Top 10 labor law compliance pitfalls

Employers, HR directors and payroll managers have a lot on their plate when it comes to compliance. It’s extremely difficult to stay up on all of the changes and details of a myriad of local, state and federal employment compliance topics.

While Wage and Hour investigations might not be as familiar to some as OSHA or IRS audits, their notoriety is increasing due to an expansion in enforcement and back wage penalties.  The vast majority of investigations done by the Wage and Hour Division of the U.S. Department of Labor focus on compliance with the Fair Labor Standards Act (FLSA) which regulates overtime, minimum wage, child labor and record-keeping.

Although there are countless ways to be found in violation of the FLSA, the 10 problems listed below are the ones that result in the largest monetary penalties. Get these 10 right, and you’ll be well on your way to 100 percent FLSA compliance.

1. Do not misclassify employees as contractors: To start off, make sure that you are not treating anyone as a contractor who should be classified as an employee.  The Wage and Hour Division uses a six-factor test to determine the correct classification of each person.  Focus on things like nature and degree of control, investment in facilities and equipment, opportunity for profit and loss, economic dependence and permanency of the relationship.

2. Include all required pay in the overtime rate: Non-discretionary bonuses, shift differentials, performance bonuses and service charges must be included in a non-exempt employee’s overtime rate of pay. This is probably the most common mistake made in payroll.

3. Pay overtime based on the seven-day work week: The federal overtime requirement applies after 40 hours in a seven-day work week.  The frequency of your payroll (bi-weekly, semi-monthly, monthly) does not affect this requirement. Comp time or banked hours are not allowed for private sector employees. There are a few limited exceptions to the 40-hour week rule for hospital and residential care employees, police officers and firefighters.

4. Be careful with your tipped employees: Tipped employees are a minefield when it comes to compliance. Employers, managers, and kitchen staff may not participate in tip pools. Make sure to pay overtime on the regular rate, not the lower cash wage. And don’t forget that if tipped employees make enough in service charges it can increase their regular rate past the usual minimum wage.  Also, make sure to inform tipped employees of the five provisions required under the FLSA.

5. Apply exemptions correctly: Commonly referred to as “white collar exemptions” these are exemptions from overtime for executive, administrative, and professional employees.  In order to be exempt these employees must meet certain job duties, salary basis, and salary level tests.  The mere act of paying someone a salary does not exempt them from overtime.  Be aware that changes to the exemption rules are expected late this year or in 2015.  

6. Do not make illegal deductions: Federal law does not allow deductions that are for the benefit of the employer (uniforms, tools, etc.) to take an employee below the minimum wage per hour. It does not matter whether the deduction is made from payroll or the employee pays for something out of pocket.

7. Do not steal time from employees: Breaks of less than 20 minutes must be paid. Lunches of less than 30 minutes must be paid. Lunches of 30 minutes or more that are interrupted for work must be paid. Most training time must be paid. Most travel time must be paid. Not paying for all hours worked can result in costly minimum wage and overtime back wages.

8. Know your child labor laws: If you hire anyone under the age of 18 you should be familiar with the federal and state child labor laws that apply to your type of business. Child labor laws are less stringent for agricultural labor. Violations of child labor laws can result in severe civil money penalties and you want to maintain a safe working environment for all of your employees, especially minors.

9. Post the correct posters: There are two ways to know which posters you have to post. Pay the poster companies for the sleek poster collage or download the individual posters for free from the internet.  The US DOL offers a helpful Poster Advisor on their website that asks you questions to determine which posters are required for your place of business.

10. Keep honest and accurate records: This might seem obvious but who really wants to read a list of nine things? Make sure that your time records and payroll records are accurate reflections of what hours were worked and what compensation was paid. It is common for manager level employees to adjust the electronic time punches of employees. If it is done infrequently and there is justification to back up the adjustment it may not be a problem. Take care that adjustments are not done to punish employees or to keep from paying overtime.