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Pizza as Pay Compensation Gets Too Creative

August 1, 1998
Related Topics: Compensation Design and Communication, Wages and Hours, Featured Article
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With employees working increasing hours - and in increasingly non-traditional ways - there's more and more room for lawsuits.

Is your compensation system strictly by the numbers? You’d better hope so—picture-perfect pay isn’t as easy as you may think. Do your hourly employees do any work off the clock? They’ve got to be paid, and not with company T-shirts or free meals. And what about that hard-working, non-exempt employee who took some files home to read? Whoops—whether she clocked in or not, she was on company time and should have been paid. And then there’s that always entertaining question of exactly who is and isn’t exempt.

The answers may surprise you. With employees working increasing hours—and in increasingly non-traditional ways—there’s more and more room for lawsuits. In fact, both Taco Bell Corp. and Wal-Mart Stores Inc. have settled or are currently facing suit for improper compensation of employees. Patrick McHale, a partner in the labor and employment law department of Shipman & Goodwin’s Hartford, Connecticut office, offers some guidance.

The law says if you permit them to work, you must pay them for all hours worked.

However they do it, companies need to capture the extra time worked so employees can be properly compensated.

What have the recent settlements concerning compensation involved?
What these cases appear to have involved, and I say appear because [they were settled], there are no court cases to look at— but Newsweek reported that Taco Bell, among others, has failed to pay its employees properly. It didn’t pay them for overtime. The article quotes one of the former employees, who claims that managers would coax workers into cleaning up the store on days off in exchange for free pizza parties, as op-posed to money. The barter system is a novel idea, but it’s completely illegal. The law says you’ve got to pay non-exempt employees their regular wages for the first 40 hours they work, and you’ve got to pay them time-and-a-half their regular rate of pay when they work more than 40 hours.

And that hasn’t been happening in some settlement cases?
That hasn’t been happening. What’s even worse is some companies weren’t even paying them straight-time wages for working more than 40 hours. They were trying to pay them with things like pizzas or beer. These are practices that employers need to be aware are illegal. An employer may say, "What do you care? These people are willing to work for a case of beer. That has value. You buy a case of Miller for $24. If I’m paying them $12 an hour and they work a couple of hours, aren’t we even?" But the law doesn’t allow you to barter.

So would the bottom line be that if an employee is non-exempt, don’t ask him or her to do anything off the clock?
That’s more than a fair statement. The law requires that employees get paid for every hour they work. Employers might say, "Well, I didn’t require them to work; they just stayed after to do a good job and to impress me." The law says if you permit them to work, you must pay them for all hours worked. "Hours worked" is de-fined as all time during which an employee is permitted to work. An employer will commonly say, "Well I didn’t ask them to stay over; these are people who have high standards. They stay after a couple extra hours and I reward them with a bigger increase, or think of them as my valuable employees. What’s the harm?" Well, the harm is they’re entitled to be paid for the time they work.

What about all the employees who now are telecommuting—how would overtime pay play out?
That’s a really interesting problem that a lot of employers are going to have. Telecommuting’s a big thing these days. More and more people are leaving their offices and taking their computers to their homes, and working on the weekend or at night. For those workers who are eligible to be paid overtime, that’s overtime work. And if an employer is aware that employees are taking their computers home and working during non-traditional hours, the employer needs to either communicate with employees that they’re not permitted to work those extra hours, or the employer needs to come up with a way to capture that time through some kind of e-mail or online system that shows when people go on the computer and when they go off. However they do it, companies need to capture the extra time worked so employees can be properly compensated. I think we’re going to find a lot of Department of Labor (DOL) cases dealing with this telecommuting issue.

What about the employee who comes to his or her boss after the fact—not necessarily asking for money, but saying, "I’m glad you liked the report I did last month; I put in 10 hours over the weekend." What options do employers have then?
Once you’re on notice, [it’s best to] communicate in writing that that’s not permitted without informing the supervisor ahead of time. For the time that has already been worked, I think you’ve got to pay it, unless you’ve already communicated to employees that they’re not permitted to work.

