Where the legal risks lurk in human resources: Reduce the risk of wage-and-hour violations

As an employment lawyer and human resources expert spending my career working with businesses of various sizes, I believe the single most important thing employers can do is make sure they are handling their employees’ wages properly. When people’s livelihoods are affected, they are much more likely to become disgruntled or have other workplace concerns. And, few things matter more to government agencies than wages.

The state and federal departments of labor are charged with enforcing regulations that protect employee rights when it comes to wages, and state departments of taxation or finance, and the Internal Revenue Service receive significant payroll taxes from businesses. Therefore, how an employee is paid often will catch their attention.

How can an employer reduce its risk of wage-and-hour violations? Consistency and compliance are important.

Common wage-and-hour violation traps for employers

Pay accuracy. Paying employees accurately seems obvious, but mistakes are common. For example, an employer might not realize that the minimum wage has changed or that exemption thresholds have changed for the coming year. January and July tend to be the most common times of year for these changes.

Calculating overtime and commissions correctly also is incredibly important. Employers should work with HR experts who know the difference between a discretionary and nondiscretionary bonus, and the impact of each on overtime.

Minimum wage. Employers should work with an HR expert because several states (e.g., Connecticut, New Jersey, New York and Vermont) have higher minimum salary requirements—compared to the federal wage of $7.25, and several states (e.g., California and Nevada) have different standards for what constitutes overtime.

Vacation payout at separation. When employers offer vacation benefits to employees, they are sometimes surprised to learn that they might be required to have a written policy about whether it will be paid out to employees. For example, if the policy does not specifically state earned vacation will not be paid out, it will be owed at termination in Connecticut and New York. Whereas in California, Massachusetts and Colorado, vacation that is earned and unused, generally must be paid out to employees.

Final-pay requirements. Many states have special final-pay requirements. For example, when an employee is being terminated involuntarily in Connecticut, the final paycheck must be delivered the next business day; in New Hampshire it must be delivered within 72 hours; and in New Jersey and New York, it must be delivered by next scheduled payday.

Frequency. Many state laws define how frequently an employee must be paid, and the laws require written advance notice to employees if their pay date is going to change.

In addition, many states regulate whether an employer can take nonregulatory deductions from a paycheck. Some states like New York, have different timelines for various employee classes.

This is not only incredibly important from a compliance perspective, but employees also rely on being paid on a specific date. For example, the employee may have a mortgage, tuition, or parents’ assisted-living payment due. A frivolous change in frequency or an unexpected deduction can put that all in jeopardy, and it can cause employees to lose confidence in their employer.

FLSA classification. One of the most well-known analyses under The Fair Labor Standards Act is whether an employee should earn overtime. The FLSA states that unless an employee is exempt under the law, an employer must pay time-and-a-half to employees who work more than 40 hours in the same workweek. A workweek is a static consecutive seven-day period.

Many employers decide to pay employees a salary because it is easier administratively. However, in most cases, to compliantly earn a salary the employee must be exempt from overtime—meaning, the employee must fit into at least one of the exemptions defined under the law.

The most popular exemptions are the administrative, executive, sales and professional exemptions. At its most basic interpretation, to meet the exemption requirements, a position must satisfy:

1.  a job duties test (meaning, it must fit certain criteria)

2.  the minimum salary threshold for the relevant jurisdiction. In 2024, the federal minimum exemption threshold is proposed to increase to$55,068/year from the current $35,568/year.

Employers should work with an HR expert because some states have higher minimum-salary thresholds for exemptions. For example, New York has higher threshold for executive or administrative exemptions. California has a higher minimum salary for exemptions like executive, administrative, and professional to name a few.

Employers may be tempted to pay a set salary to avoid the time-keeping requirements and calculations associated with non-exempt wages, which are typically hourly. However, the FLSA dictates whether a position falls into either of these classifications. To be exempt, an employee must both meet the criteria for job duties illustrated in the exemption, and in most cases, he or she also must earn a minimum threshold of $35,568/year ($684/week).

Common exemptions are the:

• professional exemption, which is common among CPAs, doctors and attorneys;
• sales exemption;
• executive exemption;
• Highly Compensated Employees (applies federally, but not necessarily in all states), which earn at least $107,432 and have at least one of the duties from any exemption (a proposed rule from the U.S. Department of Labor would make this threshold $143,988); and
• administrative exemption, which is the most heavily litigated because of its broad definition.

