Fair Labor Standards Act Featured

8:00pm EDT March 26, 2008

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 emason@bakerdonelson.com or (678) 406-8718.