What we’ve had clients do is have a policy that says: "Your hours are 35 hours, or 40 hours, or whatever they are, and you’re not permitted to work beyond that unless you get advance approval from your manager." And the language, "you’re not permitted to work" is critical because the statute says that if you permit employees to work—even if you don’t require them to work—you must pay them.

So that should be in the employee handbook given to an employee when he or she starts?
Exactly. It should be in the manual that employees will be notified at the time of hire how many hours they’re permitted to work, and that overtime may be required, but they’re not permitted to work unless they’re given advance approval. That’s a good policy that all employers should consider to protect themselves against this unwanted time.

What are other common mistakes employers make concerning wage-and-compensation issues?

The big mistake employers are making—and they’re making it with great frequency—is the misconception that if they pay employees on a salary basis, as opposed to hourly, that the employees aren’t entitled to be paid extra when they work more than 40 hours.

A salary doesn’t make them exempt?
There are two requirements to be exempt. One of those requirements is that the employee must be paid on a salaried basis. But the definition of salaried means the employee must receive each week the same pre-determined amount, regardless of hours worked.

Now, employers are getting into problems because they’re docking salaried employees’ pay for days they’re not there, or partial days when they’re not there. And if you do that, you’re really not paying employees on a salaried basis—you’re really paying them by the hour. If you prorate their weekly checks based on the number of hours worked, you can call it a salary, but under the law, you’re paying by the hour. So the first requirement is you must pay on a salaried basis for employees to be exempt.

Secondly, there are only certain types of jobs that are eligible to be treated as exempt, regardless of whether the employee is paid on a salaried basis. Bottom line: An employee must be paid on a salaried basis and must be employed in a position that’s eligible to be considered exempt.

What are the qualifications of an exempt position?
There are three types of positions that are eligible for exempt treatment. They’re called the white-collar exemptions. If you think of it practically, it’s meant to cover those who are considered white-collar employees: higher-level management folks in many cases, high-level decision makers, people with a lot of authority who exercise a lot of independent judgment in performing their tasks. There are three types of these white-collar exempt positions. The first and most commonly known is the executive-level position— someone who manages the work of two or more employees, and whose primary duty involves management functions as opposed to actually doing the work.

What’s the next category?
The next category is the professional exemption. This includes anyone who’s hired to a position that requires the possession of an advanced educational degree in a field of specialized study, like a CPA, a physician, a lawyer, an engineer, a registered nurse. To be qualified for the position, the person must possess some type of specialized study, and it generally must be at least a bachelor’s level.

Would that include any position that requires a bachelor’s degree?
It’s hard to give blanket statements in this regard. If they must have a very specific degree, and they exercise discretion and independent judgment in performing their tasks, they could be exempt. But on-the-job experience doesn’t qualify. The learning needs to be in a specific field, and it needs to be a prerequisite to being eligible for the position.

This is such a snobby area of regulation, and it defies any common sense. I try to explain this to clients, and they say, "Gosh, I’ve got to tell you, someone who has been here 15 years and knows all about [her field] is much more valuable to me than the kid right out of college with a degree." And I say, "You’re absolutely right. The problem is, the law says that you have to do this in order to be exempt."

What’s the last exempt category?
The broadest exemption, the hardest to define and quantify, is the administrative exemption. The administrative exemption applies to individuals who perform functions that are internal to the organization, as opposed to customer-based or production-based functions—and who, in their duties, exercise significant discretion and independent judgment. Common types of positions include some internal auditors, a controller of a corporation. An executive secretary, if it’s a very high-level position, not one who takes phone calls or does computer-based work, but someone who really does manage the affairs of an executive, someone who has independent judgment in that regards, could qualify under the administrative exemption.

