The Essentials of Wage and Hour Law

– KPA CONFIDENTIAL –

The Essentials of Wage and Hour Law

James F. Hendricks Jr.Partner, Chicago Office

[email protected]

Presenter

QuestionsQuestions

• If you have questions during the presentation, please submit them using the “Questions” feature

• Questions will be answered at the end of the webinar

Why the litigation explosion?Why the litigation explosion?

• Employers misunderstanding the law

• Plaintiff’s lawyers – Plaintiff’s lawyers – Plaintiff’s lawyers

• Liquidated damages and attorney’s fees

• Almost every employee is a potential plaintiff

Federal Wage & Hour Investigation

vs.Employee Lawsuit

Federal Wage & Hour Investigation

vs.Employee Lawsuit

Federal Investigation:

Federal Investigation:

• Complaint• Audit D.O.L vs. Self• Wages Due• Statute of

Limitations (2 yrs)• No Attorney Fees

• Find an attorney• Lawsuit• Wages Due• Statute of

Limitations (3 yrs*)• Liquidated

Damages• Attorney Fees

Employee Lawsuit:

Main Types of Wage and Hour Class and Collective Actions

Main Types of Wage and Hour Class and Collective Actions

• Misclassification of nonexempt employees• Improper salary deductions• Requiring or permitting “off the clock”

work• Miscalculating regular rate for overtime

purposes• Failure to comply with more stringent state

laws• Poorly drafted pay plans

Impact of State Wage and Hour LawsImpact of State Wage and Hour Laws

• State law claims may be brought as class actions as opposed to FLSA collective actions

• Class vs. collective actions:– A class member must affirmatively “opt in” to

an FLSA collective action in order to participate and be bound by the judgment

– Under traditional class actions, each class member is bound by the judgment and notified of award or settlement unless he or she affirmatively “opts out”

– Thus, class actions under state law may have very large classes

Federal ExemptionsFederal Exemptions

MINIMUM WAGE, OVERTIME, RECORDS

• Executive• Administrative• Professional• Outside Sales• Highly Compensated

OVERTIME ONLY

• Salesman• Partsman• Mechanic• Commission-paid• Motor Carrier

Complete Exemptions(MINIMUM WAGE, OVERTIME and RECORDS)

Complete Exemptions(MINIMUM WAGE, OVERTIME and RECORDS)

1. Executive

2. Administrative

3. Professional

4. Outside sales

5. Highly Compensated Employees

• Is in charge of a department or sub-department, and

• Supervises the work of two or more full time employees, and

• Receives a salary or guarantee of at least $455/wk

1. Executive Exemption1. Executive Exemption

EXEMPT only means that these employees generally

meet all the criteria and are generally exempt from overtime

NOT EXEMPT only means that these employees generally do not meet the criteria for this exemption

and generally are not exempt

WARNING! Job titles are not controlling

CAUTION!CAUTION!

ExecutiveExecutive

EXEMPT

DealerDep’t Manager

NOT EXEMPT

Ass’t ManagerCSI ManagerLot ManagerInventory ManagerFinance Manager

• Primary duty is performing non-manual work related to management policies or general business operations, and

• Exercises discretion and independent judgment with little or no supervision, (holds a position of responsibility) and

• Receives a salary or guarantee of at least $455/wk

2. Administrative Exemption2. Administrative Exemption

AdministrativeAdministrative

EXEMPT

Used Car Buyer Human

Resources Manager

Office Manager

NOT EXEMPT

Office employeesWarranty Admin.Accounts PayableRental clerkBookerDispatcher

• Performs duties requiring advanced knowledge in a field of science or learning requiring specialized instruction, and

• Consistently exercises discretion and independent judgment , and

• Receives a salary or guarantee of at least $455/wk

3. Professional Exemption3. Professional Exemption

Professional Professional

EXEMPT

AttorneyAccountant

NOT EXEMPT

Bookkeeper Warranty clerk or

administrator Accounts Payable Computer systems

Administrator

• Makes sales and takes orders away from the employer’s place of business, and

• Spends less than 20% of work hours at the employer’s place of business doing work unrelated to sales duties

4. Outside Sales4. Outside Sales

Outside Sales Outside Sales

EXEMPT

Wholesale parts sales

NOT EXEMPT

• Performs office or non-manual work, and

• Is guaranteed total annual compensation of at least $100,000 per year, and

• Performs any one of the exempt duties of an executive, administrative or professional employees

Highly-Compensated Employees Highly-Compensated Employees

Partial Exemptions(OVERTIME only)

Partial Exemptions(OVERTIME only)

• Salesman• Partsman• Mechanic• Commission-paid• Motor Carrier ???

