As a small business owner, it's a big part of running your company to be current with fair labor laws and operational compliance - on top of everything else you have to do! Instead of putting more on your plate, why not just have a reliable team of experts in your corner to ensure you're up-to-date with all your payroll compliance needs? From the HR Blog at Fuse, here are a few basics on Federal Labor Standard Act regulations.
What is FLSA coverage? Who is covered?
The Fair Labor Standards Act covers certain employees entitled to labor law standards like overtime pay and minimum wage. Employees with FLSA coverage have FLSA non-exempt status. Employees without FLSA coverage have FLSA exempt status.
Employers pay exempt employees for the job duties they perform, not the hours it takes them to do the work. Therefore, exempt employees are not eligible for FLSA coverage and are not entitled to certain labor standards like overtime pay and minimum wage. There are several considerations that determine employee FLSA status including salary basis, salary level, and duties performed.
How do you define FLSA status classifications?
FLSA NON-EXEMPT: The provisions of the FLSA cover non-exempt workers for minimum wage standards, overtime pay, and other labor standard protections. Employers must pay their FLSA non-exempt employees the federal minimum wage (at least) for hours worked. For all hours worked over 40 hours in a workweek, the employer must pay non-exempt employees overtime (time and one-half the regular rate of pay).
FLSA EXEMPT: Unlike non-exempt workers, FLSA coverage does not protect exempt workers. Employers pay exempt employees for the job they do, not the hours it takes them to do the work. Simply put, exempt employees are exempt from coverage.
In some cases, other federal labor laws override the FLSA. As a general rule, if another federal labor law governs a job, the FLSA does not apply.
How do you determine FLSA status?
First, you should determine whether the worker is an employee or independent contractor. If you define your workers incorrectly, you could be liable for unpaid taxes and fines.
The IRS provides three Common Law Rules for determining worker status. Is the worker an independent contractor or employee? Ask these questions:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If the answer is ‘yes’ to these questions, your worker is probably an employee, not an independent contractor. Though, the IRS says there is no magic formula that determines status. The most important thing to look at when identifying a worker is the entire relationship between the worker and employer. Then, document all information about this relationship.
Once you have determined that your employees, you must now identify their FLSA status: exempt or nonexempt.
There are several considerations that determine employee FLSA status including salary basis, salary level, and duties performed. In order to determine employee FLSA status classification, an employer must answer the questions about the employee and his or her duties. The Department of Labor calls these questions the FLSA exemption test.
FLSA Exemption Test
To classify employee FLSA status, you must answer the following questions:
- Does the employee earn a salary?
- How much does the employee earn per week or per year?
- Does the employee’s role require certain responsibilities or functions that the Department of Labor considers exempt duties?
While there are a few exceptions, employees must meet all three of the tests above to be considered exempt from FLSA coverage (meaning NOT covered by the FLSA). There are some exceptions, however, where other federal labor laws override FLSA coverage. The FLSA states that, as a general rule, if a job is governed by another federal labor law, the FLSA does not apply.
An employee passes the FLSA exemption test if:
- The employee receives pay on a salary basis.
- The employee earns at least $23,600 per year or $455 per week. (If the DOL's Final Rule takes effect, the threshold will increase to $47,476 per year or $913 per week.)
- The employee performs exempt job duties.
The DOL’s exempt duties typically include these roles:
- Executive
- Administrative
- Learned Professional
- Creative Professional
- Computer Professional
- Outside Sales
Salary Basis Test
Is the employee paid on a salary basis?
An employee paid on a salary basis earns a guaranteed minimum amount of payment for any amount of work done in a given week. This minimum payment includes accrued PTO days for vacation and sick days. Salaried employees may earn above the guaranteed minimum amount of pay through bonuses or other incentives but they may never earn less.
There are permissable and impermissable reductions in salary basis level for employees. Permissable reductions could include docked pay due to disciplinary suspension or an employee taking more sick/personal days than he/she has accrued. This does not affect an employee's FLSA exempt status. If an employer docks an employee's pay for impermissable reasons (and the employee does not reach the guaranteed minimum amount of payment), it would have an effect on that employee's FLSA status and the employee would be classified with FLSA nonexempt status.
Salary Level Test
Does the employee earn above the salary threshold?
If an employee earns a salary above the FLSA threshold of $23,600 per year ($455 per week), the employee is exempt from overtime pay and other FLSA coverage. Remember, if the DOL's new overtime rule takes effect, it will increase this threshold to $47,476 per year ($913 per week).
Duties Test
Does the employee perform "white collar" exempt duties?
The Department of Labor determines exempt duties based on the primary duty and other duties the employee does in his or her job. This is not determined by the employee's job title or description but by the actual work performed. White collar exempt duties typically fall under roles such as executives, administrators, and other professional positions requiring certain degree levels or high-level work.
“Primary duty” as stated by the Depratment of Labor means the principal, main, major, or most important duty the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
Executive Exemption
The Executive Exemption includes the following responsibilities:
- Regular supervision of at least two or more other full-time employees.
