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Top Five Employer Mistakes Under the FLSA

September 8, 2006
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Related Topics: Attendance, Wages and Hours, Featured Article, Legal
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Ever since the Fair Labor Standards Act’s revised regulations became effective August 23, 2004, overtime has become a hot-button topic for employers and employees alike. Worse, it has also become a prime target area for plaintiffs’ attorneys, because even with the revisions the FLSA is an extraordinarily difficult statute to comprehend and comply with.

    Fortunately, some of the most common mistakes made by employers are easily identified and remedied. Whether you have five or five thousand employees, here are five mistakes you should try to avoid:

1. Believing salaried employees are automatically exempt from overtime
    Just because you are paying an employee a salary, no matter how large, does not mean that he or she is exempt from overtime. Each individual employee must qualify for one of the specific exemptions provided by the statute. Other less common exemptions include the executive exemption, administrative exemption, professional exemption, computer-employee exemption and outside sales exemption.

    Each exemption has specific tests, and each employee to whom you pay a salary must be evaluated to see whether the exemption applies. Don’t forget that job titles and job descriptions aren’t the determining factor any more than paying a salary is—just because you call someone a manager or an assistant manager and pay them a salary does not mean they qualify for the exemption. The courts and Department of Labor construe all of the exemptions narrowly, and the burden of proof always remains with the employer.

2. Misclassifying assistant managers
    Many businesses pay a salary to their assistant-manager-level employees without paying them overtime and without considering whether they truly qualify for the executive exemption. In order to qualify for the executive exemption, an assistant manager must be paid on a salary basis at a rate of at least $455 per week. In addition, the employee must meet each of the following three tests: 1) primary duty is management of the enterprise or of a customarily recognized department or subdivision; 2) customarily and regularly direct the work of two or more other full-time employees or the equivalent; and 3) have the authority to hire or fire, or make suggestions and recommendations as to hiring, firing, advancing, promotions or other status changes that are given particular weight.

    For example, if you have a store that regularly has a manager, assistant manager and a few hourly employees on duty, it is unlikely that both the manager and assistant manager will qualify for the exemption. With respect to hiring and firing decisions or recommendations, if assistant managers have that authority it should be included in their job descriptions in an effort to prevent later disputes over the exemption. Although many assistant managers will qualify for the exemption, many others will not, and each employee must be reviewed on an individual basis.

3. Automatic deductions for meal breaks
    Many employers automatically dock their hourly employees for a 30- or 60-minute meal break each day. Although this is not illegal, it is a frequent subject of litigation and liability. If you are sued by an employee or audited by the Department of Labor, it is your burden to prove the hours actually worked by your hourly employees. If employees later claim that they worked through lunch most days, it will be extremely difficult for you to prove that each of your employees actually took a full lunch break each and every day for which an automatic meal break deduction is made. These automatic deduction cases usually become collective actions and can become very expensive for employers who have such a policy.

    Fortunately, there is an easy solution: require your hourly employees to clock out and in for their meal breaks. It is imperative that during this meal break the employee is completely relieved from duty and is not performing any work whatsoever, but it is not necessary that employees be allowed to leave the company premises during the meal break. In order to discourage workers from working through this meal break in order to get extra pay each day, make it mandatory that the meal breaks are taken each day, and discipline employees who refuse to take the meal break. Additionally, if for some reason an employee works through a meal break one day, that employee can be sent home early on another day in the same pay week so that overtime does not kick in for that week.

4. Not paying for overtime that has not been approved in advance
    Many companies have a policy requiring employees to seek approval in advance before working overtime. The problem arises when an employer refuses to pay an employee for non-approved overtime. The FLSA, unfortunately, does not distinguish between approved and non-approved overtime—if the employee works the overtime, you are required to pay time and one-half the regular rate for that overtime. But the company is not without recourse: An employee who violates a company policy by working non-approved overtime can be disciplined or terminated for that violation of policy.

5. Allowing employees to "waive" their right to overtime
    Another common mistake, particularly among small businesses, is believing that an employee can waive his or her right to time and one-half pay for all overtime hours. What frequently happens is that an employee requests extra hours and agrees that he needs only to receive his regular pay for those hours. Sometimes this request is made out of a belief that other employees might be hired and everyone’s hours will be cut, or sometimes out of an employee’s particular need for some extra money.

    Despite your good intentions, any type of deal with an employee that results in the nonpayment of overtime is void and will not be a defense if the employee later files suit. A related problem sometimes arises when employees are paid out of two different locations or two companies owned by the same person. By way of example, an employer might own two ice cream stores, each of which is separately incorporated. If an employee works at both stores during a workweek for a combined total of more than 40 hours, that employee must be paid time and one-half for all hours beyond 40.

    The individual owner of stores cannot circumvent the overtime requirement (whether intentionally or otherwise) by paying an employee out of different stores or corporations. Not only will the courts or the Department of Labor likely find the companies liable under a joint or single employer theory, but the individual will also be liable as well.

The bottom line
    Compliance with the FLSA is a task you must take seriously. The number of lawsuits involving these claims is growing at an alarming rate, and the effects can be devastating for businesses of all sizes. Because the FLSA has a penalty provision that allows plaintiffs in some circumstances to recover twice their actual back wages, and because it automatically entitles prevailing plaintiffs to their attorneys’ fees, even a minor violation can wind up being very expensive. And many of these cases become collective actions, where the plaintiff invites all other similarly situated employees to join the litigation.

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