5. Salesman

Primary duty: selling cars or trucks to the consumer

5. Salesman

Primary duty: selling cars or trucks to the consumer EXEMPT

Sales person

Sales associate

Internet sales person

Service Writer

NOT EXEMPT

After market sales

Greeter

Finance Manager

Motorcycle salesman

BDC worker

Service WritersService Writers

The Department of Labor will no longer deny the OT exemption for (service writers) FOH 24L04(k)

6. PartsmanPrimary duty: stocking, issuing, requisitioning or selling parts

6. PartsmanPrimary duty: stocking, issuing, requisitioning or selling parts

EXEMPT

Parts counter

Shipping/receiving

Mechanics’ counter

Telephone sales

NOT EXEMPT

Parts driver

Parts inventory (computer)

EXEMPT

TechnicianTechnician traineeApprenticeBody manAfter-market

installer

NOT EXEMPT

Quick lube mechanic

DetailerNew car get readyPDI technician

7. MechanicPrimary duty: performing mechanical or body

repair work on a vehicle

7. MechanicPrimary duty: performing mechanical or body

repair work on a vehicle

8. Commission-Paid Exemption8. Commission-Paid Exemption

• Employed at a “retail” dealership, and

• Receives the majority of his/her compensation from “commissions”, and

• Receives at least time and one-half minimum wage ($11.10) for all hours worked in an overtime week. (Ohio minimum wage is $7.40)

Commission-PaidCommission-Paid

EXEMPT

Finance ManagerPainterDispatcherService Foreman“Flat rate” detailerOther managers

NOT EXEMPT

Warranty clerk Office employees“Piece rate”

detailer

Finance ManagersFinance Managers

• 9th CIRCUIT OPINION – 2005

F & I Managers ARE Exempt!

Changes to Motor Carrier Act ExemptionChanges to Motor Carrier Act Exemption

• Before 2005, the FLSA’s motor carrier exemption applied to all employees who drove a motor vehicle in interstate commerce regardless of the size of the motor vehicle or the number of passengers transported in the vehicle.

• As of August 10, 2005, the motor carrier exemption only applies to drivers of vehicles that weigh in excess of 10,001 pounds.

Motor Carrier Act Exemption: Bottom LineMotor Carrier Act Exemption: Bottom Line

• Employees who deliver non-hazardous materials in vehicles weighing less than 10,001 pounds (which includes cars and most light trucks) are no longer exempt because they do not drive commercial motor vehicles.

Motor CarrierMotor Carrier

EXEMPT

Probably None

NOT EXEMPT

“Is he exempt from overtime?”“Is he exempt from overtime?”

• What does he spend the majority of his time doing?

• How is his pay plan structured?

• Does he fit exactly into one of the nine exemptions?

Irrelevant factorsIrrelevant factors

• He is paid a salary.

• We consider him a “manager” .

• He makes $45,000.

• He could supervise someone.

• When he was hired, we agreed no overtime would be due.

If an employee is not exempt from overtime…

If an employee is not exempt from overtime…

The employer must pay overtime premium on all compensation the employee receives.

ISSUE: Failing to pay all the overtime that is due.

If an employee is not exempt from overtime…

If an employee is not exempt from overtime…

The employer must pay overtime premium on all compensation the employee receives.

“Compensation” includes:“Compensation” includes:

$ Hourly wages$ Salary$ Commissions$ Bonuses$ Spiffs$ Payments from the manufacturer

Example:Example:

Warranty Administrator is paid salary of $600/wk. plus monthly bonus of about $700/mo. She works 50 hours a week.

But she’s NOT EXEMPT!!!

DOL’s calculation:DOL’s calculation:

2 years overtime on salary: $6,2402 years overtime on commission: $1,680

TOTAL DUE: $7,920

Private lawsuit calculation:Private lawsuit calculation:

3 years overtime on salary: $9,360

3 years overtime on commission: $2,520

Liquidated damages: $11,880

Attorneys fees: $25,000

TOTAL DUE: $48,760

BUT: Ohio = $97,520

Calculating overtime on salary, bonuses, commissions, etc.

Calculating overtime on salary, bonuses, commissions, etc.

1) Divide amount of salary, bonus, commission, etc. received in a week by the hours worked in the week.

2) Then take ½ of that figure times the number of overtime hours

3) That gives you the additional overtime due

ISSUE:

Using a poorly-drafted pay plan

Sales Pay PlansSales Pay Plans

1. Wage and hour aspects

2. Contract aspects

Wage and Hour AspectsWage and Hour Aspects

• You can pay commissions weekly, bi- weekly, semi-monthly or monthly.

