Hindsight is 20/20, but that won't do you any good after being served with a lawsuit for not paying an employee deserved overtime. As an employer, you cannot be too careful in keeping yourself informed as to what laws, rules and regulations apply to your business and to your employees. This is especially true when it comes to the payment of overtime pay when required by law.
Avoiding overtime pay for your employees can save your business some money in the short-term, but the consequences of not paying overtime when required by law could be severe. Here are some suggestions of ways to avoid some of the most common missteps employers take just prior to finding themselves on the wrong end of a lawsuit.
Misstep Number 1: Hiring Only 'Independent Contractors'
Many employers, especially in the beginning stages of their business, are tempted to hire workers and pay them as independent contractors instead of employees. The logic is that it is easier and more cost-effective to simply treat every worker as an independent contractor because such workers are not entitled to overtime pay, daily work breaks and lunch breaks, the employer is not responsible for certain tax withholdings and is not required to maintain worker’s compensation insurance. But at the very least, this logic is flawed, and at the very worst, this logic will leave your business paying those employees a lot more than a few hours of overtime pay.
There is a lot more to hiring an independent contractor than simply agreeing with the worker that they are an independent contractor, having them sign an agreement to that effect and paying them via a 1099 form. In fact, the courts are not solely guided by how you and your employee define the working arrangement, but instead will look to a set of factors to determine whether the person you have hired is to be classified as an employee or an independent contractor.
The factors that a particular court will use vary from state to state so becoming familiar with your state’s laws is a good first step. But your state is not the only government entity that has an interest in how your worker’s get paid. That’s right, the IRS is keeping an eye on this too. The IRS has identified 20 factors that should be used to evaluate the validity of an independent contractor classification, including flexibility of schedule, method of payment and the worker’s risk of profit or loss.
Do not find yourself stumbling toward a lawsuit because of this misstep, get informed before the lawsuit gets served. For more information on the difference between an independent contractor and an employee watch this video and read this article.
Misstep Number 2: Classifying All Employees as Being Exempt to Avoid Paying Overtime
Similar to hiring only “independent contractors,” classifying all of your employees as exempt to avoid paying overtime is a favored tactic of uninformed employers who think this will save them some funds in the short-term. But all too often this approach comes back to bite the employer in the form of one or more lawsuits from current and former employees claiming they were not paid all that they were owed for the hours worked. And it is not uncommon for these types of lawsuits to take on a snowball effect—the assumption being, where one employee was misclassified others probably were too. Paying chunks of unpaid overtime to multiple employees, not to mention potential fines from the state, can add up quickly and more than one financially stable business has found itself falling on hard times quickly and harshly because of this misstep. Don’t let this happen to you.
It is a common misconception that by simply paying an employee a salary, as opposed to an hourly wage, the employee is automatically classified as an exempt employee who is not entitled to overtime pay. Paying an employee a salary does not, in and of itself, exempt that employee from being entitled to overtime pay. In fact, a salaried employee is just as entitled to overtime pay as an hourly employee is if the salaried employee does not qualify as being exempt under applicable law. Know the exemptions that may apply to your employees and don’t fall into the trap of making misguided assumptions.
The Federal rule as set forth in the Fair Labor Standards Act (FLSA) states that exemptions are narrowly construed against the employer, which means that the ultimate burden of proving a claimed exemption rests with the employer. Thus, because the penalties can be steep, thoroughly reviewing the exact qualifications that apply to the specific exemptions, and whether those are met by the job duties performed by your employee, is very advisable.
Common exemptions identified by the FLSA include commissioned sales employees, computer professionals and executives. However, each state has its own exemptions, rules and regulations that may also apply. After reviewing the information from the FLSA, check with your state labor department to see what exemptions are available and what the requirements are to qualify. Stay out of the courtroom by making sure you classify your employees correctly.
Trying to employ tactics that will seemingly allow you to avoid paying your employees overtime is risky, and can end up costing your business much more down the road. The better approach is to know the applicable rules and laws and make sure you are not subjecting your business to the unnecessary risk of a difficult to defend lawsuit. If paying overtime remains a concern, try instituting sound management practices that will help assure that the work that needs to get done by your employees is completed before the overtime hours kick in. For helpful hints on keeping your great employees working hard for you, check out this article.