Commission-Paid Employees Entitled to Minimum Wage or Overtime Protection?


Companies often seek to limit their risks in business, as well as limit their overall payroll expenditures. What simpler way to limit payroll risks than by implementing an “eat what you kill” compensation system that provides an employee the opportunity to work on a pure commission basis? However, employers should beware of violating the Fair Labor Standards Act (FLSA) and state wage hour laws as there are very real and potentially expensive consequences.
Generally, the FLSA requires employers to pay an overtime premium to employees of one and a half times the employee’s regular rate of pay for all hours worked in excess of 40 within a workweek and to also pay at least the minimum wage for all hours worked. However, there are certain exceptions to these requirements under the FLSA. One particular area of confusion is when an employee is a commission paid employee as the FLSA has carved out several exceptions.

• White Collar Exemption:
The “White Collar” exemption generally includes executives, administrators, and professionals. In order to qualify for this exemption, certain thresholds need to be met. First, the employee must be paid a salary of at least $455 per week (this is expected to substantially increase with new federal regulations that are anticipated to become effective in 2016). Once the salary level test is met, the employee must satisfy the duties test for their respective position. For example, a salesperson advising a client on the proper product to purchase might be an administrative employee. A sales manager, paid by commission, who supervises two or more employees, might qualify under the executive exception. Lastly, a lawyer who is paid a percentage of the fees that he collects likely falls under the professional employee exemption.
Regardless of the position, an employee must receive a salary, or guaranteed draw, of at least the required weekly amount. Therefore, a pure commission paid employee cannot be exempt under the “White Collar” exemption within the FLSA.

• Outside Sales Exemption
In order to qualify for this exemption, the employee’s primary duty must be the sale of goods or services or the rental of facilities and the employee must be customarily and regularly engaged away from the employer’s place of business. The second prong of this inquiry is where most commission paid employees are disqualified. For example, a general salesperson that maintains an office at the company’s facility, but is required or expected to meet with customers, generally does not fit under the outside sales exemption and would be protected by the minimum wage and overtime provisions of the FLSA. Conversely, if an employee is an outside salesperson, the company does not have to pay him/her a salary or minimum wage.

• Employees Paid Commissions by Retail Establishments
This exemption requires that the employee must be employed by a retail or service establishment, defined as establishments 75 percent of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry. An employee at a retail establishment requires the employer to demonstrate the employee’s regular rate of pay exceeds one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked. Further, the employer must show that more than half the employee’s total earnings in a representative period (at least one month and no more than one year) must consist of commissions. Once these requirements are met, the employer may compensate the employee on pure commission without overtime premiums.
While the FLSA has many exceptions and requirements, states generally have wage hour laws that are more restrictive than the FLSA. The various requirements pose challenges to employers as they can face immense liability for violating the FLSA or state laws. Therefore, it is imperative for employers, and employees, to verify the company is satisfying the FLSA’s and state’s minimum wage and overtime requirements for commission paid employees.

Source: Bennett L. Epstein, Do You Need to Pay Minimum Wage or Overtime to Your Commission-Paid Employees? (September 21, 2015), http://www.natlawreview.com/article/do-you-need-to-pay-minimum-wage-or-overtime-to-your-commission-paid-employees.

