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The Fair Labor Standards Act (FLSA): Four Things Every Business Should Know

July 11th, 2013 by Mindy Flanigan, Inspiring HR

Although the Fair Labor Standards Act (FLSA) dates all the way back to 1938, many businesses–particularly small businesses–still don’t understand the basics of this law. Typically, small business owners or their office staff don’t always have immediate access to a crash course in ‘easy to understand’ employment laws. So a response to this law can quickly go from “I do not understand…” to “Why should I care?”.

At Infiniti HR, we’re here to help you understand the law and why it’s important. The main reason you need to be in the know is because payment of back wages, fines and penalties are a serious threat to a company’s profitability.

With few exceptions, the FLSA is a federal law that applies to nearly EVERY business. Yes, a business with just one or two employees on payroll will normally have to comply with this law. The FLSA sets minimum wage and regulates overtime, record-keeping and child labor standards.

Although many states follow federal law, some states have laws more generous than those set by the FLSA. When this happens, the business is required to follow state law. It is very easy to find out what your state’s wage and hour laws are. Simply Google: [state name] wage and hour. The first few links should direct you to your state’s Department of Labor or wage and hour website. There are some rules that vary a great deal state to state such as child labor and record keeping rules.

Let’s break this overwhelming federal law down to the four most common things people commonly don’t know.

1. Failure to pay overtime is expensive.

This means two to three years of back pay per affected employee, plus back payroll taxes and fines. The Department of Labor would be happy to investigate this charge. They will scrutinize your payroll records. If you don’t have them, they will side with the records the employees have kept. There is an app for that. Current and ex-employees will report you. If they don’t go to the Department of Labor, there is an attorney out there that would be happy to take the case free of charge up front; paid as a percentage of the settlement they get. Would you be surprised to know that a dental practice with only 12 employees ended up paying out close to $46,000 to settle a failure to pay overtime claim? Small businesses are not the only companies exposed to these claims. A large pharmaceutical company recently had to pay out $99 million to settle a failure to pay overtime suit.

2. Salaried does not mean the employee or the position is exempt.

Every employee you hire is either exempt or nonexempt. Nonexempt employees are typically paid by the hour and earn overtime wages for hours worked more than 40. Exempt employees are often paid a salary, and your business is not required to pay them overtime. Key point to note: a business cannot have it both ways with exempt staff. For example, you cannot work them more than 40 hours a week, and still treat them like hourly employees. They are paid a salary to get the job done, not for hours present. You should have them abide by an attendance policy but you must not ‘dock’ their pay by the hour for coming in late or leaving early. This reduces the role back to nonexempt and then overtime laws may apply.

3. A position must qualify to be exempt, before you choose this as the proper classification.

In order to qualify, you must determine whether the duties of the position match the standards set by the FLSA in one the following categories: executive, administrative, professional, computer, outside sales and highly compensated categories.

Although there are several criteria the duties of a position (in any of these categories) must meet in order to be classified as exempt, there are common misconceptions associated with each. For the executive classification, note that the role must regularly direct the work of two or more other full time associates or the equivalent. For administrative classification, the employee’s primary duty involves evaluating possible courses of action and having the discretion to act without immediate supervision. A professional must be a learned professional with an advanced degree such as lawyer, doctor or dentist.

4. Overtime is earned for hours physically worked more than 40 in a standard seven day period.

Just because your business runs your payroll bi-weekly, does not mean your employees earn overtime bi-weekly. It is possible to earn overtime in week one and not in week two of your pay cycle. Remember, overtime is for hours physically worked. If you pay eight hours of holiday pay in a week, and the employee still physically works 40 hours, that is 40 hours of straight time and eight hours of holiday pay – not eight hours of overtime.

Wonder what happens if an employee worked unauthorized overtime? You still have to pay it. However, you can counsel them for a policy violation as outlined in your company employee handbook.

In closing, the Department of Labor expects written justification of an exempt classification. We urge your business to issue written offer of employment letters that clearly identify the position (not the employee) as exempt or nonexempt. If you feel the duty of a position qualifies the employee to exempt, be prepared to defend that decision. Make sure those involved with hiring and employee management understand how to comply and what your standard processes are. If investigated, the Department of Labor will be looking for your compliance plan. Within it should be a stated policy and workflows that outline how you arrived at exempt or nonexempt classification decisions. When in doubt, the Department of Labor has readily accessible workflows tools to help answer any gray areas.

As a small business owner, these are four important things you should know about the FLSA. Ask yourself whether you’re truly prepared to face or settle a failure to pay overtime charge in the event that one arises. Also consider of you are delegating classification decisions to a supervisor or administrative staff, are they trained well enough to protect your company from this looming liability?

Check back next week for more on human resources, payroll, insurance and benefits.

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The Fair Labor Standards Act (FLSA): Four Things Every Business Should Know
Although the Fair Labor Standards Act (FLSA) dates all the way back to 1938, many businesses–particularly small businesses–still don’t understand the basics of this law.
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