Are there any non-white-collar exemptions?
Yes. The most common one is outside salespeople who are paid on a commission basis, who perform their tasks away from any workplace, on the road selling product. They’re eligible for an exemption. But the white-collar exemptions are the big ones—and that’s where the most common mistakes are made.

Accounting firms have particular trouble. They’ll hire people right out of college with nothing but a basic accounting degree. The employees have advanced degrees in a specific field; however, they don’t have discretionary, independent judgment. For the first six to 12 months, they work under the direction of a manager. But the firms are classifying them all as exempt. In the busy season, some of these people are working 60, 70 hours a week, and the firms aren’t paying them overtime. Or they’re giving them compensatory time.

Compensatory time is not legal except in the public sector. You’re not allowed to give someone an hour off two weeks from now in exchange for an overtime hour worked this week. Only in the public sector can you do that, and with some statutory restrictions.

What should employers do if they realize that they’ve been considering people exempt who aren’t?
There’s only one way to deal with your mistakes in this regard. You’ve got to make the change sooner rather than later. The sooner you correct it, the sooner you avoid liability. The statute of limitations on claims for unpaid wages is two years, so if you change your practice today, two years from now you’ll have no back-pay liability. But the real hard question is what do you do when employees come to you and ask, "Why am I getting overtime now?"

What should you do?
There are two ways employers can handle this. I think the best way and the most ethical way is to deal with the problem, try to quantify how many hours over the last two years employees have worked and haven’t been paid, and pay them. And take that liability away.

Many employers find that to be less than desirable for a number of reasons. One, they don’t want to part with the money. Two, they can’t quantify the hours because commonly they don’t have records of these hours. So the best course of action, if you can’t quantify the hours or if it’s too uncertain a number, is to make the change as soon as you can and communicate that the change is being made.

[It’s advisable to make that change because] under many state laws, an employee can recover twice the amount of back pay owed as a punitive element—double damages. So employers may tell employees, "We’ve been advised by legal counsel that this is a close case. And while we still think you’re exempt, we’re going to start paying you overtime going forward." But in truth, if you realize people have not been paid for time they’re owed, the best course is to pay them going back two years as best you can approximate, change your practice, and be straight about it.

Besides double damages, are there any other penalties for violations?
For willful violations, there are both criminal and civil penalties. It’s very rare. The people who are targeted for criminal prosecution are the recidivists. They’ve been audited before, have been found to have underpaid employees or failed to pay wages due, but then they continue to do it. But under federal law, there are penalties in the form of two times back pay—that’s basic damages. If you’re a willful violator, meaning you knew what the law was, but disregarded it, you could be liable for up to three years of back-pay liability—an extra year back-pay liability and double damages, plus attorneys’ fees and potential criminal penalties.

And how does an actual investigation work?
The DOL has about 950 auditors throughout the United States. Generally, it doesn’t have a lot of extra resources to do audits on a random basis. Audits are complaint driven. Someone files a complaint for unpaid wages. The investigators conduct an audit. They’ll try to meet with the employer and explain why they think the employer was wrong and why the practice results in a back-pay liability. If the employer [disagrees], the auditor refers it to the Office of the Regional Solicitor, which is the legal department of the U.S. Department of Labor. Those folks decide whether to bring an action. The Department of Labor may bring an action on behalf of employees.

If it’s a case that the agency doesn’t have the resources to handle or isn’t particularly interested in handling, it will notify employees that they believe they’re owed money, and [tell] them that if they want to sue for this money, they should. But that requires employees to go out and engage their own counsel and bring a lawsuit themselves.

Is there anything else that employers should know?
If employers would think through who they’re classifying as exempt and make sure they’re on solid ground, they could really save themselves [money] and also act in fairness to their employees. People are working longer hours; they’re working harder these days. And so it’s even more important that employers take the time to figure out what these folks are entitled to in terms of compensation.

Workforce, August 1998, Vol. 77, No. 8, pp. 27-28.

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