Fair Labor Standards Act and high-level benefits requirements.
By Kay Robinson
This is the second in a series of articles about human resources basics. In this issue, Kay Robinson, SPHR, Director of Human Resources Consulting Services with RSM McGladrey, discusses the Fair Labor Standards Act (FLSA) and some high-level benefits requirements.This article should not be construed as legal advice.
FLSA covers only employees—not independent contractors. But FLSA does define employee classifications, which positions are exempt or nonexempt. It also outlines pay requirements (when you are required to pay overtime and when you aren’t, and when you have to pay travel time and when you don’t). This is a complicated law, and while most of the requirements can be administered somewhat easily there will always be gray areas where you will want to check with an attorney.
Some companies that hire a consultant or freelancer assume that they aren’t employees—and that can get them in trouble. The Internal Revenue Service (IRS) has developed guidelines to assist an employer in classifying the employment relationship. Independent contractor status is generally characterized by an “arm’s length” relationship in terms of behavioral control, financial control or the type of relationship (contract, provision of benefits coverage, and the permanency of the relationship). Go to www.irs.gov/formspubs to download IRS Publication 15-A, Employer’s Supplemental Tax Guide, to review whether your workers are appropriately classified.
Under FLSA, the biggest issue is whether you have classified your employees correctly as exempt or nonexempt. This is different from how you pay employees, either by a salary or an hourly rate. Exempt employees are exempt from overtime and must be paid a salary. Exempt status is defined not by job title but by duties, for an administrative exemption staff must exercise discretion and independent judgment with respect to matters of significance (level of importance or consequence of the work performed). Supervising two or more staff members doesn’t automatically make you exempt. There are also professional and executive exemptions, and some computer positions all have criteria to determine whether the position is exempt.
Nonexempt staff are not exempt from overtime and may be paid a salary or an hourly rate. But, if nonexempt staff are paid a salary, they are still eligible for overtime for hours worked over 40 in a workweek. All employees who make less than $23,660 a year ($455 per week) must be classified as nonexempt. All blue collar workers are nonexempt. Clerical and bookkeeper positions are typically nonexempt. For additional information, visit www.do.gov.
When you do pay overtime to nonexempt staff, you only have to pay overtime for hours worked, not hours paid. For example, if an employee called in sick on Monday and you paid them sick time, on Friday that week (if they worked Tuesday through Friday, eight hours per day) the employee has only worked 32 hours, although they have been paid for 40 hours. If the employee worked on Saturday, you would not be required, under FLSA, to pay overtime because the time worked could be at straight time. But, you need to explain to your employees how you plan to pay overtime in your policy.
You will need to develop a travel time policy for nonexempt staff. FLSA has specific rules about when travel time is to be paid. Generally, commuting time (from home to work and back) is not considered work time. However, if an employee spends time traveling during the day as part of his or her work, then the time is payable. Time spent traveling out of town as a passenger is payable if the time is during normally scheduled work hours. This is true even if the employee works Monday through Friday, but travels on Sunday. So, let’s say the employee’s shift is 8:00 a.m. to 5:00 p.m., Monday through Friday. If the employee travels on Sunday between 8 and 5, that time is payable. However, if the employee drives somewhere after 5:00 p.m. it may not be payable. FLSA rules get a little sticky, so you will want to develop a policy that makes sense for your nonexempt staff who may be required to travel. Have an attorney review the policy before distributing it.
Before- and after-hours activities may be payable if the activities are required as part of the employee’s work, such as completing paperwork, fueling cars and taking off required uniforms. There have been recent court cases where the company was not paying for prep and clean-up time (donning and doffing gear), and the courts agreed that the time was payable. You can expect more litigation in this area.
You may not want to hear this, but, under FLSA, private employers (versus public, government-type employers) cannot provide compensatory time. This means you must pay nonexempt staff overtime rather than have them take time off at a later date (whereby they are banking the time). The only way you can get around overtime is to rearrange their schedule for the workweek. Let’s say they work 8 to 5 Monday through Friday and they work overtime one day (let’s say four hours). You could then let them go home at noon on Friday after they had worked 40 hours.
One more thing. These are the federal FLSA rules. Most states have pay policies that you will need to check out. For instance, in California, you have to pay overtime for hours worked over eight in the day, not for hours worked over 40 for the week.
Benefit administration can be complicated, and for the most part you can rely on your broker or agents to help make sure you are in compliance with COBRA (Consolidated Omnibus Budget Reconciliation Act), ERISA (Employee Retirement Income Security Act), etc. COBRA kicks in when you have 20 or more employees and you offer a group health plan. If you have fewer than 20 employees, most states require some kind of continuation of benefits coverage, as well.
ERISA is a very complex law with ever-changing requirements that not only pertain to pension plans but to welfare plans (such as health insurance). Contact an attorney or other professional benefit advisor before implementing any benefit plan or plan amendment.
Other federal laws, such as ADEA (Age Discrimination in Employment Act) and FMLA (family medical leave act) should be reviewed to make sure you are in compliance.
This information can be referenced if you subscribe to a publication or professional organization, such as “Business and Legal Reports,” or some kind of human resource professional society, such as the Society for Human Resource Management.