New Year's Resolutions: What Employers Need to Know - And Not Do - In the New Year

All too often, employment laws are not consistent with what many people believe to be common sense.  The vast majority of employers mean well and try to do the right thing.  However, as the saying goes, "the road to hell is paved with good intentions."  Simply stated – it is hard to do the right thing if you don't understand what the law requires.  With that in mind, the new year is a good time for employers to be reminded of some of the common mistakes that well-intending employers make.  Resolve to think twice if you hear yourself, or your managers, making any one of the following statements:

"Use of Independent Contractors is an Appropriate Way to Supplement our Workforce."

There is no doubt that using independent contractors has its benefits.  Unlike employees, independent contractors are not covered by overtime and minimum wage laws and generally are not eligible for employee benefits such as vacation, insurance, and retirement.  Businesses also do not have to make FICA contributions; withhold income taxes; worry about workers' compensation; or pay unemployment insurance, social security, or Medicare taxes for independent contractors.  These benefits may tempt you to treat more workers as independent contractors, especially if your company is looking to grow its workforce in the new year.  However, few workers truly qualify as independent contractors, and misclassifying employees as independent contractors is risky.  The potential liabilities include: 

  • Payment of backpay and overtime compensation going back at least two years, plus an equal amount of liquidated damages;
  • Payment of the full amount of the employee's income tax which should have been withheld, both the employer and the employee portions of the FICA tax, plus a substantial penalty; and,
  • Liability for attorneys' fees, criminal sanctions, and other penalties. 

The mistake many businesses make is believing that it is sufficient for the parties to mutually desire and agree to classify the worker as an independent contractor.  This is not the case.  Although helpful, an agreement to work as an "independent contractor" is a much less significant factor than the nature of the actual relationship itself.  What matters most is not what the parties intend or say they intend, but whether the nature of the relationship qualifies it as a legally recognized independent contractor relationship.  Unfortunately, there is no single, uniform test to determine who qualifies as an independent contractor.  There is one basic rule, however, that must be understood:  Control, and who has it, is the key.  Independent contractors are in business for themselves and, therefore, retain the right to control how they will accomplish the task they have been hired to perform.  The principal (the one who hires the contractor) has the right to dictate only the ultimate result of the independent contractor's work, not the means and methods used to accomplish the result.  If nothing else, keep this rule in mind when evaluating your own independent contractor relationships.

"Dick is Paid on a Salary Basis, so He Isn't Entitled to Overtime."

Most employers know that the Fair Labor Standards Act ("FLSA") generally requires employees to be paid overtime at time and one-half their regular rate of pay for all hours worked over 40 in a workweek.  Most employers also know that employees can qualify for one or more exemptions from this basic requirement.  What many employers do not know, however, is how an employee qualifies for such an exemption.  All too often, employers make the mistake of believing that an employee is exempt from overtime just because the employee is paid a salary.

It is true that most employees have to be paid a salary (at least $455 per week) in order to qualify for an overtime exemption; however, high salaries and job titles alone do not determine exempt status.  Rather, in order for an exemption to apply, an employee’s salary and specific job duties must satisfy all the appropriate requirements.  The various duty tests specific to each exemption are beyond the scope of this article (although we will address the executive exemption in some detail below); however, suffice it to say that if your company treats all of its salaried employees as exempt from overtime, then it is time to review those duty tests with your friendly employment counsel.

"Jane is a Manager, so She Must Be Exempt from Overtime."

A perfect example of where employers run into trouble with overtime exemptions is when dealing with so-called "managers."  While most employers are not aware of all the various duty tests which must be satisfied in order for an employee to qualify for an overtime exemption, they feel confident that "managers" can be treated as exempt, as long as they are paid a salary.  However, it cannot be stressed enough that job titles do not determine exempt status.  Just because you call someone a manager or an assistant manager and pay them a salary does not mean they qualify for an exemption.

