Five Common FLSA Mistakes Every Business Owner Should Avoid

When most think of wage and hour laws, they think about the Fair Labor Standards Act (FLSA). That’s a good start. The FLSA covers most employers and sets out the requirements for complying with timekeeping, minimum wage, and overtime requirements. 

There are too many quirks in the FLSA to cover every rule, nuance, and exception. The critical thing to remember is that there are two kinds of employees: exempt and non-exempt. 

Most employees are non-exempt. When an employee is non-exempt, the employer and the employee must accurately track time. It also means the employee is entitled to an hourly minimum wage and overtime at 1.5 times his regular rate for every hour worked over 40 in a week. 

An exempt employee is not entitled to overtime. Except for some sales roles, most exempt employees are salaried employees. But just because you pay your employee a salary, it does not mean the employee is automatically exempt. To be exempt, employees must perform very particular primary job duties. In other words, you have to ask yourself whether the employee’s most essential tasks align with the exemption you’re claiming. 

The FLSA is complicated. The terms “exempt” and “non-exempt” sound foreign. Sophisticated employers make mistakes. Even the Department of Labor, the agency responsible for enforcing the FLSA, has been accused of FLSA violations against its own employees.

For companies with remote employees, an already complicated law can become even more intimidating because of the ambiguity of how the FLSA applies to remote work. This is understandable. The FLSA is a product of the 1930s. It’s a depression era, pre-internet law written more for the cubicle, factory, and assembly line than the remote work world. Nobody who initially drafted the FLSA could have anticipated that an employee might be able to peruse work emails right before bed or become easily distracted by binge-worthy shows on their smartphones.

There are so many ways to violate the FLSA. Let’s look at a few of the most common mistakes while considering how state laws can also affect wage and hour compliance for employers, especially in the remote work environment. 

Problem #1 - Assuming that because you pay your employee a salary, he’s not entitled to overtime

When a company pays an employee a salary and assumes the employee is exempt, there’s a good chance it’s making a significant mistake. This assumption often leads to what is probably the most common FLSA claim: a “misclassification” claim. It’s called a misclassification claim because it involves “misclassifying” employees as exempt when they should be considered non-exempt and entitled to overtime. It’s not to be confused with a misclassification claim where an employer has wrongly classified an employee as an independent contractor when he is an employee (another common mistake). 

Let’s explain in more detail what is generally required to claim exempt status.  

First, in most situations, an employer must pay the employee a salary for an employee to be considered exempt. It has to be a fixed and guaranteed amount. Many employers mistakenly use the term salary when paying an hourly amount, with an understanding that the employee will probably work at least 2,000 hours per year. The employer then calculates this amount as the job’s “salary.” But this is not a salary because it does not have an underlying guarantee where the employee earns a certain amount every week, even if he only works very little during the week. Failing to pay a salary means potentially losing the exempt status and having to pay overtime.

Second, the salary paid by the employer must pass what is called the “salary threshold” test. This means that the employee’s salary must meet or exceed the amounts required by law. If you’re claiming the highly compensated employee exemption, you must also consider whether an employee’s total overall compensation, including the guaranteed salary amount, is enough to claim the exemption. For both the standard salary threshold and highly compensated employee exemption, there are set amounts. However, state laws sometimes require even higher salary amounts to claim exempt status.

The bottom line is this: paying a salary is not enough. You must pay a high enough salary to meet the requirements of whatever exemption you claim. In Arkansas, it’s one number. In California, it’s a higher number. So even if you’re complying with the FLSA’s salary threshold figure of $35,568 for 2022, which applies to most exemptions outside of the highly compensated employee exemption, you still might get nailed under state law if you don’t complete your due diligence. 

Third, you must ensure your employee’s primary duties meet the specific exemption you claim. Most companies should check that their exempt employees meet the executive, administrative, or professional duties test. This means that what employees do, not just how they are paid, dress, or what job title they carry, aligns with the exemption. 

This can be tricky in the remote work environment. You’re not lurking over an employee’s digital shoulders if you have a healthy level of trust. But how do you prove or disprove that an employee’s primary “duties” meet the FLSA’s exemption requirements if that employee brings a case or the Department of Labor audits you? 

A job description may be helpful. But the Department of Labor wants to know what the employee does - not just what the job description says he does. Suppose an employee claims he was sitting at his desk doing basic clerical work rather than managing people and making important business decisions. It can be difficult to prove otherwise in a remote environment.

So what’s my rule for avoiding exempt misclassification liability in a remote setting? I keep it simple. If there’s any question about whether the employee is exempt or non-exempt, treat them as non-exempt, and ensure they accurately record their hours so you can pay overtime. Just because an employee might qualify for an exemption doesn’t mean you have to claim it. There may be times in business when it makes sense to take risks. Wage and hour compliance, in my opinion, is not one of them. You don’t want your company being accused of “wage theft,” especially considering there is potential personal liability under the FLSA. Those kinds of risks don’t make sense. 

Problem #2 - Bad Timekeeping Practices

In an office or factory setting, knowing when your employees are working is pretty straightforward. Your employees clock in and out near the entrance and exit. For remote employees, it’s more complicated. It’s easy to check your phone after hours or jump on the company laptop while eating lunch. This flexibility is an advantage. But it can also create liability under wage and hour laws because employees might embellish the amount of time worked or fail to record all time worked. 

