17

The Legal Landscape of Compensation

While President Franklin Roosevelt was in Bedford, Massachusetts, campaigning for reelection, a young girl tried to pass him an envelope. But a policeman threw her back into the crowd. Roosevelt told an aide, “Get the note from the girl.” Her note read, “I wish you could do something to help us girls.... We have been working in a sewing factory...and up to a few months ago we were getting our minimum pay of $11 a week.... Today the 200 of us girls have been cut down to $4 and $5 and $6 a week.” To a reporter’s question, the president replied, “Something has to be done about the elimination of child labor and long hours and starvation wages.”¹

Federal, state, and local laws can significantly impact employee compensation. These laws govern overtime pay and protect employees from discrimination. It is important to appreciate the legal environment when designing and managing compensation. Discussed here are federal laws. Guidance should be sought for state-specific wage and hour laws and regulations.

The Fair Labor Standards Act (FLSA), 1938

The FLSA requires that employees be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked in excess of 40 hours in a workweek.

Minimum Wage

Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour, effective July 24, 2009. Many states also have minimum wage laws and where an employee is covered by both, he or she is entitled to the higher minimum wage.

    For more information regarding the federal minimum wage, visit www.dol/gov/general/topic/wages/minimumwage.

Overtime Pay

Unless an employee is exempt from the overtime provisions of the FLSA, he or she must receive overtime pay for hours worked in excess of 40 in a workweek. The rate of overtime pay cannot be less than time and one-half the regular rate of pay. There is no limit on the number of hours an employee 16 years of age or older may work in a workweek. Overtime is paid on hours actually worked and not time compensated. For example, if an employee receives eight hours of holiday pay for Monday and works an additional 36 hours from Tuesday through Friday, he or she is not entitled to overtime because no work was performed on Monday.

A workweek is a fixed and regularly recurring period of 168 hours—seven consecutive 24-hour periods. It does not have to coincide with the calendar week, but may begin on any day and at any hour of the day. Different workweeks may be established for different employees or groups of employees.

An employer cannot average hours over two or more weeks. Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned. Public-sector employers may grant compensatory time off in lieu of overtime wages. Employers in the private sector must pay their employees overtime pay earned.

Exemptions

The FLSA provides exemptions from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees and certain computer employees. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s regulations.

To qualify for an exemption, employees generally must:

    Satisfy all the requirements of salary-basis test discussed below.

    Be paid on a salary basis—that is, the employee must regularly receive a predetermined amount that cannot be reduced because of variation in the quantity or quality of work performed.

    Be a highly compensated employee. Under the current FLSA regulations, a highly compensated employee receives a total annual compensation of at least $100,000 (which includes at least $455 per week paid on a salary or fee basis, and can include commissions, nondiscretionary bonuses and other nondiscretionary compensation).

    See The Salary-Basis Test and Thresholds (below).

    Satisfy the duties test for the particular exemption.

    Appendix: FLSA Duties Test Checklist.

The Salary-Basis Test: to meet the requirements of the salary-basis test, an employee:

1.    Must regularly receive a predetermined amount of compensation as required by the Department of Labor’s regulations each pay period on a weekly or less frequent basis.

2.    Cannot have his or her compensation reduced because of variations in the quality or quantity of the work performed.

3.    Must be paid the full salary for any week in which the employee performs work.

4.    Need not be paid for any workweek when no work is performed.

An employee is not paid on a salary basis if deductions are made from the employee’s predetermined salary:

    For absences caused by the employer.

    Because of operating requirements of the business (e.g., there is no work to do, but the employee is ready, willing, and able).

    For absences for jury, witness or temporary military duty except for offset of fees received.

Deductions may be made for full-day absences without violating the salary-basis test for the following reasons:

    Sicknesses or disability under a bona fide plan or policy (sick leave policy, short or long-term disability plan),

    Personal reasons (vacation, personal business), and/or

    Suspensions for misconduct under written policy that applies to all employees.

The following deductions are also permitted without violating the salary-basis test:

    Pro-rated pay for partial initial/terminal weeks. (For example, an employee resigns and her last day is Wednesday. You need not pay her the full week.)

    Unpaid federal FMLA leave (partial- and full-day absences).

    Violations of major safety rules (partial- and full-day absences).

