The federal Fair Labor Standards Act (FLSA) was enacted in 1938 to ensure employees a “fair wage for a fair day’s work.” The FLSA establishes standards for a minimum wage rate, maximum number of hours, overtime pay, child labor and recordkeeping. In general, the FLSA requires employers to pay a minimum wage for all “hours worked” and prohibits work in excess of 40 hours in a workweek unless the employer pays the employee a premium of one and one-half times the employee’s regular rate of pay for those hours in excess of 40. It also contains numerous exemptions to these requirements. These subjects, among others, are addressed in this chapter.
Many states have enacted their own minimum wage and overtime laws, which may differ from the FLSA. However, wages and hours in many states are primarily governed by the FLSA. However, there generally are other state wage and hour laws that employers need to consider.
The Fair Labor Standards Act (FLSA) applies to enterprises with related operations performed for a common business purpose, including all operations regardless whether those operations are performed at the same location. For instance, all departments of a store or plant and all stores and plants within a company are included in the “enterprise.” Independent contractors and certain independent retail and service establishments are not included within the enterprise. A business that is a covered enterprise is subject to the FLSA with respect to all of its employees.
To qualify as a covered enterprise, a company must have both:
In addition, the FLSA applies to some organizations regardless of their sales volumes.
Hospitals and institutions primarily engaged in the care of the sick, aged, mentally ill or disabled who reside on the premises are covered by the FLSA.
Public employers have been covered under the FLSA since 1986, subject to certain exceptions. These exceptions include higher overtime eligibility levels and longer work periods in which to calculate overtime for law enforcement and fire protection employees. Elected officials and their personal staff members and appointees, as well as members of the legislative branch, are excluded from the FLSA’s coverage of public agencies.
Preschools (including child care facilities), elementary schools, secondary schools, institutions of higher education and schools for gifted or handicapped children are covered by the FLSA.
The vast majority of manufacturing companies that are engaged in the production of goods for commerce are subject to enterprise coverage under the FLSA.
Transportation companies are subject to enterprise coverage. However, certain employees such as interstate truck drivers and the helpers and mechanics working on those trucks, are exempt from the overtime requirements of the FLSA.
Public utilities are covered under the FLSA.
Retail and service establishments whose annual revenues are at least $500,000 are subject to the FLSA. These establishments include:
Numerous businesses are excluded from the above definition of retailers because the concept of retailing is not generally applicable to them. They may still be covered, however, under other provisions of the FLSA. Such businesses include:
Certain commission-paid employees of retail and service establishments are not subject to the FLSA’s overtime requirements. In order to be considered such an employee, the employee’s regular rate of pay must be more than one and one-half times the current minimum wage and more than 50% of his or her compensation for a representative period (not less than one month) comes from commissions.
Even if an organization is not a covered enterprise as outlined above, its individual employees may still be covered by the FLSA. An individual is covered if he or she is engaged in interstate commerce or in the production of goods for interstate commerce or performs activities closely related and directly essential to the production of goods for interstate commerce. The FLSA also covers certain domestic service workers, such as day workers, housekeepers, chauffeurs, cooks or full-time babysitters, depending on the amount of cash wages they receive from one employer in a calendar year or if they work a total of more than eight hours a week for one or more employers.
Employers covered by the FLSA are required to display an official poster outlining FLSA provisions. This poster is available at no cost from local offices of the Wage and Hour Division and is also available through the DOL by calling (866) 4US-Wage (866-487-9243) or it is available electronically for downloading and printing at:
Clergy and religious workers are excluded from coverage under the FLSA because they are not considered to be employees under the Act. This exclusion is called the ministerial exception and applies to employees whose work is “ministerial in nature” and thus is “important to the spiritual and pastoral mission” of the organization. Included within this category are ordained ministers but also music leaders, small group leaders, counselors and others who are active in the ministry. However, commercial activities of religious institutions and those who perform those commercial activities are covered by FLSA. That means regular staff who work for a church (or religious order or nonprofit), such as janitors, cooks and bookkeepers are employees for purposes of the Act. Minimum wage and overtime protections attach to those “secular” employees.
