Proper Classification
There are two major classification errors that occur, which are discussed below;
Independent Contractor vs. Employee: The IRS has strict guidelines on who can be legitimately classified as an Independent Contractor and incorrectly classifying a worker opens the door to steep penalties and increased scrutiny by the IRS. The Federal government estimates that between 1996 and 2004 it lost an estimated $34.7 billion in tax revenue due to the misclassification of workers as an Independent Contractors.
Exempt vs. Non-exempt Status: Once it has been determined that a worker is indeed an employee the next question is can that employee be classified as exempt. An exempt employee is one that is from the minimum wage regulations, overtime regulation and various other wage and hour provisions. For an employee to be considered exempt their position, work duties, and wages must meet the rigorous requirements set forth by the Fair Labor Standards Act (FLSA). It is important to know if your state also has criteria for who can and cannot be considered exempt as failure to comply with both may result in penalties.
Differences between federal and state regulations
As briefly touched on above, the state in which you operate may have different standards than those outlined in the FLSA, which is the major piece of federal legislation that governs the wage and hour arena. In almost all circumstances when federal and state laws differ the employer will follow the rule that is most advantageous to the employees. For instance; the current federal minimum wage is $7.25 per hour and in California the current state minimum wage is $8.00 per hour. This means that California employers must the state minimum wage of $8.00 as this is most advantageous to employees.
It is imperative to know if your state has any specific wage and hour regulations, what those regulations are and how to properly apply them to avoid unnecessary claims.
Improperly applying wage & hour rules
This last category is wide ranging as there are many regulations in this area that can be misapplied, some of the most common errors are as follows;
- Overtime
- Improper deductions from pay
- Final pay
- Minimum Wage
- Call Back Pay
- Reporting Time Pay
- Standby or On-Call Time
- Meal and rest periods
- Preparatory and concluding activities
- Training Time
- Travel Time
As one can see there are many areas in which a company may be exposed to wage and hour claims. This is why it is essential for employers to understand all wage and hour rules that affect their operations and know how to apply them properly. Below are some tips to assist in avoiding wage and hour claims;
- Develop a thorough knowledge and understanding of all wage and hour regulations that apply to your operation on both the federal and state levels.
- Conduct an extensive Human Resources and payroll audit, some focus areas should be;
- Determine proper exempt, non-exempt and independent contractor statuses
- Proper payment of overtime
- Payment for all hours worked
- Train managers on wage and hour regulations and explain how errors can affect the company. Also, remind them that they are accountable for the proper management of their department(s)/employee(s) and wage and hour compliance is part of their performance and will be judged accordingly.
- Educate staff on your organizations rules about overtime, proper use of the time clock, taking meal and rest periods, and all other wage and hour related items. In addition, be sure to educate the staff on the repercussions for failing to follow the company rules in this area.
- Take wage and hour complaints seriously and immediately correct any errors.
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