- Management as the primary duty of the job.
- Has input in other workers' employment such as hiring, firing, and promotions.
Some examples include CEOs, mid-level managers, and shift managers.
Learned Professional Exemption
The Learned Professional Exemption includes primary duties which require advanced knowledge in order to perform including:
- Consistent exercise of judgment and discretion
- Advanced knowledge in the field of science or learning (including law, medicine, accounting, theology, actuarial computation, teaching, architecture, pharmacy, and other occupations distinguished from mechanical arts or skilled trades)
- Advanced knowledge acquired by a prolonged course of specialized instruction.
- Required to analyze, interpret, or make deductions from varying facts or circumstances.
Note: The DOL states that advanced knowledge cannot be attained at the high school level.
Some examples include lawyers, doctors, teachers, accountants, and clergy.
Administrative Exemption
The Administrative Exemption includes the following primary duties:
- Office or non-manual work directly related to business operations or management
- Exercise of judgement and discretion
- Support production or line employees and keep the business running without engaging in the production or sales of the actual product or service of the business.
Some examples include Human Resources, Payroll, Benefits Management, Marketing, Public Relations, and certain computer-related jobs. Read more about the FLSA Computer Exemption here.
FLSA and overtime rules FAQs
What is Back Pay?
Back pay is a retrospective payment relating to a prior pay period. This typically happens due to salary increase or incorrect rate of pay in the cases of minimum wage and overtime pay.
Here is a guide from the Department of Labor on FLSA methods employees may take to recover unpaid minimum wage or overtime pay:
(1) The Wage and Hour Division may supervise payment of back wages.
(2) The Secretary of Labor may bring suit for back wages and an equal amount as liquidated damages.
(3) An employee may file a private suit for back pay and an equal amount as liquidated damages, plus attorney's fees and court costs.
(4) The Secretary of Labor may obtain an injunction to restrain any person from violating the FLSA, including the unlawful withholding of proper minimum wage and overtime pay.
If an employee has received any back pay wages under the Wage and Hour Division or the Secretary of Labor has filed suit to recover lost wages, the employee may not bring suit under the FLSA.
What is considered work?
According to the FLSA (and the courts), “work” includes all time spent performing job-related activities which (a) genuinely benefit the employer, (b) which the employer "knows or has reason to believe" are being performed by an employee, and (c) which the employer does not prohibit the employee from performing. These can include activities performed during "off-the-clock" time, at the job site or elsewhere, whether "voluntary" or not.
What is overtime?
FLSA sets a threshold of hours to be worked in a single seven-day workweek at 40 hours. Any time worked over the threshold is considered overtime. Some jobs like, medical or government, may have different thresholds.
When should overtime be paid?
Unless an employee is exempt from FLSA coverage, an employee must receive overtime pay at the rate of time and one-half the regular rate of pay for any amount of time worked over 40 hours in a single workweek. Overtime pay is due in the corresponding pay period for which the overtime work was performed.
Is it illegal to work ‘off-the-clock”?
Yes! Any work performed off-the-clock is illegal. Workers should be paid for any hours worked, whether or not that work is counted on a timesheet. Even work that is not specifically requested but allowed must be compensated. Some of the most common types of the off-the-clock work include:
- Preparation like prep work to open a restaurant before a shift begins or transferring equipment to a worksite.
- Post-shift work that “should have” been completed during the time of the shift.
- Rework a project to correct errors or when project objectives change.
- Administrative work such as paperwork or follow up, even employee training.
- Waiting for work when nothing is immediately available and workers are required to wait for a task.
Under the FLSA Statute of Limitations, how long does an employee have to file a claim for unpaid overtime wages?
With the impending changes to overtime rules, employers and HR managers should be familiar with the rules of FLSA procedures, specifically the FLSA statute of limitations. Do you know how long your employees have to file a lawsuit for unpaid overtime wages?
The basic answer is two years-to-date after the wage violation, unless the employer willfully violated the FLSA, in which case the employee has three years to file.
If the employee experienced ongoing wage violations (not just one time), he or she will only be able to recover unpaid wages (called back pay) for the two years prior to filing the claim.
What is the difference between a wage claim and a lawsuit?
Employees may file a wage claim with the Wage and Hour Division of the DOL and, in some states, employees may be able to file with their state department of labor. A claim does not involve the court system, whereas a lawsuit does. If the claim cannot be resolved, the employee may file a lawsuit—if there is still time under the FLSA statute of limitations. A lawsuit may occur if the claim could not be resolved or if the claim was impractical, in which case an employer may take the suit to court.
Note that some states have different requirements for filing wage claims. In Delaware, for example, employees must file wage claims at least 90 days before the FLSA statute of limitations ends. In New Jersey, employees may claim wages worth $30,000 or less.
FLSA changes to overtime rules have consequences for many businesses in the U.S. Human Resources needs to know all the ways employees may claim back pay for overtime or off-the-clock work and what they could be entitled to under the FLSA statute of limitations.
The original article can be found here!