The FLSA, however, requires that employees be paid not less than the minimum wage for all hours worked. The current federal minimum wage is $7.25 per hour. Pursuant to Executive Order, the minimum wage for federal contractors during 2020 is $10.80 per hour.
Note: Both state and local ordinances can require employers to pay a minimum wage which differs from the federal minimum wage. Employers are encouraged to check their state and local laws for applicable minimum wage rates in their areas.
Under the FLSA, employees who receive tips may be credited up to $5.12 per hour (of the $7.25 per hour amount) for tips received. However, tipped employees performing work on or in conjunction with a federal contract are to receive $7.25 per hour. The employer must be able to demonstrate the employee receives at least the minimum wage each hour of work when tips and direct wages are combined. Under the Executive Order pertaining to federal contractors, the minimum wage for tipped employees is $7.55 per hour for 2020.
Many employers had previously utilized some type of required tip sharing or tip pooling procedure. The FLSA now expressly prohibits employers from keeping tips received by employees regardless of the purpose. This restriction prevents management from keeping any portion of received tips, regardless of whether the employer takes a tip credit. An employer who violates this provision becomes liable to the employee for all tips retained and an equal amount treated as liquidated damages.
Employers can hire individuals under age 20 and pay them at a rate of $4.25 per hour for the first 90 days of employment. After the initial 90-day period, the employee’s hourly rate must be increased to at least the current minimum wage. Employers cannot take any actions against current employees, including a reduction of their hours or wages, in order to take advantage of the youth opportunity wage.
The FLSA also permits the employment of certain individuals at wage rates below the statutory minimum wage, so long as employers obtain certificates issued by the Department of Labor, including:
The FLSA does not limit either the number of hours in a day or the number of days in a week that an employer may require an employee to work, as long as the employee is at least 16 years old. Employers are encouraged to review state laws in this area.
The FLSA requires an employer to pay an employee an overtime premium equal to one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek unless the employee is exempt from overtime compensation.
In determining an employee’s regular rate for purposes of determining overtime, the employer must include the employee’s hourly wages and any incentive pay, commission or bonus (including attendance, production and incentive bonuses).
Even if the employee will not receive a bonus until later (for example, a quarterly production bonus or an annual longevity bonus), the payments must be included in the overtime compensation determination – even if it means retroactively adjusting those computations once the amount of the bonus is determined. The FLSA provides special rules for retroactive adjustment of an employee’s regular rate. The regular rate need not include:
In December 2019, the DOL issued a final rule updating the FLSA definition of the regular rate of pay for the first time in more than 50 years. The final rule, which went into effect on January 15, 2020, clarifies that many benefits and perks should be excluded from the regular rate calculation, including (in addition to those listed above):
The final rule also includes guidance and fact-based examples of what types of bonuses are considered discretionary. Bonuses that may be discretionary include:
Such bonuses are usually not promised in advance, and the fact and amount of payment are in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.
Finally, the final rule updates the regulations regarding the “basic rate,” which is authorized under section 7(g)(3) of the FLSA as an alternative to the regular rate under specific circumstances. Under the current regulations, employers using an authorized basic rate may exclude from overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The final rule updates this regulation to change the $0.50 limit to 40% of the higher of the applicable local, state or federal minimum wage.
If a hospital, nursing home or other healthcare provider has in-patients, then it may use a special option to calculate overtime. Instead of the 40 hour per week standard, eligible institutions with in-patient care for residents can elect to pay overtime based upon the “8 and 80” rule. Under this rule, if employees agree, they are eligible for overtime compensation if they work more than eight hours in a workday or in excess of 80 hours in a two-week work period.
Example - If a hospital employee works 24 hours (eight hours per day for three days) one week and 48 hours (eight hours per day for six days) the next week, he or she is not owed overtime compensation. This is because the total hours for the two-week period is only 72 hours and the employee never worked more than eight hours in one day.
