Audit: Test Your Compliance

To be considered exempt from overtime, an employee must generally be paid on a salary basis and his or her job duties must meet the DOL’s standards for one of the six exemption categories discussed below. Answer the following questions to determine whether you’ve misclassified a worker as exempt:

Executive Employee

1. Is the employee’s primary duty managing the enterprise or a department or subdivision of the enterprise?
2. Does the employee customarily direct the work of two or more other employees or their equivalent?
3. Does the employee have the authority to hire or fire, and do her recommendations carry significant weight if unauthorized to make the final decision?
4. Is the employee paid the equivalent of at least $913 per week on a salary basis?

If you answered “No” to any of these questions, you may have misclassified the worker as an exempt executive.

Note: If the employee is at least a 20% owner of the business and meets requirements #1 and #2 above, he or she need not meet the salary requirement in #4 or the authority requirement in #3.

Administrative Employee

1. Is the employee’s primary duty performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers?
2. Does the employee exercise discretion and independent judgment with respect to matters of significance? That is, does he or she evaluate and compare possible courses of action and then make a decision or recommendation after considering the various possibilities?
3. Is the employee paid the equivalent of at least $913 per week on a salary basis?

If you answered “No” to any of these questions, the employee may be misclassified as exempt administrative.

  Learned Professional Employee

1. Is the employee’s primary duty to perform work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction?
2. Is the advanced knowledge obtained by completing an academic course of study resulting in a four-year college degree or leading to certification?
3. Is the employee paid the equivalent of at least $913 per week on a salary basis?

If you answered “No” to any of these questions, the employee may be misclassified as an exempt learned professional. Exception: Those who have completed the educational requirements for a law or medical degree need not meet the minimum salary requirement. Also, teachers need not be certified or meet the minimum salary requirement to qualify as learned professionals.

Creative Professional Employee

1. Is the employee’s primary duty to perform work requiring invention, originality or talent in a recognized field of artistic endeavor such as music, writing, acting and the graphic arts?
2. Does the work require more than intelligence, diligence and accuracy (i.e., does it require “talent”)?
3. Is the employee paid the equivalent of at least $913 per week on a salary basis?

If you answered “No” to these questions, you may have misclassified a worker as an exempt creative professional.

Computer Professional

• Is the employee paid at least $913 per week on a salary or fee basis?

Is the employee’s primary duty:

1. Application of system analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; or
2. Design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
3. Design, testing, documentation, creation or modification of computer programs related to machine operating systems; or
4. A combination of the aforementioned duties requiring the same level of skills?

If you answered “No” to #1 or were unable to answer “Yes” to any parts under #2, you may have misclassified the worker as an exempt computer professional.

Outside Sales Employee

• Is the worker’s primary duty making outside sales?  
• Does he or she regularly work away from the company’s place of business?  
• Does the worker sell tangible or intangible items, such as goods, insurance, stocks, bonds or real estate, or obtain orders or contracts for services or the use of facilities?

If you answered “No” to any of these questions, you may have misclassified the worker as an exempt outside sales employee.

Other pay considerations

Travel Time

Many nonexempt (hourly) employees are entitled to pay for time spent traveling. Some general guidelines:

• Travel between home and work. Regular commuting back and forth to work doesn’t count as paid time unless the employee performs work en route. Travel time does count, though, when an employee must travel a substantial distance for an emergency job at a customer’s premises.
• Travel as a regular part of the job. When an employee’s duties regularly involve travel, you must count that as paid time.
• One-day travel assignments. You must count all such time as work, except meal periods and the ordinary commute.
• Extended trips. Travel during normal working hours, no matter the day of week, counts as work time.

In addition, the time an employee spends waiting for work counts as paid time: for example, when an administrative -assistant waits for her boss to give her an assignment or a mechanic stands around while a machine’s being repaired. Both have been “engaged to wait”: Their employers require them to be present even though they may not have tasks available for the entire shift.

Employees on call: Thanks to a recent decision in a class action case, it’s now clear that if you have employees report to their regular workplace location in response to a call, they aren’t entitled to extra pay for their trip time. That’s counted as regular commuting time, which is always unpaid.

Your organization can take advantage of this rule only if the employees report directly to their regular workplace first. If you send them to another location (such as a customer’s property), you must pay for their travel time.

Sleeping Time

In certain circumstances, you must pay for the time an employee working an extended shift spends sleeping. If she’s on duty fewer than 24 hours, the entire period counts as work time even though she may sleep or engage in other personal activities during her shift. If the shift extends beyond 24 hours, you and the employee may agree to exclude meal periods and sleeping periods of not more than eight hours from her hours worked.

