only for the employee whose salary was impacted, but for all employees in the same job classification working for the same manager responsible for the improper deduction. Loss of the exemption means that these workers would be entitled to back pay to make up for the deduction, plus overtime pay for all hours worked in excess of 40 during any work week during the relevant period. Additional remedies include a penalty equal to the total amount owed and attorneys’ fees.

The Regulations, however, do provide for a “window of correction” for isolated or inadvertent deductions. Employers may also take advantage of a “safe harbor” set out in the Regulations by providing a clearly communicated policy prohibiting improper deductions, setting out a complaint procedure and promptly correcting any improper deductions.

ERROR #3: WORK “OFF THE CLOCK”

Under the FLSA, “working time” is defined as any time an employee is “suffered or permitted to work.” The definition of working time is important because employees who do not fall within any of the tests for exempt status must be paid for all hours worked, and must be paid one-and-one-half times their regular rate of pay for all hours worked in excess of 40 in any work week.

The Department of Labor Regulations have adopted the “continuous workday” rule, whereby all of the time between an employee’s first and last “principal activity” would be compensable working time. For example, the time spent walking to an employee’s workstation or walking to the time clock to punch in would not be considered compensable working time because it generally takes place before the employee has engaged in a principal activity. However, preliminary and postliminary activities that are an integral part of the employee’s job and/or undertaken to benefit the employer, such as filling out reports, removing trash and picking up plans or requisition orders, will be considered compensable working time.

Similarly, although an employee’s commuting time to and from his place of work is ordinarily not compensable working time, the time spent travelling between customer sites after an employee has reported to work or picked up equipment will be compensable. Likewise, workers who are required, as a part of their normal job activities, to work at home after hours filing out reports, checking email, completing paperwork or returning telephone calls, may be considered as having a “continuous workday” that extends their compensable working hours and includes their commuting time.

Many disputes over working time involve cases where an employee was required to spend time before and after his regular workday putting on and taking off specialized or protective clothing or equipment. Under the FLSA, excluded from compensable “working time” is “any time spent in changing clothes or washing at the beginning or end of each workday . . . by the express terms of or by custom or practice under a bona fide collective-bargaining agreement . . . .” However, there is no precedent for issues that arise from the time spent by employers and employees taking recommended safety measures due to the COVID-19 pandemic. Employers will be regularly taking employees’ temperatures and asking questions about employees’ exposure to the virus. Employees will be “donning” masks, gloves and other personal protective equipment before their shifts and “doffing” them at the conclusion of their working time. In general, to determine if this so-called “donning and doffing” activity is a “principal activity” that would start or extend the compensable work day, the courts have considered the nature and unique quality of the clothing or equipment, whether the clothing or equipment is integral to the job and the time required to put it on and take it off. How the courts will address this issue with regard to COVID-19-related activities remains to be seen.

Finally, given how many employees are staying home and teleworking due to COVID-19 stay at home and shelter in place measures taken by state and local governments, employees are now accessible twenty-four hours a day through their smart phones and laptops. Employers should keep track of and pay non-exempt employees for all work performed from home or while otherwise out of the office. Furthermore, as noted above, unless a specific exception applies, exempt employees must be paid their full salary in any work week in which they perform any work, whether at the office or at home.

ERROR #4: OVERTIME CALCULATIONS AND BONUSES

Non-exempt employees are entitled to receive pay equal to one-and-one-half times their regular rate of pay for all hours worked in excess of 40 in any given work week. In order to calculate an employee’s overtime pay, an employer must first determine an employee’s “regular rate of pay.” For employees who are paid by the hour, this may seem like a simple task. However, what many employers overlook is that certain bonuses must be included in that rate of pay when calculating overtime.

Under the FLSA, bonuses provided to workers fall into one of two categories: discretionary or non-discretionary. Discretionary bonuses are sums paid in recognition of services performed during a given period and must meet the following criteria: (1) both the fact that the payment will be made and the amount of the bonus are in the sole discretion of the employer; and (2) the payment is not made based on any prior contract, agreement or promise that would cause the employee to expect the payment. Discretionary bonuses are not included in an employee’s regular rate of pay and do not impact overtime calculations.

A bonus will be considered nondiscretionary if the employer contracts, agrees or makes a promise to pay it. Some examples provided by the Regulations include bonuses that are announced to employees to encourage them to work more rapidly or efficiently; bonuses to induce employees to remain in their employment; attendance bonuses; individual or group bonuses based on production; and bonuses for quality or accuracy of work. Such nondiscretionary bonuses must be included in a worker’s regular rate of pay when calculating overtime.

To calculate overtime with a nondiscretionary bonus component, the employer must look to the period for which the bonus has been awarded, whether a week, a month, a quarter or a year, and apportion the bonus amount over the workweeks of that period of time. Overtime for each such workweek should reflect the enhanced compensation received by the employee for that work week.

ERROR #5: PAID AND UNPAID BREAKS

The FLSA does not require employers to provide workers with meal or rest breaks from work (although some states’ laws do include such requirements). The FLSA does regulate when employee breaks must be considered as paid working time.

A worker must be paid for a meal break unless all three of the following conditions are met: (1) the break is at least 30 minutes in length; (2) the employee is free to leave his duty post; and (3) the employee is completely relieved of all duties during the break. Problems often arise with the last requirement when employees eat lunch at their desks and continue to work through the meal period. Given the broad definition of working time as time when an employee is “suffered or permitted to work,” an employer will be responsible for paying the employee for time spent working over his mealtime.

The FLSA does require that employees be paid for rest breaks of a “short duration” of five to 20 minutes. However, employees need not be paid for rest breaks of greater than 20 minutes if they are completely relieved of their job duties during that period, the break is of a definite duration and the relief period is long enough under the circumstances for the employee to use the time as he sees fit.

With many employees working from home due to COVID-19, employers may be tempted to assume an eight hour workday and/or to institute automatic lunch break deductions from employees’ work hours. These are risky practices that may lead to wage and hour lawsuits. Employers must pay non-exempt workers for all hours worked. An employee who answers a client’s call after his usual working hours or who checks his email over the weekend, must be paid for that working time. An automatic daily deduction for meal breaks does not take into account employees’ skipping their usual lunchtime or working while on the job. Employers should be extra mindful of keeping accurate and complete records of all employees’ time worked, whether in the workplace or at their homes.

ERROR #6: TRAVEL TIME

As noted above, ordinary commuting time to and from the employee’s regular worksite is generally not considered compensable working time. This is the case, even if the employee must travel to different work sites for his job. However, if the employee must report to a designated location to pick up equipment, materials or supplies before reporting to his regular worksite, his working time starts when he arrives at that designated location. Travel during the workday as part of the employee’s principal activity, such as where an employee travels to multiple customer sites, must be counted as compensable hours worked.

Where an employee is required to travel to a different city for a one-day work assignment at the employer’s request, the time spent traveling is considered paid time since it is not ordinary home to work commuting time and is more appropriately considered part of the employee’s principal activity. However, time spent in travel to the airport or train station would be considered normal commuting time and would not be compensable.

For travel that involves an overnight stay, travel time will be compensable if it occurs during the employee’s regular working hours, seven days a week. However, time spent travelling on a train, airplane, bus or car outside of the employee’s regular working hours is not compensable.

Don’t let your business get caught in these common wage and hour traps. A complaint by a disgruntled employee to the Department of Labor could trigger a DOL audit of your compliance with the FLSA. If the DOL comes looking for FLSA violations, you will want to be sure that your employees have been correctly classified and paid all wages due them.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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