Employers often want to enforce a “no overtime without prior authorization policy” to control costs. However, such a policy will not prevent employees from being entitled to overtime compensation. Overtime pay must be given, even if the time is not authorized. In such cases, employees should be told that working unauthorized overtime will lead to discipline (but not non-payment). If employees continue to perform such work, they should be paid for it and disciplined.
There are a number of special circumstances under which the FLSA overtime provisions and regular rate of pay differ from the situations explained previously. A few examples of special plans for overtime compensation are discussed below.
Employees working two jobs at two different rates for their employer during the same workweek can be paid overtime earnings when the total hours worked exceeds the applicable overtime level according to two approaches.
Under this approach, the employee’s total earnings for the two separate jobs is divided by the total number of hours worked. That figure is the weighted average regular rate.
Example - If an employee works 40 hours a week at a job paying $15 an hour and works 10 hours at another job paying $12 an hour, the weighted average rate would be $720 divided by 50 hours or an hourly rate of $14.40.
An employee and his or her employer can agree prior to performance of the work that the employee will be paid overtime compensation based upon the rate of the job being performed during the overtime hours. This agreement should be in writing.
An employee may be employed on a salary basis but have hours that fluctuate from week to week. According to an agreement, the employee may be paid a fixed salary for each week he or she works, no matter how few or many hours. When the employee works overtime, his or her overtime compensation is determined by dividing his or her salary by the total number of hours worked. This figure is multiplied by ½ times the number of overtime hours worked. The ½ figure is used because the salary is intended to provide the employee straight-time compensation for all hours worked, including overtime hours, so the employee only needs to receive the additional half-time for the overtime hours.
Example - A nonexempt employee whose salary is $600 works 50 hours in one week. Her salary of $600 is divided by the hours she worked, 50, yielding a rate of $12 per hour. She is entitled to $60 overtime compensation (half the hourly rate times the number of overtime hours worked – $6 x 10).
A Belo contract is a very specialized guaranteed pay plan derived from a Supreme Court decision by the same name. Such a plan only applies where an employee’s hours of work regularly fluctuate above and below 40 hours per week for reasons beyond the employer’s control (such as a service technician who handles customer emergency equipment breakdowns).
The guarantee may involve a straight-time and overtime component for workweeks up to a certain number of hours (50, for instance) and a time and one-half payment for hours worked over that limit. The regular rate used in such plans must be a bona fide rate and operative in determining compensation. Due to the complexity of these contracts, an attorney specializing in this area should be consulted before implementing one.
On January 12, 2020, the DOL announced a final rule revising and updating its regulations interpreting joint employer status under the FLSA; the final rule is effective March 16, 2020.
The final rule addresses two types of potential joint employment scenarios:
No single factor is determinative, and the weight to be given to each factor will depend on the circumstances. However, satisfaction of the maintenance of employment records factor alone does not demonstrate joint employer status. In addition, whether the employee is economically dependent on the potential joint employer is not relevant to determination of joint employer status.
The final rule also provides that the following factors do not make a finding of joint employer status more likely under the FLSA:
Finally, the final rule provides examples applying the DOL's analyses to factual situations to provide more certainty and clarity regarding who is and is not a joint employer under the FLSA.
Example 1 - An employee works for a subsidiary and the parent company initially hired the employee and maintains the employee’s personnel file. Both the parent and the subsidiary share the same employee handbook, and safety inspectors from the parent company periodically observe employees at the subsidiary to make sure they are following safety rules. Both companies are likely joint employers liable for FLSA violations.
Example 2 - A shopping mall contracts with a maintenance company to provide janitorial services. The maintenance company employees must wear mall uniforms. The mall determines what the maintenance company employees’ duties are each day, although the maintenance company provides all necessary supplies and equipment. The mall keeps the records tracking the work hours of the employees and on several occasions has requested that the maintenance company hire or terminate the employment of certain workers. Both the shopping mall and the maintenance company are likely joint employers liable for FLSA violations because the mall exercises control.
