Employee Wage Laws - Is Your Small Business Compliant?

Small businesses are impacted by the new rules developed by the Secretary of the Department of Labor. Generally, employees are entitled to overtime unless they meet one of the "white collar" exemptions given in the rules of the Fair Labor Standards Act (FLSA). Effective August 23, 2004, employees considered exempt from overtime are subject to new overtime rules and base salary tests. The owner of a small business can be at financial peril if these rules are not fully understood and obeyed. For example, an enterprise with three salaried employees that the owner incorrectly considers "management" and exempt from overtime rules for three years could be liable for nearly $100,000 in penalties, back overtime wages, and legal costs.¹ Employers with a prior conviction for FLSA violations may face six months' jail time.

FLSA laws affect most small businesses and violations are not infrequent. In 2003, over 31,000 complaints were filed with the Department of Labor and over 342,000 employees received back wages where employers were assessed nearly $10 million in civil penalties. The Department has a clear policy of investigating alleged violations of the FLSA laws. Business owners were faced with the investigation time — an average of 108 days from complaint to resolution — that could have been more effectively spent on the enterprise. Recent amendments to the rules are intended to simplify and strengthen the rules. All business owners should be aware of the FLSA² requirements to ensure compliance.

FLSA applies to businesses of all sizes — specifically, a business that has gross annual volume sales or business of at least $500,000; or is engaged in the operation of a hospital; or an institution primarily engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; or a school for mentally or physically disabled or gifted children; or a preschool, elementary or secondary school; or an institution of higher education is impacted by the new laws. If a business employs only immediate family members as its only regular employees, it is not covered by FLSA.

The FLSA is regulated by the U.S. Department of Labor's Wage and Hour Division. This is the agency that sets the minimum wage — currently $5.15 per hour. The first requirement for compliance with FLSA is to meet the wage and overtime requirements established by law. Hourly employees who work in excess of 40 hours per week are entitled to the established overtime rate of at least one and one-half times the employee's wage. Employees who earn at least $30 per month in tips may be paid a minimum wage of $2.13 per hour. However, if an employee's tips and hourly wage do not add up to the minimum wage, the employer must make up the difference. The FLSA does allow a pay rate below the minimum for student-learners (vocational education students) as well as full-time students in retail or service establishments, agriculture, or institutions of higher education. An employer may also pay less than the minimum for mentally or physically disabled workers. Sub-minimum wage employment requires a certificate from the Wage and Hour Division. An employer may pay a youth, defined as someone under 20 years of age, not less than $4.25 per hour for the first 90 days of employment; however, the employer may not continually fire employees to hire new youths.

The new and existing regulations generally apply a three-part test for exemption from overtime pay: (1) The employee must be paid a set and fixed salary that is not subject to variations because of quantity or quality of work (salary basis test); (2) the amount of the salary must meet a minimum level (salary test); and (3) the employee's duties must be primarily involved in the executive, administrative, or professional duties of the business (duties test).

Salary Basis Test
To meet the salary basis test for exemption from overtime, the employee must be paid a set sum of money for each week or shorter time period worked. An employee must be paid for this time period regardless of quantity or quality of work and must be paid if the employee works any length of time within that period. Employers do not have to pay the employee if they do not work in that period. Employers are not to take deductions from salary for employer-caused or -controlled work stoppages. If an employee is ready, willing and able to work, they must be paid for that period.

Even if a business is not covered by the law because of the amount of sales requirement, in some instances employees may still be covered, and that employer must pay the minimum and overtime wages and comply with record keeping requirements. For instance, the law is applicable if an employee regularly engages in interstate commerce, such as regularly sending and receiving postal mail, making and receiving long distance telephone calls, shipping goods to another state or receiving goods from other states or keeping records of those goods. It is fairly clear that the possibility of the FLSA not applying to any employee of small business is remote.

Domestic service workers such as daycare workers, housekeepers, chauffeurs, cooks or full-time babysitters are covered if their cash wages from one employer are at least $1,000 in a calendar year (an amount that is annually adjusted via the Internal Revenue Code) or if they work a total of more than eight hours a week for one or more employers.

Missouri businesses are also subject to the Missouri Minimum Wage and Overtime Law. However, the state does not enforce the law by requiring that employees who bring civil suit go through the federal agency to claim compensation.³

Salary and Duties Tests
The FLSA exempted certain employee groups from the mandatory overtime provisions.⁴ Generally, these groups consist of employees that are salaried and receive higher rates of pay. The thought is that these employees enjoy a professional position at a set salary and, therefore, should not receive an additional benefit for working more than 40 hours per week. Under the FLSA the employer has to look at both the salary level and duties required of the employee to determine if overtime is due. The reasoning is that simply giving an employee a manager's title, a small salary, and then demanding well over a 40 hour work week is unacceptable.

