The nuances between what legally constitutes a person and an employer aren’t always clear-cut when it comes to FLSA compliance. In fact, when considering lawsuits about back wages, the federal government has the authority to deem a business owner an “employer” if certain criteria are present under the Fair Labor Standards Act (FLSA).
The consequences can be devastating both professionally and personally if you are found in violation of the FLSA. Being held liable for years’ worth of back wages and penalties could easily cost you and your business hundreds of thousands of dollars per incident.
And if you think insurance can shield you from such expenses, think again. In reality, employment practices liability insurance (EPLI), which may protect a business against claims made by employees in some areas, may not cover wage and hour issues.
The FLSA sets basic standards for minimum wage and overtime pay. But what complicates matters even more is that some states, such as California, actually have more stringent wage and hour laws than the FLSA. If you’re doing business in one of those states, the laws that are most beneficial to the employee must apply.
So, how can your company stay on the right side of FLSA compliance for both wages and hours and remain penalty-free? The first step is to educate yourself.
Understanding FLSA terminology
Under the FLSA, you may be considered an employer if you “suffer or permit an individual to work.” So, basically, if you require or allow someone to work, you’re employing them. In fact, according to the U.S. Department of Labor’s Field Operations Handbook, “mere knowledge by an employer of work done for him or her by another is sufficient to create the employment relationship under the FLSA.
As a good rule of thumb, you could be deemed an employer if you have:
1. Authority to hire and fire employees
2. Supervision and control of work schedules
3. Responsibility for the rate and employee compensation
4. Control or maintenance of employment records
In general, company owners and managers are more likely to be liable as an individual for unpaid wages when their conduct directly contributes to non-compliance with the FLSA under an “economic reality test.” This test looks at the individual’s involvement with the corporation’s day-to-day operations and their direct participation in creating or adopting unlawful pay practices.
Though relatively rare, there have been cases where the U.S. Department of Labor (DOL) determined certain individual business owners to be “employers” and concluded that they were personally liable for employees’ back wages and penalties.
In fact, the DOL states: “Employers who have willfully violated the law may be subject to criminal penalties, including fines and imprisonment.”
One restaurant owner in New York was ordered to pay $478,000, and another one in Chicago was found liable for $339,418 in back wages and damages. In both cases, the owners were found personally responsible for “willfully” underpaying employees.
Because the burden of proof for FLSA compliance lies with the employer, not the employee, it’s vital for businesses to maintain accurate records related to hours worked and wages paid.
It’s not uncommon for small businesses to have informal work arrangements, incomplete or non-existent job descriptions, or no employee handbook at all. For example, a family member may draw a salary and perform a variety of tasks “as needed,” such as ordering office supplies and filling in when regular employees are out.
Such informality can lead to a lack of proper timekeeping records for all employees and isn’t likely to meet federal or state wage and hour compliance standards. This can leave the business open to the risk of an audit by the Department of Labor, wage claims or class-action lawsuits.
Most common reasons for FLSA non-compliance
Although the two examples of restaurant owners found liable for employee back pay illustrate the importance of FLSA compliance, they’re not the only type of non-compliance issues. It may come as a surprise to learn that the most common reason businesses face FLSA lawsuits or DOL audits is the misclassification of employees as exempt rather than non-exempt.
It’s important to understand the difference between these two classifications:
- Exempt jobs are excluded from minimum wage and overtime regulations and are paid at or above the minimum salary level each week. Employees working in an executive, administrative, or professional capacity may be exempt. Outside sales can also be an exempt position. Each has very specific, defined criteria to meet the exemption.
- Nonexempt employees, such as inside salespeople and customer service representatives in call centers, are not typically exempt from FLSA requirements. If a non-exempt employee works more than 40 hours a week, you must pay them an overtime premium, which is usually one and a half times their hourly rate.
In some states, there may be a daily overtime requirement that must be paid if an employee works more than eight hours in a single day. Generally, offering comp (compensatory) time in lieu of paying overtime is not legal for private employers. Except in rare instances, such as with government agencies, it’s probably best to avoid comp time altogether to be safe.
Technology is making it easier than ever for some employees to work well past their 40-hour limit, thanks to remote access, email and teamwork apps like Slack.
This makes it incumbent on business owners and managers to be careful about contacting employees after hours to perform “one little assignment.” Done too frequently or without thought, these extra requests may balloon into hours-long tasks where all time worked must be tracked and the employee paid appropriately.
The second most common reason for a lawsuit or audit comes from employees being incorrectly classified as independent contractors. Most of the remaining non-compliance issues have to do with rates of pay, incorrect or non-existent tracking of hours, and travel time issues.
Department of Labor audits
The reality is that wage and hour law can be confusing, and most businesses simply don’t know they’re non-compliant. In fact, the Department of Labor (DOL) estimates that approximately 70 percent of businesses operate with FLSA compliance issues.
If discrepancies are discovered, here are several excuses that won’t protect your business from fines or penalties:
- Everyone in my industry does it this way.
- My employees will be insulted if I declare them non-exempt and make them track their hours.
- It’s too costly to pay overtime.
- I build extra pay into employees’ salaries to make up for any overtime.
It is worth noting that the DOL tends to conduct audits across particular industries when it finds a trend in non-compliance. That’s why the food service, health care, technology, construction, and banking industries have all faced regular audits in recent years.
The best strategy for avoiding FLSA non-compliance is to ensure accurate record-keeping and time-tracking, as well as the proper classification of employees. It’s a good idea for business owners to seek professional guidance before making decisions about how to track hours, and before declaring employees exempt or non-exempt. Although these may seem like straightforward issues, they’re often complex and subject to regulatory changes.
A reputable professional employer organization (PEO) can provide valuable guidance on issues such as wage and hour compliance, as well as other facets of employment law. Or you may want to seek guidance from a law firm knowledgeable in wage and hour law.
If you decide to hire a PEO to assist you, consider looking for those with the certified professional employer organization (CPEO) designation from the IRS.
Want to learn more about how you can stay current on complex and ever-changing employment and labor laws? Download our free e-book, Employment Law: Are You Putting Your Business at Risk?.