Example 3 - A shopping mall contracts with a maintenance company to provide janitorial services after hours. The shopping mall reserves the right to supervise the employees' performance of the services. The shopping mall does not set the maintenance employee's pay rates or schedules and does not in fact supervise the employees. However, the shopping mall requires in its contract with the maintenance company that the company comply with applicable federal, state and local employment laws. In this example, unlike in Example 2, the shopping mall is likely not a joint employer because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. Under the DOL's final rule, the fact that the shopping mall requires in its contract with the maintenance company that the company comply with applicable employment laws is not relevant to the joint employer analysis.
Example 4 - An employee works 30 hours per week as a cook at one restaurant and 15 hours per week at a different restaurant; both restaurants are associated with the same national franchise, but are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. In this example, the DOL would not consider the restaurants to be joint employers of the cook because they are not associated in any meaningful way with respect to the cook's employment.
On September 27, 2019, the Department of Labor (DOL) announced a final rule that made more than a million more American workers eligible for overtime. The new rule increased the Fair Labor Standards Act’s (FLSA) salary threshold for exempt status from $23,660 to $684 per week ($35,568 per year). Additionally, the rule increased the total annual compensation requirement for “highly compensated employees” (HCE) from the currently enforced level of $100,000 to $107,432 per year. The rule also allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level. This rule is scheduled to take effect on January 1, 2020.
Under the DOL’s final rule, effective January 1, 2020, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary test requirement. Such bonuses include nondiscretionary bonuses tied to profitability or productivity, such as bonuses based upon the performance of the company in the prior year. In order for such bonuses to count toward the standard salary level test, the bonus payments must be made at least annually.
Under this option, an employer may pay the employee at least 90% of the salary level each pay period ($615.60/week). At the end of the year, the bonus, incentive payment or commission must bring the total amount paid to at least $35,568. Employers may make one final catch-up payment no later than the next pay period after the end of the year if the bonus, incentive payment or commission ended up being less than anticipated.
Note: For highly compensated employees, employers are still allowed to count nondiscretionary bonuses and commissions toward the salary level requirement; there is no 10% cap. The employer must pay the employee at least $684/week and at least $107,432 annually (which can be comprised of nondiscretionary compensation of up to $71,864 if paying the minimum weekly amount.)
There are six principal “white-collar” exemptions to the FLSA.
For the executive, administrative or professional exemption to apply, the employee must be paid on a salary basis. An employee is paid on a salary basis if, for each week the employee works, he or she receives a predetermined salary (exclusive of board, lodging or other facilities) that is not subject to reduction based upon the quality or quantity of work performed.
Under certain circumstances, employers may be able to make deductions from an employee’s salary without jeopardizing the employee’s exempt status. For instance, an employer does not have to pay an exempt employee for any week in which he or she performs no work, regardless of the reason for the employee’s absence. On the other hand, an employer may not deduct from exempt employees’ pay for absences of less than a week that are caused by the employer (such as lack of work), except for unpaid disciplinary suspensions. Employers may not deduct from exempt employees’ pay for partial day absences, except for intermittent or reduced-schedule FMLA leave or partial absences during the initial or final week of employment.
An employer may suspend an exempt employee without pay for one or more full days as discipline for an infraction of workplace conduct rules, if the suspension is in good faith, a written policy provides for such suspensions and the workplace conduct rule involves serious misconduct (such as harassment, workplace violence, drug or alcohol violations or violations of state or federal laws), but not performance or attendance problems.
An employer may deduct any amount from an exempt employee’s pay (including an amount that would be equivalent to a partial day of pay) as a penalty imposed in good faith for a violation of a safety rule of major significance (defined as a rule regarding the prevention of serious danger in the workplace or to other employees).