The Department of Labor established clear "bright line" salary requirements and duty lists which have shifted with the new laws. Prior to the 2004 amendments, the rules had both a "short" and a "long" duties test. These tests required employers to time test the duties of employees to qualify for the exemption from overtime. The "long" duties test became largely inoperative as they had a small salary requirement of $155 per week to meet the exemption. Because of the defunct nature of the "long" test, the short test bears the primary discussion. The tests are broken down into categories regarding executive, administrative, professional, computer, and outside sales employees.

Previously, for executive employees the test for exemption was if the employee earned at least $250 per week (this equates to a salary of $13,000 annually) and whose primary duties were managing at least two other employees. The exemption test has been amended to require an employee to earn at least $455 per week (this equates to a salary of $23,660 annually) and whose primary duties are managing at least two other employees and who has hire and fire authority or whose recommendations on hire/fire/promotion are given great weight. Also, if an employee has a bona fide 20% equity interest in an enterprise, they are exempt only if they are actively engaged in the company's management.

Professional employees were previously exempted from overtime if the employee earned at least $250 per week and whose primary duties required advanced types of work in a field of science or learning, including application of consistent exercise of discretion and judgment; or primary duties including invention, imagination, and talent. That test is now if the employee earns at least $455 per week and the same primary duties. The Department of Labor states that the final rule is intended to not make any changes to the educational requirements for the professional exemption. Expressly nonexempt are licensed practical nurses and other similar health care employees.

For computer employees, the exemption test was previously whether the employee earned at least $250 per week or $27.63 per hour. The dollar value remains the same under the new test; however, it limits the duties requirements to computer systems analysts, computer programmers, software engineers, or other similarly skilled workers in the computer field if the employee's primary duty consists of the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; or certain design, development, documentation, analysis, creation, testing, or modification of computer systems or programs.

Outside sales employees were not and are not subject to a salary requirement for exemption from overtime. The duties test is now simplified to the primary duty being the making of sales or obtaining orders or contracts for services and who is regularly away from the employer's place of business in performing these duties.

The new regulations provide that manual laborers or "blue collar" workers are nonexempt as they are involved in repetitive operations with their hands, physical skill, and energy. Non-management carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, construction workers, and other laborers will continue to be entitled to overtime pay.

An employer owes overtime wages for all nonexempt employees who work more than 40 hours per week. Nonexempt employees cannot waive their right to overtime pay; a nonexempt employee cannot agree to work more than 40 hours at regular pay. Notice that overtime is not necessarily required for work over eight hours a day, the critical period is time worked in a week. For example, if an employee works eight hours in one day, the employer could ask the employee to only work six hours the next day.

The term "hours worked" includes the time an employee must be on duty, or at the employer's premises or any other designated place of work. If an employee is required to be on premises one-half hour before his or her shift starts for training or "just in case it gets busy," that employee is working and time is running for the 40 hour work week. A work week is a period of 168 hours in seven consecutive days (7 x 24 = 168). A work week may begin on any given day and hour decided by the employer. Each work week stands alone; in other words, an employee's time is not to be averaged out over a month. It is notable that the employee must have actually worked 40 hours. An employee who works 40 hours and is compensated for eight holiday hours is not entitled to overtime for that eight hours. Employees are also not entitled to extra pay for working a holiday, though this may be customary in the U.S.

Computing overtime pay is rather straightforward. For example, an employee with a regular wage of $10 per hours works 42 hours in a week. For the two hours over the 40 hours, the employee must be paid time-and-a-half. In this case, it would be 1.5 x $10 = $15 x 2 overtime hours = $30. The employee's total wage for that week would be $10 x 40 hours = $400 + $30 = $430.

Some employers pay their employees by piece rate, i.e. by the number of items they produce. For example, an employee cutting out pieces of wood to make spoons may be paid for each finished piece. However, the piece rate must be at least the minimum wage; otherwise, the employer must make up the difference. The thought is that paying by the piece rate is to encourage productivity, not to limit wages. If an employee works over 40 hours per week, the employer must pay time-and-a-half the piece rate (again, only if that piece rate meets the minimum wage) for pieces produced during the overtime hours, if this arrangement is agreed to before work started.

Compensatory or "comp" time is defined by the FLSA as compensation for employees of public agencies in lieu of overtime equal to a rate not less than one-and-one-half hours for each hour of employment for which overtime compensation would be required. For an overtime exempt employee, the employment compensation package can be negotiated between the parties. Employers should be cautious as to whether the payment of comp time would affect the salary basis of the employee's compensation to a level of nonexempt status. For a nonexempt employee, an employee who is an executive, administrator, professional, computer employee, or outside sales employee (discussed further below) the employer cannot use comp time to replace the payment of overtime pay. Even if the nonexempt employee requests comp time, it cannot be given. Missouri law requires that overtime be paid in monetary compensation in the period earned. President Bush has requested that Congress pass legislation that would allow an employer to offer comp time in lieu of overtime pay.

Record Keeping
The FLSA sets up record keeping requirements for employers. At a minimum, the employer must keep the following information on each employee:

• Personal information, including employee's name, home address, occupation, sex, and birth date if under 19 years of age;
• Hour and day when the workweek begins;
• Total hours worked each workday and each workweek;
• Total daily or weekly straight-time earnings;
• Regular hourly pay rate for any week when overtime is worked;
• Total overtime pay for the workweek;
• Deductions from or additions to wage;
• Total wages paid each pay period; and
• Date of payment and pay period covered.

