Is your company working within the guidelines of the Fair Labor Standards Act (FLSA)?  Have you recently examined how you define salaried, hourly, exempt, and non-exempt? Which term should be used to signify compliance?  Are you testing your positions?  How do you pay your sales staff?  Are some truly, Outside Sales employees?  How do you treat your commissioned employees, are they entitled to overtime? How do you calculate compensatory time-off?

These and other questions should be answered to be sure your organization is working within the guidelines of the FLSA.

Historically, the terms salaried and exempt are often used interchangeably and this can be confusing and dangerous when trying to comply with the Fair Labor Standards Act.  Salaried is a way of determining how a company is going to pay its employees.  Will the company pay on an hourly basis, or pay their employees weekly, bi-weekly, semi-monthly, or monthly?  Hourly employees are typically the "Blue Collar" workers and salaried are typically administrative and management level employees known as "White Collar."  Exempt verses non-exempt is a classification given to each employee. The difference in terms is overtime pay - who gets it and who does not.  Exempt employees are just that, exempt from overtime pay.  Non-exempt employees receive overtime pay which totals one and one-half times their hourly regular rate of pay.

The tricky part is determining who is exempt.  A few years ago a determination may have been based on an employee's title or to whom the employee reported - not so now.  A company should be testing their administrative and managerial level positions to be 100% sure the positions, not the employees, are exempt or non-exempt.  Not performing the test, which is two pronged, could lead to back-pay of overtime for these misclassified positions.  A company must look at salary and duties, and both must be considered to meet the criteria for an exempt classification.  If not met, overtime must be paid.

How employees receive overtime has changed too.  Comp-time in lieu of overtime has changed the most. Comp-time is now only allowed if given in the same week as it is earned and must be awarded as one and one-half times, not hour for hour.  So if an employee works 42 hours in a week and wants to leave at 4pm on Friday instead of 5, the employee would need to be paid for the remaining 2 hours of overtime or leave at 2:00pm, since the employee is owed 3 hours of overtime not 2 which would be hour for hour. It is a violation of the FLSA not to pay the hours worked over 40 hours as overtime.

Now, are you ready for some mind bending?

Overtime pay is commonly thought of as one and one-half times an employee's regular hourly rate of pay for hours worked over 40. However, if the employee receives other forms of pay, such as a pre-defined productivity bonus or sales bonus, or if the employee is "salaried" but non-exempt, determining the regular rate of pay requires more work. In general, to determine the "regular rate" of pay for an "hourly" non-exempt employee, a company must use all compensation earned in the given week such as hourly "straight-time" earnings, commission, and bonuses, but may exclude certain other types of pay such as payments made for occasional periods when no work is performed due to vacation, holiday, or illness, or reasonable payments for traveling expenses, or other expenses.  To calculate overtime on such compensation, the total weekly pay, as previously described, is divided by the number of hours worked by the employee in that workweek, resulting in the regular rate.  The overtime "premium" owed is determined by multiplying the overtime hours worked by one-half the regular rate.  Only half the regular rate is required as additional premium compensation because the straight time hourly rate, bonus, commission or other similar compensation is deemed to cover the employee's straight time earnings for all hours worked, including overtime hours. A reminder - be careful to recognize all forms of pay that might enter into these calculations as some are easy to overlook such as housing or the value of products received in lieu of compensation.