If an employer makes improper deductions from salary, it may lose the exemption if the facts show that it did not intend to pay its employees on a salary basis. An actual practice of making improper deductions shows that the employer has violated the salary basis test.
An isolated or inadvertent partial-day deduction generally can be made up without losing the exemption. However, such a deduction due to lack of work jeopardizes the exemption (such as an employee sent home early and not paid for the full day). The exemption can also be lost if there is a corporate policy permitting partial day deduction or requiring that partial day absences be “made up.”
The DOL’s regulations permit a “safe harbor” on the salary basis test. Under the safe harbor provision, an employer will not be considered to have violated the salary basis test if it has a policy against improper deductions, communicates that policy to its employees and reimburses any employee found to have suffered an improper deduction. On any deductions, however, state law requirements sometimes vary.
The executive exemption applies to an employee who is paid over $684 per week on a salary basis, if the employee:
The executive exemption also includes any employee who owns at least a bona fide 20% equity interest in the enterprise in which he or she is employed and who is actively engaged in its management.
It is important to note that, when evaluating whether any exemption applies, the employee’s actual duties and responsibilities are determinative, not the job title or job description.
The administrative exemption applies to an employee who is paid at least $684 per week on a salary basis, if the employee:
The professional exemption, which includes both “learned professionals” and “creative professionals,” applies to an employee who is paid $684 per week on a “salary basis” or a “fee basis.” Teachers, lawyers and physicians are excepted from the salary requirement and have their own duty requirements for this exemption.
In the case of a creative professional, the employee also must perform work requiring invention, imagination originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.
In the case of a learned professional, the employee also must meet all of the following criteria:
Employees in the following occupations may be exempt as learned professionals: registered or certified medical technologists, registered nurses, dental hygienists, physician assistants, accountants, chefs, certified athletic trainers and funeral directors.
The computer employee exemption applies to an employee who is compensated on a salary or fee basis at a rate of at least $684 per week or who is compensated on an hourly basis at a rate of not less than $27.63 per hour (or approximately $57,460 per year) and whose primary duties consist of one or more of the following:
Outside sales employees are exempt if they are customarily and regularly engaged away from the employer’s place of business or away from an in-home office in making sales or obtaining orders for services or the use of facilities. Outside sales must be the employee’s primary duty. There is no salary requirement for this exemption.
Under the new exemption for highly compensated employees, an employee with total annual compensation of at least $100,000 is considered exempt if all of the following are true:
The following are some categories of employees that are either totally exempt (exempt from minimum wage and overtime requirements) or partially exempt (exempt from overtime requirements only) from the FLSA. Although some states do not allow the following exemptions (and state law must be followed where it is more favorable to the employee),
The following workers are exempt from the minimum wage and overtime provisions of the FLSA:
The following employees are exempt from the FLSA overtime provisions only:
Time spent by employees engaging in activities other than those that are job duties but are related to the job may or may not have to be treated as compensable time. In general, the FLSA considers time spent performing activities that are primarily for the employer’s benefit as compensable, while time spent primarily for the employee’s benefit is not. Hours that are paid but not worked do not count as hours worked under the FLSA, including:
Employers may choose to credit this time away from work and if so, should take care to comply with policies they adopt.
Rest periods are common and are considered to be primarily for the employer’s benefit. Thus, short periods of 20 minutes or less for breaks, such as for coffee and snacks, are compensable hours worked.
If an employee does not punch in and out for an unpaid meal period during the work shift, the employer must ensure that the employee actually is relieved of duties for the entire meal period. Supervisors must be sure that employees actually take their scheduled meal periods. When they do not, the time cards must be marked accordingly. Meal periods not spent predominantly for the benefit of the employer are not compensable; while meal periods for the employer’s benefit are compensable. For instance, if an office employee who is required to eat at his desk and answer telephone calls or a factory worker who is required to be at his machine is working while eating, such time is compensable.
There is a distinct recordkeeping risk in allowing employees to eat at their work place because the question arises as to whether they had an uninterrupted meal period.
