Complying with U.S. Wage and Hour Laws and Wage Payment Laws

September 24, 2019
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Scope—This article provides an overview of the task of complying with U.S. and state wage and hour laws and wage payment laws. The focus is on the federal Fair Labor Standards Act (FLSA), and it is intended as a conceptual complement to other articles concerning the FLSA available on the SHRM website. The article also addresses how state laws regulate the field of wages and hours. Current developments in enforcement of such laws are also addressed. This article does not address child labor laws.

[Editor's note: On Sep. 24, 2019, the U.S. Department of Labor (DOL) issued a final rule that sets a new salary threshold of $684 a week ($35,568 annualized) for the Fair Labor Standard Act's (FLSA's) white-collar exemption from overtime pay, effective Jan. 1, 2020.]


Overview

This article discusses federal and state laws governing the payment of wages and hours worked. Specifically, it addresses the scope of and compliance requirements under the federal Fair Labor Standards Act (FLSA) with regard to minimum wage, overtime pay and overtime eligibility laws, including the exemptions from FLSA coverage.

See:

Understanding Overtime Exemptions Under the FLSA

Calculating Overtime Pay in the United States

What You Need to Know About ... Overtime Pay

While the FLSA itself has remained substantially unchanged for over 50 years, compliance with the scheme of federal and state laws, regulations, and, in some jurisdictions, municipal laws regulating the payment of wages and overtime pay can be daunting. This article discusses some of the differences between federal and state laws, the legal issues that arise, and the compliance challenges for employers. It includes suggestions for assisting human resource professionals to develop the policies and practices necessary for effective administration and compliance with the applicable laws and regulations. It also covers state laws concerning wages and hours and wage payments.

Background

The FLSA is a signature accomplishment of the labor movement during the administration of President Franklin D. Roosevelt. Today, it is supplemented by numerous U.S. Department of Labor (DOL) regulations administered by the DOL Wage and Hour Division (WHD). See Compliance Assistance - Fair Labor Standards Act and Wage and Hour Division History.

The FLSA was a sweeping piece of federal legislation that covered all employers with two or more employees, so long as the employers were within the reach of Article I, Section 8 of the U.S. Constitution, known as the Commerce Clause. The Commerce Clause states, in a pertinent part: "The Congress shall have power to . . . regulate commerce with foreign nations, and among the several states, and with the Indian tribes."

As broad as the FLSA was when originally enacted, it left untouched the working conditions of many U.S. workers who were not engaged in interstate commerce. Once the limits of the federal legislation became clearer through numerous court cases, the states began enacting their own laws concerning minimum wages, overtime and other areas not covered by the federal legislation.

State Law Coverage

Today, almost every state has its own wage and hour law, which may or may not prescribe a different hourly wage than what is prescribed by the FLSA, and which may or may not follow the exemptions afforded by the FLSA. State laws typically are more generous to employees in terms of the minimum wage, the scope of exemptions and the definitions of operative terms such as "overtime." Many states require overtime pay in situations more favorable to employees than under the FLSA. In seeking to comply with the law, employers should always consult both federal and state laws concerning wages and hours. See 'Toggle' to Ensure Compliance with Laws and The Perils of Multistate Employment.

Prevailing and Living Wages

While most employers are required to pay only the federal or state minimum wage, employers with certain federal or state contracts, subsidies, grants or loans, or those of a certain size or in a certain locality may be required to pay a prevailing or living wage, whichever is higher. Prevailing wages apply to employers with federal contracts subject to the Davis-Bacon Act, the Walsh-Healey Public Contracts Act (PCA) or the McNamara-O'Hara Service Contract Act (SCA) and to some state government contracts. Prevailing wages typically exceed the federal or state minimum wage rates.

Living wage ordinances are initiatives that aim to strengthen the local economy and protect local workers by setting minimum wages that meet or exceed the poverty level. They apply to employers with certain local and state government contracts or subsidies, some state grants and loans, and, in rare cases, to all employers in a particular locality of a certain size. Some states index against the federal poverty guidelines to compensate for a higher cost of living in some areas, with most states setting living wages between $11 and $15 per hour. Some states require a higher rate if employers do not offer benefits.

