Small business owners have enough
worries to juggle running their business.
The last thing they need to worry about is being sued over not paying overtime to
their employees. That’s why it pays to understand the Fair Labor Standards Act, says
Erica Mason, a fourth-year labor and employment associate at Baker Donelson Bearman
Caldwell & Berkowitz, PC, who focuses her
practice on servicing employers in the hospitality and food services industries.
Smart Business spoke with Mason about
dealing with overtime compensation issues
that the FLSA encompasses.
What is the Fair Labor Standards Act (FLSA)?
The Fair Labor Standards Act requires covered employers to pay employees overtime
— at a rate of time and one-half their hourly
rate — for each hour worked over 40 hours
per week. In 2004, the United States Department of Labor revised regulations regarding
which employees are exempt from overtime
laws and, in the process, increased the number of types of employees owed overtime.
How does a small business know whether its
employees are covered by the FLSA?
The FLSA covers both ‘enterprises’ — the
company as a whole — and ‘individuals’ —
specific employees working within a non-covered enterprise — for purposes of overtime payments. The act applies to enterprises
that engage in ‘interstate commerce’ and that
have at least $500,000 in annual business revenue. The act also covers individual employees whose job duties somehow involve ‘interstate commerce,’ e.g., interstate telephone
calls, processing credit card payments from
residents of other states, etc. Many states
have their own overtime laws. You need to be
aware of the states’ unique overtime requirements that your small business is operating in
or has employees working in. For example,
Massachusetts, California and Nevada have
even more stringent rules than the FLSA’s.
What are some pitfalls small businesses
should be aware of regarding the FLSA?
The $23,660 rule: If your employee does-n’t make $455 a week, or $23,660 a year, he or she is eligible for overtime, even if he or she
would otherwise fit an exempt category.
The $100,000 rule: Many employers
incorrectly assume their ‘highly compensated’ employees who earn at least $100,000 per
year are automatically exempt from the
FLSA’s overtime requirements. In fact, while
the FLSA does exempt white-collar workers
who make more than $100,000 a year, earnings are calculated on a weekly basis.
Therefore, employees working on commission, who may go unpaid or receive very little
pay during weeks when no commission is
earned, aren’t actually exempt in the weeks
where they are not ‘highly compensated.’
Further, the employee must also meet the
requirements of either the executive, administrative or professional exemption.
The ‘executive’ exemption: One frequent
misclassification involves executive assistants who are paid on a salaried basis, merely because the title sounds like the FLSA’s
‘executive’ and ‘administrative’ exempt classifications. A good rule of thumb for the executive exemption is that, if an employee does
not directly supervise at least two other
employees, he or she probably isn’t an
exempt ‘executive’ employee.
Deferred compensation packages:
Stock options are not part of the exemption equation. Employees at start-up companies who agree to defer compensation in
exchange for stock or options could fight
for back overtime pay if they would otherwise have been entitled to it. It’s important
to keep records of hours worked in
deferred compensation scenarios to avoid
future disputes.
Telecommuters: This often causes trouble in calculating the actual number of
hours worked by telecommuting employees, which can unwittingly result in overtime liability. The general rule is that when
an employee is paid on an hourly basis, any
7.5 minutes of work must be rounded up to
15 minutes and paid. When an employee
uses a company-supplied BlackBerry or
sends work-related e-mails from home,
that’s considered time on the clock and
should be compensated.
Do job titles and job descriptions determine
exempt status?
No. Just because your job descriptions indicate that an employee primarily performs
‘exempt’ activities doesn’t make that employee exempt under the law. While the courts
may look to job descriptions for guidance,
the employees’ actual day-to-day job duties,
and the manner in which they’re performed,
ultimately determine whether he or she has
been properly classified.
Similarly, job titles aren’t dispositive when
determining exemption. An employer may
call someone an ‘assistant manager,’ but if he
or she is really just a salaried employee who
does the same things as the hourly employees for a bit more money, that person is likely not exempt.
What can small business owners do to safeguard themselves against lawsuits?
Maintain meticulous payroll and time
records, which may help limit liability, and
keep a good employment lawyer on hand to
verify the proper exemption classification for
your employees. These are definitely not the
kind of determinations you want to be making on your own.
ERICA MASON is a fourth-year labor and employment associate at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. She focuses
her practice on servicing employers in the hospitality and food services industries. Reach her at [email protected] or (678)
406-8718.