Wage and hour basics for starting employers

This guide contains only general information.
It is NOT LEGAL ADVICE.
Please note that each state may have different standards.
IB Law Firm is not responsible for the contents of external links.
Wage and hour lawsuits can take in average $4.5 million to settle. Some class actions were settled at over $100 million. In spite of the high stakes, many employers prefer to push the wage and hour compliance to the bottom of their priority lists.

This summary of general wage and hour principles will help starting employers to understand the basic steps that they will need to make to comply with the employment laws and avoid risky lawsuits.

There are three major sections in this guide: (1) how to classify, (2) how to pay, and (3) what to record.
Classification
It is essential for employers to correctly identify who is an employee and who is not. Then, employers should classify employees as salary or hourly paid employees. This classification stage is very fact-sensitive.
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Employee v. Independent contractor
Employers should carefully assess each position based on federal and state laws.
The wage and hour protections apply only to employees. Whether a person is an "employee" depends on many factors. Under the Federal Labor Standards Act ("FLSA"), the employer-employee relationship is tested by the "economic reality" factors, such as

  1. The extent to which the services rendered are an integral part of the principal's business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor's investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor's opportunities for profit and loss.
  6. The amount of required initiative, judgment, or foresight in open market competition.
  7. The degree of independent business organization and operation.
Each state may have its own standards in addition to the FLSA standard. For example, in California, to classify a person as an independent contractor, the employer will have to satisfy three conditions of the so-called ABC test.

A. The person is independent of the hiring organization in connection with the performance of the work.
B. The person performs work that is outside the hiring entity's business.
C. The person is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.

Under this ABC test, workers are considered employees unless proven otherwise.
Salaried v. Hourly employee
Salaried employees are those with executive, administrative, or professional roles and with a higher pay.
The salaried employees are also called "exempt" because they are exempt from the requirements of overtime and other wage payments. If an employee is salaried (exempt) s/he usually enjoys the security of steady paychecks and is usually paid more. On the other hand, if an employee is an hourly employee (non-exempt), and has to work long hours, his/her pay rate should increase.

There are two main indicators that an employee is exempt:

(a) Role: exempt employees' primary role is executive, administrative, and professional.

Exempt employees are those who have executive, administrative, professional, or like roles. There are other, occupation-specific exemptions, such as computer programmers or salespersons.

Importantly, there is no unified set blueprint for each role. It depends on specific duties of each position and company practices. Where things can get murky – is the borderline or mixed positions of exempt and non-exempt work.

As an example, Petco settled a class action case with its assistant store managers not long ago. The employees said that Petco misclassified them as exempt employees while they were non-exempt. They said that they had to do primarily manual work; and so, they had to be paid hourly, including the overtime wages. Petco denied these claims. The case was settled at almost eight million dollars. The takeaway from this example is that no matter how you label the position – manager, CEO, or something else – what matters is the actual duties, not the name card.

(b) Pay: exempt employees' base salary satisfies the minimum requirement.

The second indicator of exemption is the base salary. It must be more than $684 a week for Executive, Administrative & Professional employees. This comes to approximately $35,000 – 36,000 a year. And there is another exemption of highly compensated employees who must receive approximately $107,000 or more a year. There may be nuances of what is included in the base salary: bonuses, lodging, or meals. But the idea is that the salary has to be above a certain minimum.
Payment
How to pay and calculate wages is a separate world of nuances. Here are some examples of common mistakes.
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Paid v. Unpaid time
Defining what to pay for.
An employer must pay for all time worked. The work time may include, depending on the situation, changing clothes, commuting from worksite to worksite, going through medical check-up, going through the security, being on-call, hours of paid absence, and even waiting for a computer to load. What time to include in the paycheck depends on many factors, such as what are the employee's duties, what is the specific location, what does employer require to wear, what is the size of the building, and more.

The work time should be determined on a case-by-case basis and should address all aspects of the specific employee position and its job duties. For example, if an employee has to go through a mandatory security check, the time that the employee has to wait to be checked may need to be counted as work time.
Regular rate v. Hourly rate
Defining the calculation unit for the wages.
The basis for overtime calculation is the regular rate. The regular rate is different from the hourly base rate. The main distinction is that the regular rate includes all that the employee earned while the hourly rate is simply used as a base rate.

For example, if an employer promised to give his 20/hr employee John a $10,000 bonus every year, this is a non-discretionary - earned - bonus. So, it is a part of the pay and should be included in the regular rate. It means that though John's hourly rate is $20/hr, his regular rate is approximately $25/hr because of this extra $10,000 in earnings. John's overtime rate is not $30/hr, but $37.50/hr.

What is earned? Some bonuses can be earned, like in the example above. But some bonuses (discretionary) are not. The earned bonuses should be included in the regular rate, but non-earned bonuses should not. The other remunerations that must be included in the regular rate calculation may include lodging, "free" meals, standby time, annual premium pay, and additional pay for working on holidays.

On the other hand, there are payments that are not usually included in the regular rate. For example, recruitment and relocation bonuses, travel and per diem payments, clothing and uniform allowances, a remote worksite allowance, and cash incentive awards.
Overtime calculation
Employers must calculate wages based on federal and state formulas.
Most employers are familiar with the 1.5 overtime rate. Yet, the "how" to calculate overtime wages under federal and state laws may cause questions. Here is a generalized step-by-step calculation process:

1. Calculate the total remuneration of the employee, including the basic pay, pay for paid absence, pay for a holiday when no work is performed, annual premium, pay for regularly scheduled standby duty, additional pay for working a holiday, and others.

