Penny Wise—Pound Foolish: Wage & Hour Pitfalls

It’s no secret—staying in compliance with all the laws that apply to employment relationships is like trying to round up a herd of cats. Or, here in Alaska—a herd of lynx. Employers have to remain vigilant and monitor the constant influx of changes in federal, state, and local laws all while remaining mindful of employee expectations for the employment relationship and staying true to their company’s core values, mission, and business goals. The one area of compliance that routinely presents a challenge for most employers is wage and hour law. In recent years, the US Department of Labor (DOL) has routinely estimated that 70 percent to 75 percent of employers operating in the United States are not in full compliance with the Federal Labor Standards Act, the primary federal wage and hour law.

DOL’s annual report for fiscal year (FY) 2017 disclosed that over the past five years it has recovered back wages due to more than 1.3 million workers. To put that in perspective, that is more than the population of Las Vegas, Nevada; Orlando, Florida; and Cincinnati, Ohio combined. Over the course of the past five years, the DOL has purportedly recovered more than $1.2 billion (yes—that’s billion with a “b”) on behalf of those workers. The agency asserts it recovered more than $270 million in FY 2017 alone. That equates to an average of $740,000 a day. And, by all accounts, these enforcement efforts at the federal level are on the rise. DOL conducted 3,200 outreach events in FY 2017 in order to educate workers of their wage and hour rights. The agency’s website has undergone significant upgrades and now contains a substantial amount of information to help both workers and employers better understand their rights and obligations; it was visited more than 35 million times in FY 2017. These educational efforts, while welcomed by most employers as they often help clear up misunderstandings employees and employers alike may have about applicable law, are inevitably also going to result in additional claims. In Alaska enforcement is also on the rise. The State of Alaska Department of Labor’s enforcement efforts continue to focus on identifying misclassifications of workers, unpaid overtime and payroll taxes, and unlawful disparities in pay practices. According to DOL, the industries with the most frequent violations continue to be healthcare, construction, agriculture, hospitality, temporary help, and retail. Needless to say, all of these industries are key components to Alaska’s economy. Thus, wage and hour compliance is an important issue for Alaskan employers.

If an employer is found, after a federal or state agency audit or investigation of an employee raised claim, to have violated a wage and hour law, the economic consequences are significant. In addition to any back wages found to be due, the employer often is required to pay interest on the wage assessment, a statutory penalty (that can equal the wages owed essentially doubling the amount due), and, to the extent the employee retained the services of a lawyer to help him/her bring the claim, all reasonable attorneys’ fees and costs incurred.

Given the high probability of a compliance violation or employee claim and the significant potential financial exposure if one does arise, employers are well advised not to skimp on their compliance efforts or to fairly and legally compensate their employees. While it may save a few cents up front to take shortcuts in pay practices and/or not to work with HR or legal professionals to ensure the company’s pay practices pass the compliance tests, those pennies saved can end up costing a pretty significant pound!

To help review a company’s potential exposure for wage and hour issues, the following is a summary of some of the most common pitfalls.

Minimum Wage

Unfortunately, employers cannot just set an hourly rate for their non-exempt/hourly employees and check that issue off the compliance list. Minimum wage rates regularly change on both a federal and state level. And, in some cities such as Seattle, San Francisco, and others, on a local level as well. Indeed, pursuant to Alaska Statute 23.10.065(a), the Alaska minimum wage is adjusted annually for inflation using the Consumer Price Index (CPI) for the proceeding January-December calendar year. The CPI increased 0.4 percent in 2016 and as a result, the Alaska State minimum wage increased to $9.84 effective January 1, 2018. Alaska also recently eliminated the law that allowed employers to pay certain workers with disabilities a sub-par minimum wage rate. Because of the constant changes in minimum wages, employers are encouraged to check their minimum wage rate compliance annually.

Overtime/Voluntary Flexible Work Hour Plan

Most employers are well aware that overtime pay here in Alaska is determined not only on a weekly basis (after 40 hours in a pre-set work week) but also on a daily basis (after 8 hours in a pre-set work day). Even still, many employers still fail to properly track when a work week or work day starts (this occurs frequently for rotational workers) and have difficulty calculating the correct overtime rate if the employee’s regular rate of pay is not adjusted for certain bonus payments or other compensation. There are several resources available to Alaskan employees to help sort through and simplify these issues, including compliance specialists who are available to answer questions at both the DOL and State of Alaska’s Wage and Hour Division. Alaskan employers can also participate in the state’s Voluntary Flexible Work Hour Plan that allows an employer to avoid overtime pay obligations on a daily basis if an employee voluntarily decides to work a consolidated work week (four 10-hour shifts, for example). The devil is, of course, in the details as eligibility for the plan requires pre-approval and strict conformance with the rules that apply to the approved plan, including ensuring that the employee’s schedule once working under the plan does not deviate more than 20 percent from the approved schedule. If a violation occurs, the plan can be invalidated, usually resulting in retroactive overtime liability. But, like with all these issues, such financial consequences can be eliminated or at least reduced if compliance is monitored.

Misclassification of Independent Contractors

Many employers attempt to keep payroll and other overhead expenses down by engaging the services of independent contractors. Unfortunately, though, the majority of those independent contractors are misclassified. The legal test to have a true independent contractor relationship is difficult to meet. To add to the complexity of this issue, there are often different standards that must be met to qualify the person as an independent contractor for wage and hour purposes than there are for workers’ compensation and other legal liability exposure purposes. Calling a person an “independent contractor” does not suffice even if the worker agrees to that classification in writing. The proper classification will depend upon, among other things, the financial and liability risk each party takes on, how the work is directed and controlled, the terms and conditions of the arrangement, how the person is paid and so forth. If a worker is misclassified as an independent contractor, an employer could end up owing back wages, overtime pay, business reimbursements, payroll taxes, penalties, and workers’ compensation premiums. For these reasons, all employers are wise to be diligent to ensure that any independent contractor relationship meets the multiple tests and the relationship is frequently reviewed to ensure compliance. If an employer believes that a misclassification may exist, there are programs under which an employer can self-disclose the misclassification, cure any underpayments, and avoid penalties that an enforcement action would bring.

