Pay mistakes can be particularly devastating for employers, leading to lawsuits, back pay, interest, fines and possible criminal sanctions; all the more reason to focus on compliance with state and federal wage and hour laws. In addition, wage and hour lawsuits and agency actions continue to rise — with both state and federal enforcement agencies making a top priority of cracking down on wage and hour violations.
The following are some of the common pay mistakes that employers often make:
Mistake #1: Misclassifying Employees as Exempt
This is one of the most common, and often most costly, pay mistakes. Before you can pay an employee, you have to determine if the employee is exempt or nonexempt.
The requirements for classifying an employee as exempt in California are extremely technical. Simply labeling an employee a “supervisor” or “manager” does not make that employee exempt, nor does the fact that you have labeled the employee “salaried” or that the employee is highly educated.
When in doubt, assume the employee is nonexempt and then determine whether the employee’s actual job duties clearly meet the requirements of an exempt employee in California. Generally in California, a properly classified exempt employee must spend more than 50 percent of his/her weekly work time performing exempt duties and must meet the minimum salary requirements. Areas where employers frequently get into trouble include “floor managers” and “working supervisors” where the position may entail a number of nonexempt duties. If you have any uncertainty, consult legal counsel.
Employers also need to be aware of the new federal overtime rules, which become effective on December 1, 2016, and affect the minimum salary threshold requirement that must be met before an employee can be classified as exempt.
Beginning December 1, 2016, an employee needs to meet the higher federal salary threshold of $913 per week ($47,476/year) to be classified as an exempt administrative, executive or professional employee under California and federal law. California employees must continue to meet California’s strict duties test, as well as the salary test.
Use the Checklist for Complying with the Federal Overtime Rule to help you prepare for the federal overtime rule under the Fair Labor Standards Act.
Mistake #2: Improperly Documenting Time and Pay
California employers must keep accurate up-to-date records of actual hours worked, including meal breaks and amounts paid, and they must maintain payroll and timekeeping records. Information on total hours worked and applicable rates of pay must be made available to employees or the Division of Labor Standards Enforcement (DLSE) upon request.
Do your employees’ time cards say they worked from 8:30 a.m. – 5 p.m. with a 30-minute lunch, day in and day out? This could be a warning that employees are not recording actual time worked. Timekeeping records should reflect if an employee ends up working before or after his/her scheduled start time.
You should accurately record all meal breaks, which should reflect that you provided an uninterrupted, 30-minute meal no later than the end of the fifth hour of work.
Your company policy should generally define your timekeeping practices, including that employees should accurately report all time worked and immediately report any errors to a supervisor. Employers can require employees to verify that their time record is accurate. You may want to consider occasionally auditing time card records to determine whether employees are accurately reporting time and/or if there is a pattern of employees working through meal breaks.
Mistake #3: Not Paying for Off-the-Clock Work
You can prohibit your employees from working off the clock and require advance authorization for overtime. However, you must pay the employee for any off-the-clock work, even if it wasn’t authorized.
Set clear expectations that off-the-clock work will not be tolerated and monitor employees to ensure compliance with the policy. Supervisors should never suggest that employees work but not record it. Although you have to pay the employee for all work performed, you can still discipline routine violators of your off-the-clock policy, as well as supervisors who routinely allow off-the-clock work and expose your company to liability.
Keep in mind that pre- and post-shift duties, such as putting on required safety gear at the job worksite, are likely compensable under California law if they are an integral part of the job. The question of employer control over the employee’s activities will be examined. Document all job duties and examine whether you ask employees to engage in any pre- or post-shift duties that might be compensable. When in doubt, consult an employment attorney.
Mistake #4: Miscalculating Overtime
Employers often mistakenly pay overtime using an employee’s normal hourly rate, but overtime must be paid at the “regular rate” of pay. The regular rate of pay includes almost all forms of pay that the employee receives, including non-discretionary bonuses, commissions, the value of meals and lodging and other payments.
Once you have determined the legal “regular rate,” use that rate to determine overtime pay.
Private employers in California should also remember that there is generally no such thing as “comp time” (compensatory time off) for nonexempt employees in lieu of overtime. California employers can use “makeup time” under certain conditions. Makeup time allows an employee to request time off for a personal obligation and make up the time in the same workweek without incurring an overtime obligation. The state makeup time guidelines must be strictly followed.
Mistake #5: Mislabeling “Employees” As “Independent Contractors”
It may be tempting to think you can cut costs by using independent contractors. But when workers don’t truly meet the independent contractor test, it exposes employers to significant legal liability, including civil penalties for willful misclassification, liability for unpaid wages for a period up to four years including potential overtime pay, liability for meal and rest breaks and audits by the Department of Labor (DOL), Internal Revenue Service, Employment Development Department and/or Department of Industrial Relations (DIR).
Misclassification of independent contractors is a top enforcement priority for both federal and state agencies. Moreover, the federal DOL and the state DIR both operate from the presumption that most workers are employees.
Simply labeling someone an “independent contractor” does not make him/her one. Courts and agencies look to numerous factors, including:
- The degree of control the employer exercises over the worker;
- The worker’s economic dependence on your company; and
- Whether the work being performed is integral to your business.
The more control you have over the details of how and where the work is done, the more likely the worker is an employee, not an independent contractor. True independent contractors need to be able to exercise meaningful discretion to accomplish their work. In addition, different agencies apply different tests to determine independent contractor status. A best practice is to have any independent contractor arrangement reviewed by legal counsel to ensure compliance.
More Pay Tips
Employers must be aware of other common pay mistakes. Take these following actions:
- Display required federal and state minimum wage notices in a prominent location and make sure these are up-to-date. See Poster Updates: A Compliance Must.
- Provide specific wage information at the time of hire and whenever there are any changes to the required information, using the Wage and Employment Notice to Employees (Labor Code section 2810.5).
- Provide each employee an itemized wage statement listing specific information, including gross and net wages, total hours worked and all deductions, at the time wages are paid. CalChamber’s new SmartStub can help you determine what information must be on your wage statements.
- Reimburse employees for all business expenses that are directly related to performing their duties or following your direction.
- Deposit withholdings from an employee’s wages, such as state and federal income taxes, Social Security and Medicare in a timely manner.
- Provide a terminating employee his/her final paycheck within the legal timeframes or risk waiting time penalties.