You may also exclude sleeping periods of not more than eight hours per day if you provide adequate sleeping facilities and allow for uninterrupted rest. But when the job interrupts an employee’s sleep, you must count each interruption as paid time. If an employee can’t get at least five hours’ sleep, you must pay for the entire period as time worked.

Training Programs and Lectures

You must pay an employee for time spent attending training programs and lectures unless the following apply:

• Attendance is outside regular working hours.  
• Employees don’t perform any productive work during the sessions.  
• The program doesn’t directly relate to their jobs.
• Attendance is voluntary.  

If you give employees the impression that they must attend or risk losing their jobs, their attendance isn’t considered voluntary. If the training is intended to help an employee perform her job better, it’s directly related to her job. But if the purpose is to upgrade an employee’s skills in hopes of advancement—and you haven’t required her to attend—you don’t have to pay her for training time.

What about any hours spent in an apprenticeship program? Usually, you can exclude this period from paid time if the apprenticeship meets the standards of the DOL’s Bureau of Apprenticeship and Training and the instruction doesn’t involve productive work or performing regular duties. You must count instruction time, however, if the written agreement specifically provides for it.

Civic and Charitable Work

The DOL regulation defines civic and charitable work as “hours of service for a public agency for civic, charitable or humanitarian reasons.” Examples include volunteering for nonprofit organizations such as food banks, churches and religious organizations, and fund-raising events designed to raise money for disease research and the like.

Essentially, you must pay for hours spent on civic or charitable work if:

• The activity takes place during normal business hours or  
• If outside normal work time, it’s the same type of work the employee would do as part of her job or  
• You require employees to participate.

You needn’t pay for civic or charitable work if:

• You don’t require participation or penalize those who don’t.  
• The work doesn’t occur during normal work hours.  
• The duties performed are outside their normal work duties.

Minimum-Wage Compliance

As of this writing, most states have higher minimum wage rates than the federal rate of $7.25 per hour. Where the state wage is higher, you must pay workers the state minimum rate.

Beginning in 2015, the DOL increased the minimum wage to $10.10 per hour for workers on federal construction and service contracts.

In addition, some cities and municipalities have raised their minimum wages through so-called “living wage” laws, which establish higher minimum pay rates for businesses that receive contracts or subsidies from local governments.

Based on the success of living-wage campaigns, many cities are enacting broader minimum wages that cover most, if not all, employers operating within the city.

Under the federal minimum-wage law, employers may pay some workers at lower rates: student-trainees, full-time students, tipped employees, workers under age 20 during their first 90 days of employment, apprentices and disabled workers.

For example, you may pay workers under 20 years old $4.25 per hour during their first 90 consecutive calendar days—not working days—after their hire dates, but only if they don’t replace workers who would have earned the minimum wage. Fulltime students may be paid at the rate of 85% of the minimum wage under certain circumstances. Before paying less than the minimum wage, be sure to check with the DOL about any special circumstances required.

For workers paid on a piece rate, commission, fee or salary basis, you can usually determine whether you’re meeting the minimum-wage requirements by dividing their total straight-time earnings by their hours worked in the week. Straight-time earnings include all pay other than extra compensation for overtime. No matter how many hours an employee works during a given workweek, her straight-time pay for all regular hours worked must at least equal the minimum wage.

Caution: The longest period over which you may average earnings to determine if you’re paying wages at the minimum rate is one workweek: a fixed 168-hour period. For example, if an employee works 30 hours one week and 50 hours the next, she must receive overtime pay for the hours worked beyond 40 in the second week, even though her average in the two weeks is 40.

Difficult Calculations

Some situations make it difficult for you to calculate whether you’re meeting the minimum-wage requirements:

1. Employees working at two or more rates. If an employee does two or more jobs for you with different hourly rates, you would normally calculate the regular rate by taking his total earnings from all rates for the week and dividing that by the total hours he worked at all jobs.

2. Piece rates. An employee working on a piece-rate basis (paid his rate of production rather than a set hourly wage) must earn at least the minimum wage. To determine that, you should divide her total earnings for the workweek by her hours that week. If the rate is less than the legal minimum, you must make up the difference. In other words, in each pay period you must pay her either actual piecerate earnings or the minimum wage, whichever is greater. Also, you can’t withhold pay in a second week to make up the difference between her earnings in the first week and the legal minimum.