Lawyers watch wage-and-hour activity pick up as lawsuits proliferate

Business First of Columbus – by Cindy Bent Findlay For Business First

Friday, December 8, 2006

The law is clear on many wage-and-hour employment issues, but it seems many employers are still confused. And lawyers are becoming
more aware of the potential for recovery after a few well-publicized, large settlements and awards in class-action wage-and-hour cases.
As a result, class-action and collective wage-and-hour lawsuits are proliferating rapidly in federal and state courts, say attorneys for
employees and employers.
“I don’t think there is any increase in instances where employers are running afoul of these statutes. I’d say lawyers are getting a better
understanding of individuals’ rights,” says Bob DeRose, a partner at Barkan Neff Handelman Meizlish LLP in Columbus.
DeRose, a plaintiffs’ attorney whose firm has multiple wage-and-hour cases pending in Ohio and federal courts, says he sees the suits
spawning from many industries and just about in every form.
Wage-and-hour issues
Misclassification of who should be exempt from overtime pay and how overtime is calculated are typical examples.
“Years ago people thought if they were paid a salary, that fact alone meant they were not entitled to overtime for hours worked over 40,”
says John Marshall, whose Columbus firm, Marshall & Morrow LLC, also represents plaintiffs.
“We’re getting an increasing number of calls from people who are concerned about whether they should be paid overtime because of
increased public consciousness about the subject.”
Marshall has helped plaintiffs file wage-and-hour suits in Ohio and federal courts, including a case where technicians alleged that Digital
Dish, a satellite television company based in the Holmes County town of Millersburg, did not pay overtime or a legal minimum wage for
hours worked during training days. The case is pending in the U. S. District Court for the Southern District of Ohio.
Other pending Ohio cases include complaints against Lowe’s Home Centers claiming the giant hardware retailer improperly calculated
overtime for certain managers in Ohio stores.
Wage-and-hour lawsuits are not new, but more are being filed as collective or class actions.
Some defense attorneys quietly complain that plaintiffs’ attorneys have simply seized on the issue as the newest frontier in which to wield
highly profitable class-action lawsuits as weapons against employers.
“This is a place where the legal community hasn’t paid great attention, but it seems like employers are either negligently or in some cases
intentionally not following the law, and that’s part of the reason there’s more activity – the legal community’s eyes and ears are now open
about it. In my opinion, that’s a good thing,” says Marshall.
Rules have changed
Congress changed rules on what types of employees are exempt from overtime pay eligibility in 2004, creating some fluidity in this area of
labor law. But some say a spike in cases was coming before those changes because of the complicated nature of wage-and-hour law.
“I’ve known people at the wage-and-hour division of the federal government who feel comfortable they can walk into almost any place and
find some technical violation somewhere,” says Douglas Paul, an employment attorney with Buckingham Doolittle & Burroughs LLP’s
Cleveland office.
Marshall said there are cases in which employers who docked the pay of salaried employees for missed attendance suddenly face paying
those same employees overtime, because docking their pay changed the employees’ exempt status.
Overtime cases building
The cases are rippling over more industries in an increasing wave, says Mark Knueve, partner in the Columbus office of Vorys Sater
Seymour and Pease LLP.
In addition to the retail industry, Knueve says he’s observed cases in the financial, health-care and insurance industries in which relatively
high-salaried employees are disputing overtime pay and other wage-and-hour issues.
“It’s on the radar screen of most labor and employment lawyers where five years ago I don’t think we would have been involved in many, if any, overtime cases,” says Marshall, whose firm is handling many cases of this type.
Lawyers say there seems to be no end in sight to employment cases and that Ohio is no exception to the trend.
“The bigger these cases get, the more chance for recovery of substantial fees, the more likely we are to see these,” says Paul.

Cindy Bent Findlay is a freelance writer in Columbus.
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Unpaid Internship Programs

The Fair Labor Standards Act (“FLSA”) sets forth the general requirement that all employers pay employees minimum wage and overtime pay. Under a narrow exception to this rule, an unpaid internship can comply with the FLSA if the student intern qualifies as a “trainee.” In other words, employers don’t need to compensate students who qualify for this unpaid category. To determine whether an individual is a “trainee,” the Department of Labor considers these six factors:
1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion, its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Although more than half of college students today have participated in unpaid internship programs, these programs tend to violate the FLSA when employers use internships as a way to complete work tasks and not educational experiences for the student. Bottom line-the more an unpaid internship resembles an educational program for the benefit of the intern, the more likely it is to qualify under the FLSA’s narrow exception.
Source: Susan Miner Parrott, Are You Paying Your Summer Intern Correctly? (May 28, 2015),http://www.jdsupra.com/legalnews/are-you-paying-your-summer-intern-33073/.
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What Happens in a Wage and Hour Investigation?

As we’ve previously discussed, the Department of Labor Wage and Hour Division (WHD) has stepped up its enforcement initiatives over the past few years to pursue civil money penalties, back wages, and liquidated damages when violations of the Fair Labor Standards Act (FLSA) are found.  Specifically, Section 11(a) of the FLSA authorizes the WHD to enter an employer’s premises to investigate the employer’s compliance with the Act’s requirements.  Most of these investigations begin after an employee submits a complaint.  But the WHD can also initiate investigations by strategically targeting certain industries (like the restaurant industry, for example) or by examining particular geographic areas.

Here are the main steps in an investigation:

1. INITIAL CONFERENCE. The investigator will first contact the employer to set up an initial conference to explain the review process, or they may just show up unannounced.

2. EXAMINE RECORDS. Next, the investigator will examine records to see if any exemptions apply.  This includes records relating to the employer’s involvement in interstate commerce, government contracts, and the dollar volume of an employer’s annual business transactions.  The investigator will then look for any miscalculations or inaccuracies by examining personnel time records and payroll records dating back at least two years.  If willful violations of the FLSA are reported, records for the past three years may be examined.

3. EMPLOYEE INTERVIEWS. The investigator will interview certain employees to verify their payroll records and inquire into the employer’s pay policies.

4. ENFORCEMENT ACTION. If violations are found, the investigator will meet with the employer to discuss corrective actions and request any back wages owed to the employees for minimum wage and overtime violations.

