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Pay Attention to Pay

By Denise K. Drake

Employers must be aware of and comply with a host of state and federal laws related to employee pay.  Below, we detail five common mistakes that employers make, and how to avoid them.

1. “Exempt” Employees Misclassified. Employees must meet both a salary basis and duties test to be properly classified as “exempt” from Fair Labor Standards Act (“FLSA”) overtime pay requirements. The U.S. Department of Labor (“DOL”) proposed to more than double the salary required to qualify as “exempt” in 2016.  A decision blocking the DOL’s new rule from going into effect is currently on appeal.  The DOL recently advised that, while it is reconsidering the threshold salary level for “exempt” employees, it continues to assert its right to set a minimum level.  Employers should be prepared for the DOL’s right to regulate pay to be upheld, and must also remember the “duties” test is alive and well.  Wages, penalties, and attorneys’ fees associated with misclassification are typically significant.   

With an estimated 8 million employees incorrectly classified as “exempt,” neither the DOL nor private attorneys have slowed their attacks.  Employers should audit (pay attention to) the duties their exempt employees actually perform, as well as all descriptions of the employees’ duties to ensure employees are properly classified.    

2. Independent Contractors Misclassified.  Employers may only classify a given worker as an “independent contractor” if the relationship between the employer and the worker in question satisfies certain tests, such as the Internal Revenue Service’s (“IRS”) “Right to Control” test, among others. The IRS, the DOL, the National Labor Relations Board, state governments, and plaintiff attorneys are highly likely to continue their high priority challenges on the misclassification of W-2 employees as independent contractors. Wages, fines, penalties, back taxes, benefit payments, and attorneys’ fees add up quickly, and more often than not, reach the six figure range.  Employers should audit (pay attention to) all independent contractor relationships in light of their employee benefit plans and all applicable laws to ensure workers are properly classified.     

3. Rounding Policies. Many employers round their employees’ clock in and out times to the nearest five, ten, or fifteen minute interval, and pay employees based on the rounded time.  Rounding policies, in and of themselves, are not unlawful.  Employee attorneys continue to file suit against employers who round clock in and out times.  These attorneys point to restrictive clock in and out policies, tardiness policies, unpaid pre- or post-shift meetings, disciplinary policies, and unpaid pre- or post-shift work in an effort to prove the employer’s practice of rounding time did not equally benefit the employer and employee over time, as required by law. Employers that round time need to pay attention to their policies, create clear communications in relation to work and personal time, and ensure whether rounding benefits the employer and employee equally over time.  

4. Timekeeping Auto-deductions. Employers are not required to pay employees for non-working time. Accordingly, some employers automatically deduct time when they know an employee is not working. Employee meals continue to be the most frequent period of time subject to auto-deduction.  Employees challenge such deductions when meal periods are skipped or interrupted with no change to the auto-deduction (and, accordingly, no change to the employee’s pay).  Some employers auto-deduct other periods of time at the beginning or end of a shift as well.  It is critical that employers pay attention to the language in their auto-deduct policies and provide employees with a clear and simple mechanism to override any improper deductions.  

5.  Required Notices. Congress and the DOL require that employers provide employees with certain notices regarding certain aspects of their pay. Such required notices range from posters (e.g., WH 1088, “EMPLOYEE RIGHTS UNDER THE FAIR LABOR STANDARDS ACT”), to tip credit notices and other designations when employers pay their tipped employees a cash wage that is lower than the minimum wage.  Many states also have similar, specific notice or written agreement requirements. For example, specific, written agreements are required when California employees are paid commissions.  In some circumstances, employees who are properly paid, regardless of whether a notice is given, may bring claims for damages or penalties.  Employers should pay attention to (audit) the notices, forms, and designations required for each type of payment used with employees, including the date of the most recent notice, its contents, and whether new notices need to be issued and new pay designations need to be added.