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April,
1997 Wage/Hour
Issues Confronted By Small Firms Solo practitioners and small firms often encounter employee compensation problems. The area of employee compensation is heavily regulated by statute. A failure to oversee compensation arrangements to make sure there is compliance with wage/hour laws can result in substantial, unanticipated liability. The size of the employer, the benign (or even generous) intentions of those involved, or even an express agreement do not constitute defenses to a claim of failure to pay in accordance with statutes. Both state and federal law regulate employee compensation. The Fair Labor Standards Act, 29 U.S.C. § 200 et seq. and corresponding CFR provisions set forth the federal minimum wage and overtime requirements. Applicable California statutes are set forth in the Labor Code. The Industrial Welfare Commission ("IWC") is a state commission with the authority to establish minimum wage rates and regulate working conditions. It exercises this authority through Wage Orders regulating wage and hour requirements and working conditions in different industries and occupations. (Wage Orders can be obtained from the IWC, and are set forth in Title 8 of the California Code of Regulations §§ 11000-11150.) Employers are
required to comply with federal and state law. In general, however,
state law is stricter than federal. Therefore, employers often look
to state law for setting operating standards, since compliance with
the stricter state law usually ensures compliance with the more
lenient federal law standards. If an individual is an employee, a premium wage rate must be paid for all work performed in excess of eight hours per day and/or forty hours per week unless the individual is exempt from the overtime laws. Thus, the following issues must be considered:
Determining "Employee" Status The threshold issue in many employment matters is whether the individual performing services is an independent contractor or an employee. Generally, there are advantages in engaging an independent contractor rather than an employee -- independent contractors are not entitled to overtime compensation, certain tax and social security withholdings, contributions for unemployment compensation, workers' compensation coverage, and benefits afforded to employees such as health insurance, pension rights and termination rights. However, the determination as to whether an individual is an independent contractor or employee is based upon legal criteria. A mistaken classification of an individual as an independent contractor when the person is an employee can lead to significant liability for unpaid overtime, inaccurate tax and social security withholdings, failure to provide workers' compensation coverage and unemployment contributions, and other liabilities. Legal criteria determine status, and even a written agreement that the individual is an independent contractor does not prevent a later claim and determination that the individual is an independent contractor. Indeed, these questions often arise after the fact -- such as where there has been an agreement that the individual will work as an independent contractor, the individual is injured (either at or off the job site) and seeks workers' compensation coverage or health benefits and thus, seeks a determination that the person was an employee. On the other hand, classifying someone as an employee when that individual is not, could give rise to a dispute over whether the individual was entitled to a benefit, such as entitlement to enrollment in a group insurance plan. Several state and federal agencies have their own definitions as to what constitutes an independent contractor relationship, and compliance with the regulations of one agency does not assure compliance with the requirements of a different agency. Furthermore, usually the benefit of any doubt is given towards a finding that the individual is an employee. Under common law rules the relationship of employer and employee exists when there is a right to control and direct the worker not only as to the result to be accomplished, but also as to how the work must be done. It is not necessary that the employer actually direct the manner in which the services are performed; it is enough if there is a right to do so. Alternatively, an independent contractor is a worker who is subject to the control and direction of another only as to the result of the work, not as to the means of performing it. For example, a typist who is required to comply with instructions about when, where, and how to work; who must perform the services in a particular method or manner; who performs work upon which the business depends to an appreciable degree; who works on the business' premises; who must render the services personally and cannot engage someone else to do so; who has a continuing relationship with the business; who must submit regular reports; who uses equipment furnished by the business; and who is paid by the hour, week or month (as compared to on a job or commission basis) is more likely an employee. This is so because these factors tend to indicate that the employer has a right to control not only the result of be achieved, but also the method in which it is to be achieved. To qualify as exempt, an employee must pass a duties test and, in the case of exempt executives or administrators, a salary requirement. Duties Test Under the duties test, an exempt employee must spend at least 50% of his or her actual time worked on exempt work. While minor fluctuations usually will not alter status, a permanent or long lasting change in work can alter status. The exempt work performed must be compared to the total amount of time the employee regularly works per week. An employee who regularly works 40 hours per week must spend at least 20 hours a week on exempt work; an employee who regularly works 50 hours per week must spend at least 25 hours a week on exempt work. There are three types of exempt work: executive, administrative and professional. Executive work is supervisory. Under this exemption the employee's primary duty must consist of the management of the enterprise or of a customarily recognized subdivision thereof; and, the primary duty must include the customary and regular direction of the work of two or more other employees. In other words, an exempt executive is someone who spends over one-half of his or her work time on supervising at least two full time employees (or equivalent number of part-time employees). Exempt supervisory work includes hiring, firing, or disciplining (or effectively recommending the same); interviewing, selecting and training employees; setting or adjusting pay rates or work hours; evaluating productivity of efficiency of others; responding to complaints or grievances; distributing work amongst employees; determining materials or supplies. Although the job title is not determinative, whether the individual is considered by others to have supervisory authority is a relevant factor. The executive exemption is one which is frequently used improperly in small businesses. Often there is an employee who is a supervisor of others, but who also performs non-supervisory work. For example, there might be one secretary who supervises other secretaries or clerical staff, but who also performs secretarial work. Usually such an employee is not exempt. The downfall usually is that although the individual does perform supervisory work, it does not account for more than half the hours. The administrative exemption applies principally to employees who are executive or administrative assistants, such as an executive assistant to the president, an executive secretary, or work in a staff capacity, such as a personnel director or purchasing agent, or those who are in charge of a so-called functional department, or perform special assignments. The general test for exemption as an administrator is that the employee's primary duty must consist either of performance of office or other non-manual work directly related to management policies or general business operations; and, his or her primary duty must include work requiring the exercise of discretion and independent judgment. As with the executive exemption, small firm employees often fail to qualify as exempt administrators because it accounts for less than half the hours. Different types of exempt work can be combined to meet the requirement that at least 50% of the employee's time be spent on exempt work. For example, an employee who spends 20% of his or her time on exempt executive work and 40% on exempt administrative work is exempt. Sometimes it is advantageous to reassign duties in order to ensure that the necessary percentages are met. The state professional exemption applies to persons licensed to practice law, and eight other listed professions. In recent years the professional exemption has been expanded to encompass some individuals other than those in the listed professions if the educational requirement for the job is very advanced (at least one year specialized study in addition to completion of a 4-year college course) and the work is creative or intellectual more than 50% of the time. Although the professional exemption has been expanding, very few persons involved in legal work other than lawyers are exempt professionals. Paralegals are not exempt professionals.
