I’ve had many employers come to me for help after they have received a demand letter from an attorney for a former employee, or after they have been served with a lawsuit alleging violation of the Fair Labor Standards Act (“FLSA”). A common theme I’ve noticed with small or medium sized employers and particularly those without a designated human resources department is a misunderstanding about some of the fundamental requirements of the FLSA. This is not surprising because many of the FLSA’s rules conflict with well-established business principles which employers routinely apply in other aspects of their business. We’ve all heard the maxim, “a deal is a deal.” But sometimes with the FLSA, a deal is not a deal, or at least not an enforceable one. Here are what I consider to be the top five misconceptions by employers, which I have come across in my practice:
1. “But I had an agreement with my employee that they would not get overtime.” Employers are often surprised when they are sued by an employee who has expressly and sometimes even in writing agreed with them that they are not entitled to overtime or minimum wage. It often comes as a shock to employers when this happens because they are accustomed to making valid and enforceable agreements in connection with their business. This is one of the areas where the FLSA changes the “rules of the game” and catches many employers off guard. Simply put, you can’t contract around the FLSA. Even if an employee agrees in writing, believes the deal is fair, and fully understands what they are doing, the agreement is useless. And when the employee has a change of heart and decides to sue the employer for unpaid overtime or minimum wage, the judge won’t care about the agreement and the jury will never hear about it. In fact, you might be surprised to learn that an employer can’t even obtain a release of an FLSA claim from an employee unless it has administrative agency involvement or court approval, even if the release is part of a severance package paid to a departing employee. The rationale behind this rule of course is fairly straightforward. If employers were able to make such agreements, it’s pretty easy to see how this would result in the neutralization of the FLSA through the free market because competitive employers would naturally require such an agreement as a condition of employment.
2. “What do you mean they are owed overtime? They were a salaried employee.” I hear this from employers who have some peripheral knowledge of the FLSA but who have never grasped the concept of the difference between an exempt employee and a non-exempt employee. It is very common to have salaried employees who are exempt, meaning they are not legally entitled to overtime. However, the reason they are exempt is not because they are paid on a salaried basis. There are other important factors, which are determinative of whether employees are entitled to overtime or minimum wage for that matter. Those factors are sometimes difficult to apply and are outside the scope of this article, but most involve the employee’s level of responsibility and authority. Therefore, if an employer pays its cashier on a salaried basis instead of hourly, it still must keep track of the employee’s hours and pay overtime when the employee works more than forty hours per week. And if the employee happens to work so many hours that the effective hourly rate falls below minimum wage, the employer must make up the difference. So, non-exempt employees may be paid on a salaried basis, but I don’t recommend this to my clients. This is because employers must use what is known as a fluctuating workweek method to determine the effective hourly rate for purposes of paying overtime which will likely be different each pay period. This is another area full of pitfalls which is frequently litigated and requires more administrative work by the employer. My advice is to keep it simple, keep your non-exempt employees hourly and your exempt employees salaried. Just don’t loose sight that the method of payment is only part of the equation when it comes to an employee’s classification as exempt or non-exempt.
3. “Let’s give the employee a raise and a management position so we don’t have to deal with tracking hours and paying overtime.” This is the flip side of the salaried employee trap. Employers are often tempted to give an employee a management position in order to avoid paying overtime because they have heard that managers are classified as exempt under the FLSA. The problem is that the title of “manager” (or any other job title for that matter) has no bearing on whether an employee is properly classified as exempt or non-exempt. The question to ask in terms of whether this truly relieves an employer of the obligation to track hours and pay overtime is does the employee actually manage anyone or anything? Does the employee have actual authority over other employees and if so, how many? Does the employee have the authority to hire, fire or discipline other employees? Does the employee have authority to create an obligation on behalf of the company or create company policy?These questions should demonstrate that it is the employee’s authority within the business, not the job title that is determinative of whether they are exempt. Once again, the specific requirements for the exempt classification of employees are outside the scope of this article. But if you are faced with a business partner who is suggesting that you give a non-exempt employee a raise and a new job title and dispense with overtime, don’t fall into the trap of taking form over substance and believing its going to satisfy the FLSA’s requirements. Consult a professional who can help you with the correct classification.
4. “But my employee didn’t work more than 80 hours during the pay period. How are they entitled to overtime?” Here is an area that really irritates employers because it can lead to what they perceive as unfair and inconsistent results. For example, two employees can work the same number of hours during a two-week pay period and one can be entitled to overtime where the other is not. The misconception here is that the pay period establishes the applicable time frame for purposes of overtime. It does not. Under the FLSA, each week stands alone. Overtime is based on whether the employee worked more than 40 hours in one week, not whether they worked more than 80 during the two-week pay period. So, if an employee works 50 hours the first week and only 30 the second, the employer still owes the employee 10 hours at the overtime rate for the first week, even though the total hours for the pay period are 80 or less.
5. The automatic “lunch deduction.” It can be frustrating for an employer who is trying to comply with the FLSA but who faces unpredictability in terms of the number of hours its employees are working each week and whether they will have worked more than 40 hours by the end of the week. Obviously, the more employees, the more this can become an administrative headache with each employee working a different number of hours for the week. This frustration can be exacerbated when there is an expected lunch period in place but which is not followed. Some employers deal with this problem by using what is known as an automatic lunch deduction. That happens where an employer does not require its employees to clock out for lunch, assumes the employees are all following the lunch schedule and takes an automatic deduction from the employees’ total work hours for the week for purposes of accounting for lunch. Therefore, if an employee’s total reported hours for the week was 45, the employer takes an automatic lunch deduction of one hour per day bringing the compensable hours back down to 40 and the employee is not paid overtime. The automatic lunch deduction is a terrible idea and most likely will cause an employer more headaches than it cures. First, the “automatic” lunch deduction is an “automatic” red flag for plaintiff’s employment lawyers who may be looking for a weakness in the pay system that can be exploited in an overtime case. Not only is an employer assuming that each employee will follow the schedule, they are not requiring the employees to clock in and out for lunch. This immediately creates vulnerability for an employer because the employer has the legal obligation to pay for all hours that the employee actually works and to maintain accurate time records notwithstanding the assumed work schedule. If the employee does not take the expected time off for lunch, the employer may not use the fact that the employee knew there was an automatic lunch deduction in place as a defense. If you take nothing else away from reading this article, it should be this.
Employers seem to get in trouble the most when they try and find a way around the FLSA’s overtime or minimum wage requirements. And it’s not just the small businesses, which fall into this trap. A number of well-known national businesses have been sued, sometimes successfully, for misclassifying employees as managers in order to avoid paying overtime. So if you happen to find yourself saying, “do we have to pay overtime if we did this…” you will probably be spending time (and money) with an employment attorney like myself in the near future. Its better to get an attorney involved as a preventative measure for advice on how to proceed than after-the-fact in dealing with a claim or lawsuit.