Ten of the Most Common Wage and Hour Mistakes

By: Keith H. McCown and Laurence J. Donoghue MORGAN, BROWN & JOY, LLP 200 State Street Boston, MA 02109 Tel: (617) 523-6666

10 Failure to Pay Employees on Day of Termination.

9 Inadequate (or Non-Existent) I-9 Documentation.

8 Unfamiliarity with Rules as to On Call Pay.   

7 Failure to Pay for Certain Travel Time.

6 Improper Use of "Comp Time".

5 Unlawful Deductions from Employee Paychecks. 

4 Docking Pay of Salaried Employees. 

3 Improper Designation of "Exempt" Employees. 

2 Incorrect Calculation of Overtime Pay.

1 Inadequate Record Keeping.

Even employers who are very attentive to workplace laws and regulations can be asleep at the wheel when it comes to wage and hour laws. In our law practice, we often find very careful managers who have not been paying attention – or not paying proper attention – to issues relating to overtime, compensatory time, record-keeping, and other wage and hour matters. It is easy for employers to carry on business for years without understanding that they are violating the law; in fact, they are often ignorantly confident that they are actually doing things right. 

But when employers become the target of wage and hour claims, they often find the administration of the law to be harsh and unforgiving. Unlike many other areas of employment law, there is little “gray” in the regulation of wages and hours. Quite simply, with wage and hour issues, you either do it right, or you risk being caught with no real defenses, and you had better be ready to pay to resolve a claim if one is finally raised. Even some personal injury lawyers have begun to branch out into bringing wage and hour lawsuits, because the law provides that the employer caught in a violation must pay the other side’s legal fees, plus multiple damages, in some cases.

With that in mind, we have prepared a “top ten” list of the most common wage and hour mistakes. This is a simple alert to encourage the process of making sure that your employees are being properly compensated under the law – and making sure that your workplace is free from the exposure that wage and hour claims can bring!         

Keep in mind that the following is only a summary.  For more specific guidance you should review the appropriate laws or regulations, or seek advice of counsel. Here is our Top Ten list: (Top)

The Number Ten Most Common Wage and Hour Mistake:

Failure to Pay Employees on Day of Termination.  

Many employers are unaware that, under Massachusetts law, if an employee is involuntarily terminated, on the day of the termination the employee must be paid in full for any wages due.  This includes accrued vacation pay, if any.  On the other hand, employees who resign need only be paid on the next regular payday. So long as the employee is paid promptly all wages due, there is unlikely to be much repercussion flowing from a violation of this requirement, but a better practice is to prepare and pay all wages and accrued vacation on the day an employee is being discharged. (Top)

The Number Nine Most Common Wage and Hour Mistake:

Inadequate (or Non-Existent) I-9 Documentation. 

Department of Labor Inspectors investigating an employer over a wage and hour issue may also review employer I-9 documentation.  This is the documentation employers must complete when hiring an employee, to assure that the employee is a U.S. citizen or lawfully authorized to work in the country.  If I-9 compliance is lacking, DOL may notify the Bureau of Citizenship and Immigration Services (“BCIS”) formerly known as the Immigration and Naturalization Service (INS).  Historically, the INS did not follow-up on most cases referred by DOL.  However, given the post-9/11 climate, BCIS may change this practice.  Employers may then be charged with a violation of the immigration laws and fined.

But aside from BCIS fines, I-9 non-compliance can easily contribute to a wage and hour problem.  The I-9 documentation may be one of the first things the DOL inspector asks for and reviews.  A bad first impression may well result if this routine, relatively simple paperwork is not in order. This may provoke the investigator to take a more detailed and critical view of the employer’s practices and record keeping.  The inevitable result is a more difficult, or at least lengthier, investigation. (Top)

The Number Eight Most Common Wage and Hour Mistake:

Unfamiliarity with Rules as to On Call Pay. 

Today, with so many off-duty workers carrying employer-issued pagers and cellular phones, employers must be cautious about the “on call” wage and hour rules for non-exempt employees.  The general rule is that employees need not be paid for “on call” status if they can still effectively use the time as their own, for normal activities outside of work.  For employees who have some form of “on call” status in their work, the law recognizes a distinction between “waiting to be paid” (non-work status) and being “paid to wait” (working or mandatory compensation status). Merely carrying a pager or cellular phone will usually not prevent an employee from carrying on normal activities outside of work, and not all employees who carry such devices must be paid for the hours where they might be called to work.  On the other hand, requiring that an “on call” employee stay home, or be within a short distance from the workplace, might be enough of a restriction so that the employee must be paid.  This is especially true if the employee is called in frequently.