The most widely-recognized overtime exemptions are for executives, administrative personnel, and certain professional employees.  Someone who is employed as a "manager" may qualify under any one of these categories, but most often falls under the executive exemption.  In order to qualify for the executive exemption, your manager must be paid a salary of at least $455 per week and must: 

  • Primarily manage the business as a whole or a customarily recognized department or subdivision of the business;
  • Customarily and regularly direct the work of two or more other full-time employees or their equivalent; and,
  • Have authority to hire or fire; to make suggestions and recommendations as to hiring, firing, advancing, or promoting; or to make other employment status changes that are given particular weight. 

Thus, if your "manager" simply manages a department, but does not regularly supervise at least two other full-time employees (or four part-time employees) or have the right to hire or fire them, then your manager would not qualify for the executive exemption. 

"Dick's Overtime was not Authorized so He Isn't Entitled to Overtime."

Many employers have a policy prohibiting employees from working overtime unless it is authorized in advance.  This is a perfectly legal policy.  Employees may be disciplined for violating it and even terminated if they continually ignore it.  However, such a policy cannot be used to deny employees payment for overtime once it has been worked, whether approved or not.  The FLSA does not distinguish between approved and non-approved overtime.  Non-exempt employees must be paid for all hours “suffered or permitted” to work and, if your employee works overtime, you are required to pay time and one-half your employee's regular rate for that overtime – period, even if you have a policy prohibiting off-the-clock work.

"Jane Worked Voluntarily 'Off the Clock,' so She Isn't Entitled to Be Paid for That Time."

Another common mistake employers make is believing that employees can waive their right to compensation.  What often happens is that employees need to put in extra time to finish a task, but feel pressure not to record the time because of budget constraints or performance issues.  Other employees may work from home on their "own time" by checking e-mails, making calls, or doing Internet research.  The employees do not clock-in before doing this work, so the time is not captured and is never paid.  Many employees do not expect compensation for these efforts and may even voluntarily agree to forego the right to compensation.  However, the rule remains the same – non-exempt employees must be paid for all hours "suffered or permitted" to work.  This means that you must pay for all work performed by your employees that you knew or should have known was being done – even if the employee doesn't expect to be paid.

"Since Dick Worked Overtime Last Week, We'll Let Him Take 'Comp Time' This Week so We Won't Have to Pay Him Overtime."

"Comp time" is a familiar phrase used in many workplaces.  Under a comp time (or, "compensatory time off") system, employees are compensated with extra paid time off if they work more than 40 hours in a workweek.  Comp time is given in lieu of traditional overtime pay.  Many employees appreciate this approach because they enjoy the additional paid time off.  However, only public sector employees have the option to choose comp time in lieu of overtime.  For the vast majority of employers, overtime-eligible employees always must be paid one and one-half times their regular hourly wages for all hours worked beyond 40 in a workweek.  Thus, if your company compensates employees with comp time, it still may be on the hook for traditional overtime compensation if the comp time is not taken in the same workweek as the extra hours. 

"Jane has used up Her Family Leave Time and Still Can't Come Back to Work.  We'll have to Terminate Her and Hire a Replacement."

Most employers know that the Family and Medical Leave Act ("FMLA") permits eligible employees to take up to a maximum of 12 weeks of unpaid leave for their own serious health condition.  Many employers believe that once this maximum leave has been exhausted, the employee can be terminated automatically if he or she is unable to return to work.  However, it is now well established that such an inflexible policy violates the Americans with Disabilities Act ("ADA").

Following the recent enactment of the ADA Amendment Act, the scope of the ADA was broadened significantly, expanding the number of individuals who are entitled to protection.  In light of this expansion, it is very possible that an employee taking FMLA leave for his or her own serious health condition also may be entitled to protection under the ADA.  Thus, you must consider your obligations under the ADA before terminating an employee who is unable to return to work following the exhaustion of all FMLA leave.  If your employee is covered under the ADA, then you should engage in an "interactive process" to determine whether there is any reasonable accommodation which would allow the employee to return to work.  One such accommodation may be granting additional unpaid time off from work.


Your company certainly is not alone if it has fallen victim to the above mistakes.  Still, there is no time like the present to get your policies back on the right track.  Otherwise, despite the best of intentions, your company may be stuck on the proverbial "road to hell." 

©  2010, Ward and Smith, P.A.

For further information regarding the issues described above, please contact Jeremy R. Sayre.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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