Source:  DOL Fact Sheet http://www.dol.gov/whd/regs/compliance/whdfs44.htm; BURKE COSTANZA & CARBERRY LLP, Department of Labor Investigations – Basis for an Employer, Jan. 31, 2013 http://www.bcclegal.com/labor-employment-blog/2013/1/31/department-of-labor-investigations-basics-for-an-employer. 

Employees in the Health Care Industry

Misclassification cases are commonly brought by employees in the healthcare industry.  Although the Fair Labor Standards Act (FLSA) provides exemptions from overtime pay for certain employees, determining whether an employee is exempt from overtime pay is extremely fact-specific.  One exemption that is often incorrectly applied to employees in the healthcare industry is the “learned professional” exemption.  This exemption is met when (1) the employee earns a salary of at least $455 per week; (2) the employee has a primary duty of performing work that involves advanced knowledge (or predominantly intellectual work); (3) the advanced knowledge is in the field of science or learning; and (4) the advanced knowledge is customarily acquired by extended courses of specialized intellectual instruction.

Although certain job positions in this industry will typically fall under this exemption, the bottom line is that employers should not presume that a professional license will automatically qualify an employee as exempt.  An employee’s education or training alone is not determinative—employers must consider the employee’s actual day-to-day job duties, rather than their job title.  For example, registered nurses (RNs) will generally satisfy the “duties test” for the learned professional exemption.  That is, if the RN is actually performing the typical duties of a nurse, which involve discretion and judgment.  If, however, an employee is engaged in non-traditional nursing roles, the exemption may not apply.  On the other hand, licensed practical nurses (LPNs) are generally not exempt.  Because this position does not require a specialized advanced degree, these employees typically do not fall under the learned professional exemption, regardless of past training or experience.

Source: Thomas N. Shorter & Tom O’Day, Proper Classification Under the Fair Labor Standards Act: Time To Prepare for More Wage & Hour Litigation In Health Care, THE NATIONAL LAW REVIEW, Oct. 30, 2014, http://www.natlawreview.com/article/proper-classification-under-fair-labor-standards-act-time-to-prepare-more-wage-hour-.

Working Off the Clock

The Fair Labor Standards Act (“FLSA”) requires employees to be paid for all hours worked.  This includes the common practice of working off the clock.  It may be a 5 minute request by an employer at the end of the day, checking voicemails before starting a shift, or running errands while not clocked in, but the practice is still illegal.  Employees must be compensated for all “hours worked,” whether clocked in or not.

Even when it is not required, employees frequently continue working at the end of the regular work day.  They take home assigned projects, finish waiting on a table, or complete other tasks after the regular working hours.  But for FLSA purposes, time spent doing work when an employer has reason to believe an employee is working and the employer is benefitting from that work constitutes “hours worked.”  This means employers may still have to compensate employees for time spent working, even when it is not requested by the employer.  Employers that do not want work to be performed have a duty to exercise control and enforce any policy regarding the hours worked by employees.  Without more, a mere rule prohibiting such work will not suffice.

Unpaid Internships

The Fair Labor Standards Act (FLSA) allows unpaid internships for “for profit” private sector employers in certain circumstances.  For example, an unpaid internship is legal if it “is for the benefit of the intern” and “similar to the training which would be given in an educational environment.” However, the growing appeal of practical or “real world” experience on a resume has made unpaid internships a common practice, and both students and organizations are beginning to speak out.

On one hand, some students feel compelled to “take whatever they can get,” viewing the lack of compensation as an equal exchange for the internship’s valuable educational experience.  But not all students can afford to provide free labor while missing out on a paid job.  Advocates for paid internships also point out that unpaid internships create a lack of incentive in both students and employers.  For instance, the incentive to teach may not be as great if the employer has nothing to lose.  In turn, students may not be as motivated to contribute their time without receiving financial benefits.

Source:  Megan Weyrauch, What Students Think of Your Unpaid Internships, ULOOP, OHIO STATE BUSINESS NEWS (September 19, 2013),  http://osu.uloop.com/news/view.php/99044/what-students-think-of-your-unpaid-internships. 
 

Restaurant/Bar Industry: Arizona Employee Questions Employer’s Illegal Tip Policy

Last week, an Arizona news column reported about a restaurant that requires its employees to donate their tips to charity one day a month.  Can employers have this much control over employees’ tips?  Under Arizona wage statutes, the answer is no.  But aside from violating Arizona state law, this practice could also violate the Fair Labor Standards Act (“FLSA”).  It all depends upon whether a “tip credit” system was used.

Here’s a little background information on “tip credits.”  Under the FLSA, tips are the sole property of the employee.   Covered employees must make at least $7.25 per hour, the federal statutory minimum wage.  Provided certain conditions are met, employers may pay “tipped employees” at an hourly rate that is less than the federal minimum wage by crediting a portion of employees’ tips against their minimum wage obligations.  The difference between the required cash wage (at least $2.15) and the federal minimum wage is the maximum tip credit an employer may claim.  If the employee’s tips and wages combined do not meet at least the hourly federal minimum wage, the employer must make up the difference.