Of course, even in cases where no pay is required for carrying a pager or phone, the employee must be compensated if actually summoned and required to perform work. (Top)

The Number Seven Most Common Wage and Hour Mistake:

Failure to Pay for Certain Travel Time. 

Normal home-to-work commuting time need not be compensated, but the rules about paid travel time are a little trickier.  For example, if an employee is called back to a place of work (such as a customer’s facility) because of an emergency, the travel time involved in the callback is compensable.  If the employee is required to report to a particular place (office, dispatch center, etc.) at the start or end of a work day, travel time between the place of reporting and the actual work site must be paid time.

There are also special rules for out-of-town travel.  Generally, any travel that takes place during the employee’s normal hours of work must be paid, even if the travel occurs on a day the employee is not working.  Thus, if an employee generally works Monday through Friday 9 a.m. to 5 p.m., the employee must be paid for out-of-town travel on Saturday or Sunday between those same hours.

Employers who have a significant amount of travel by non-exempt employees should review their practices to determine if they comply with the legal requirements for paid and unpaid travel time. (Top)

The Number Six Most Common Wage and Hour Mistake:

Improper Use of "Comp Time". 

Today’s two-career families often value flexible time off. This has led many employers to adopt compensatory time or "comp time" practices, where employees can take extra time off instead of receiving pay for overtime hours worked. Many of these informal arrangements are illegal.

Under the law, each pay period stands alone, and it is usually unlawful to allow hours worked over 40 in one pay period to be offset by time off with pay in another pay period.  As a result, most comp time “banks” used by private sector employers are not lawful substitutes for normal overtime pay. (There are special rules for public sector employees that allow comp time banks.) The few private sector comp time plans that are lawful require that the comp time hours be taken in the same pay period in which the overtime hours were worked, a severe limitation that often makes the entire idea of comp time unworkable.

Over the last few years, there have been efforts in Congress to amend the law to allow for increased use of comp time.  However, this legislation has not progressed, and chances of passage in the near future seem dim. (Top)

 The Number Five Most Common Wage and Hour Mistake:          

Unlawful Deductions from Employee Paychecks. 

Federal and state laws limit an employer’s right to deduct amounts from an employee’s pay, and particularly under state law, employers often cross the line in circumstances that seem quite innocent or reasonable. Under federal law, deductions should not be made if they will bring the employee’s earnings below the minimum wage for any pay period. In some workplaces this becomes a problem, but not generally. State law can be much more restrictive and complicated.

Massachusetts (and some other states, to a degree) limit deductions from paychecks to those authorized in writing by the employee – even when the employee owes the employer money, and the easiest way to recover it is by withholding from a paycheck or paychecks. Employers are not permitted to decide for themselves what they can set off against an employee’s wages – even in the final paycheck, where the employer may be inclined to recover some amount of money wrongfully obtained by the employee.  The law requires the employer to pay the employee the amount due in wages, and to file a separate claim for any amounts the employee may owe the employer.

There are a few exceptions.  For example, in Massachusetts and most other states, if an employee resigns or is fired after having had a vacation pay or salary advance, the amount of the advanced pay may be deducted from a final check or checks. But where the employee has departed with employer-owned equipment, or with an outstanding loan not in the nature of advance salary, or even having stolen from the employer, the law frowns on employers unilaterally deciding what to deduct from paychecks.  Since payment of wages statutes often have both civil and criminal consequences, it is wise to be conservative in making unauthorized deductions from employee paychecks. (Top)

The Number Four Most Common Wage and Hour Mistake:

Docking Pay of Salaried Employees. 

To be exempt from overtime requirements under the most common wage-hour exemptions, it is necessary that an employee be paid on a "salary basis".  Being salaried does not by itself create the exemption, but to qualify for many exemptions, one frequent element is that the employee has to be salaried. In general, this means that the employee receives the same amount of money each week the employee works, regardless of the number of hours actually worked. 

Employers who “dock” the pay of salaried employees for hours they are not working may inadvertently be treating the employees as hourly workers, which can threaten their exempt status. The rules as to docking were liberalized somewhat by recent, new Department of Labor (DOL) regulations.  However, there are still limits to an employer’s right to make such deductions. 

An employer may dock a salaried employee who is absent for a full day for “personal reasons” (other than sickness or accident), but docking for absences of less than a day is problematic.  Similarly, a salaried employee absent for a day or more for illness or injury may be docked, provided that the employer has a sick pay or similar plan to compensate the employee for such absence. Also, salaried employees may be docked as a result of disciplinary suspensions issued for violating major safety rules or workplace conduct rules.  Finally, regulations under the Family and Medical Leave Act (FMLA) provide that docking an employee for taking intermittent leave under the statute will not defeat the “salary basis” test.  However, this is limited to situations in which the absence qualifies for FMLA leave.