Example: Employee A worked daily 10 hours on Monday through Thursday and used 8 hours of paid sick leave on Friday. On Wednesday, it was a holiday. The employer has a policy of paying an additional $2.5/hr for working on holidays. Employee A's base rate is $10/hr. His total remuneration is
Base pay 10 hours x 4 (Mon - Thu) x $10/hr = $400
Paid absence 8 hours on Friday x 10/hr = $80
Holiday additional pay for 8 hours on Wednesday x $2.5/hr = $20
Total remuneration is $500

2. Compute the total hours worked by the employee, including basic hours, irregular and regular overtime hours, actual hours of standby, and hours of paid absence.

Example: Employee A is a security guard. He has to be on-call all the time he is on duty. His on-call 40 hours should be included in the computation. Even though he took a paid leave on Friday, his 8 hours of paid leave should also be included in the computation. Hence, the total hours worked are 48 hours.

3. Compute the regular rate by dividing "total remuneration" by "total hours worked."

Example: $500 (total remuneration) / 48 hours (total hours worked) = $10.42/hr. As seen, the employee's $10.42 regular rate is higher than his $10.00 base rate.

4. Compute the hours worked over 40 a week (Federal overtime).

Example: The employee worked 48 hours even though 8 of them were used as paid sick leave. Thus, he worked 8 overtime hours over the 40 a week.

5. Multiply the overtime hours by the "regular rate."

Example: 8 overtime hours x $10.42/hr (regular rate) = $83.36

6. Calculate the state overtime.

On the state level, there may be additional overtime calculation rules. For example, in California, employees who work over 12 hours a workday or over eight hours on the seventh consecutive workday are also entitled to the double rate of overtime. Also, in addition to the 40 hours a week, states may impose an additional over 8 hours a day requirement. Please check your state's overtime calculation laws.

7. Calculate the total amount to be paid.

Example:
Base pay 10 hours x 4 (Mon - Thu) x $10/hr = $400
Paid absence 8 hours on Friday x 10/hr = $80
Holiday pay 8 hours on Wednesday x $2.5/hr = $20
FMLA overtime 8 hours x $10.42 (regular rate) = $83.36
Total $583.36
FMLA, PTO and other paid and unpaid leaves
Should I pay if the employee did not work?
Whether an employer must provide its employees with paid ("PTO") or unpaid leave – is governed by the Family Medical Leave Act ("FMLA") and your state and/or local laws.

Under FMLA, eligible employees of certain (not all) employers are entitled to up to 12 workweeks of unpaid leave a year. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. FMLA applies to private employers who employ 50 or more employees. Read more about FMLA at DOL's Q&A page.

Each state has its own laws regarding paid time off ("PTO") or paid sick leave, its accrual, and payment. Please check your state's requirements regarding PTO.
Other requirements
Minimum wages, waiting time penalties, meal and rest breaks, wage statements, etc.
There are many other requirements in federal, state, or local laws. To name a few:
- what is the minimum wage (federal, state, county, or city)
- when the last paycheck should be given to the departing employee (waiting time penalties)
- how often to pay the wages
- should the employer pay for missed meal or rest breaks
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what should be included in the wage statement

Please check your state's laws for more wage and hour requirements. This guide contains only general information. It is not specific to any state or jurisdiction.
Recording
Recording the correct wage and hour policies and practices is a gamechanger in wage and hour disputes.
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Recording the correct work time
Cultivating a compliant wage and hour atmosphere.
Keeping accurate records of employees' work time goes hand-in-hand with how the employer determines the work time. For example, if an employee's work time begins when s/he changes into a uniform, the time-tracking should start at least before that moment. If an employee works from home, the time-tracking might need to start before she turns her computer on. If an employee has to go through a medical check or a security check, the time-tracking may need to start before the checkpoint.

Even if the employer has correctly determined when the work time starts and ends, it may sometimes become challenging to keep the work within those boundaries. For example, there may be occasions when an employer asks an employee to perform work off-clock. ("Hey, could you drop this off on your way home please?" or "Can you unload this truck during your lunch please?"). That is when the work starts creeping outside of the clock-in/ clock-out zone. To record the absence of such creeping is more challenging. Employers can create a red-flag system to intercept any potential wage and hour violations. For example, an easy-to-use reporting system for any off-clock work or an easy way to correct the time records.

Employers have an exception from the strict time-recording rules. This exception is called the de minimis rule. See Anderson v. Mt. Clemens Pottery Co. (1946) 328 U.S. 680, 692, and Lindow v. United States (9th Cir. 1984) 738 F.2d 1057, 1063. Under this rule, employers may disregard insubstantial or insignificant periods of time beyond the scheduled working hours when the bits of time are administratively difficult to record. However, this de minimis rule applies only to claims under FLSA (federal law). Please check your state laws for similar or equivalent rules. For example, under California's statutes and regulations, the de minimis doctrine does not apply. See Troester v. Starbucks Corp., 5 Cal.5th 829 (Cal. 2018).
Recording the compliant wage and hour policies and practices
Employee Handbooks, written policies, and more.
It is essential to maintain records of correct written policies. Employee's Handbook is one of the first written policies that employers should consider. Employee's Handbook should include clear guidelines on work time, payment of wages, breaks (depending on the state), PTO & FMLA (if applicable), and other aspects related to the employment relationships.

The next step after the written policies is to cultivate an atmosphere that not only discourages but also prevents the possibility of off-clock work. In other words, to the extent possible an employer should make it impossible for employees to work off-clock. Examples of compliant wage and hour culture may include, trained supervisors, practices of checking and reminding employees about working only on-clock, posters with explanations about employee's rights, providing to employees the opportunity to complain and report about their off-clock work or about inconsistencies in their timesheets.
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