Yesterday we issued an Alert about the District Court
in South Carolina ruling that the NLRB’s Poster Rule exceeded the agency’s authority
and was, therefore, invalid.   We
mentioned that there was a somewhat contradictory decision from the District of
Columbia District Court that upheld the posting requirement, but struck down
certain remedial aspects of the rule.
That D.C. case was appealed and the U.S. Circuit Court of Appeals for
the D. C. Circuit has, today, issued an injunction against the NLRB pending
review by the Court of Appeals that prevents the NLRB from requiring that the
poster be put up.

This appellate court decision means that
private employers who are subject to NLRB’s jurisdiction will NOT have to post
the poster on or before April 30.  It
will likely take several months to get a final decision by the Court of
Appeals.  Until then, employers need not
post the NLRB-mandated poster. (Note, though, that federal contractors are
required to post an almost identical poster under E.O. 13496).

As always, we will keep you up to date as
developments occur.

Nonexempt Employees Paid on a Commission Basis – Common Overtime Mistakes

Overtime compensation is required irrespective of the method used to calculate
wages.  That is “common knowledge.”  Yet, mistakes are made.  I have seen numerous occurrences of
incorrectly computed overtime pay for commissioned employees.  It is also not rare for an employer to
initially compute the overtime wages correctly, and then obliterate the good
intentions by adding one final step.

Piece rates and job rates are as likely to involve the same mistakes, but I am focusing on
commissions because that arrangement is more common.  If you are utilizing any type of incentive
pay plan, my observations and suggestions should be useful.  In fact, some of the shortcomings that I will
describe often affect hourly-paid employees.

Before discussing common errors, let’s look at the correct way to compute overtime
compensation when employees are paid on a commission basis.  It is important to “keep it simple.”  When unnecessary nuances enter into the
equations, mistakes happen.  The Code of
Federal Regulations, Title 29 Part 778, at §§ 778.117 and 778.118, sets forth
some very straightforward rules regarding the computation of overtime wages
when commissions constitute all or part of the regular wages.  Part 778 (the overtime compensation CFR) may
be accessed at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.2.39&idno=29.

When an employee’s regular wages result from a commission plan, those wages are
typically compensation for all hours worked (not just the first forty) in the
workweek.  Therefore, the required overtime pay is the half-time premium.  As
overtime pay must be a multiple (at least time and one-half) of the regular
rate, it is necessary that the regular rate be determined each workweek.  A DOL opinion letter – www.dol.gov/whd/opinion/FLSANA/2008/2008_09_22_12NA_FLSA.htm – is an excellent example of the simplicity of properly computing overtime pay for a commissioned employee.

The FLSA record keeping rules (Part 516) correlate with the above explanations by
requiring, in part, that the records reflect, for each workweek and for each
employee,

• basis of pay (e.g.,
  “commission,” “piece rate,” “hourly,” etc.),
• the regular rate,
• total regular wages (for all
  hours worked), and
• overtime premium wages
  (half-time pay for overtime hours).

It is helpful, in developing an understanding of the overtime compensation
principles, to be knowledgeable of Part 778 in general, but particularly §§
778.100 through 778.308.  Especially
useful are the §§ 778.107 through §§ 778.109 explanations of “the regular
rate.”

These are examples of practices that lead to overtime back wage liabilities.