In order to
classify someone as an exempt administrative or executive employee,
the person must be paid on a salary basis . Generally, regulations
provide that an employee will be considered to be paid on a salary
basis if he or she regularly is paid a predetermined amount which
is not subject to reduction because of variations in the quality
or quantity of work performed, or the actual number of hours worked.
The minimum salary for an exempt executive or administrative employee
is $1150.00 per month. Overtime premiums are generally due on work performed in excess of eight hours in a day or forty hours in a week, whichever is greater. In general, the following premium rates are applicable: 1 1/2 times the regular hourly rate for:
2 times the regular hourly rate for:
There is no
"pyramiding" of overtime hours. Once the hour will be
compensated at the applicable overtime rate, the hour does not count
again in evaluating the applicable rate. For example, if an employee
is paid 1 ½ times an hourly rate for working in excess of
eight hours on the first day of the work week, that additional hour
does not count in calculating whether a premium is due for work
in excess of forty hours in that week. "Hours
worked" includes all time during which the employee is subject
to the control of the employer. Thus, an employee who is subject
to the employer's control, but performs slowly, goofs off, or does
poor quality work must be paid for the time spent. Nor can wages
be docked for negligence. "Hours worked" also includes
all time that the employee is suffered or permitted to work, whether
or not required to do so. For example, an individual who stays late
on his or her own accord in order to catch up, must be paid the
appropriate overtime rate. In order to avoid unforeseen and unnecessary
overtime obligations, employers often implement a policy that all
overtime must be approved in advance. However, where an employee
violates the policy, and the employer has reason to know of the
violation and is not diligent in stopping the violation, the employee
will still be entitled to the benefit of overtime laws. However,
appropriate disciplinary action may be taken for violation of the
policy. "Training time" must be counted as hours worked if the training is required for the job, regardless of where the training occurs. Similarly, for an employee regularly working at one work site, travel time between work locations (other than the initial arrival and end of the day departure from the regular site) must be included in hours worked. There is no legal requirement that premium pay be provided for work done on legal holidays, but an employer could become obligated for premium pay for holidays by agreement or by practice. If an employee is compensated for holidays (or vacation days or sick leave days) on which he or she does not work, the holiday (or vacation or sick leave) hours do not count in determining overtime entitlement as overtime premiums are based upon hours worked, not upon hours paid. The wage orders have been revised over recent years towards permitting more flexible work weeks. For example, in 1994 the state's criteria for permitting compensatory time off in lieu of overtime pay (commonly known as "comp time") was expanded. However until it is certain that federal law also recognizes comp time in lieu of pay, this may not be a viable option. Waivers? Labor Code § 1194 prevents any waiver of an employee's right to minimum wage or overtime from having any force or effect. This is true even if the waiver is done knowingly, expressly and in writing, or based upon a long term practice, such as an informal comp time arrangement (i.e., if someone works late, he or she can come in late or leave early later in the week.) Time Records For each non-exempt
employee, an employer must keep records of total daily hours worked;
the starting and ending time of each work day; meal periods (unless
the operation closes during the meal period); total hours paid;
and rate of pay. It is important that the starting and ending time
be recorded (rather than only the total hours) because time records
with only the total hours worked tend to evolve into unreliable
recitations of the regular number of hours scheduled per day, rather
than a true account of the hours worked. Records of what the hours
were supposed to be, rather than actual times worked, often appear
in cases with claims for overtime compensation, with the employee
successfully arguing that he or she was instructed to write only
the regularly scheduled straight time hours. The recording of actual
starting and stopping time is helpful for showing that fluctuations
in hours are noted, and that what is recorded is what happened.
On each pay day an employer must provide the employee with an itemized statement showing gross wages, net wages and deductions; total hours worked and inclusive dates of the pay period; the employee's name and social security number; and the name and address of the employer. An employer must have at least two pay days per month. If an employer fires an employee, all wages earned and unpaid must be paid at the time of discharge. If the employee quits, the employee must be paid all accrued amounts on his or her last day if the employee has given at least 72 hours' notice of quitting. If less than 72 hours' notice is provided, the wages are due 72 hours after the notice is provided. The consequences of failing to make timely payment of wages owed to an ex-employee may be serious. Labor Code §203 provides a penalty for "waiting time" of up to thirty days wages, if there is a willful delay of corresponding length in paying wages due upon termination. Theoretically, a willful delay in paying a single day of wages for thirty days can result in a penalty of thirty days wages in addition to the wages owed. Accrued vacation time has been determined to be deferred compensation, and thus, must be paid upon termination. Sick leave pay which can be used only for illness is not deferred compensation and is not owed upon termination. Conclusion |
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