These 5 common overtime traps can come back to cost you
Small companies often manage their employees with a focus on controlling labor costs and optimizing performance. One employee can wear many hats, and usually it is the business owner or upper level manager directing everyone’s activity in response to the needs of the moment. Consequently, job duties are often not set in stone, and one or maybe two senior level people are making all business and management decisions. This common method of operations can result in the business running a risk of incurring sanctions for failure to pay overtime as required under the Fair Labor Standards Act (FLSA) for any employee who is properly classified as nonexempt from the overtime and minimum wage requirements of the FLSA. As a result, your overtime payment obligations simply start adding up, and as soon as one employee makes a complaint to the applicable state wage payment agency or the Department of Labor, you may end up with a sizeable and unexpected payroll expense, and in some cases, fines and employee attorney fees. Failing to properly observe applicable wage payment laws (including the state and local wage payment laws applicable to your employees) is a costly and very risky strategy. The most common small business overtime risk scenarios are:
1. Simply ignoring the obligation or not paying overtime because the employee was not expressly authorized to work the hours worked, or underperformed while working.
Nonexempt employees are entitled to be paid for all hours worked regardless of work quality or quantity.
Under the FLSA, employers are obligated to pay employees (who are not exempt from the overtime rule) for all hours worked if they “suffered or permitted” the employee to work. This standard means that if you are aware of employees working outside of their regularly scheduled hours or outside of their recorded time worked entries. This means that if an employee comes in early or late to meet deadlines, correct work deficiencies, or in attempt to impress the boss, are entitled to time and a half for any hours over 40 hours in one week. Employees who stay at the worksite outside of their regularly scheduled hours and end up dealing with a customer, coaching a coworker, answering the phone, or engaging in any other work activity, even if not authorized to do so, are also entitled to time and a half for any time over 40 hours in a week. Employees who come to work, underperform, and end up having to work longer hours to accomplish their job responsibilities are also entitled to overtime when applicable. Employees who are required to engage in specific practices prior to starting their workday (such as a bag check or changing into a uniform) are also required to be paid for this time, including any applicable overtime.
To avoid the overtime obligation in the above scenarios you need firm policies and oversight to avoid inadvertent overtime obligations. This includes a definitive instruction that employees are not permitted to come to the work site outside of their scheduled hours without prior written permission. Poor performance should be handled through performance improvement plans or other disciplinary measures rather than through an arbitrary financial penalty in their paychecks through the omission of overtime or even worse, not paying the employee for all hours worked. Ensure that you are quantifying worktime appropriately and in compliance with your state and local wage payment laws.
2. Misclassifying the employee as exempt from the overtime and minimum wage requirements of the FLSA.
Employees classified under the executive or administrative exemption need a lot of autonomy and independence in their roles that rarely occurs in a small business setting.
Employees who are exempt from the FLSA overtime mandates include executives and administrative employees. To be exempt from the overtime rules, the employees must earn at least $684 per week, usually without regard to the actual hours worked or their quality of work. This means that if the employee only works 2 hours per day, they are entitled to the same pay as if they worked 10 hours that day. The rationale here is that when the employer needs it, the employee will work extended hours to perform their job responsibilities, so if the employee can meet these same responsibilities in a fraction of the time, they are still entitled to the same pay. Employees who can be classified as executives or administrative employees need a substantial degree of autonomy and independence in their roles that rarely occurs in a small business setting. For example, if the company has detailed procedures and operational processes which all employees must follow, it is unlikely that any of these employees qualifies as an executive or administrative employee for FLSA purposes. Misclassifying employees as exempt, and requiring or permitting these employees to work in excess of 40 hours a week for a given salary without paying overtime can result in substantial penalties down the road including unpaid wages for hours worked and applicable overtime. To minimize this risk, employers should review all job descriptions of their exempt employees, identify if the job description is representative of how the employee performs within their role, and if not, identify the differences and determine if the job description and/or how the employee performs their job responsibilities, truly meets the exemption tests.
3. Communicating with nonexempt employees about work outside of normal business hours, or fostering a workplace culture that encourages employees to perform work off-the-clock.
Today’s technology coupled with the multi-tasking culture prevalent in many small businesses, will often lead to employees performing unscheduled work which will ultimately inflate your payroll costs.
In most small businesses, employees are wearing many hats, and good employees often step up to handle problems outside of their defined roles. Unfortunately, this many cooks approach can often lead to chaos resulting in the need for employers and managers to reach out to employees during their off time for work issues, or resulting in employees reading or responding to time-sensitive work emails outside of their normal work hours. In the majority of situations, this work activity from home is compensable time, including any applicable overtime. If you have no policy limiting employee access to company systems outside of scheduled hours, nor a policy mandating that employees record all time worked, including all time worked off the clock, you may be liable for unpaid wages and any applicable overtime, if an employee files a complaint alleging that you have a work culture that encourages off-the-clock work because you ask employees to “keep an eye out for important work emails” or where managers often contact employees off-the-clock and essentially ask them to perform work, even minor work such as asking for a client’s telephone number, or asking them to respond to an email. Sometimes encouragement to work off the clock crosses the line into directives, such as disciplining underperformance by requiring nonexempt subordinates to complete late or inadequate work on their own time, or directing employees to table their workplace questions or concerns until after their scheduled end time is a violation of the FLSA. It is important that managers understand their obligations under the FLSA, because if their conduct violates the FLSA, even when their directives and conduct are not authorized by the employer, the employer will still end up footing the bill for any unpaid wages and applicable overtime. Comprehensive management policies and manager training along with employee whistleblower policies are essential to avoiding this overtime risk scenario.
4. Automatically deducting a lunch break or other breaks without permitting employees to reverse this deduction when applicable.
If employees are required to eat lunch on site, often eat at their desks, or need to engage in work-related travel during their lunch break, it is unlikely they had a lunch break within the meaning of the FLSA.
While the automatic deduction of a lunch break itself is not unlawful, you need to ensure that your employees are actually taking their lunch breaks or adjusting their pay records to eliminate the deduction when applicable. For an automatic lunch break to be valid under the FLSA, it should be at least 20 minutes long and the employee should leave their work area during the break and not perform any work related duty during their break. If employees schedules are set up so that it is likely they are performing some work during their lunch break, such as commuting to another work site, they did not have their full lunch break and if the time they had was less than twenty minutes, then there should be no deduction for their lunch break. Employees who eat lunch at their desks will end up performing work as emails roll in or phones ring or coworkers ask them questions. Similarly, if employees are required to eat lunch at their desks or somewhere at the worksite, this is not considered a lunch break because you have restricted their independence during the break. Comprehensive policies that mandate the recording of all time worked and permit employees to scale back any automatic time deductions, or to correct inaccurate paychecks
5. Poor Record-Keeping
Will your payroll records support your payroll obligation in the face of a wage dispute or audit?
5. Poor Record-keeping.
Under the FLSA, employers are required to maintain all records related to the payment of wages for at least three years. This includes time-records, job descriptions, offer letters, and written authorizations for wage deductions. To ensure that your records support your payroll expense, they should be detailed showing clock in and clock out times, and signed by the employee with an attestation as to accuracy. Payroll records that are standard forms that the employee submits such as simply showing scheduled hours as hours worked, will likely be insufficient to protect the employer’s position in the face of a wage dispute.