• Many employers believe that
  employees paid on a commission basis are not subject to overtime
  compensation provisions.  The owner
  of a courier business (under DOL investigation) recently informed me that
  he had classified his owner/drivers as employees (not “independent
  contractors”) to avoid problems with the IRS, but that he assumed the commissions constituted
  total wages (no need to pay overtime compensation).
• It goes without saying that the
  record keeping rules (Part 516) require an accurate record of hours
  worked.  Employers must be
  especially diligent, when employees are paid on commission, in order to
  ensure that all hours worked are recorded.
  Failure to consider all hours worked when computing overtime wages
  obviously results in FLSA violations.
• The perception that regular wages are always just for forty hours
  and that overtime pay is time and one-half added to the perceived
  regular wages complicates the computation of overtime compensation for
  commissioned employees.  I have seen
  various types of errors occasioned by the misconceptions; the most
  detrimental are those that result in failure to pay any overtime
  compensation, even though the records reflect that overtime was paid.  One client had been creating an
  artificial “regular rate” to make the records appear that overtime pay had
  been added to commission earnings, but in reality the half-time premium
  was imbedded in the commissions (not legal, of course).
• A similar (but more formal)
  method is to boost the overtime hours by 1.5, divide total commissions by
  the new “total” of hours worked to obtain a (flawed) regular rate, and
  then show in the records that this rate was paid for the first forty hours
  and time and one-half this rate was paid for overtime hours.  Obviously, the result is false records
  and failure to pay any true overtime compensation.
• “Tinkering” with the results
  after overtime wages have been properly computed often obliterates the
  intended overtime pay.  This happens
  when an employer, intentionally or inadvertently, modifies the calculations
  of compensation.  One example is the
  use of a guaranty plan.  There are
  numerous variations of such an arrangement (always resulting in FLSA
  violations).  Here is an
  illustration: The employer had been paying 25% commission with no overtime
  pay.  After being investigated by
  DOL, and paying back wages, the employer came into compliance  by agreeing to pay half-time premium
  wages for all hours over forty.  The
  employer modified the commission plan, reducing the percentage to
  22%.  However, this employer made a
  serious mistake by advising the employees that he will see to it that they
  do not average less than the previously paid 25%.  Each workweek, after all commissions
  have been determined @ 22%, the employer follows the Part 778 rules in
  arriving at the regular rate and adding the half-time premium pay to the
  commission earnings.  Then the
  employer re-computes commissions at the old (now guaranteed) 25%
  rate.  If this yields less than the
  computed total wages, no change is made.
  If the 25% computation yields more than the wages computed @
  22% plus overtime pay, a pseudo bonus is added to increase the total pay
  to the desired level.  The half-time
  premium compensation that had been computed and added to the 22%
  commissions now becomes meaningless because the pseudo bonus ensures
  payment of the guaranteed commission rate.
  However, even in workweeks when there is no need for adjustment,
  overtime compensation has not truly been paid (because of the guaranty
  arrangement).  The “overtime pay” is
  now simply a part of the regular wages, increasing the regular rate.
• A subtle variation of the
  above-described guaranty plan is to base the guaranty on a period longer
  than a workweek.  For example, the
  employer might guarantee that the total pay for the year will yield a 25%
  average commission.  If necessary, a
  supplement will be added (at the end of the year) to achieve the desired
  percentage rate.  Again, the records
  do not reflect the facts, the methodology is wrong, and no actual overtime
  compensation has been paid.

All of the described practices result in a back wage liability.  In the first two examples, if the employer
has not been previously investigated by the Wage and Hour Division and there is
no evidence of willfulness, civil money penalty assessment is not likely.  Litigation (if it occurs) will probably
involve the basic two-year statute of limitations.  With regard to the other examples, DOL will
view the records as having been falsified, indicating willful violations.  Civil money penalties are likely.  If there is litigation by DOL or employee
plaintiffs, a three-year statute of limitations will be invoked.

Early on I suggested that, when computing overtime pay for commissioned employees, it is
best to “keep it simple.”  Doing so avoids the deviations and problems that I just described.

In summary, if your overtime computation methods for commissioned employees are less than
straightforward, you should make changes right away.

This article is focused on arrangements involving commission as the only method of
pay.  The same principles generally apply
if commissions are supplements (see Part 778, §§ 778.115 and 778.118).  If the commissions are paid other than
weekly, see §§ 778.119 and 778.120.  Piece rates and job rates are discussed in
Part 778 at §§ 778.111 and 778.112; however, the more detailed information (in
Part 778) regarding commissions will be helpful when analyzing compliance
procedures regarding piece rates or job rates.

The Wage & Hour Self-Audit Guide, in the Self Auditing section of www.BizKeys.com,
contains an overtime compensation section that covers the overtime basics, with
elaboration regarding various guaranty plans that result in violations.

COURT ISSUES DECISION ON NLRB’s RULE     REQUIRING POSTING OF NOTICE INFORMING EMPLOYEES OF THEIR RIGHTS

                                                     BY: William G. Trumpeter, Esq.

                                                             Miller& Martin PLLC

                                                   btrumpeter@millermartin.com

   The court’s ruling in the National Association of Manufactures v. NLRB,  Civil Case No. 11-1629(ABJ) (USDC DC March 2, 2012) challenging the NLRB’s Notice posting rule is in and it is a split decision.  The bad news for employers is that the court has upheld the NLRB’s authority to issue a rule that requires employers to post the notice to employees informing them of their rights under the National Labor Relations Act.   The good news is that the Court struck down the portions of the rule that provided the failure to post the notice would be deemed an unfair labor practice and would also constitute grounds for tolling the short six-month statute of limitations applicable to unfair labor practice charges under the Act.

   What does this mean to employers?   Failing to post the notice will not automatically be deemed an unfair labor practice, but failure to post can have adverse consequences.  First, failure to post may be used as evidence of anti-union animus in cases in which animus is an element of the general Counsel’s burden of proof.  Second, although the Board struck down the portion of the rule stating that the NLRB could infer that the failure to post was good cause to toll the statute of limitations, it left open the question of whether the failure to post could be used to justify an equitable tolling of the statute of limitations in a case in which the Board contended and proved that the employee bringing the charge was unaware of his or her rights under the Act.  Third, Failure to post could be used by the Board as justification for overturning an election result in favor of an employer.   Election interference need not rise to the level of an unfair labor practice to result in an election reversal.   

