Wage and hour claims are increasing rapidly, which can be costly to business owners who are unaware of the proper guidelines. In addition, class action lawsuits on such claims are becoming increasingly prevalent.

The Department of Labor has markedly increased its efforts to enforce the Fair Labor Standards Act (FLSA), and many state agencies have done so under state wage and hour laws. Below are some of the most common mistakes made by employers regarding the FLSA.

1. Giving “comp time” to non-exempt employees.

Instead of paying overtime when a non-exempt employee works more than 40 hours in a workweek, many employers require or allow the employee to take comp time – time off instead of overtime pay. Be aware that it is a violation of the FLSA to award comp time instead of overtime to a non-exempt employee.

Non-exempt employees must be paid one and one-half times their regular hourly wage for all hours worked beyond 40 in a workweek. The only exception is when a non-exempt employee takes the comp time in the same workweek as the extra time worked, so that the total time worked in that week does not exceed 40 hours.

2. Treating as exempt anyone who is paid on a salary basis.

Another common mistake is treating an employee as exempt from overtime simply because he or she is paid on a salary basis, regardless of the employee’s job duties. Payment on a salary basis alone does not render an employee exempt. To fall under the so-called “white collar” exemptions for executive, administrative and professional employees, an employee must not only be paid on a salary basis, but the employee’s duties must also satisfy the requirements prescribed by the particular exemption.

3. Treating as exempt anyone who is paid on commissions.

Many employers assume that employees paid on a commission basis are not entitled to overtime. However, payment on a commission basis by itself does not render an employee exempt from the FLSA’s overtime requirements. While there is an exemption for certain employees who receive more than half their compensation in the form of commissions, that exemption is limited to employees of a “retail or service establishment.”

4. Paying overtime only on hourly wages

In calculating overtime for a non-exempt employee, an employer must take into account not only hourly earnings, but any compensation paid to the employee in the form of salary, commissions, production or other non-discretionary bonuses, and other similar compensation as well.

To calculate overtime on such compensation, the weekly commission or salary amount is divided by the number of hours worked by the employee in that workweek, resulting in a “regular rate.” The overtime owed is determined by multiplying the overtime hours worked by one-half the regular rate. Only half the regular rate is required as additional compensation because the salary, commission or other similar compensation is deemed to cover the employee’s “straight time” earnings for all hours worked, including overtime hours.

For example, if an employee has a weekly salary or commission of $500, and that employee works 50 hours in a given week, the “regular rate” of pay for that employee for that week is $10 per hour. The employee must be paid for his or her 10 hours of overtime at a rate of $5 per hour (half of the $10 per hour regular rate). Thus, the employee must be paid a $500 weekly salary plus $50 in overtime pay.

5. Treating as exempt anyone who is engaged in sales

Many employers improperly classify as exempt anyone engaged in sales. However, the FLSA exemption relating to sales is limited and specific – the exemption applies only to employees whose primary duty is making sales at the customer’s place of business, referred to as “outside sales.” The outside sales exemption does not apply to an employee who makes sales from any of the employer’s offices, or even from the employee’s home office – nor does the outside sales exemption apply to sales conducted by mail, telephone or internet.

While the complexity of the FLSA can sometimes make compliance a challenge, by following this guidance and that of your counsel, mistakes described here are easily avoidable. Many compliance determinations depend heavily on the facts of an employer’s given situation. Because the consequences for noncompliance can be severe, it is important to pay close attention to the law when determining how your employees are compensated.

Sommer and Schwaber can be reached at (301) 230-5200.

Ed’s Note: Legal Alert will not publish on Dec. 25 and Jan. 1. Look for your next Legal Alert on Jan. 8. Happy Holidays!!!

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