Legally, employers should be more concerned about underpaying than overpaying employees because it’s what can get a company into trouble. You need to make sure you have policies and practices in place that keep your employees from working overtime unless specifically allowed in writing. When employees work unapproved overtime, you should pay them for it but take disciplinary action. Don’t set a bad precedent on timekeeping practices. If you discover remote employees are not working, you should discipline or terminate the employee. But don’t dock their pay. That’s asking for legal problems. 

Your policies must be clear that non-exempt employees must not work “off the clock.” For all remote employees, exempt and non-exempt, setting your work schedule to safeguard employee time is essential. While working more than 40 hours in a workweek may provide increased productivity in the short term, my experience is that it eventually leads to burnout and inefficiency. That doesn’t help the employee or the company. 

You should encourage a healthy work-life balance where employees only work overtime if they get written permission. You should also invest in quality timekeeping software so that your employees can accurately record time. 

In a remote work environment, you could consider draconian strategies like locking company devices after certain hours. You could also ask employees to refrain from installing work applications on their mobile devices. Employees, however, generally do not appreciate this and would prefer to retain flexibility and autonomy. In other words, you can take these steps if you’re concerned about wage and hour liability or need corrective measures to stop an employee from working off the clock. But prematurely or reactively doing so could hurt your relationship with your employee. 

Instead, it’s probably better to focus on creating a culture where there is no expectation for hourly employees to work after regular work hours. This starts from the top. Managers must be careful not to send emails or texts and make phone calls after hours. When they send an email, they should not expect a response until the next day. Preferably, managers should set up email to not arrive in an employee’s inbox until regular work hours. This is easy to do if you use Microsoft Outlook or Gmail. 

Problem #3 - Travel Pay

Many remote employees are remote because they constantly travel. This raises the critical issue of whether employers should pay for travel time. The analysis is too complicated to get into detail here. But here are the basics of what you need to know. Usually, employers need not pay non-exempt employees for ordinary commuting time if it’s at the start or end of the workday. Other travel likely does need to be paid. 

For example, if an employee travels between two construction sites during the workday, you must pay for the travel time. If you have an employee who travels and you do not pay him for it, you should pause and look at the issue. The employee’s time and travel expenses could be a problem. This analysis can be incredibly complicated for long-distance travel that overlaps with regular work hours and multiple time zones. Lean towards paying your employees for travel time whenever in doubt. 

Problem #4 - Forgetting that the FLSA is Not the Only Show in Town

The FLSA is a part of the wage and hour puzzle. But it’s not the whole show. This is especially true in a remote environment. States, and even some cities, have unique ways of doing things with wage and hour laws. These laws are usually similar to the FLSA, but plenty of nuances exist to trip up unsuspecting employers. For instance, when an employer is required to pay overtime in California might not be the same as when required to pay it in Ohio. Many states have overtime requirements that are not apparent. 

Some states also have different requirements for minimum wage. You need to be aware of this. You’ll need to ensure that you meet each state’s requirement about posting or providing the required notices on wage and hour laws. In other words, think of the FLSA as the floor instead of the ceiling. Be careful because your employees might be even more protected under state or city laws. 

Problem #5 - Failing to Act in Good Faith

The Fair Labor Standards Act’s minimum wage and overtime laws are complex. So are the state wage and hour laws you must handle when your company embraces remote work. The complexity means that even well-intentioned companies make mistakes. But that doesn’t mean you should put your head in the sand. 

Under the law, correcting mistakes is always better than covering them up. Those who do not act in “good faith” or “willfully” violate the FLSA drastically increase their liability. So how do you prove that you acted in good faith and that any mistakes you made were not willful? Most often, it means proving that you provided accurate facts to a qualified accountant and attorney, got a written opinion on how to comply with the law, and followed the advice. 

If your violation is considered “willful,” your employees will likely have claims that go back three years rather than two. If you cannot show you acted in “good faith,” your employees will probably be entitled to liquidated damages, doubling the employee's award. Under the FLSA, there is also a high likelihood you’ll be forced to pay the other side’s attorney fees. This means that wage and hour liability can add up quickly. 

Let’s say your company has employed someone for three years but failed to pay about $10,000 in overtime yearly. If you acted in good faith and did not willfully violate the law, you’ll probably owe that employee around $20,000. But if you did not perform any investigation or just turned a blind eye to the FLSA, the statute of limitations may become three years, and the employee will probably get liquidated damages, which doubles the award. This means the employee may get $60,000 plus attorney fees and costs. 

In other words, if you turn a blind eye, a $20,000 problem turns into a $60,000 problem. If multiple employees are involved, you can add a few zeroes to the end of that figure. To make matters worse, your executives, managers, and owners can be held personally liable in some situations. That’s why getting an accountant and attorney involved is essential if there are questions about timekeeping practices or exempt status.  

Time spent with your accountant and attorney on the front end of a wage and hour issue is less stressful and more cost-effective than time spent trying to litigate or settle on the back end.