If a meal period is interrupted by more than an insignificant amount of time (two or three minutes), then the employee must be paid for the lunch period as hours worked or receive a second lunch period. Repeated interruption of meal periods on a continuing basis may lead to a finding that all the meal periods are not duty free (the employee is not entirely relieved of duties) and hence are compensable hours worked.
When employees are idle during their regular workday because of interruptions beyond their control, the time spent waiting is counted as working time if it is unpredictable and short in duration such that employees are unable to use that time for their own purposes and it is instead controlled by the employer. A few examples of compensable waiting times:
Employees on duty 24 or more hours or who reside on the employer’s premises may agree in writing to have uninterrupted sleep time of up to eight hours per night deducted from hours worked. Bona fide meal times also may be so deducted by agreement. Persons who reside on the employer’s premises also may sign agreements setting forth their work and non-work time on a fair and reasonable basis. Such agreements are voluntary on the employee’s part.
Whether on-call time is compensable depends on the extent to which the employee’s personal time is restricted. Carrying a beeper does not constitute hours worked, provided the employee is relatively free to come and go as he or she pleases or use the time for personal pursuits. The employee can be required to refrain from drinking alcoholic beverages during this period. The employee must be given sufficient time to report (generally 20 to 30 minutes, depending on geographic population density) so that the employee can be free to use time for his or her own benefit. Requiring an employee to stay at home or at work means that time spent is counted as hours worked. Placing an employee constantly on-call or frequently interrupting the on-call period may lead to a finding of hours worked.
The use of an employer’s vehicle for travel by an employee and activities performed by an employee that are incidental to the use of such vehicle for commuting, such as getting a car washed or its oil changed, shall not be considered part of the employee’s principal activities if both:
Attendance at meetings, lectures and training programs or courses is considered compensable hours worked unless all four of the following are met:
Time spent outside of normal work time in state or licensing agency-mandated training such as to meet continuing education requirements is not hours worked.
Time spent in uniform changing activities must be counted as hours worked if the employees must change at work and the employee cannot perform his or her job without the uniform.
Time spent by employees in waiting for and receiving medical attention is compensable if the medical attention is received during normal work hours and either:
Time spent receiving a physical examination that is required for continued employment is compensable. Time spent on tests (such as drug screens) by applicants seeking employment is not compensable.
Time spent by employees working for public or charitable purposes at the employer’s request or under its direction or control or while the employee is required to be on the premises, is compensable hours worked. For instance, an employee directed by the employer to attend a charitable function must be paid for that time. However, time spent voluntarily in such activities outside of the employee’s normal working hours is not compensable.
The Patient Protection and Affordable Care Act added a new provision to the Fair Labor Standards Act regarding lactating mothers. The FLSA now requires employers to provide reasonable unpaid breaks for nursing mothers. These unpaid breaks must be provided each time that a lactating employee needs to express breast milk and the employer must provide a private place for that activity. Making available a bathroom or a bathroom stall is not sufficient. These breaks must be allowed for nursing mothers up to one year after the birth of a child. These requirements apply to all employers. The requirements are mandatory for employers with 50 or more employees; however, employers with fewer than 50 employees can be exempt from the requirements upon a showing that compliance would impose an undue hardship on the employer.
The Department of Labor has not specified the frequency, number or minimum duration for these breaks. The breaks however must be “reasonable,” and provided as often as needed by the employee. The location need not be exclusively reserved for expressing milk, but may be temporarily converted for this purpose. It must be free from intrusion by co-workers or the public and shielded from view. If the employee is not completely relieved from duty during the break, then the time must be treated as worked time and if the employer allows paid breaks, then the employer must compensate a nursing employee if she uses paid break time to express breast milk. This provision does not apply to employees who are completely exempt from the FLSA’s overtime requirement.
Public employees are able to engage in voluntary sporadic or occasional work for their employer in a different capacity without those hours being combined for overtime purposes. An example would be a school clerk collecting tickets at a high school football game. There are also very liberal rules covering outside employment by law enforcement and fire protection employees.