Misclassification of Exempt Workers

In order for employees to be exempt from minimum wage and hour laws, including overtime pay, they must have certain minimum duties that fall within a specifically legally recognized exemption classification under federal or state law and be paid a minimum salary threshold. While there are specific classes of workers (for example, there are specific exemptions for certain minor workers, shrimp hand pickers, live-in child care workers, licensed guides, newspaper delivery workers, etc.), most exempt employees fall under the general executive, professional, or administrative classifications. Each of these classifications has its own minimum duties requirements. Compliance issues often arise because employers have not taken steps to ensure that their employee is actually performing the tasks required to meet the duties test (relying on the employee’s job description is not enough—employers must check to make sure the employee is actually regularly performing those duties) and/or that the employee is actually receiving the minimum salary amount required to legally be considered exempt. In Alaska this is particularly important because the salary threshold is much higher than the current federal threshold of $455 per work week (although the federal threshold was scheduled to increase to more than $900 per work week in December 2016—that law was legally challenged and has not yet gone into effect). Here in Alaska, the minimum salary threshold is based on a formula that requires the employee to be paid twice the amount he/she would earn if paid minimum wage for a 40 hour work week. Given the current $9.84 minimum wage rate, that equates to $787.20 per work week ($9.84 x 40 x 2). Thus, in general, an Alaskan worker must perform the minimum duties of one of the recognized classifications and make a minimum of $787.20 per work week in order to fall within the state’s general exempt classification. Like the misclassification of independent contractors, any wage and hour violations should be immediately cured and remedial steps should be conducted in a way that minimizes the risk of a statutory penalty assessment.

Off The Clock Work

In today’s society of telecommuting and everyone’s smartphone essentially serving as a virtual office, it has become difficult for employers to prevent off-the-clock work by nonexempt workers. Unfortunately, some employees (and attorneys) take advantage of this reality and the number of class action lawsuits for off-the-clock work has increased. While any “de minimus” (legal jargon for insubstantial or insignificant) time spent by the employee will remain unpaid, it is often the case that little tasks can eventually add up resulting in risk for an off-the-clock claim. In order to avoid the expensive legal risk of an off-the-clock claim or class action, all employers should familiarize themselves with the wage and hour rules for, among other things, travel time, waiting or “on call” time, training time, and time spent putting on/taking off protective gear or other required work clothing and monitor the time employees spend performing any work tasks (such as recordkeeping, answering emails, texts or calls, etc.) before or after their shift begins. Many employers adopt written policies to specifically address these issues and implement mechanisms to reduce liability (such as shutting down remote access to email accounts and systems during non-work hours and requiring employees to sign certifications each week that they have accurately recorded all hours worked).

Tips and Tip Pools

The laws related to tips and tip pools constitute a complex web that is often dependent upon the particular facts of the employment relationship. In general, however, employers in Alaska are not allowed to take a “tip credit” to meet their minimum wage requirements, are required to pay out any collected tips (after deducting any actual credit card fees incurred) on a daily basis (or as soon as practical), and ensure that tips are adequately tracked for payroll taxes and recordkeeping purposes. Employers in Alaska can mandate that tips be pooled; however, only those employees that customarily and regularly receive tips can participate. Who actually falls in that category is where controversy and disagreements often arise but the threshold here in Alaska is currently those that usually receive at least $30 in tips a month. So the owner of a salon or the dishwasher at a restaurant usually wouldn’t qualify. Employees can certainly still voluntarily distribute a portion of their tips to their coworkers, but an employer cannot mandate it. An employer-imposed gratuity (which is different than a voluntary tip) has different rules. Both the DOL and State of Alaska have published very helpful guidelines and FAQs on tips and tip pools that can serve as terrific resources for employers with such pay programs.

Notice and Recordkeeping

Employers have a number of wage and hour notice recordkeeping obligations. These include an obligation to display the current minimum wage poster and post a notice in the workplace (or otherwise sufficiently notify employees) when paychecks will be delivered. Employers must also keep accurate payroll and time records, ensuring that all workers (exempt and non-exempt) record hours worked and, for non-exempt workers, whether and when unpaid meal breaks are taken. There are also rules on how long certain records must be kept. Failure to comply with these notice and recordkeeping requirements can not only subject the employer to statutory penalties that can add up to a significant amount, but the lack of having this documentation in place can also make an employer’s defense against a wage and hour claim much more difficult.

Again, the summary above is only an overview of some of the potential wage and hour pitfalls employers regularly face. And these issues and the applicable rules are often as clear as the slushy mud found on Alaska’s roads during the breakup of the latest snowdrift. It is natural if some do not seem self-explanatory and the answer is not readily apparent. For more information, all employers are encouraged to consult with a HR or legal professional to determine if and how these issues or others apply to their particular workforce and how best to address the same. Additional information is also available at www.dol.gov and http://labor.alaska.gov/lss/whhome.htm.

Renea I. Saade is a Shareholder of Littler Mendelson (www.littler.com), the largest labor and employment law firm worldwide. Renea regularly provides practical employment law advice, counsel, and representation to employers operating in Alaska and throughout the Pacific Northwest. She lives in Anchorage and may be reached at rsaade@littler.com or 907-561-1249. This article is provided for educational purposes only and is not an adequate substitute for legal counsel.