Seven FLSA Quirks – Unanticipated and Costly

August 7th, 2012

Would it concern you to know that you might have individual responsibility forcompliance failures of your company? If you or your entity were to be sued for
back wages, how would you feel about a six-year statute of limitations? What if a minimum wage or overtime suit accuses you of being a racketeer? Certain types of compliance failures, or the results of them, can be completely unexpected. Let’s examine these (and other) FLSA nuances.

1.  You might believe that your relationship with another employer, such as a subcontractor, should not result in an obligation regarding that employer’s practices with respect to wages or employment of minors. Similarly, you would not expect to be held responsible for FLSA practices of the entity by which you are employed. However, Joint employment concepts allow for multiple entities and/or individuals to be held simultaneously responsible for the same violations. Most back wage suits filed by DOL or by plaintiffs’ attorneys cite, as defendants, individuals believed to have been “acting directly or indirectly in the interest of an employer in relation to an employee.” The same is
true when the DOL assesses civil money penalties. When I was with the Wage and Hour Division, one of my investigations, of one establishment, resulted in
civil money penalty assessment against three entities and four individuals. http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.2.50&idno=29 explains FLSA joint employment principles.

2.  Interns and trainees are often
treated as non-employees. In a business setting, this is usually not an accurate determination. See http://www.dol.gov/whd/regs/compliance/whdfs71.htm. When an employment relationship exists, failure to pay minimum wage and/or overtime compensation obviously results in a back wage liability. Likewise, allowing under-aged children to work – even when it is believed that they are “interns” – results in an assertion of child labor violations. Prior to retirement, I investigated a veterinary clinic and kennel. Minors, under fourteen years of age, worked on weekends – feeding and caring for the animals. These children were treated as “interns” or “volunteers.” They received no compensation, and there was no record of their employment. Child labor, record keeping, and minimum wage violations were charged against the employers.

3.  Record keeping provisions of the FLSA are explicit, but they are often ignored. There is no civil money penalty for failure to maintain proper records, but insufficient records often lead tomonetary or child labor violations. For example, failure to record time devoted to preparatory or concluding activities, checking emails and voice mail after scheduled hours, or compensable travel time, can result in a significant number of unrecorded (and uncompensated) hours worked. As I previously mentioned, certain workers might not even appear on the records. The lack of records is never a good thing, and perceived concealment will be treated as an indication of willfulness (increasing the civil money penalties). The penalties are even greater when child labor violations result from minors working “off the records.” Required records: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.1.13&idno=29.

4.  Exemption misclassification errors are familiar to most employers. However, the possibility that an inapplicable exemption might be claimed is not limited to “white collar” scenarios, and the result is not always limited to an overtime issue. Child labor violations can also occur because of exemption misclassification. Agricultural employment is generally exempt from overtime provisions, and employment of minors is less restrictive. However, the determination of agricultural status is sometimes difficult. An example of such a quandary is Christmas tree planting, maintenance, and harvesting. Christmas tree production is not “agricultural” for FLSA purposes unless the activities qualify under the complex explanations of “secondary agriculture.” See §§ 780.105, 780.159 – 780.205, and 780.208 at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.2.41&idno=29#29:3.1.1.2.41.2.355.6. Not only are employees owed overtime pay (unless another exemption applies), but the non-agricultural child labor standards apply. In a non-agricultural setting, a minor must be at least eighteen years of age to operate a power saw (including a chain saw). In a true agricultural operation, a minor may legally operate such a saw at sixteen years of age. Of interest to Christmas tree
growers in Maryland, North Carolina, South Carolina, Virginia, or West Virginia – the United States Court of Appeals for the Fourth Circuit ruled that the production of Christmas trees is “agricultural” for FLSA purposes. It is improbable that DOL will attempt to enforce its position within the Fourth Circuit, but you should consult with your attorney. The FLSA § 13(b)(28) overtime exemption applies to non-agricultural Christmas tree production and harvesting operations when eight or fewer employees are involved. See § 788.10 at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=97db7fbc09311d3382f49aade5cfaa82;rgn=div5;view=text;node=29%3A.1.1.2.47;idno=29;cc=ecfr.

5.  How the FLSA applies is sometimes dependent on other laws under which the employer has obligations. For example, if your state’s minimum wage is higher than the FLSA minimum wage, and you have failed to comply with that higher wage rate, DOL will compute any FLSA overtime back wages at the state minimum wage plus the half-time premium. Similarly, if you are subject to state “prevailing wage” laws, the wage determination wage rate will be treated as the regular rate (if you paid less than that rate) when computing overtime back wages. The same is true with regard to federal contract laws (Davis-Bacon Act, laws related to the DBA, and the Service Contract Act),
but the DOL Wage and Hour Division has full enforcement authority regarding those statutes and a related non-FLSA overtime law.

6.  An even stranger quirk involving another law is the FLSA effect of the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). That law requires farm labor contractors and joint employers to comply with the FLSA. MSPA has no statute of limitations. While this law ordinarily involves agriculture, it also applies to certain non-agricultural employment (e.g., forestry restoration and maintenance crews, employed by a labor contractor, are treated as “agricultural” for purposes of MSPA). In such a case, the FLSA overtime standards apply, but the FLSA statute of limitations does not apply to legal actions filed under MSPA. If a “farm labor” contractor fails to comply with the FLSA, litigation to recover back wages may be pursued by employees (plaintiffs) without regard to the FLSA three-year maximum statute of limitations. By alleging MSPA violations (i.e., that failure to comply with the FLSA equals failure to comply with MSPA), the plaintiffs may take advantage of the lack of a MSPA statute of limitations. I assisted the defense attorneys on one such case, in which the court allowed a six year statute of limitations (based on the state’s applicable statute of limitations under contract law). I have no reason to believe that DOL would deviate from its customary two-year (three-year in the event of willfulness) litigation practices, but employers
who are subject to MSPA are very vulnerable to an extended statute of limitations when employee plaintiffs sue for FLSA back wages.

7.  The FLSA provides, via the liquidated damages provision, that the back wage award may be doubled. An employer informed me that he owes FLSA back wages, but that the plaintiffs’ attorney sought to recover treble damages by filing a civil suit under the Racketeer Influenced and Corrupt Organizations Act (RICO). This might have been a stretch, but the threat of a RICO suit is another potential aggravation and expense for employers.

The child labor provisions were referenced on several occasions. This topic was discussed in the June 2012 BIZWatch.

An FLSA compliant employer with no joint employment exposure is not likely to be affected by any of the described FLSA quirks. If there is doubt, “getting your house in order” is always advantageous (instead of waiting for DOL or a court to become involved). If there is a possibility of joint employment, it is to your benefit that such other employers take the initiative to ensure that there is not a continuing accrual of back wages. Whether you are seeking to enhance compliance within your own area of control, or assisting a joint employer in a compliance review, the www.bizkeys.com FLSA self-audit area will be very beneficial.

 

 

D.C. Circuit Court Enjoins NLRB on Posting Requirement

April 18th, 2012

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

April 16th, 2012

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 Decision On NLRB’s Employee Rights Posting Requirement

March 5th, 2012

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.