3. Commissions. Employees paid on a commission basis must receive at least the minimum wage for each hour worked in a week. If you pay an employee a salary plus commissions and the salary is high enough to cover the minimum each week, this requirement poses no problem. But if you pay him solely on commission, you must make up the difference for any week in which commission earnings fall short of the minimum wage. Also, the payment must be made free and clear: You can’t recover any part of the minimum-wage payment from earnings in weeks when his commissions exceed the minimum wage.

4. Tipped employees. Workers who regularly receive more than $30 a month in tips are considered “tipped employees.” Under the FLSA, employers that claim a tip credit against their minimum-wage obligation must pay tipped employees a cash wage of at least $2.13 an hour. If an employee’s tips and cash wages don’t equal the minimum wage, the employer must make up the difference. The tip credit doesn’t apply unless the employee has been made aware of the credit provisions and has been allowed to retain all the tips he or she received.

Caution: Many states don’t allow a tip credit against the minimum wage or they set the rate higher than the federal $2.13 per hour.

Payroll Deductions  

Ordinarily, you must avoid making payroll deductions that might cut into the legal minimum wage. But employers are permitted to make the following deductions for hourly workers even if they bring pay below the minimum:

• Reasonable cost of board and lodging.  
• Taxes.  
• Union dues under a bona fide collective bargaining agreement.  
• Insurance premiums paid to independent insurance companies, assuming the payments are voluntary and the coverage doesn’t yield any benefit to the employer.  
• Savings plans and bonds requested by the employee.  
• Repayment of loans, as long as the employer has no connection to the lender. (Exception: This restriction doesn’t apply to repayment via payroll deductions of free-and-clear cash advances to an employee.)  
• Payments on store accounts at the employee’s request if the stores are wholly independent of the employer.  
• Wage attachments, including court-ordered support payments.  
• Deductions for lateness or absence. You can deduct any time an employee doesn’t work, whether due to lateness or absence, because hourly workers are paid only for time worked. However, you can’t deduct for more than the time missed as punishment if this would drop the worker’s pay below the minimum wage for the time he did work.  
• Meal periods. Be careful if you automatically deduct time for meal periods instead of having hourly employees clock in and out before their lunch or dinner break. Make sure employees take the full meal period and don’t work. Lately, so-called “working off the clock” has spurred many class-action lawsuits, and employees have been winning big awards.

The following deductions are illegal to the extent they reduce wages below the legal minimum:

• Fines for infractions, poor work, other disciplinary reasons.  
• Deductions for damage to employer’s property.  
• Repayment of cash register shortages, including those resulting from mathematical errors or customers walking out without paying the check. The Wage and Hour Division has limited deductions for employee thefts to cases in which the person has been found guilty in court.  
• “Voluntary” payments from employee to employer that don’t involve deductions from wages, such as a cash bond required from an employee at the time of hiring.  
• Wardrobe costs deducted from paychecks to cover employee clothing purchases when dressing in the store’s signature style is required or “encouraged.” Several class action cases addressing this issue are pending across the country. Law–yers for the employees argue that not-so-gentle persuasions to buy employers’ stylish fashions to wear on the floor amount to forced deductions from hourly rates and violate the FLSA by bringing the hourly wage below the minimum.

Computing Overtime

You must pay overtime to every nonexempt employee who works more than 40 hours in a single workweek. The overtime rate is one and a half times an employee’s hourly rate. If an employee earns a fixed hourly rate with no other compensation, computing her base rate is easy. But in many cases, it’s not so simple:

• Fixed hourly rate plus other pay: Divide the employee’s total earnings for the week (hourly wages plus bonus, for example) by his total hours of work.  
• Different rates in the same week: Divide total earnings for the week by the employee’s total number of hours worked.  Pieceworkers: Add the total earnings for the workweek (including bonuses) and any sums paid for waiting time or other hours worked. Then divide the sum by the number of hours worked in that week.  
• Workers on day rates or job rates: When you pay an employee a flat sum for a day’s work or for doing a particular job (regardless of the number of hours) and he receives no other form of compensation, total all sums received at such day rates or job rates in the workweek. Then divide by the total hours worked.  
• Salaried workers whose pay covers more than a workweek: You can convert a monthly salary to its equivalent weekly wage by multiplying the salary by 12 months and dividing it by 52 weeks.  
• Fixed salary for fluctuating hours by agreement with employee: Divide the salary by the number of hours worked in that week. Because you already paid straight time, the employee must receive additional pay for each overtime hour worked that week, at not less than one-half the regular rate.

Special Types of Payments

When calculating a worker’s base hourly rate, you must take into account any other wages you pay her, including commissions, bonuses and other money she regularly receives.

Whether an employee is paid on salary plus commission or on a straight commission basis only, you must count commission earnings when calculating the employee’s regular hourly rate. A problem may arise when you allocate deferred commissions for overtime purposes.

