Crime And A Half

Learn what the Fair Labor Standards Act says about wages and overtime-and avoid breaking the law.
Magazine Contributor
8 min read

This story appears in the February 2001 issue of Entrepreneur. Subscribe »

Life at home was a bit disjointed for a Michigan funeral director and embalmer, who found he was handling 15 to 20 phone calls every night when the funeral home's phone line was routed to his house. His employer wasn't paying him the overtime he should have been earning-his employer wasn't paying him for that time at all. Fed up, the funeral director quit and sued under the Fair Labor Standards Act (FLSA). In July, the 6th U.S. Circuit Court of Appeals ruled that handling so many phone calls was more than typical on-call time. The funeral director was working, albeit from home, and should have been paid for his time and for any overtime he accrued.

The case points out the basic principle of the FLSA, which has governed wages and work hours in the United States since 1938. Covering more than 80 million full- and part-time workers in both the public and private sectors, the FLSA encodes a deceptively simple concept: You have to pay employees for every hour they work. And, unless they're properly classified as exempt from the regulations, employees who work more than 40 hours per week must be paid time and a half for their overtime. That seems easy enough, but the devil is in the details. Because of the complexities of the modern workplace, most employers, if they looked closely enough, would find that somehow or other they're violating this often confusing law. Violations can lead to fines of up to $10,000 per employee and further investigation by the U.S. Department of Labor, so you need to understand the requirements and make sure your own marginal cases comply with the law.

Does the FLSA apply to your company? The original act applied only to factory workers, but it now applies to every business with two or more employees and a gross income of $500,000 or more. (It also applies to public agencies, hospitals, schools and health-care facilities.) Even if your business has a lower gross income, your employees are subject to the law if they engage in interstate commerce-and that term is interpreted rather broadly. Your employees are covered if they produce goods for interstate commerce, travel to other states on business, make frequent phone calls out of state, do janitorial work in a building where the goods produced are shipped out of state, or even type letters that will be sent out of state. And the child labor and minimum wage provisions of the FLSA apply to virtually every employee.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

On The Clock

The FLSA requires you to pay non-exempt employees for every hour they're on duty-any time they're engaged in their regular work, even if it's before or after their scheduled workday, and regardless of whether the hours are recorded on their time sheets. If they come in early to set up or stay late to put things away, you have to pay them, so insist that they record the time. If you don't want to pay overtime, tell them not to come in early and chase them out at the end of the scheduled workday. Likewise, insist that employees working from home keep proper records of hours.

What if they're not actually working? If they're driving between the workplace and home, that doesn't count as being on duty, but if they're driving from one job site to another, that counts. If employees are standing around waiting for an assignment or waiting for a broken machine to be repaired, they're still on duty and must be paid. Employees on short breaks (20 minutes or less) must be paid, but those out for lunch (30 minutes or more) do not-provided they are relieved of their duties during that time. Recent court cases have established that if workers have to wear pagers and rush to the phone when paged or stay near the reception desk while eating in case someone comes in, they're not on break.

Employees attending meetings or training must be paid for their hours, unless the meetings aren't directly related to their jobs and they're attending voluntarily, outside their normal work hours. The overriding question is whether any productive work is performed during the training. If it is, then you have to pay for the time. So you can't label a new employee's first two weeks on the job as an unpaid training period. If the employee is on a business trip of fewer than 24 hours, you have to pay for the entire period, except for ordinary commuting time and meal breaks. That's the law, even if the employee spends part of the time sleeping. For extended trips-more than 24 hours-you can exclude up to eight hours per day for eating and sleeping if you've provided adequate sleeping facilities and the employee can sleep without work-related interruptions.

Hours worked also include time spent during the normal workday waiting for or receiving medical attention on the premises or at the employer's direction, time spent in grievance hearings, and civic and charitable work you've directed the employee to perform.

At A Minimum

For now, federal minimum wage laws mandate that adults must receive at least $5.15 per hour. Full-time students ages 20 and under working part-time or summer jobs may be paid the youth rate of at least $4.75 per hour but only for the first 90 days of their employment. And you need certificates from the Department of Labor's Wage and Hour Division to pay the $4.75 rate.

When employees work on piece rate, commission, flat fee or salary, determine the hourly wage by dividing the total straight-time income for the week by the number of hours worked. Make sure the hourly figure at least equals the minimum wage. Be especially careful if the employee is paid solely on commission. You're required to make sure the total hours worked, divided by the commission income, doesn't fall below the minimum wage. If it does, you have to make up the difference. You can't later recover the money from weeks when commissions exceed the minimum wage.

Here's a notable exception: If you run a restaurant and your servers receive more than $30 each per month in tips, the law allows you to pay a cash wage of only $2.13 per hour. However, if the cash wage plus tips doesn't equal the minimum wage, you're expected to make up the difference. Make sure employees understand the arrangement and that they're allowed to keep any tips they receive.

The FLSA specifies when you may and may not make payroll deductions that would reduce wages below the legal minimum. Among deductions not allowed to push wages below the minimum are disciplinary fines for poor work or violating rules, repayment of cash register shortages, reimbursement for damage to the employer's property, the cost of uniforms, and the cost of required physical exams. It's OK to deduct taxes; reasonable cost of board and lodging; savings plans requested by the employee; wage attachments, such as court-ordered support payments; and repayment of cash advances, even if the deduction reduces wages below the minimum.

Over And Above

The rules regarding overtime and exemption from overtime are complicated. Basically, you have to pay overtime whenever an employee works more than 40 hours in one week. Even if you didn't authorize the extra time, you have to pay overtime. To figure the hourly wage to compute overtime, include all payment for employment, including regular bonuses, commissions, piece rates and shift differentials. Divide that by 40 hours, then multiply by 1.5 to compute the rate of pay for any hours more than 40.

You don't have to pay overtime for employees classified as exempt because of the nature of their jobs, such as professionals, outside sales reps, computer specialists, administrators and managers. But beware of assuming that someone paid on a salary basis is automatically exempt. Exempt employees exercise independent judgment or creativity. Exempt employees need not be paid when they're gone for a full day. However, if you dock pay for a partial-day absence, such as a doctor's appointment, you're treating the employee as nonexempt and could be held liable for any failure to pay overtime. The only case when it's OK to dock an exempt employee's pay for a partial-day absence is when you have a sick- or personal-leave policy. In that case, you can reduce the allotted sick days by the half-day. But if the employee has used up the allotted sick days and takes another half-day off work, you can't deduct that.

Note that state wage and hour laws-especially in California-may set different standards. You're required to abide by whichever is more favorable to the employee. Complying with wage and hour laws can be difficult. Remember that their goal is to make sure American workers are paid fairly for the time they work-and that's a worthy goal.

For more information on Fair Labor Standards Act compliance-including child-labor laws-visit

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