• You must satisfy minimum wage on the same basis: weekly, bi-weekly, semi-monthly or monthly.

• You can “loan” or advance a sales person money to cover the minimum wage and then recoup it in subsequent weeks or months.

• You must pay for all hours worked: sales meetings, off day deliveries, prospecting, etc.

• All sales people should punch a time clock.

• If they punch in but not out, make an estimate of the hours actually worked and calculate pay on that basis.

• Put the pay plan in writing and reissue it whenever you make a change.

CONTRACT

ABC Motors hereby contracts

with XYZ Company to have XYZ

do some work for it and agrees

to pay XYZ about $50,000.

___________________

For ABC Motors

CONTRACT

ABC Motors hereby contracts

with XYZ Company to have XYZ

do some work for it and agrees

to pay XYZ about $50,000.

___________________

For ABC Motors

B. Contract AspectsB. Contract Aspects

B. Contract AspectsB. Contract Aspects

• A pay plan, whether written or oral, is a legally binding contract.

• A court will normally construe a contract against the party who drafted it (you!).

What is…What is…

? “25% gross profit”? “Commissionable gross”? “Pack” ? “Market Adjustment”? “Wholesale reserve”? “Over/under trade allowance”? “Inventory adjustment”

• Be sure that you define every important term so that a jury will understand exactly what you mean.

• Use examples of how the commissions will be calculated (show the math).

• Cover all the common problems:

Split deals

Commission payments after the employee leaves

Right to see how commissions are calculated

Drafting Managers’ Pay Plans Drafting Managers’ Pay Plans

• Do not use “short hand” terms or dealership industry jargon.

• “Salary” or “draw” or “advance” or “guaranteed draw” ???

• Refer to lines on the financial statement.

• Explain in detail how compensation will be calculated for first and last month of employment.

• Provide for inventory and accounting adjustments.

• Watch out for “guarantees”.

ISSUE:

Promising an employee a “guarantee”

What is a “guarantee” ?What is a “guarantee” ?

A. A guarantee of a certain amount of pay?

B. A guarantee of employment for the entire period of the guarantee?

ABC MOTOR COMPANY

1. $25.00 per flat rate hour

2. A guarantee of 4300.00 per month

3. Whichever is greater

4. Effective Jan. 1, 2011

…

This pay plan is good for 6 mos., at that time it will be evaluated

by both parties

Never use the word “guarantee” unless you say:

Never use the word “guarantee” unless you say:

“This guarantee is a guarantee of compensation only. It is not a guarantee of employment. Like all of our employees, you will be employed on an ‘at will’ basis.”

ISSUE: Treating employees as “independent contractors.”

Who is an “independent contractor”?Who is an “independent contractor”?

• No clear line

• Depends on the forum you are in

• Factors to consider:– The extent to which services

rendered by an individual are an integral part of the principal’s business

– The permanency of the relationship between the individual and the principal

Who is an “independent contractor”?Who is an “independent contractor”?

• Factors to Consider (cont’d):– The amount of investment in facilities and

equipment by the individual– The opportunities for profit or loss by the

individual, and the method of compensation– The degree of independent business

organization and operation by the individual– The degree and nature of control of the

individual by the principal

Who is an “independent contractor”?Who is an “independent contractor”?

• Factors to Consider (cont’d):– The degree of independent judgment exercised by

the individual who performs the services

– Performance of the same or similar services by the individual for third parties in addition to the principal

– Employment of the individual by the principal in any other capacity

– A comparison of the relationship to other independent contractor operations of a similar nature in the industry

– The right of either party to terminate the relationship on short notice without penalty

• Dent repair• Stripers• New car prep employees• Grounds keepers• Janitor/maintenance• Dealer trade drivers• Security guards• New managers

“The usual suspects”“The usual suspects”

Potential liability:Potential liability:

• Unpaid wages

• Pension contributions

• Insurance benefits

• Liquidated damages for non-payment of wages

• Attorney’s fees

• Wage and Hour: failure to pay wages due

• IRS: penalties for failure to withhold taxes

• Unemployment: failure to make proper contributions

• Negligent hiring / retention

• Unemployment compensation

• Workers compensation

• Negligence toward third party

Your potential liabilityYour potential liability

ISSUE: Failing to keep accurate time records

Time RecordsTime Records

• The employer shall maintain an accurate record of the hours worked by each non-exempt employee each day and each week.

