QuickCounsel

Staying Out of the Regulators’ Spotlight:
Complying with the Fair Labor Standards Act and State Wage and Hour Laws

Summary FLSA Exemptions Employee or Independent Contractor? Rise In Enforcement Conclusion Additional Resources Rate this QuickCounsel

Summary

With the increased hiring of enforcement personnel at the U.S. Department of Labor (“DOL”) and heightened interest in wage and hour violations by State Attorneys General (“AGs”), companies now more than ever need to ensure that they are complying with the Fair Labor Standards Act (“FLSA”) and state wage and hour laws. The FLSA mandates that employers pay employees the minimum wage and overtime when due. Yet some employers run afoul of this law by misclassifying employees under the “white collar” exemptions or as independent contractors and not fully compensating them. Recently, the DOL, state departments of labor and AGs have sharpened their focus on business compliance with the FLSA and comparable state wage and hour laws. Such enhanced government scrutiny is in addition to an explosion of both individual and class action wage and hour suits brought by the plaintiffs’ bar. To avoid investigations and litigation, it is important for corporate counsel in all sectors of business to understand the applicable requirements and how best to comply with them.

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FLSA Exemptions

In 2004, the DOL issued hotly-contested regulations that reiterated and clarified that job duties, not job titles, determine which employees are exempt from certain minimum wage and overtime payment requirements under Section 13(a)(1) of the FLSA. Under the DOL’s regulations, FLSA exemptions apply to employees who satisfy the “primary duty” test by working in the following capacities:

• Executive;
• Administrative;
• Professional;
• Outside Sales; or
• (Certain) computer services.

In order to qualify for an exemption, employees must earn a minimum “salary level” of $455 per week. The employee must also be paid on a “salary basis,” which means:

• An employee must receive a set amount of compensation each pay period;
• The compensation must not be reduced because of variations in the quality or quantity of the work performed; and
• The employee must be paid the full salary for any week in which the employee performs any work (the employee need not be paid for any workweek when no work is performed).

If an employer violates the “salary basis” and improperly claims an exemption for payments to which an employee is entitled, a “safe harbor” exists that still may limit an employers’ exposure to liability. To qualify under the safe harbor, an employer must:

• Have a “clearly communicated” policy prohibiting improper exemptions, which includes a complaint mechanism;
• Reimburse employees for any improper deductions; and
• Make a good faith commitment to comply in the future (although this is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints).

Importantly, while most states follow the FLSA, some have their own, more restrictive wage and hour laws. Employers must remember that state law generally applies if it provides greater protections to employees. For example, while the FLSA uses the “primary duty” test, some states, such as New Jersey and Pennsylvania follow the “80% rule.” This means that, regardless of the federal standard, employees in those states who spend more than 20% of their work time on non-exempt duties do not qualify for overtime and minimum wage exemption. Connecticut’s exemption partially mirrors the DOL’s new criteria but differs in important aspects, and California enforces its own unique requirements.

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Employee or Independent Contractor?

Employers who mistakenly classify workers as independent contractors, rather than employees, also may be liable for a plethora of obligations, such as unpaid unemployment insurance, workers’ compensation, social security, tax withholdings, temporary disability, minimum wage and overtime. Standards exist for determining whether a worker can properly be classified as an employee or independent contractor, although these vary between federal and state law.

Courts will look at the “economic realities” test to determine whether a worker qualifies as an employee under the FLSA. This test includes:

The IRS also has a separate standard, formerly the “Twenty Factor” test, which is used in determining who is an employee or an independent contractor for tax purposes. The test focuses on three main categories:

• Behavioral control;
• Financial control; and
• The relationship of the parties.

Individual states often have their own tests that will guide investigations or inquiries by state labor departments or AGs into employee misclassification. For example, Virginia has a four-factor test that focuses on an employer’s control over the employee. New York also looks at control, as well as the level of supervision and direction the employer has over the services provided.

Misclassifying employees may result in missed pay for hours worked, including missed meal breaks. Federal law does not require meal breaks, so it is up to the individual states to determine the availability and length of the break. For example, in New York, employees are entitled to a certain amount of time for their meal period depending on the industry they work in, the number of hours worked in a day and time of day these hours are worked. In contrast, Georgia and Texas have no such requirement. Additionally, according to the DOL, if an employer does decide to offer a short break (typically 5 to 20 minutes), the break will be considered compensable work under the FLSA and would be included in total number of hours worked in determining overtime.

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Rise in Enforcement

Employees who have been misclassified as exempt workers may file complaints with the DOL or file a private action in federal or state court. The Wage Hour Division of the DOL generally handles investigations of such complaints. Recently, the Wage Hour Division came under fire for failing to process employee complaints, or improperly handling complaints made to the agency. As a result, the DOL has vowed to increase its enforcement of wage and hour laws.

Additionally, AGs increasingly have pursued violations of state employment laws. Such cases are politically appealing to AGs, the majority of whom are popularly elected, because they are packaged as defending lower-income workers harmed by their employers and bring in millions of dollars in workers’ compensation premiums, unemployment insurance, and other taxes to states struggling with budget shortfalls.

For example, the Ohio AG’s 2009 Task Force on Employee Misclassification, which links the AG’s office to state tax, labor, and family service agencies to investigate companies’ compliance with state employment law, is similar to programs already established by the New York and New Jersey AGs. In 2008, the Massachusetts AG issued over thirty citations and thousands of dollars in fines to restaurants and retailers for violations of child labor and wage and hour laws. Further, in the last year, the California AG has recouped hundreds of thousands of dollars from building contractors, transportation firms and cleaning companies for misclassifying their workers as independent contractors or as corporate shareholders in order to bypass workers compensation requirements. Such enforcement activity is likely to increase further as state budgets are squeezed to pay unemployment and workers compensation.

Regardless of who brings the action, the cost to employers will be substantial, as successful actions may result in employers having to pay back wages, liquidated damages, attorneys’ fees and costs.

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Conclusion

Complying with modern employment law requires companies to adhere to the FLSA and federal regulations, as well as complementary and supplementary state laws and regulations. The federal and state governments, to say nothing of the plaintiff’s bar, are stepping up their efforts in this area, making increased fines and large damage awards a real possibility. All general counsel should examine whether their companies are prepared for this era of renewed enforcement, and, if there is any doubt, consider how they can best improve compliance with wage and hour laws.

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Additional Resources

Government Resources

ACC Resources

Sponsor Resources

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The information in this QuickCounsel should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This QuickCounsel is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.

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Published November 17, 2009

Reprinted with permission from the Association of Corporate Counsel
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