Again, it is important for employers to work with an HR expert because several states have different requirements than the FLSA to qualify for an exemption and do not recognize the same exemptions as the FLSA.

What is at stake with FLSA classification? An employer who misclassifies a non-exempt employee as exempt could end up owing hundreds of hours of backpay for overtime and penalties. Federally, the look-back period is two years, unless the DOL feels that the employee acted in bad faith. If the DOL concludes bad faith, then the damages could be tripled.

Some states like New York, New Hampshire and California have a longer look-back period. California even has a different enforcement mechanism for wage-and-hour violations, called the Private Attorneys General Act, which deputizes employees to bring private actions on behalf of other aggrieved employees, essentially standing in the place of the attorney general for civil penalties, which are normally only recoverable by the attorney general. Worse, when an employer classifies employees as exempt, it often stops tracking the hours that they work, which makes defending these claims incredibly difficult.

Employee vs. independent contractor

In today’s gig economy, an increasingly common wage-and-hour mistake is the misclassification of employees as independent contractors. True independent contractors are not employees; instead, the company that hired the contractor generally is one of its clients.

The various independent contractor tests are complex and vary nationwide. The U.S. Supreme Court has said that several factors need to be balanced to decide if a person qualifies as an independent contractor. These include how integral the work is to the business, permanency of the relationship, degree of control by the business and the contractor’s potential for profit/loss, judgment and independent business organization and operation. [EDITOR’S NOTE: For more information, PIA Northeast members can access the resources in HR Info Central in the “Labor Law” section.]

Working with an employment attorney is key for any employers who are unsure of how to proceed. Independent contractor misclassification is one that has the attention of taxation and labor enforcement agencies nationwide. It also has the attention of plaintiff’s lawyers ready to bring PAGA, wage-and-hour collective and class actions.

Equal pay and salary transparency laws

While most employers know that equal pay laws require that wages be calculated in a nondiscriminatory manner, not all employers are aware that salary transparency laws have gone into effect in many states and localities. These laws require employers to include salary ranges in job advertisements and sometimes job descriptions.

December is a time of year when employees might inquire, discuss or complain about their pay and an employer may wish to prohibit such conversations. Beware! Employers that prohibit discussing wages will likely find themselves in the hot seat in front of the National Labor Relations board because discussing pay and working conditions is a protected Section 7 right for private sector employees under the National Labor Relations Act.

Shortcuts can be costly

Many employers may try to streamline payments and recordkeeping by using software or electronic transfers. Be sure to incorporate certain practices to avoid running afoul of laws.

Mandating direct deposit. Most states require that employees opt into using direct deposit. That is the case for Connecticut, New Hampshire, New Jersey, New York and Vermont.

Timekeeping software. Some of these programs will automate deductions for meal breaks or rounding work time, which can lead to incorrect recordkeeping and incorrect wages being paid.

Skipping the time clock. Wage-and-hour laws and the FLSA require timekeeping for non-exempt employees, as noted in this article.

Advancing pay. Sometimes employers will advance pay or paid time off at the request of an employee, but sometimes employers will find themselves out of that cash if the employee fails to repay it and local laws do not provide a mechanism for recouping it.

Charging deductions. Employers often are tempted to charge employees for lost equipment or cash shortages. This practice is a minefield. Most of the time, such deductions will be unlawful.

Not paying unauthorized overtime. Few things annoy chief financial officers more than individuals working unauthorized overtime and then getting paid time and a half. An employer without a knowledgeable HR partner might be tempted to not pay this time. However, the correct procedure is to discipline the employees but still pay them for the hours worked.

Making everything a discretionary bonus. Employers might wish to avoid blending overtime rates and paying bonuses to departing employees, but the law defines whether a bonus is discretionary or nondiscretionary. Nondiscretionary bonuses need to be blended into regular overtime rates and paid to employees if they are earned.

As employers plan compensation strategies, raises, bonuses and their financial budgets for 2024, they should partner with an HR expert who can help ensure their practices, exemptions and classifications are aligned with the roles for the individuals operating in them.

This article originally appeared in the December 2023 issue of PIA Magazine.