There are additional requirements in most circumstances where an employer is allowed to pay a wage rate below the minimum wage. Employers should preserve payroll records, collective bargaining agreements, and sales and purchase records for three years. Time cards, piece work tickets, wage rate tables, and work schedules should be preserved for two years and are open to inspection by Department of Labor investigators. The records can be maintained at the place of business or at a separate central records office. Failure to preserve these records is a class C misdemeanor in Missouri.⁵

If a small business does not comply with the regulations for wages and overtime, an employee or other person may notify or bring a claim to the Wage and Hour Division. The Division may then send out investigators to determine compliance with the laws and regulations. Where violations are found, the investigators may recommend changes in employment practices to bring the employer into compliance. It is a violation to hire or fire or in any other manner discriminate against an employee who has notified or complained to the Wage and Hour Division. A repeat and willful offender can be fined up to a maximum of $1100 for each violation of the overtime laws. An additional $10,000 fine may be imposed for intentional violators. Further, the FLSA prohibits the shipment in interstate commerce of any goods that were produced in violation of the labor rules. This restriction may limit the profitability of goods produced. Missouri allows for civil suit for damages for employer noncompliance.

The Small Business Administration (SBA) under The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) has created SBA Ombudsman and SBA Regional Fairness Boards. Small businesses may comment to the Ombudsman on any regulatory burdens or enforcement actions taken against them by the DOL by calling (888) REGFAIR (734-3247). A small business may request a waiver or reduction of civil penalties of a statutory or regulatory requirement⁶; however, SBREFA does require that the business' actions not be willful or criminal in nature and the business must have made a good faith effort to comply with the law.

IThe FLSA requires most businesses to pay the minimum wage and pay overtime wages. The changes in the new rules regarding exempt employees in both salary and duty requirements may directly affect whether employees are exempt or not. The Department of Labor has a web-based program, FirstStep Employment Law Advisor⁷, that can help entrepreneurs determine which of the 26 labor laws apply to their businesses. The Advisor asks a series of questions regarding the business industry that most likely fits the enterprise, number of employees, federal contracting questions, and others. The resulting information provides a list of links to applicable laws and regulations. Frequently asked questions regarding Missouri employment laws can also be found online.⁸ If a small business has concerns regarding compliance, an accountant, human resource professional, or lawyer can provide advice on meeting the new regulations.

A small business can conduct preventive maintenance with regard to FLSA laws by taking the following steps:

1. Review and/or create employee job descriptions and duties lists.
2. After reviewing the new FLSA rules, determine which employees are nonexempt and appropriately pay overtime.
3. Review employee work habits to discover if employees are "suffered or permitted" to work extra hours in the day. Work conducted during lunch or prior to or after regular work period can add to the overtime dilemma.
4. Maintain work records for at least three years. Many file these with their tax records because of the similar retention time.
5. Review part-time employees and make sure minimum wage and overtime are also appropriately paid.
6. Disable any compensatory time mechanism for nonexempt employees as it is not called for in the law. Comp time should not be considered in lieu of pay for nonexempt employees.
7. Review compensation to make sure that any deductions from employees' paychecks are not allowed below the minimum wage or overtime requirements. Review deductions for legality (examples: deductions for purchase of uniforms, equipment breakage).
8. Review contract labor agreements. If the person has more characteristics of an employee than an independent contractor, the wage and hour rules may apply.

¹ Calculation for overtime back pay: 3 employees x $3,000 average unpaid overtime x 3 years = $27,000 x 2 liquidated damages per code = $54,000
Calculation for penalties and fees: $10,000 fine + $1,100 civil penalty per violation x 3 employees x 3 years x number of weeks denied overtime + attorney's fees + employee's attorney's fees + court costs = $45,000.
² The provisions discussed in this report on the Fair Labor Standards Act can be found in Title 29 of the United States Code, Chapter 8 Fair Labor Standards. The Department of Labor, Wage and Hour Division rules can be found in 29 Code of Federal Regulations Part 541.
³ Missouri's Minimum Wage and Overtime Law can be found at Section 290.502, RSMo 2003.
⁴ The FLSA also gave broad rulemaking authority to the Secretary of the Department of Labor to establish definitions for these groups of employees. 29 USC section 213(a)(1).
⁵ Section 290.520, RSMo 2003.
⁶ 29 CFR Section 578.4.
⁷ http://www.dol.gov/elaws/FirstStep/
⁸ http://www.dolir.mo.gov/ls/faq/faq_general.htm

By Eric Anderson, J.D., M.B.A, the BRIDG business specialist located in the Center for Entrepreneurship and Outreach at the University of Missouri-Rolla.

This article provides general coverage of its subject area. It is provided to the reader as a resource for understanding the status of the applicable law and is not intended to be legal advice or service. If legal advice is sought or required, the services of a competent professional licensed in your state should be sought.