Live from #SHRM13: What You Need to Know About Compensation Law
By Anne Manners
Compensation lawsuits are on the rise, labor and employment lawyer Laurence Stuart, managing principal of Stuart & Associates, told SHRM 2013 attendees in Chicago Monday. On the west coast and in “more liberal states” there are all kinds of acceleration penalties and fines that employers can face if they’re found guilty of compensation violations, and in some states, it’s a felony to pay your employees improperly, he explained in his talk titled Auditing Compensation Practices — Common Mistakes and Practical Solutions.
In short, businesses need to ensure they are paying their employees properly under national and state compensation laws because if they aren’t, the consequences can be costly and even devastating.
Exempt vs. Non-Exempt Employees
Whether an employee is classified as exempt or non-exempt must be based on their duties, says Stuart. “Do not assume just because someone is wearing a white collar and sitting in an office that they’re exempt.”
You need to pay close attention to the definition of exempt in the Fair Labor Standards Act and be sure you are classifying each employee correctly and then paying them correctly based on their classification.
Stuart outlined some common mistakes employers make when they’re paying their exempt and non-exempt employees and reminded people what they should be doing to stay on the right side of the law:
- An exempt employee must be paid their salary. “When you’re paying a salary, they get the salary,” Stuart said. You can’t dock exempt employees’ pay for part-day absences because when you do you destroy their exempt status and owe them overtime. You must be careful not to make other improper deductions from an exempt employees paychecks as well. You need proper, signed authorization or a valid garnishment order if you are going to withhold pay.
- A non-exempt employee must be paid for all hours worked. That includes time when employees are expected to be on-call and time when they are taking calls, texts or emailing from a smartphone. “I think we’re about to see an enormous amount of litigation around this issue,” said Stuart. Some companies have taken away company-issued smartphones and remote access from non-exempt employees in order to deal with this issue and avoid breaking the law.
- A non-exempt employee’s time sheets must match their pay records. This is easy if you’re handling everything through a digital system, but if you’re still using spreadsheets or some other manual method of tracking time, it’s easy to make errors, says Stuart.
- Non-discretionary payments made to non-exempt employees must be included in calculating overtime pay. That means if you pay regular bonuses that are scheduled and automatic, that compensation must be taken into account when calculating the “regular rate” for determining overtime pay, says Stuart.
Independent Contractors and Temps
When determining whether a worker is an employee or an independent contractor, you must consider the nature and scope of the work they’re performing and the length of the relationship they will have with your company, says Stuart.
Employers need to be aware that the IRS and state tax agencies sometimes use different standards for independent contractors and state agencies are actively auditing businesses these days, says Stuart. “You can call someone a contractor as much as you want, but it doesn’t make it so.”
Different states also have different laws governing how long an employee can work for a company as a temp. Remember, they’re called temps because they’re status is supposed to be temporary, says Stuart.
The Equal Pay Act
This federal law requires employers to give men and women the same pay when they are at the same level doing the same job.
It seems ridiculous to many people, but Stuart says he still talks to employers who say they pay men more for reasons such as “they have a family to support and women don’t.” He reminds employers that it doesn’t matter what your intentions are, you can’t pay men and women differently when they are at the same level and doing the same job.
Other Compensation Law Issues to Consider
There are a number of other compensation errors employers commonly make that can land them in legal trouble, says Stuart.
- 401(k) plan mismatches. If your company makes a match to employees’ 401(k) plans based on a percentage of their pay, you need to be sure to include overtime in that calculation. If you’re not paying overtime correctly then you’re also not making 401(k) matches correctly, says Stuart.
- Payday frequency. Different states have different laws about how often employers have to pay their employees. If you have employees in a state that requires twice-a-month paydays, you can’t pay your employees monthly, says Stuart.
- Direct deposit practices. Some states require employers to allow employees to opt out of direct deposit and receive a live check on payday instead, says Stuart.
- Timing the last paycheck. When you fire an employee, you have a specific amount of time to pay them and that amount of time varies by state. Failure to pay that last paycheck on time can sometimes be a misdemeanor, says Stuart.
What to Do if You’ve Broken a Compensation Law
The best and safest plan is to fix things moving forward and to go back and make corrections, says Stuart. It’s a good idea to consult a lawyer and get advice about communicating changes and corrections with employees.
MyBackOffice is an HR administration outsourcing firm that specializes in providing startups and small businesses with access to the kind of high-quality HR services and group benefits that usually only the biggest employers enjoy. Contact us to learn how the MBO team can save you time and hassle, allowing you to focus on what you love the most — building your company.