Wage and hour claims are at the forefront of many employment disputes. These claims have increased due to the uncertainty that comes with classifying an individual as an employee or independent contractor and the different minimum wages that vary across jurisdictions. Wages and hour claims by employees can result in significant penalties and fines for even the smallest employer. Below is a discussion of the common mistakes an employer may make that can lead to wage and hour disputes.
Employee
The hiring process is a critical time that requires employers to properly classify their new hires. An employee is an individual whose terms of employment, such as work product, rate of pay, and work schedule, are controlled by the employer. State law requires employers to pay employees the proper minimum wage, as well as appropriately compensating certain employees when they work overtime.
Many states require a “rate of pay” form to be completed and given to all new hires. This form allows the employer to specify the amount of pay and any applicable overtime that the employee must be compensated for. There are penalties for not completing rate of pay forms.
Independent Contractor
On the contrary, independent contractors are not protected by wage and hour laws because they are not considered employees under the Fair Labor Standards Act (FLSA). Independent contractors are self-employed and thus not economically dependent on an employer because they can set their schedules and negotiate their pay rates.
Since misclassification commonly results in specific industries, such as construction and technology, employers are urged to carefully evaluate the work duties of the individuals they hire or engage and the amount of control and direction the employer exerts. Merely labeling an individual an independent contractor is not enough. Depending on the state, the test for determining employee status will differ. Some states rely on evaluating traditional “control” factors, while others use the ABC test to determine if there is an absence of control, unusual work, or an independent trade.
Non-Exempt Employees
After classifying an individual as either an employee or an independent contractor, employers have an additional step when categorizing employees. An employee can either be exempt or non-exempt. As stated above, the FLSA provides certain protections, such as minimum wage and overtime pay, but these benefits are only available to non-exempt employees.
Non-exempt employees are those who earn an hourly wage or earn a salary that is less than the minimum amount determined by the United States Department of Labor (DOL). Certain states may have salary thresholds higher than what is designated by the DOL. To learn more about the federal threshold and whether you may be located in a state with a higher salary threshold, please refer to our May 20, 2024, article here.
Exempt Employees
An exempt employee is paid a salary above a certain threshold, and they are not subject to the FLSA’s minimum wage and overtime pay requirements. Exempt employees must work a role within the federal government’s definitions of administrative, professional, executive, computer, or outside sales field of work.
Ensuring the employee’s job duties are consistent with an exemption status is also critical. Job titles are not enough to determine employee classification. Instead, each field of work has a unique test that must be met to qualify for the exempt status.
Takeaway
The prevalence of wage and hour claims highlights the critical need for employers to navigate the complexities of employment and labor laws with precision. Misclassifying workers can lead to significant financial penalties and legal repercussions. To mitigate these risks, employers need to conduct thorough evaluations of job roles, regularly update their understanding of legal requirements, and ensure accurate employee classifications.
In a second article of this series, we will address not only further preventative measures employers can take to mitigate these risks, but also how employers can defend themselves when wage and hour claims arise.