The Fair Labor Standards Act

As noted above, the FLSA is a very complex piece of legislation that is complemented by a complex set of federal regulations. The FLSA generally establishes minimum wages for hours worked, including in certain circumstances the requirement to pay overtime pay for time worked in excess of 40 hours in a single workweek. These seemingly simple concepts can become quite complex in the context of modern compensation planning and design and workplace practices that do not fit neatly within the paradigm of the 1930s. Today, the questions of whether an employee meets the requirements for overtime eligibility and, if so, how overtime pay should be calculated present significant challenges for HR professionals. Answering these questions may include considerations of differential pay, incentive pay plans, commission-based pay and severance pay plans. All of these issues may be encompassed within the job description of payroll administration at a small organization, but may merit an upper-management position or outside consultancy in a large organization.

Necessity of employer-employee relationship

An employer-employee relationship is required under the FLSA. For example, certain trainees, interns, externs, apprentices and graduate assistants may not be considered employees within the meaning of the FLSA.

See:

Fair Labor Standards Act Advisor: Am I an Employee?

Are we legally required to pay interns?

Employing Interns

However, it is the nature of the relationship that determines whether it is truly an employment relationship or independent contractor relationship. Employers cannot escape the regulation of federal and state wage and hour laws by simply designating workers as independent contractors.

See:

Employing Independent Contactors

Independent Contractor: What is a statutory employee?

Independent Contractor: Who can be considered an independent contractor?

Minimum wage

The applicable minimum wage depends on the nature of the job and the jobholder. For example, there are different minimum wages for workers with disabilities, full-time students, youth under age 20 in their first 90 consecutive calendar days of employment, tipped employees and student learners. Many states have established minimum wages at higher levels than the federal minimum wage. See What Is the Minimum Wage? and Minimum Wage Laws in the States.

Overtime pay

The FLSA generally requires that nonexempt employees receive pay at one-and-one-half times their regular rate for all hours worked in excess of 40 hours per workweek. This legal requirement is loaded with qualifications lodged within the definitions of the terms used. Even experienced HR professionals have difficulty applying these complex rules to specific situations. See Overtime Pay Requirements of the FLSA and Minimum Wage Laws in the States.

Garnishment issues

The federal Consumer Credit Protection Act (CCPA) limits the amount of an employee's earnings that organizations may garnish in any one week. The DOL's Wage and Hour Division administers the CCPA. See The Federal Wage Garnishment Law and The Perils of Ignoring Wage Garnishment Orders.

Governmental guidance on compliance issues

The DOL has published numerous web pages addressing compliance with the FLSA. For help with:

The DOL website is enormous and constantly changing. Readers should be diligent in pursuing information from the DOL website even if the above links do not render the information sought.

Record-keeping

Employers must be able to prove they are in compliance with applicable wage and hour laws by keeping detailed payroll records. Given the ease of maintaining records digitally at low cost, employers are advised to keep payroll records well beyond the dates required by the FLSA or state laws. See Recordkeeping Requirements under the Fair Labor Standards Act (FLSA).

State Law Counterparts to the FLSA

When states regulate wages and hours, they usually do so in the following areas and ways:

  • Higher minimum wage.
  • Broader definition of "overtime" more favorable to the employee.
  • Specific requirements for the method and time of payment.
  • Different remedies for violations.

States are particularly active in regulating minimum wages because the cost of living varies greatly from one state to another. States are less active, though, in regulating overtime because the burden of working long hours in one state is much the same as working long hours in another state. States also frequently regulate the form and frequency of payment of wages. See When the state minimum wage differs from the federal minimum wage, which must employers pay?

Another area that states commonly regulate is the timing of the payment of wages and payment of wages upon termination of employment. State laws often require payment of wages within a certain time frame, and payment of earned wages are often due immediately upon involuntary termination of employment. 

Exemptions Under the FLSA

[Editor's note: On Sep. 24, 2019, the U.S. Department of Labor (DOL) issued a final rule announcing a new salary threshold of $684 a week ($35,568 annualized) for the Fair Labor Standard Act's (FLSA's) white-collar exemption from overtime pay, effective Jan. 1, 2020.]