• The employer can delegate this duty to employees, but it remains responsible for compliance.

• No required format: Punched time cards, handwritten time sheets, computer log, etc., so long as they are accurate.

• Most accurate: Punched time card

• There is no fine for failing to require employees to keep accurate records.

• However, without good time records, you are at your employees’ mercy.

There is no such thing as “comp time” for private sector employees.

ISSUE: COMP TIME

• Overtime is calculated on a weekly basis.

• You cannot offset overtime hours with straight time hours in another week.

• You may have to pay comp time under state wage laws even though you do not get credit under federal law.

• Do not allow comp time.

• If you have given comp time in the past, pay it off or phase it out.

ISSUE: Child labor violations

“Hazardous Occupations”“Hazardous Occupations”

• Roofing Work

• Excavation work

• Working with power-driven saws

• Construction work

• Driving a car

Civil Money PenaltiesCivil Money Penalties

• Up to $11,000 per violation

• Possible injunction

ISSUE: Not paying attention to state and local wage laws

Federal versus State LawFederal versus State Law

• Federal law does not preempt state employment laws.

• Employees are entitled to the provision most favorable to them.

State wage law concerns:State wage law concerns:

1. Higher minimum wages

2. Different or non-existent exemptions

3. Wage payment laws

4. Wage deduction laws

5. “Living wage” laws

Some Exemption ExamplesSome Exemption Examples

• IL and NV do not recognize “partsman”

• MA does not recognize “s,p,m”, but has an exemption for “garageman”

• NY recognizes “s,p,m” only if they receive 1½ times the NY minimum wage

• NV and CA require OT after 8 hours in a day

Wage Payment LawsWage Payment Laws

• Federal: Employer must pay wages “promptly” after they are earned.

• Ohio: Employees must be paid by the first day of the month for any work done in the first half of the preceding month, and by the 15th day of the month for any work done in the last half of the preceding month. Employers may pay on a less frequent basis only by written contract or when the practice is customary.

Wage Deduction LawsWage Deduction Laws

• Federal: Employer may deduct from an employee’s wages so long as it does not cut into minimum wage or overtime.

• States: Possible criminal sanctions

Improper Salary DeductionsImproper Salary Deductions

• Many states have strict laws about what deductions may be made from pay

• Employer may try to recoup losses or expenses caused by the employee:

– Lost or returned merchandise, canceled sales, etc.

– Compensation to sales assistants

– Deductions for employee errors

– Deductions for business expenses (e.g., licenses, trade journals)

– Deductions for broken equipment

New DOL Opinions Re: Salary Deductions

New DOL Opinions Re: Salary Deductions

• An employer may make deductions for absences of one or more full days because of sickness or disability before an employee has qualified under such a plan and once the employee has exhausted his or her leave allowance. See Wage & Hour Opinion Letter No. 32 (September 14, 2006)

• An employer may not make full day deductions from the salary of a fluctuating workweek employee when the employee has exhausted his sick leave bank or has not yet earned enough leave to cover the absence. See Wage and Hour Opinion Letter No. 15 (May 12, 2006)

Wage DeductionsWage Deductions

State and federal taxes

Health InsuranceGarnishmentsChild supportCash advances

Cash shortagesDamage to

vehiclesUnreturned

uniformsParts and serviceFines or penalties

“Living Wage”“Living Wage”

• Municipalities rather than states

Common Classification MistakesCommon Classification Mistakes

• Not considering differences in state and federal salary and duties tests

• Treating trainees as exempt before they fully qualify as exempt

• Failing to guarantee the proper minimum salary

• Prorating the salary of a part-time exempt employee to less than $455/week

• Making improper deductions from salaries of exempt employees

Payroll Practices: Red FlagsPayroll Practices: Red Flags

• Watch out for “red flags” regarding payroll practices:

– Improper deductions from salaried employees

– Improper calculation of “regular rate”

– Job descriptions for exempt employees that do not reflect exempt duties

– Nonexempt employees working through meal breaks

– Nonexempt employees performing work before or after they punch or log in/out

– Employees who routinely stay late but have no overtime

– Not complying with employer’s own written policies

Mandatory Arbitration AgreementsMandatory Arbitration Agreements

• FLSA claims are arbitratable.• To ensure arbitration agreement is valid,

consult counsel.

Regular Audits of Exempt PositionsRegular Audits of Exempt Positions

• ID all exempt and non-exempt employees• Analyze the current definitions for each

exemption• Update and maintain accurate job

descriptions• Alter job duties to ensure compliance with

exemption

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