The following practices are permitted without violating the salary-basis test:

    Deducting from accrued leave accounts (full- or partial-day absence).

    Tracking hours worked.

    Requiring employees to work a specified schedule.

    Making bona fide, across-the-board changes in schedules.

    Salary plus.

As long as the employee is being paid the minimum weekly amount on a salary basis as required by the regulations, it is okay to pay additional compensation, such as commissions, bonuses, or additional compensation based on hours worked beyond the normal workweek. For additional hours worked, the employer can compute pay on an hourly, daily, or shift basis provided the employee is guaranteed the required minimum weekly amount.

The Duties Test: The categories of employees under the duties test include:

    Executive.

    Administrative.

    Professional.

    Highly Compensated.

    Computer Employee.

    Outside Sales.

    Appendix: The FLSA Duties Checklist.

There are some things that employers can and should do to assure that they are in compliance with the overtime provisions of the FLSA, which include:

    Auditing all positions that are classified exempt to determine if they meet the salary requirements and duties test.

    Assuring that all employees they treat as “salaried nonexempt” are paid overtime rates when they work more than 40 hours a week, in addition to their fixed salaries for working up to 40 hours a week.

    Having a policy that requires employees to get approval before working overtime.

    Training employees whose positions are nonexempt on appropriate timekeeping and overtime policies and procedures. Even if an employee works overtime without permission, the employer must pay them for all hours worked. However, they may also discipline them for violating a policy that prohibits unauthorized work hours.

Child Labor Provisions

Child labor provisions ensure that when young people work, the work is safe and does not jeopardize their health, well-being, or educational opportunities. The child labor laws are designed to protect against workplace hazards impacting the employment of youth under the age of 18 years. They provide restrictions on the hours and condition of employment for children. These restrictions can vary depending on the type of industry.

Record-Keeping and Posting Requirements

Employers must display a poster containing the provisions of the FLSA. In addition, they must keep certain records for non-exempt employees, including payroll records, collective bargaining agreements, sales, and purchase records for at least three years. Wage computation records such as time cards, electronic time records, or piece work tickets should also be retained for three years.

These records must include:

1.    Employee’s full name and Social Security number.

2.    Address, including zip code.

3.    Birth date, if younger than 19.

4.    Sex and occupation.

5.    Time and day of week when employee’s workweek begins.

6.    Hours worked each day.

7.    Total hours worked each workweek.

8.    Basis on which employee’s wages are paid (for example, “$9 per hour,” “$440 a week,” “piece work”).

9.    Regular hourly pay rate.

10.   Total daily or weekly straight-time earnings.

11.   Total overtime earnings for the workweek.

12.   All additions to or deductions from the employee’s wages.

13.   Total wages paid each pay period.

14.   Date of payment and the pay period covered by the payment.

    For additional information about the Fair Labor Standards Act, visit the Department of Labor’s website at www.dol.gov/whd/flsa.

Portal-to-Portal Act, 1947

The Portal-to-Portal Act amended the Fair Labor Standards Act and defined general rules for hours worked. Hours worked ordinarily include all the time during which an employee is required to be on the employer’s premises, on duty, or at a prescribed workplace. These rules are applicable in calculating hours worked for purposes of paying overtime. These include on-call/standby time, preparatory/concluding activities, waiting time, travel time, and training time.

    On-call pay is pay that employees receive when they are on call but not actually working.

    On-call/standby time. An employee who is required to remain on call on the employer’s premises is working while “on call” and is eligible for overtime compensation.

An employee whose activities are not restricted, but who is required to remain on call at home, or otherwise be available and have access to a phone or beeper so he or she can be reached, is not working (in most cases) while on call and would not be eligible for overtime compensation. However, if the employer placed additional constraints on the employee’s freedom, the employer would be required to compensate this time.

    Preparatory/concluding activities that must be compensated include activities such as putting on or taking off safety gear or making deliveries for the employer on the employee’s way to or from work. The key to whether or not the time is compensable is determining whether or not the activity is an indispensable part of the employee’s job activity, or if it is solely for the benefit of the employer.