The FLSA operates by initially stating all the requirements for employers and then by enumerating broad exceptions to those requirements. Historically, such exemptions have been described as applying to white-collar employees, who are exempt from the FLSA's minimum wage and overtime requirements. On the other hand, the term "blue-collar employees" is used for those who are nonexempt, being the primary beneficiaries of the FLSA's guarantee of minimum standards for working conditions. These descriptors have continued to be used in even the most recent legislation and rulemaking, even though such clothing-based descriptions may seem strange or even politically incorrect by modern standards. See Understanding Overtime Exemptions Under the FLSA

The "Big Five" FLSA exemptions

The FLSA provides for exemptions from overtime pay for five white-collar employee categories:

  • Executive.
  • Administrative.
  • Professional.
  • Computer-related professional.
  • Outside sales.

See Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA).

When states legislate in this area, they typically follow the same exemptions.

The greatest impact of these exemptions is on the elimination of the need for employers to pay overtime wages for hours worked in excess of 40 per week. Some of the exemptions depend on wages being paid on a salary basis, which must satisfy the FLSA's salary level test. Employees paid on a salary basis that meets or exceeds the salary level nonetheless may be entitled to overtime pay if their specific duties do not fall within the requirements for the executive, administrative and outside sales exemptions. The professional exemption depends on the nature of the education of the employee or the degree to which the employee functions as a professional, an artist or a teacher. Similarly, the computer-related exemption depends upon the nature of the employee's computer-related duties. See FLSA Overtime Security Advisor and FLSA Overtime Rule Resources.

In contrast, jobs that are considered nonexempt and thus subject to the FLSA's overtime requirements tend to be those performed on the premises and involve lower-level manual or ministerial duties.

Compensation in the form of a salary is not sufficient, in and of itself, to make the job exempt from the FLSA requirements. The application of the FLSA exemptions to certain job categories has been a hotly contested issue and the subject of hundreds of lawsuits, including ones on behalf of whole classes of employees. In those cases, the outcome has the potential to affect entire job categories, employer liability for violations is compounded by the size of the class, and violators will be assessed back pay with interest, penalties of liquidated damages in some cases, and attorney fees.

See:

Calculating Overtime Pay in the United States

Supreme Court Case May Spark More Class Actions

Other minimum wage and overtime exemptions under the FLSA

In addition to the white-collar exemptions, there are numerous other industry-based exemptions, some of which apply to minimum wage, to overtime or to both.

Employees exempt from the overtime provisions of the FLSA based on industry include:

  • Commissioned retail employees.
  • Agricultural employees.
  • Trip-rate drivers and driver's helpers.
  • Live-in domestic employees.
  • Petroleum products distributors.
  • Rail and air carrier employees.
  • Small radio and television station employees.
  • Dealership employees.
  • Taxi company employees.
  • Motion picture theater employees.
  • Saw mill employees.
  • Employees in concessions to national parks.

Employees exempt from the minimum wage provisions of the FLSA based on industry include:

  • Amusement or recreational establishment employees.
  • Seafood processing employees.
  • Employees of small newspapers.
  • Seamen.
  • Casual babysitters and companions.
  • Wreath makers.
  • Child actors.

See Fair Labor Standards Act Exemptions.

The burden of proving entitlement to an exemption to the FLSA always rests on the employer.

Employers that want to claim any of the above exemptions must be careful to make sure that they qualify in every respect. Usually, this requires consultation with legal counsel or a consultant with a highly specialized degree of knowledge.

Business Case

There is always a good business case for the proposition that employers should obey the law. The various wage payment statutes impose significant disincentives upon employers that ignore or flout the law—civil damages, recovery of attorney fees and other litigation expenses, monetary penalties, and enforcement proceedings funded by the federal or state government. Executives who devise or implement strategies to circumvent the law may be subject to individual liability—judgments that can be collected under certain circumstances from their personal bank accounts or liens on their homes and personal assets. Insurance does not usually cover such liabilities and may result in yet another dispute—with the insurance company over coverage. See Under some state and federal laws, HR professionals can be held individually liable and Are You Personally on the Hook for Wage and Hour Violations?

HR's Role

The role of human resource management in complying with wage and hour laws begins with understanding the federal and state laws that apply to an organization. The HR function, with the assistance of legal counsel, is responsible for making sure every employee is properly classified under the applicable laws. An employee may be entirely exempt, exempt only from minimum wage requirements or exempt only from overtime requirements. Chances are good that all employees will be subject to state laws concerning the timing and manner of payment of wages, even if entirely exempt from the FLSA.

