Popular Misconceptions: The FLSA, Salaried Employees, Overtime and Off-the-Clock Work

At the close of the past century, lawsuits under the Fair Labor Standards Act (FLSA) hovered between 1,000 and 2,000 each year, but by 2006 that number had risen to 4,400. In 2007 the Department of Labor (DOL) reported that overtime violations represented about 90 percent of all collected back wages under FLSA actions, and it now reports that 70 percent of employers are not in compliance with the FLSA, mostly regarding overtime pay and the proper classification of employees. Further, FLSA class action lawsuits over pay are currently filed more frequently than any other type of federal workplace litigation, outweighing by far claims under the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act, and the Employment Retirement Income Security Act (ERISA).

A lot of the non-compliance cited by the DOL stems from businesses not understanding the FLSA, especially when it comes to classifying employees as exempt or non-exempt, and then not awarding overtime pay when it’s due. To say the least, popular misconceptions about the FLSA and overtime abound in the business world. Here are some of those misconceptions:

“All our employees are on salary, so we don’t need to bother with overtime pay.” Unfortunately, paying an employee a salary is only one part of the equation under the FLSA to qualify that person as being exempt from overtime pay. There is also a duties test, which limits the salary exemption to those employees in executive, administrative, professional, computer professional, outside sales and highly compensated positions. To boot, the employee’s salary must be $455 a week or higher to reach the first bar, and then an employee-by-employee enquiry into actual duties and responsibilities must be undertaken to justify any award of exempt status.

For example, to qualify for the administrative exemption, employees must exercise their “discretion and independent judgment” in carrying out their duties. Many administrative positions fail to reach this standard. (There is also a category of non-exempt salaried employees that requires overtime, but it’s calculated entirely differently from the simple time-and-a-half equation for hourly employees.)

“We’ve added ‘manager’ to all our job titles so we can classify every employee as exempt and avoid overtime.” To begin with, see above. The title given to an employee’s position does not qualify anyone for an exemption. As explained earlier, to be exempt an employee must pass two tests—one regarding salary (at least $455 a week) and the other involving duties performed. The duties test could indeed end up with one vice president becoming exempt and the one in the office next door non-exempt.

Because of widespread misunderstanding and outright abuse of the employee classification system, the DOL has announced plans to hire 250 more inspectors for its Wage and Hour Division (WHD). Though most inspections result from complaints filed, random inspections are sometimes employed when a problem becomes widespread and too frequent. It’s best to get in compliance now and stay there. Companies can end up paying liquidated damages (twice the lost wages) along with legal fees and government fines for abusing overtime standards. Playing with a misguided concept like renaming all positions as managers could result in just such a liquidated damages nightmare.

“We had our employees sign an agreement that they would not charge for overtime.” Nice try, but the FLSA forbids such agreements, or waivers, and the mere existence of these documents could become prima facie evidence that your company intentionally sought to avoid its obligation to pay overtime.

“We got our employees to agree to work overtime in exchange for comp time off.” Another nice try, but unless the law is changed, this tactic won’t fly. The Equal Employment Opportunity Commission (EEOC) actually tried this itself but ended up getting busted for liquidated damages. The EEOC used the old saw about the employees being “exempt,” but it was shown that this was not entirely the case. The FLSA requires time-and-half pay for every hour over 40 in any defined workweek unless the employee truly can be classified as exempt. Some states have raised the bar even higher. California, for instance, requires overtime pay after eight hours in any workday.

“We dock workers for breaks and lunch time so that we don’t have to pay overtime.” There’s not enough detail in your statement to tell if what you’re doing is kosher, so let’s look at breaks and meal times in general. The FLSA considers break periods compensable, but it allows for unpaid meal breaks so long as they are free of any work-related obligation. Employees who take lunch at their workstations are thus not enjoying a bona fide meal break according to the FLSA and must be paid. To avoid this, employers need to enforce meal periods that are both off the clock and off duty. In addition, most states regulate lunch breaks, requiring them after six hours of work as a general principle (though states do vary, so it is wise to check), but the FLSA carries no mandate for breaks of any type.
 