In general, federal, state and local government employers, with the agreement of their employees, can give compensatory (or “comp”) time off (at time and one-half) rather than pay cash overtime. In other words, if an employee worked 60 hours in a week, he could get 30 hours of comp time off instead of 20 hours of overtime pay.
If the work done by an employee for which comp time may be provided includes work in a public safety activity, emergency response activity or seasonal activity, the employee can accrue up to 480 hours of comp time (320 hours of actual overtime worked). “Public safety activity” generally refers to law enforcement officers and firefighters. “Emergency response activities” generally refer to the dispatch of emergency vehicles, rescue work and ambulance services. “Seasonal activities” typically include work during periods of increased demand that are regular and recurring in nature. There is a 240-hour cap on comp time (160 hours of actual overtime worked) for all other types of work.
Compensatory time received by an employee in lieu of cash must be at the rate of not less than one and one-half hours of compensatory time for each hour of overtime work and must be under an agreement or understanding between the employer and employee prior to beginning the overtime. There is no specific time limit as to when a public employee may elect to use comp time earned. However, the public employer must permit the employee to use such time within a reasonable period after the employee requests time off, unless such use will unduly disrupt the government’s operations (which generally depends on the government’s workload and specific circumstances of each case). When an employee’s employment is terminated, he or she must be paid for all remaining comp time at his or her current rate of pay.
Many employers provide bonuses as an additional form of compensation for employees. How the bonus is structured and calculated affects whether an employee has a right to the bonus. For merit bonuses, the right generally arises at the beginning of the employment relationship and will be for a set amount or based upon a formula for calculating an exact amount for the bonus. If bonuses are not based on an established system or criteria, then a right to the bonus does not arise.
When a bonus is payable at the discretion of the employer, an enforceable right generally does not exist. Many courts have addressed issues regarding bonuses after resignation or termination. The question of discretion by the employer to grant or deny a bonus or to set its level is generally determinative. Also, a bonus plan may require an employee to continue working for the company to be eligible for a bonus payment.
In general terms, a commitment to pay a percentage of earnings as a bonus is sufficiently exact to be legally enforceable, but a system that is established to make a payment in a certain range may not be enforceable.
Information that must be maintained
Employers are required to maintain payroll records showing the following information:
For all employees:
For employees subject to minimum wage and overtime provisions of the FLSA:
For exempt employees:
Note: A copy of the paycheck is not sufficient to meet these requirements.
Payroll records (such as ledgers, W-2 forms and payroll registers), employment agreements and sales and purchase records must be kept for three years. The FLSA does not require any particular form in which the records must be kept. Supplementary basic records (such as time cards, work sheets, wage rates and billing records) must be kept for two years.
Compensable hours are all hours an employee is engaged to work, engaged to wait or actually at work, whether or not authorized. Thus, if an employee starts work early or works beyond the end of his or her shift, such work must be compensated, whether or not it was authorized or even necessary. Employees, however, may be disciplined for unauthorized or unnecessary work.
Employers may keep track of employees’ time in any method they choose. Employers, for instance, may use a time clock, have a timekeeper keep track of employees’ work hours or tell their workers to write their own times on the records. Generally, any timekeeping plan is acceptable as long as it is complete and accurate.
Time clocks are not required but can be used to record hours worked. If time clocks are used, rounding practices may be used. If the rounding method is followed, employers must ensure that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked. Employers should round employee time to the nearest increment (five minutes, 10 minutes, not to exceed 15 minutes).
The child labor, minimum wage and overtime provisions of the FLSA are enforced by the Wage and Hour Division of the U.S. Department of Labor. Government investigators have authority to inspect and make a typed record of an employer’s records, to interview employees and to otherwise make determinations of FLSA violations. The Secretary of Labor, an individual employee or a group of employees may sue an employer to collect past due minimum wages or overtime compensation.