The calculation of a salaried non-exempt employee's regular rate is done in a similar fashion, but with an important difference. If the employee's salary is for an agreed to 40 hour week, the straight-time rate is the salary divided by 40. But if the salary is for an agreed to 30 or 35 hour week, the straight-time rate is the salary divided by 30 or 35. In this case, the straight-time rate would be the same as the regular rate and is used to calculate the straight-time pay for all hours worked, with an overtime premium (one-half the regular rate) added for all hours worked over 40 in that week. The payment of a bonus or commission in addition to salary adds to the complexity of this calculation. That additional pay is added to the total straight-time pay earned for hours worked and that total is then divided by the hours worked to arrive at the regular rate used for overtime. For example, an employee's salary is $350 for an agreed to 35 hour week. The straight-time rate is then $10 per hour. If that employee works 42 hours and also receives a commission of $84, what is the regular rate? The regular rate is determined by multiplying the straight time rate of $10 by 42 hours, which equals $420, and adding the $84 commission for a total of $504; and then dividing the $504 by the 42 hours worked to arrive at a regular rate of $12 per hour. The employee's total pay for that week equals the $504 plus one-half of the regular rate of $12, or $6, times 2 hours, or $12, for a total pay of $516.

An example of a different calculation of the regular rate of pay is a salaried employee who is non-exempt and is employed at a salary of $300 per week regardless of the number of hours worked in the week. If that employee worked 50 hours in a given week, the regular rate of pay for that employee for that week is $6.00 per hour ($300 / 50).  The employee must be paid for his or her 10 hours of overtime at a rate of $3.00 per hour (half of the $6.00 per hour regular rate).  Thus, the employee must be paid a $300 weekly salary plus $30 (10 x $3.00) in overtime pay. If that employee worked 60 hours in a week, the regular rate would be $5.00 per hour ($300 / 60) and the overtime premium would be one-half of that or $2.50 per hour. In this second case, the employee's pay would be $300 of weekly salary plus $50 (20 x $2.50) in overtime pay.

After completing the calculation of an employee's regular rate of pay, remember that the resultant regular rate can never be less than the minimum wage.

Do sales employees receive overtime?  Outside sales employees must be making sales or obtaining orders or contracts as their primary duties and they must be customarily and regularly engaged away from the company's place(s) of business to be exempt from overtime.  Both must be met or overtime is payable. Their salary does not apply when determining the overtime exemption.

Commissioned employees are not automatically exempt from overtime.  Commissioned employees would be exempt from overtime if they receive more than half their compensation in the form of commissions and are employed at a retail or service establishment.  In most cases, testing of the position is required.

There are also rules that govern how overtime is to be calculated when a pay period spans more than one week. What used to be a simple calculation is now more complex. The manner in which hours worked are reported to a payroll company could be misunderstood in these situations, resulting in under payment of overtime.

The daunting task is simplified if you test.  Test, maintain your records and make any necessary changes to avoid those painful overtime back payments, which would be required if your company is found not to have classified company positions correctly under the FLSA.

More on FLSA?

Please Note:

An employer cannot exempt workers from FLSA by simply calling them independent contractors. Some employers classify their workers as independent contractors even though the worker only performs his or her job for that company and is not offering their services elsewhere. 'Binge' workers or special project workers who are called in to complete one task and work in excess of the normal work week are illegally referred to as 'volunteers'.  Consider the subject of where does work begin? In the locker room when the employee is putting on protective clothing or at the door where he or she enters a posted work area?

A company should also check State laws regarding overtime as they may add additional record-keeping and compensation burdens. For example, in California, time worked in excess of 8 hours a day is considered overtime even if the total hours worked in a week is less than 40, and the first 8 hours of work on the seventh day of work in a week must be paid at one and one-half time. California also mandates double time for certain periods of work.

The world of wage & hour is changing rapidly for employers. Many employers expect to implement a shortened workweek sometime this year, and some will impose mandatory furloughs. Telecommuting is increasing and new recordkeeping rules under the Fair Labor Standards Act (FLSA) may be on the way soon.

Are you prepared to:

* Meet economic challenges through the use of furloughs - and costly pitfalls to watch out for.

* Face the misclassification explosion taking place - and what to do if you fear you may be part of it.

* Comply with the latest trends in immigration records enforcement.

* Review the do's and don'ts of telecommuting programs.

* Take steps right now to help improve your wage & hour compliance and reduce risks.

 

In the next from the HR Perspective we will continue the discussion of these issues and more. Plus you will have the opportunity to contribute with our on-line opinion survey.