Common Wage and Hour Mistakes Employers Make

The following article first appeared in the News & Insights section of Carmody Torrance Sandak Hennessey’s website. It is reposted here with permission.

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Key Takeaways for Employers

• Employees may not be exempt from overtime pay simply because they are paid a salary
• Employers must evaluate each independent contractor relationship
• Employers must pay employees for all time they are required or permitted to work, including “extra time” outside of scheduled work hours
• Be proactive and regularly audit:
  • Exempt and independent contractor classifications
  • Payroll and timekeeping practices
  • Overtime calculations
  • Incentive compensation plans
• Train managers on the importance of:
  • Requiring employees to accurately track all hours worked
  • Providing legally required meal breaks
  • Not permitting “off the clock” work

Wage and hour compliance continues to be challenging and one of the greatest sources of liability for employers.

Claims under the federal Fair Labor Standards Act and state wage and hour laws can result in government investigations and litigation that expose employers to penalties and damages such as back pay, liquidated damages, attorneys’ fees and cost.

Many violations are not the result of intentional misconduct, but rather misunderstandings of complex legal requirements.

Listed below are some common and significant wage and hour mistakes that employers should work to avoid.

Misclassifying Employees as Exempt from Overtime

One of the most frequent mistakes is concluding that employees are exempt from overtime simply because they are paid a salary, have managerial-sounding job titles, or because the employee agrees that their salary adequately compensates them for all hours worked.

An employee’s agreement, or even request, to be paid a salary does not make the employee exempt from overtime.

Exempt status depends on satisfying both the applicable salary requirements and the employee’s actual job duties.

Misclassifying Workers as Independent Contractors

Improperly treating workers as independent contractors instead of employees is another common mistake that can create significant wage and hour exposure, as well as tax and benefits issues.

Like the misclassification of employees as exempt from overtime, an individual’s agreement or request to be classified as an independent contractor is not dispositive.

Instead, a worker’s status as an employee or contractor is based on a legal analysis of various factors that generally focus on the economic realities of the relationship and the employer’s control over the work performed.

Employers must evaluate each independent contractor relationship rather than relying solely on a written agreement.

Failing to Pay for All Hours Worked

Employers must pay employees for all time they are required or permitted to work.

This sounds simple and straightforward, but violations often happen when employees perform work before or after their scheduled shifts, respond to emails or text messages outside normal working hours, “volunteer” to work off the clock, complete mandatory training, travel beyond their normal daily commute, or work through unpaid meal periods without compensation.

Improperly Calculating Overtime

Overtime must be paid at the rate of 1.5 times the employee’s “regular rate of pay.”

The employee’s regular rate of pay is not always just their hourly rate of pay. The regular rate of pay often includes nondiscretionary bonuses, commissions, shift differential pay, and certain incentive payments.

Paying overtime just on an employee’s hourly rate of pay without including these additional forms of compensation can result in overtime underpayments.

While the underpayment may be small for a single employee, the liability can be quite significant if the mistake extended to numerous employees over several years.

Improper Payroll Deductions

There are limited circumstances when an employer is legally authorized to make deductions from an employee’s pay.

Deductions for damaged, lost or unreturned equipment, cash shortages, uniforms, a negative paid time off balance upon separation of employment, or other business expenses may—without proper state Department of Labor authorization—violate Connecticut law. 

Poor Timekeeping Practices

Employers have an obligation to maintain true and accurate records of hours worked by employees.

Accurate time records are essential to defending wage and hour claims. Employers should have clear timekeeping policies and practices that require employees to accurately record their hours of work each day.

Time records should include the time an employee started working at the beginning of the day, the start and stop times for a meal break, and the time they stopped working at the end of the day.

Poorly Worded Commission or Bonus Plans

Commission and bonus plans must be clearly written and should address, at a minimum, employee eligibility, the requirements for how a commission or bonus is earned, how the commission or bonus is calculated, the time and method of payment, and payment upon separation of employment.

Vague or ambiguous terms generally will be construed against the employer and will invariably lead to costly disputes. 

What Should Employers Do?

The best defense against wage and hour claims is to be proactive in regularly auditing exempt and independent contractor classifications, payroll and timekeeping practices, overtime calculations, and the incentive compensation plan.

Training managers about these issues is also critical, especially the importance of requiring employees to accurately track all hours worked, providing legally required meal breaks, and not permitting “off the clock” work.

Being proactive in addressing these issues is much better than trying to address them after a complaint has been filed.

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About the author: Nick Zaino is a partner at Carmody and co-leader of the firm’s Corporate & Business Group.