The statute of limitations to collect past-due wages is two years for ordinary violations and three years for willful violations.
Liquidated (pre-determined) damages in an amount equal to unpaid back wages are available as a remedy, plus attorneys’ fees and costs. An injunction is also possible in court cases brought under the act by the Secretary of Labor. Attorneys’ fees can be recovered in successful private actions. Civil fines, called civil money penalties (CMPs), of up to $2,050 can be assessed by the DOL for repeated or willful violations.
Violations of the child labor laws expose an employer to both civil and criminal prosecution. Naturally, the civil penalties for violations are very high. Beginning in 2016, federal agencies must adjust their penalties for inflation on an annual basis. The penalties outlined within this section are effective on or after January 24, 2019. An employer who is found violating any of the FLSA’s child labor provisions is subject to a civil penalty of up to $13,072. In addition, an employer is subject to a civil penalty of up to $59,413 for a violation that caused a death or serious injury to a minor. If the employer is found to have engaged in a willful or repeated violation of the child labor provisions that result in serious injury or death are subject to a civil penalty of up to $118,826.
The FLSA is very complex and involves numerous detailed regulations. In addition, DOL investigators are quite experienced. Thus, it is extremely important that employers consult an attorney at the earliest stage of any potential lawsuit involving wage and hour laws. Keep in mind that the information contained in this chapter only addresses a portion of the relevant laws and regulations related to wage and hour laws.
The equal pay provisions of the FLSA provide that persons performing jobs requiring equal skill, effort and responsibilities at the same establishment may not be paid different wage rates based upon their sex. Title VII and the Lilly Ledbetter Act taken together provide that an employer may not discriminate in pay based on sex, race, national origin, age, religion or disability. These statutes are enforced by the Equal Employment Opportunity Commission (EEOC). Recently the EEOC has increased enforcement to bring wages of women more in line with those of men.
The Equal Pay Act has the same statute of limitations – two years for ordinary violations and three years for willful violations – as the FLSA. Liquidated (pre-determined) damages are also available to claimants where the employer is unable to prove its actions were taken in good faith.
Given the potential liability to employers and the level of back pay that can be awarded in a wage and hour investigation or lawsuit, internal audits are advisable. These audits should focus on:
The assistance of an outside attorney specializing in this field is advisable in such audits to allow the employer to eliminate compliance issues before becoming the subject of an investigation. However, these audits become valueless if any compliance issues discovered during the audit are not promptly resolved.
In addition to the FLSA, other federal wage and hour laws may apply to employers who do business with the federal government, as set forth briefly below.
The Walsh-Healy Public Contracts Act sets basic labor standards for employers with federal government contracts to manufacture or supply articles with a value of over $10,000. Under this law, government contractors are required to pay prevailing wage rates in addition to conforming to the requirements of the FLSA. The U.S. DOL enforces it. The amount recoverable includes the difference between the wages paid and the prevailing wage or benefit rate and liquidated (pre-determined) damages to claimants. There is also the possibility of exclusion from government work.
The Davis-Bacon Act covers mechanics and laborers engaged in federal public buildings and work projects with a value of $2,000 or more. Under this law, government contractors are required to pay prevailing wage rates in addition to conforming to the requirements of the FLSA. This law is also enforced by the U.S. DOL. Disqualification from government work is a possible sanction in addition to back wages for underpayments.
The Service Contract Act covers employers with federal government service contracts worth $2,500 or more. Its provisions and enforcement are similar to the Walsh-Healey and Davis-Bacon Acts.
Wage and hour enforcement activity has increased dramatically in recent years. In addition to increased administrative enforcement, there have also been an increasing number of private lawsuits brought by individuals and groups of individuals. In the lawsuits, liquidated damages (double back pay) are often sought and the three-year statute of limitations for willful violations invoked. Thus, compliance with federal wage and hour laws is essential and self-audits should be conducted at regular intervals.
Policies and Forms
Chapter 08: Wages and hours