The new DOL rules contain “safe harbor” provisions (i.e., a chance to correct a problem without penalty) that will protect an employer from losing the exemption if the employer: (1) has a clearly communicated policy prohibiting improper deductions; (2) has a complaint mechanism to resolve claims of improper deductions; (3) reimburses employees for any amount improperly deducted; and (4) makes a good faith commitment to comply in the future.

Some forms of docking for salaried employees may be permissible under some circumstances, but any such practice should be reviewed carefully to assure that exempt status is not being jeopardized.  Also, an employer should adopt a policy to take full advantage of the “safe harbor” provisions. (Top)

The Number Three Most Common Wage and Hour Mistake:

Improper Designation of "Exempt" Employees. 

Most employers know that certain employees are exempt from the overtime provisions of federal and state law.  However, misconceptions about these exemptions are remarkably common.

Employees will not qualify as exempt supervisors unless they are paid a regular, fixed salary – but many employers pay their supervisors hourly, which will fail the test for the exemption. On the other hand, just paying an employee a fixed salary, instead of by the hour, does not exempt the employee from overtime requirements. Many employers incorrectly assume that their “white collar” salaried employees are not entitled to overtime, and this is a dangerous oversimplification. Still other employers believe that commissioned sales personnel have no entitlement to overtime, because they are paid by unpredictable commissions rather than by the hour or by the week. This, too, is a dangerous oversimplification. Outside or “traveling” sales personnel may indeed be exempt, but inside or “telephone” sales personnel may not be exempt, and they may be entitled to overtime pay even when they are compensated with totally unpredictable commissions.

Making unfounded assumptions about who is exempt or non-exempt is another very common wage and hour mistake. (Top)

The Number Two Most Common Wage and Hour Mistake:

Incorrect Calculation of Overtime Pay. 

Most employers are aware that non-exempt employees must be paid “time and one-half” for weekly hours in excess of forty (the law generally does not require overtime for hours in excess of eight per day, except for certain government contractors).  However, employers frequently miscalculate the overtime premium.  In many cases, it is not enough to simply take the employee's normal hourly rate and multiply it by 1.5.  Overtime must be paid at time and one half of the employee's "regular rate". 

"Regular rate” is a term defined by law. It is an average hourly rate, to be calculated weekly, based on compensation paid divided by hours worked. “Regular rate” only starts with the base hourly straight-time rate, or an hourly rate based on a weekly salary, for non-exempt salaried workers subject to overtime pay requirements. “Regular rate” also includes items such as shift differential, stipends paid periodically, many bonuses, incentive payments, commission payments, etc. – virtually any element of compensation paid in exchange for the employee’s work, even if it is not part of the regular base rate of pay. Having made the necessary calculations to determine the legal “regular rate,” an employer must then use that rate to determine time-and-one-half overtime.

The law has been on the books since the 1930's, but employers today are still quite often improperly calculating the rate of overtime pay for their employees. (Top)

The Number One Most Common Wage and Hour Mistake:           

Inadequate Record Keeping. 

A surprising number of employers have informal or non-existent means to record hours worked by non-exempt employees.  Some of these employers rely on an honor system or a presumption that employees work a set schedule, and believe that requiring employees to sign in or punch a time card would be a negative factor in the culture of the workplace.  This is frequently true in office settings and other white-collar workplaces. Other workplaces keep records – but not accurately. Week after week, regardless of hours actually worked, the employer maintains records showing the same hours worked, typically based on scheduled hours rather than actual hours worked. Some employers even pay “overtime” by adding extra pay each week to an employee’s paycheck, regardless of the hours the employee is working. Still other employers allow employees to work before “starting” time, or to work through meal times or breaks, or after “quitting” time, without recording the actual time worked.

There is a problem lurking in any of these casual informalities.  If an employee (or, more likely, a former employee) files a wage and hour complaint claiming to be denied wages or overtime, the enforcement agencies (or the employees’ private attorney, if they sue directly in court) will demand records as to hours worked by the employee.  If the employer does not have any records, or if the records are unreliable, the presumption runs in favor of the employee's estimate, often wildly imaginative, of hours worked. 

Imagine the employer who thought it was already paying for overtime with extra pay every week, finding out that all of the money is going to be treated as straight time – and there is still a big amount due as overtime, based on that “straight time” rate that has already been paid! Imagine the employer who knows that employees normally only work a few hours over 40 per week, being confronted with a demand to pay employees who are now claiming that they regularly worked 55 hours per week!

The lesson is that every employer should have some method of accurately recording hours worked. Improper record keeping is the most common of wage and hour mistakes. (Top)

Contact Keith H. McCown