Wage and Hour Errors Common at Small Employers

Large employers may be getting the message on wage and hour compliance, but the word is not yet out among small employers, Michael Weber, an attorney with Littler in New York, told SHRM Online.

Weber reported seeing common wage and hour errors such as employers rounding work time down, but never up.

Some employers also are mistakenly paying workers based on their work schedule rather than actual hours worked, noted John Brown, an attorney with Ogletree Deakins in Dallas.

For example, Weber observed, some employees arrive and start working early, but don’t punch in until their scheduled start time—a form of off-the-clock work.

“Off-the-clock work is strictly prohibited. Make sure managers don’t require it,” Weber said.

Employee handbooks should state clearly that all time is to be recorded. A lunch break should be taken in full, with a nonexempt employee not doing any work after punching out or before punching back in.

“The better you train employees and managers, the fewer problems you’ll have,” Weber remarked. Larger employers often will perform a wage and hour audit to make sure they’re in compliance, while smaller employers more typically learn about a compliance problem only when they are sued, he added.

“In New York City, if you look at the docket, you’ll see a small Greek restaurant or a Chinese diner or other smaller employers. You will not see Del Posto,” he remarked, referring to a high-end Italian restaurant in the Chelsea neighborhood, owned in part by celebrity chef Mario Batali.

Brown agreed that “a small employer is much more likely to make an obvious error.” He added, “Larger employers are much more aware of wage and hour laws like the FLSA [Fair Labor Standards Act], and are making serious attempts to be in compliance.”

But he noted that shift differentials sometimes aren’t included in the regular rate when they should be. For example, an employee may be paid $7.25 an hour on the day shift for 40 hours and $7.50 an hour on the night shift for an additional five hours. Some employers mistakenly would calculate pay based just on the day rate without including the night shift rate.

Another common wage and hour error is not including time spent answering the phone or working on the computer before or after regularly scheduled worktime, noted Joel Rice, an attorney with Fisher & Phillips in Chicago. “Instruct managers not to contact nonexempts during nonwork hours unless it’s an emergency,” he recommended. And nonexempts should be instructed not to access e-mails after hours. If they do anyway, they have to be paid for that time, but can be disciplined for violating a work rule, Rice noted.

Jennifer Shaw, an attorney with Shaw Valenza in Sacramento, Calif., said that one of the most common unintentional overtime errors is not paying the regular rate of pay for overtime. “The regular rate and base rate will differ if the employee receives a [nondiscretionary] bonus, commission, etc.,” she explained. “Also, employers in certain California industries—like in-home caregiving—don’t realize there are special overtime rules applicable to them and that the FLSA rules may be more generous than California law.”

Fixing Errors

If errors are made, “quickly calculate what the employee is owed and pay that amount right away,” Shaw said. “Do not wait for the next payroll date.”

Be aware of other overtime errors, such as those resulting from misclassifying employees as exempt, misclassifying employees as independent contractors, failing to aggregate all hours an employee works at various worksites for closely related entities and taking too much tip credit, noted Paul DeCamp, an attorney with Jackson Lewis in Reston, Va.

“An employer that discovers an error in how it pays overtime needs to find a prompt path to compliance,” he observed. “Sometimes the noncompliance is clear, such as failing to include a shift differential in overtime, and the employer needs to change the practice as quickly as possible to come into compliance. Other times, the situation may be a lot less clear, such as where a bonus may arguably be discretionary, or a category of employees may arguably be exempt from overtime. In those instances, the employer will need to weigh its options, which may include bolstering the arguments for exempt status by modifying job duties, or making a bonus more discretionary.”

An employer may opt to revamp its compensation program to eliminate a potentially risky practice, DeCamp noted. “Employers need to anticipate questions from employees, and possibly former employees, including whether the change means that the employer had not been paying them correctly. And the employer needs to give serious thought to whether to provide back pay to address the situation,” he said.

“In general, the clearer the violation, the more important it may be for the business to provide back pay contemporaneously with announcing the changed practices,” DeCamp added. “While employers do not ordinarily like to pay money to address the past, that outcome is often preferable to handling the matter in a defensive posture if and when employees start asking questions. If paying some measure of back pay is likely, most employers would rather send the message that they found an issue, fixed it and are making the workers whole, versus looking like they are paying money only because they got caught.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.