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Two Common Wage and Hour Traps – Worker Misclassification and Overtime Pay

Wage and hour employment law refers to the set of laws that establishes and regulates wage standards. This includes worker misclassification issues and overtime pay standards. The Fair Labor Standards Act (FLSA) sets the majority of wage and hour mandates at the federal level. These laws can be tricky, and they can become even more complicated when dealing with contingent and temporary workers, mainly due to co-employment issues. Therefore, it behooves every employer, whether or not they have a staffing partner, to educate themselves on two of the most critical “wage and hour traps”.

Misclassification Issues
It is critical that you correctly classify the people working for you as either employees or independent contractors.

Companies often misclassify workers as “independent contractors” when, in fact, the worker is entitled to “employee” status. The reasons for this are many, ranging from “everyone is doing it in this industry” to a concerted attempt to avoid paying payroll taxes and employee benefit coverage.

However, a worker’s “contractor status” is not something that can be agreed upon between the employer and the worker. It is based on the underlying nature of the work relationship, with the crux revolving around how much control the employer retains over the work performed, and how much economic and actual independence is retained by the worker. For more information on issues and factors around misclassification, please read our article “The Issue around the IRS, Employees, and Independent Contractors” in our Client Resource Hub.

Educating yourself on how to correctly classify your workers is crucial; the monetary penalties can be exorbitant:

  • Microsoft – The company had to pay a $97 million settlement for a suit brought by a group of temporary workers. In this case, which stemmed from an IRS audit, these workers claimed they were entitled to employee benefits such as the stock purchase plan.
  • Time Warner – The company had to pay a $5 ½ million settlement for a suit brought by the DOL. The suit alleged that Time Warner misclassified as many as 1,000 workers as independent contractors in order to circumvent having to provide employee benefits.

Overtime Pay
Federal overtime provisions require that employers pay 1 ½ times of the regular pay rate for all hours to workers, including temporary/contingent workers, who worked in excess of a standard 40 hour workweek. There are some exemptions – very narrowly defined – for certain executive, professional, computer, outside sales and administrative positions. In addition, if your employee doesn’t make $455/week ($23,660/year), he is eligible for overtime, even if he could be categorized as exempt through other methods.

Despite what many people think, exempt employees cannot “donate” their time to the company by working off the clock.

The consequences for failure to pay overtime can be staggering, in terms of both penalties and time/effort to defend against a lawsuit:

  • Kraft Foods/ Staffing Solutions Southeast (DBA ProLogistix) – a lawsuit was filed in June 2011 alleging that temporary workers hired for assignments at a Kraft Foods’ warehouse were denied pay for the hours they worked, for earned vacation time, and for the minimum number of hours that they were contracted to work (but were not used).
  • Walmart/Labor Ready Midwest/QPS Employment Group – a lawsuit was filed in October 2012 alleging that temporary workers hired to work in Walmart stores were refused overtime pay and that neither Walmart (nor the staffing firms)kept records of the time they worked, making it impossible for them to prove their case.

What To Do:
The best ways to protect against these two main “wage and hour traps” is to:

  • understand the laws. This includes understanding the
    • guidelines on classifying FLSA exempt employees
    • salary-basis test for FLSA exempt employees
    • five FLSA exemption categories
  • partner with a reputable human capital management (i.e. staffing) firm to write detailed job descriptions for all temporary positions and then use them as a basis to determine the correct classification.
  • fine-tune your payroll record keeping. In many cases, keeping painstaking payroll records for nonexempt employees is your best defense.
  • train your managers on wage and hour compliance issues. Even if you have written the best job description and have a solid policy in place, they will be useless if your management team does not know about them and cannot follow them.
  • have yearly audits. Periodically review every job description. Things change; duties change; laws change. This will reduce the likelihood that you will be drug into costly litigation, and it will save you money.