Four Tips To Help Minimize FLSA Compliance Risks
According to last year’s Department of Labor (DOL) statistics, 48 percent of the companies investigated had overtime pay violations. Reputable organizations are not trying to skirt the law, and the high penalties probably dissuade other organizations, so why are so many organizations found not in compliance? Complexity
The Fair Labor Standards Act (FLSA) has a multitude of definitions and rules that must be understood and accounted for. Updated in April 2004, FLSA regulates the U.S. minimum wage, the overtime pay rate, and youth labor standards for full and part-time employees in the private and public sectors. It also requires employers to keep records on wages paid, hours worked, and other employee information.
By instituting good business practices many companies can help avoid costly compliance mistakes. This article discusses how properly identifying exempt employees, reviewing salaries, automating pay rules, and creating audit trails can help your organization minimize compliance risks.
The DOL defines FLSA-bound organizations as follows:
A covered enterprise is the related activities performed through unified operation or common control by any person or persons for a common business purpose and -
(1) whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated); or
(2) is engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted
children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); or
(3) is an activity of a public agency. |
It is worth mentioning that FLSA does not regulate all aspects of an employee’s compensation. For example, FLSA does not require an employer to provide vacation, holiday or sick pay; lunch or rest breaks; premium pay rates for weekend or holiday work; pay increases; or discharge notices and severance pay
More information on FLSA can be obtained from the DOL website at http://www.dol.gov/esa/regs/compliance/whd/hrg.htm.
Know How Exempt and Non-Exempt Employees Differ
Employers need to determine which employees are covered by FLSA and which employees are exempt from the rules that govern minimum wage or overtime pay rates.
For example, company executives, administrative employees, outside sales personnel, and many computer-related positions are not covered by FLSA minimum wage and overtime pay regulations. Other employees, such as commissioned retail and service, vehicle sales, and railroad, taxi, American ship and local delivery positions, may be covered by overtime pay rules, but not minimum wage regulations.
Another example includes employees at some healthcare facilities who may agree with their employers to a 14-day work period instead of the typical 7-day period. This can be done providing the employees are “paid at least time and one-half their regular rates for hours worked over 8 in a day or 80 in a 14-day work period, whichever is the greater number of overtime hours.”
Recommendation: Employers should regularly review exempt and non-exempt status of their workers as well as adopt a process that requires more than one manager to approve the status set for the employee.
Review Salary Levels
Salary levels are also used by the DOL to determine when FLSA is applicable to a given employee. In April 2004, FLSA was updated to include new salary thresholds of $455 per week (up from $155 per week) as a minimum and $100,000 per year for highly-compensated employees (up from $13,000 per year).
If a salaried employee, under his or her employment agreement, earns a salary that meets the minimum wage requirements and is paid as straight time for any number of hours worked in a work week, then the regular rate is determined by dividing the salary by the number of hours worked each week.
The following examples are given by the DOL:
1) Suppose an employee's hours of work vary each week and the agreement with the employer is that the employee will be paid $420 a week for any number of work hours required. Under this agreement, the regular rate will vary in overtime weeks. If the employee works 50 hours, the regular rate is $8.40 ($420 divided by 50 hours). In addition to the salary, half the regular rate, or $4.20, is due for each of the 10 overtime hours, for a total of $462 for the week.
2) If the employee works 60 hours, the regular rate is $7.00 ($420 divided by 60 hours). In that case, an additional $3.50 is due for each of the 20 overtime hours for a total of $490 for the week. In no case may the regular rate be less than the minimum wage required by FLSA. |
The DOL further adds: “If a salary is paid on other than a weekly basis, the weekly pay must be determined in order to compute the regular rate and overtime pay. If the salary is for a half month, it must be multiplied by 24 and the product divided by 52 weeks to get the weekly equivalent. A monthly salary should be multiplied by 12 and the product divided by 52.”
Recommendation: Review salary levels for compliance with FLSA. Many organizations have raised salaries in order to avoid possible FLSA non-compliance.
Automate Regulatory Pay Rules
Many companies have automated aspects of their payroll processes with basic out-of-box products or homegrown systems, but these solutions may not be enough to mitigate the risks of non-compliance. These systems may not be able to adapt as requirements change. Even the payroll management firms used by many organizations may not completely solve the problem, because they focus more on calculating gross pay to net. A more complex problem requires a more comprehensive solution.
It is for this reason that the American Payroll Association’s 2005 Best Practices Study, which was released in April 2006, states that: “The trend in timekeeping solutions is heading away from an in-house solution to a solution provided by a time and attendance provider.” This trend indicates that organizations are recognizing the resources required for keeping up the pace with compliance change and best practices management far outweigh the cost of purchasing a pre-built system.
Compliance issues surrounding FLSA focus on timekeeping, so better timekeeping offers better ability to comply with the regulation. Unlike many payroll systems, which focus on the creation of the check, and paying benefits and taxes, the time & attendance systems focus on timekeeping, or more accurately, precise timekeeping.
It is through this precise timekeeping that organizations can successfully manage compliance. The complexity is managed with each punch-in, or absence request, not sometime later in the period when it may be too late to do anything about a potential problem.
Recommendation: Evaluate your current timekeeping and payroll systems to determine if it accurately calculates overtime pay according to FLSA requirements.
Provide Audit Trail for FLSA-related Transactions
Having an audit trail for time & attendance and wages is not just a good idea, it is an FLSA requirement. The FLSA requires employers to keep records on wages, hours, and other items, as specified in DOL recordkeeping regulations. The good news is most of this information is already being managed as a part of the regular activities for most organizations.
FLSA requires an audit trail of the following payroll information:
- Hour and day when the work week begins
- Total hours worked by each individual for each work day and work week
- Total daily or weekly straight-time earnings
- The regular hourly pay rate for any week in which overtime is worked
- Total overtime pay for the work week
- Deductions or additions to wages
- Total wages paid for each period
- Date of payment and pay period covered
The DOL also notes: “Records required for exempt employees differ from those for nonexempt workers. Special information is required for home workers, for employees working under uncommon pay arrangements, for employees to whom lodging or other facilities are furnished, and for employees receiving remedial education.”
| Many payroll systems do not support the ability to manage the detailed time and attendance information required by the FLSA, so many organizations are adopting time and attendance systems to manage this process. These systems provide an automatic audit trail for all time collection and adjustments made to the employee’s timesheets. |
Blowing the Whistle
The DOL investigates complaints made by employees and states that it is a violation to fire or in any other manner discriminate against an employee for filing a complaint or for participating in a legal proceeding under FLSA.
Willful violations may be prosecuted criminally and the violator fined up to $10,000. A second conviction may result in imprisonment. |
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Recommendation: Verify that your organization has a suitable timekeeping system—and is currently using it—to monitor and record all transactions that impact an employee’s timesheet.
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