   As it stands now, the Notice must be posted on April 30, 2012.  The teeth of the enforcement provisions of the rule, the creation of an unfair labor practice, have been filed down and the bite may not be as painful, but failing to post the notice may still have adverse consequences as outlined above. 

 If you would like more information concerning these proactive measures to remain union-free, please contact Bill Trumpeter at btrumpeter@millermartin.com or (800) 275-7303, ext. 318.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations.  As always, readers should consult a qualified attorney for specific legal guidance.  Should you need assistance from a Miller & Martin attorney, please call 1-800-275-7303. 

That is probably a question that many readers  are asking, with all of the publicity about DOL, IRS, and states cracking down on employers who treat workers as “contractors.”

 There is a perception that this focus by enforcement agencies is new.  The joint effort and publicity are, in fact, new phenomena.  However, the DOL has consistently viewed FLSA employment relationship concepts broadly.  While in on-the-job training, after being hired by the DOL Wage and Hour Division (and prior to the intensive four-week classroom training), I was sent with investigators to observe.  On the very first case, I watched while the seasoned investigator interviewed a carpet installer at a furniture/flooring store.  On the way back to the office, I said “Mr. McClure, he referred to himself as an independent contractor.  Why is there an overtime problem? ”  Investigator McClure advised me that it will all be clear after I receive formal training, but – in the meantime – he assigned some reading material about the FLSA employment relationship.  My point is that DOL has never taken the position that merely designating a worker as an independent contractor destroys an otherwise applicable employment relationship, even when the worker furnishes tools, equipment, and a vehicle.

During my DOL career, I found that efforts to enforce the FLSA when the employer contended that the workers were “contractors” were made more difficult because of lack of interest by the IRS and state agencies.  Employers and their representatives were ready and willing to “fight the battle” with DOL because they believed that the laissez-faire approach of other agencies should be adopted by the DOL.  Some of those investigations resulted in litigation so that DOL could prevent continuing violations and collect the unpaid overtime wages.

The IRS and state agencies are now paying attention to the rampant misclassifications.  They realize that employers who misclassify workers are ignoring statutory payroll taxes, and that allowing employers to treat workers as “contractors” requires more resources to collect federal and state income taxes.  The recent joint agreement between the DOL and numerous state agencies will greatly reduce the expense of enforcement, as the agencies will be sharing information.  The publicity will result in more confidential complaints, helping the agencies to focus their investigations directly on employers who are alleged violators.

It is true that the various laws do not have identical definitions of “employ,” “employee,” and “employer.”  In the FLSA, the Congress made it a point to leave no doubt.  To employ is to “allow or permit” to work (paraphrased).  Of course, there are legitimate business dealings between independent entities or persons, so removed from employment that it is not arguable, but there are often unclear scenarios that must be resolved.  The Supreme Court established FLSA employment relationship guidelines during the 1940s, and the DOL has applied these principles since.

Why should you care?  If you are paying individuals or small crews via 1099 (in lieu of W-2), you are vulnerable to IRS and/or state tax agency enforcement.  If you are using “contractor” classification as an excuse to not pay overtime wages, you are a prime candidate for DOL or state employment law agency enforcement. 

Overtime back wages are not the only possible employment law outcome.  Minimum wage violations are sometimes evident because the costs of furnishing equipment (e.g., a courier driver’s delivery vehicle) may reduce the effective rate to less than the minimum wage.  FMLA violations may be retroactively asserted because the “contractors” bring you up to the fifty-employee thresholds.  ERISA violations might have occurred because of the misclassifications.  There are other possibilities, such as EEOC implications.

Even if all of your contractors are legitimately in their own businesses, you should be concerned about whether they are treating their workers as employees and complying with applicable laws.  The FLSA includes a “joint employment” concept that could extend your contractors’ obligations to you.  Their failure to pay overtime wages, for example, might become your liability.  Their illegal employment of minors could result in your being assessed a substantial civil money penalty (see the November 2011 BizKeys newsletter for an excellent article about the costs of child labor violations). 

Another reason that you should be concerned is competition.  In 1938, the Congress enumerated several reasons for enactment of the FLSA.  One of those reasons was to prevent unfair competition.  In the DOL press release about the memorandum of understanding with the IRS and many states, one of the stated anticipated outcomes is to “level the playing field” among employers.  It is not fair for you to absorb the costs of treating your workers as employees while your competitors are avoiding the expenses of complying with tax and employment laws by treating workers as “contractors.”

The Wage & Hour Self-Audit Guide, in the Self Auditing section of www.BizKeys.com, contains an “Independent Contractor” topic.  That is a good place to start if you have classification concerns.  Also, see http://www.dol.gov/whd/workers/Misclassification/index.htm.