It is an employer’s responsibility to keep track of each overtime-eligible employee’s working hours to ensure compliance with meal and rest period obligations. Many companies use the time clock, or computer log-in and log-out, as methods to keep track of time worked. Problems can arise here, however, if an employee clocks in early to drink coffee and read the newspaper, but then works an eight-hour day after that. The Cup-o-Joe time would then be compensable as overtime. Avoiding unwanted or unauthorized overtime requires a lot of due diligence on the employer’s part, and time sheets or other hourly records are indispensable for proving compliance with overtime regulations.

“We pay overtime but calculate it over the two-week pay period to average it out.” This is another trick to try to get around the FLSA’s overtime requirements. Remember, the law says that overtime must be paid after 40 hours in each workweek. In your example, if Worker A puts in 42 hours one week and then 38 hours the next, that would average out to 40 hours each week, but the FLSA forbids calculating pay this way. Overtime accrues each week, and in some states each day (see California above).

“We sent some employees to outside training on a Saturday and now they’re demanding overtime pay. We consider it ‘off the clock’ and not payable.” If the site of the training could be considered a “prescribed place of work” to which the employees have been ordered, then yes indeed, non-exempt employees would be eligible for hourly wages, even overtime wages if they had already logged in 40 hours for the workweek. However, if their attendance is solely voluntary, then you’d be off the hook for any pay. The DOL gives these guidelines for determining when a training session is “voluntary”:

1.    Attendance is outside of the employee’s regular working hours;
2.    Attendance is in fact voluntary;
3.    The course, lecture, or meeting is not directly related to the employee’s job; and
4.    The employee does not perform any productive work during such attendance.

Similarly, attendance at a training session is considered “not voluntary” when:

1.    You, as the employer, require it;
2.    Your employee understands or is led to believe that not attending will adversely affect his or her present working conditions;
3.    Not attending will adversely affect your employee's continued employment; or
4.    Disciplinary action will be taken against your employee for not attending.

In an opinion letter, the Wage and Hour Division offered this principle for determining what are and what are not “hours worked”: “As a general matter, when an employee’s time is spent predominantly for his or her employer’s benefit, it constitutes ‘hours worked’ and is compensable under the FLSA. See, e.g., Skidmore v. Swift & Co., 323 U.S. 134 (1944).” Given this guideline, it’s probably safest to assume in most situations that training and other “off-the-clock” endeavors are predominantly for the benefit of the employer and thus are compensable.

Off-the-clock and off-site work have been much the hot topics lately, especially with the recessionary practice of furloughing employees to save money. For instance, if an employee who’s on a furlough accesses his company e-mail or answers a business call on a company cell phone, then that’s considered “work” and must be compensated.

In your situation, to be safe, either send the employees to training during regular work hours or be prepared to pay them accordingly for weekend overtime. Most employers are also unaware that employees often must be paid while traveling to and from the airport on business trips or even while waiting around for a plane. So plan cautiously and accordingly.

This brief discussion of the FLSA and the proper compensation of non-exempt employees should help clear up some common misunderstandings, but it’s always best to seek legal advice or send an enquiry to the DOL to seek an opinion. The goal is to stay in compliance and avoid fines and costly legal settlements. To do so, you have to elevate your company from the ranks of the 70 percent that the DOL says are not now in compliance. Get started now.

To help you with understanding the FLSA, computing overtime and properly classifying employees, Personnel Concepts has developed a trio of muscular tools: the FLSA Salary Basis Compliance Kit, the FLSA Overtime Rules Compliance Kit, and the Fair Pay Discrimination Compliance Kit. Get yours today and ensure you’re not one of the 70-percenters exposing themselves to potential DOL inspections.

About the author:
Gary McCarty is a researcher and Web Content Manager for Personnel Concepts.

Note: The details in this white paper are provided for informational purposes solely. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.