A commission paid on a workweek basis is added to the employee’s other earnings for that workweek. The total divided by the number of hours worked in the week equals the employee’s regular rate for that particular week.

The FLSA requires that you include all compensation in the regular rate, except some specific exclusions. These include discretionary bonuses, gifts and payments in the nature of gifts on special occasions, contributions to certain welfare plans, payments made to the employer for certain profit-sharing, thrift and savings plans, as well as stock options.

Types of supplementary, one-time payments that are usually considered part of the employee’s base rate include:

• Attendance bonuses.  
• Productivity bonuses.  
• Bonuses for quality and accuracy of work.  
• Nonmonetary awards. You must include in an employee’s regular hourly rate any prize awarded for the quality, quan-tity or efficiency of the work he performs. The sum to be allocated would be the cost of the prize to you.  
• Premiums paid for hazardous work or night work.  
• Overtime premiums. Some workplaces use collective bargaining agreements (in a union workplace) or a written employment contract (in nonunion workplaces) that specify workers will be paid extra if they work more than eight hours in a shift even if the total number of hours worked in the week doesn’t exceed 40 hours. Similarly, such agreements may call for extra pay if the employee works more than 40 hours in a workweek but less than 80 hours over a two-week period. In those cases, the FLSA would not require extra pay. The arrangement is voluntary between the parties. Add the extra payments to the base rate unless the extra payment equals or exceeds time and a half.

Example: Assume a worker usually earns $10 per hour and a union contract provides that if she works more than eight hours in a shift, the extra hours will be paid at a rate of $12 per hour. Add the extra dollars to her base pay when you calculate overtime. If, however, the agreement provides for the extra hours to be paid at $15 per hour, don’t add the extra pay to the base pay.

Exclusions from Base-Rate Formulas

You needn’t count the following when calculating a worker’s base rate of pay:

✔ Holiday pay. You can’t credit holiday pay against any overtime pay due to the employee. In some instances, employees entitled to holiday or vacation pay forgo the holiday or vacation and work on that day. If they receive their customary rate (or higher) for working that day, you can exclude the additional sum given as holiday or vacation pay from the regular rate of pay.

✔ Discretionary bonuses. You may exclude such bonuses, as well as those paid as gifts for Christmas and other occasions, from your workers’ base-rate computation when the amount is solely within your discretion.

✔ Sick pay. When you pay an employee for occasional periods of work loss caused by illness, you needn’t include that in his regular time. But you can’t credit such payments against overtime pay.

✔ Show-up and call-back pay. Some employment agreements provide for a stated number of hours’ pay if the employee isn’t provided the expected amount of work. For example, an employee might be guaranteed at least four hours’ pay for reporting to work or being called back to work after her scheduled hours are over. If the employee works only two hours but is paid for four, you don’t need to count the pay for the two hours not worked toward her regular rate of pay.

✔ On-call pay. If on-call employees are required only to leave word where you can reach them and they aren’t confined to a particular place, their hours spent on-call aren’t considered work time. However, any payment for such time, while not attributable to any particular hours of work, must be included in the employee’s regular rate. If an on-call employee is called out, the time he spends on the assignment is treated as hours worked; the employer must count it and pay for it.  

Should you track exempt employees’ hours?

You also may want to track the number of hours exempt employees work. If an employee is reclassified as hourly, you must be able to show how many hours he worked. If you can’t, a court may force you to accept the employee’s estimates.

Nothing in the law prevents you from requiring all employees (exempt and nonexempt) to record their hours by punching a time clock or filling out a time sheet. That way, you’ll have the records in case you need them. Just make sure you don’t base exempt employees’ compensation on those hours, or you will jeopardize their exempt status.

Tracking actual hours worked may turn out to be useful if you end up converting employees who are currently exempt into hourly workers when the new regulations take effect. You will have to estimate how many hours the exempt employees are putting in to determine what their new base hourly rate will be. For example, if exempt managers are now working on average 60 hours per week, and you expect them to continue at that pace, you will have to calculate what the hourly rate should be for the first 40 hours and the anticipated extra 20 hours at the 1.5 times base hourly pay rate to end up paying the newly hourly employees approximately the same.

More about the rules from the Department of Labor: https://www.dol.gov/WHD/overtime/final2016/

A fact sheet for employers from the DOL’s Wage and Hour Division: https://www.dol.gov/whd/overtime/final2016/generalguidance.pdf

Download a full PDF of the final overtime rules: http://federalregister.gov/a/2016-11754

Source: http://www.businessmanagementdaily.com/