Proper classification of employees requires at least an informal job analysis, although a formal job analysis can be a useful tool for an employer establishing its right to a claimed exemption. Reliance on job descriptions alone is not advisable, as the actual tasks performed often differ from the written description. Job analysis involves the systematic study of jobs to determine what activities and responsibilities they include, their relative importance in comparison with other jobs, the personal qualifications necessary for performance of the jobs, and the conditions under which the work is performed. Job analysis focuses on the job, not the person doing the job (even though some job analysis data may be collected from incumbents). The role of HR also includes the payroll function of making sure that employees are paid what they are actually due, when it is due. Payroll encompasses activities related to the payment and recording of employees' salaries, wages, bonuses, net pay and deductions. While payroll may report to departments other than HR or be outsourced, it is a function that relates closely to human resources. HR professionals who are responsible for hands-on administration must have a thorough knowledge of payroll. Those who oversee the payroll function need resources for reference when called on to handle complex payroll questions.

See:

Overtime Exemptions Remain Widely Misunderstood

A Checklist for Complying with the New Overtime Regulations

Legal Issues                                           

The U.S. DOL has stepped up enforcement of the FLSA, primarily through industry-specific actions against large employers and class actions.

See:

WHD Fact Sheet #44: Visits to Employers

Employment-Related Class-Action Settlements at Record Highs

DOL Will Investigate Wells Fargo

Private parties are using the leverage of collective and multiple plaintiff actions under the FLSA. Often, these cases turn on longstanding ambiguities in federal and state law as to the requirements of the wage and hours laws. Even apart from such monumental legal actions, employers of all sizes continue to struggle with compliance issues under the FLSA and state counterparts.

Communications

At a minimum, employers are required to post notices of the wage/hour rights afforded by federal or state law. These are usually posted in an employee break room or other place readily accessible to employees. Official posters are available from the federal and state government and from private providers. Large employers should have multiple postings—for example, on every floor of a multifloor building. HR professionals should periodically inspect the postings to make sure that they are still there and have not been defaced. See U.S. Department of Labor, Wage and Hour Division (WHD): Workplace Posters.

Pay transparency is a growing trend in compensation. A 2014 survey conducted by outplacement firm Challenger, Gray & Christmas found that 55 percent of respondents believed companies should practice some form of salary transparency. Transparency in pay practices is intended to gain employee trust and therefore increase employee engagement. See HR Executives Favor Greater Salary Transparency and Making Pay Public.

Metrics

Employers can gain competitive advantage by measuring what they do and then acting on these data. Every employer should have some idea of how well its wage/hour compliance is working. For very small organizations, this may just be a "gut feel." For large employers, this may be a highly systematized collection and analysis of data aided by computer programs.

Technology

In terms of complying with wage and hour laws, organizations may apply technology in several ways:

  • Use of the Internet to stay abreast of new developments in the law.
  • Use of software to develop written job descriptions and employee handbooks.
  • Use of the Internet to acquire the text for mandatory notices of rights.
  • Use of human resource information system (HRIS) software to document wage and hour classifications and changes.
  • Electronic storage of records and reports.

Global Issues

Just as employers face complications from state laws in complying with U.S. wage and hour laws, multinational employers face complications from the laws of the countries in which they do business. Often, the laws of foreign countries—especially European countries—are more generous to employees than U.S. laws. Global employers should investigate the laws of the countries in which they operate. This usually means hiring a law firm with a multinational practice. See When Should Pay Go Global? and Avoid These Global Compensation and Benefits Plan Obstacles.

Supervisory training

SHRM has sample training presentations on the FLSA that may be helpful in educating managers and supervisors in compliance with federal wage and hour law. See Compensation: FLSA Training for Supervisors.

U.S. Department of Labor Resources

U.S. Department of Labor: Wages

U.S. Department of Labor, Wage and Hour Division

U.S. Department of Labor, Wage and Hour Division (WHD): Frequently Asked Questions

U.S. Department of Labor, Wage and Hour Division (WHD): Industry-Specific Resources




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