So if an employee’s hourly rate is below $7.25, any income from tips would supplement the hourly rate to raise it to the federal minimum wage requirement.  It would be unlawful for an employer to withhold tips in this situation because it would result in the employee being paid less than minimum wage.  However, employers may divert an employee’s tips when an employee’s hourly rate is equal to or greater than $7.25.

Some states, like Ohio, have chosen to increase the minimum wage above the federal requirement.  Ohio’s current minimum wage is $7.95 per hour for non-tipped employees and $3.98 per hour for tipped employees.  This wage rate applies to the employees of businesses with annual gross profits greater than $292,000 per year.

Source: Georgann Yara, When boss dips into tips, it raises a red flag (September 6, 2014) http://www.azcentral.com/story/money/business/career/2014/09/06/tips-wages-state-federal-law/15216185
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Restaurant Industry Employers

Over the past few years, violations of the Fair Labor Standards Act (“FLSA”) were found in nearly all of the 9,000 restaurants under investigation by the Department of Labor.  To address the rampant wage and hour violations in the restaurant industry, the Department of Labor has stepped up its enforcement initiatives to pursue civil money penalties, back wages, and liquidated damages when violations are found.

Here are a few of the recurring violations:

1. Overtime violations: Non-exempt employees are entitled to receive overtime pay at one and one-half times their regular rate for all hours worked over 40 in a workweek.  Employers violate this provision by paying employees “straight time” wages for overtime hours, or incorrectly calculating overtime.  The overtime requirement applies to both tipped and non-tipped employees.

2. Illegal tip pools: Employers may require tipped employees to contribute tips to a general pool to be shared with non-tipped employees.  Employees who do not “customarily and regularly” receive tips (dishwashers and cooks, for example) cannot be participants in a valid tip pool.  Nor will the tip pool be valid if management employees are participants. Employers must notify employees of any required tip pooling arrangements.

3. Deductions: Employers may deduct a percentage from employees’ tips to pay charges imposed by credit card companies when a customer’s tip is charged to a credit card.  However, this deduction cannot reduce employees’ wages below the minimum wage.  Employers many not deduct charges for phone lines or other administrative costs from the employees’ tips.

4. Dual jobs: When employees spend a substantial amount of time (more than 20 percent) performing general preparation work, employers may not take a tip credit for the time spent on those duties.  This means that a tipped restaurant employee may be entitled to the full minimum wage rather than the reduced tipped credit rate if a significant amount of time was spent performing duties unrelated to the tipped occupation, such as bathroom cleaning or food preparation.

Source:  Nathan Pangrace & Anne Prenner Schmidt, Department of Labor targets restaurant industry employers (September 16, 2014), http://www.lexology.com/library/detail.aspx?g=3abf7b31-db9f-4355-9fa2-1967d471169b.
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On-Call Employees

Under the Fair Labor Standards Act (“FLSA”), employees must be compensated for actual work performed, whether on or off the job site.  But with the many technology advancements in the workplace, employers can now effectively run their businesses around the clock by keeping employees “on-call” after regular business hours, requiring them to work only if needed.  Hospital employees, for instance, have to remain in the hospital premises when on-call.  Other employees may be able to leave work when on-call, but are still subject to restrictions.  For example, on-call firefighters are often not required to remain at the station, but they may have only a 30 minute time frame to respond to a call.  Under the FLSA, on-call employees may be eligible for compensation—but only under certain circumstances.  Thus, employers have struggled with determining when to pay employees for working on-call.  Here are the relevant principles to keep in mind:

Under the general test set forth in Skidmore v. Swift & Co., 323 U.S. 134 (1944), an employee that is “engaged to wait” is entitled to compensation, but an employee “waiting to be engaged” is not.  The regulations interpreting the FLSA provide some insight, requiring compensation for on-call time when (1) employees are required to stay on the premises, or (2) when employees must remain so close that they cannot use their time away from the premises for their own purposes.

It’s easy to see how this is a confusing area of wage and hour law.  Realistically, it is difficult to apply a simple 2-part test to the countless job positions in today’s workforce.  These cases are very fact-specific and are typically decided on a case-by-case basis.  Courts have relied on various factors in determining whether on-call time is considered work time.  These factors include: whether the employee had actually engaged in personal activities during the on-call time; the flexibility of trading on-call responsibilities with another employee; agreements between the parties that provide some amount of compensation for waiting time; the frequency of calls; and whether the fixed time limit for response was unduly restrictive.

Source:  Joseph U. Leonoro, On-Call Time – When Is It Compensable? (July 13, 2012), http://www.sjlaboremploymentblog.com/when-is-on-call-time-compensable/.
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