    Waiting time. Whether waiting time is hours worked under the Act depends upon the circumstances. If an employee is engaged to wait, it is work time and counts toward the 40-hour workweek. For example, a fireman who plays checkers while waiting for an alarm has been “engaged to wait” and is working during this period of inactivity. On the other hand, an administrative assistant who arrives at work 30 minutes before the start of her workday and reads a book during that period of time is not engaged to wait.

    Meals and breaks. Rest periods of short duration, usually 20 minutes or less, are customarily counted and paid for as working time. Bona fide meal periods (typically 30 minutes or more) generally need not be compensated as work time. The employee must be completely relieved from duty for the purpose of eating regular meals and not be required to perform any duties while eating.

    Travel time. The kind of travel involved determines if the time spent traveling is compensable time. Commuting to and from work is generally not compensable time.

    Training time. Attendance at lectures, meetings, training programs, and similar activities need not be counted as working time only if all four of these criteria are met, namely: It is outside normal hours, it is voluntary, it is not job-related, and no other work is concurrently performed.

Employee Commuting Flexibility Act, 1996

The Employee Commuting Flexibility Act amended the Portal-to-Portal Act to allow employers and employees to agree to the use of employer-provided vehicles for commuting to and from work, at the beginning and end of the workday, without the commuting time being counted as hours worked. In order for this commuting time not to be considered hours worked, the use of the employer’s vehicle must be within the normal commuting area for the employer’s business or establishment, and the use of the vehicle must be subject to an agreement between the employer and the employee or employee’s representative.

Many states laws regulate wages and hours worked. Some states, such as California, have daily overtime requirements. Employees are entitled to the maximum protection afforded under both federal and state law. Therefore, it is important that an employer be familiar with any state or local requirements.

Equal Pay Act, 1963

The Equal Pay Act was an amendment to the Fair Labor Standards Act. It prohibits sex-based compensation discrimination. Under the Act, employees must be performing equal work in jobs that require equal skill, effort, and responsibility, and that are performed under similar working conditions within one establishment. The exceptions to the act include pay that is based on:

    Seniority.

    Merit.

    Quantity or quality of work.

    Any factors other than sex.

Title VII of the Civil Rights Act of 1964 (Title VII), the Americans With Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA)

    All of these laws, discussed in Chapter 3 (The Legal Landscape of Employee Rights), prohibit discrimination in all aspects of employment including pay, job assignments, benefits, and any other term or condition of employment.

The Lilly Ledbetter Fair Pay Act, discussed next, significantly changed the statute of limitations for filing a claim of discrimination.

In addition to prohibiting discrimination against older workers, the ADEA does allow companies to set mandatory retirement age for certain highly paid executives.

Lilly Ledbetter Fair Pay Act, 2009

This law amends Title VII, the ADA, and the ADEA by providing that the period of time for filing a charge of discrimination (either 180 or 300 days) begins when:

1.    A discriminatory compensation decision or other practice is adopted.

2.    An individual becomes subject to the decision or practice.

3.    An individual is affected by the application of a decision or practice, including each time wages, benefits, or compensation is paid.

Effectively, under the Lilly Ledbetter Fair Pay Act, the statute of limitations for filing a charge of discrimination starts each time an employee receives a paycheck based on a discriminatory decision. Each paycheck that delivers compensation that was based on a discriminatory decision is a wrong that is actionable under the equal employment opportunity statues, regardless of when the discrimination began.

Under the law, an unlawful employment practice occurs when “a person,” is affected by a discriminatory compensation decision or practice. A person could include the spouse of a deceased worker claiming that pension benefits are reduced because of a discriminatory decision.

    The Equal Pay Act and the Lilly Ledbetter Fair Pay Act are enforced by the Equal Employment Opportunity Commission. For additional information, visit www.eeoc.gov/laws/.

Discussion Questions

1.    What steps have you taken to ensure that your organization is in compliance with the overtime provisions of the Fair Labor Standards Act, including auditing your positions, reviewing your policies and procedures about overtime, training managers about the law’s requirements, and notifying your employees about their status?

2.    What steps does your organization take to assure that non-exempt employees are not working unauthorized overtime?

3.    What are some of the proactive steps that an organization can take to identify and eliminate pay inequities?

4.    There is often confusion about paying employees for travel time, training time, breaks, and so forth. What does your organization do to ensure that managers are briefed on these subjects?