32 SEPTEMBER / OCTOBER 2019 HUMAN RESOURCES Debra A. Mastrian Partner SmithAmundsen LLC dmastrian@salawus.com SmithAmundsen LLC is a Diamond Associate Member of the Indiana Bankers Association. Under the Fair Labor Standards Act, employees must be properly classified as either exempt or nonexempt, and nonexempt employees must be paid overtime (1½ times their regular rate of pay for all hours worked over 40 hours in a workweek). All compensation, including commissions and non-discretionary bonuses, must be included in the regular rate of pay for purposes of calculating overtime, unless the compensation is one of eight specified types of payment (e.g., holiday gift, birthday gift, discretionary bonus and certain profit sharing payments).1 Employees may be classified as exempt if they satisfy one of the specified statutory exemptions, the most common of which are the administrative, executive and professional exemptions. To satisfy these exemptions, an employee has to meet both a salary basis test (be paid at least the minimum required amount of salary each workweek)2 and job duties test (have certain job responsibilities). The title of the position is not relevant. The work that the employee is actually performing on a daily basis is the main inquiry. Two of the most common mistakes made by employers involve misclassification of employees (exempt versus nonexempt) or improper calculation of overtime (did not include all hours worked and/or did not use the correct regular rate of pay). Within the past few years, several financial institutions have faced collective or class action lawsuits under the FLSA, involving these types of mistakes. Earlier this year, an Indiana automotive service Common FLSA Violations Mistakes can be costly business agreed to pay over $1 million in overtime back wages and liquidated damages after an audit by the Wage and Hour Division of the U.S. Department of Labor found that the company failed to include bonuses, commissions, incentive pay and shift differentials in the regular rate of pay overtime calculations. On July 1, the Division issued an opinion letter on the proper calculation of overtime for non-discretionary bonuses (quarterly and annual). A non-discretionary bonus paid, based on the number of straight time hours worked, required the employer to recalculate the regular rate of pay for any period the bonus covered and pay additional overtime. A quarterly bonus paid as a percentage of straight and overtime compensation did not require recalculation of overtime, because the bonus necessarily included all overtime as a matter of arithmetic.3 FLSA cases have been on the rise, in part because employers face “strict liability” for violations, meaning no defense for honest or unintentional mistakes. Good faith can be a defense to avoid certain penalties, such as liquidated damages, but it is not a defense to the underlying wage, back pay and attorneys’ fees awarded under the statute. A self-initiated, internal wage and hour audit is an important risk management tool that can identify potential issues and resolve compliance concerns before they result in wage claims. The audit should be done in conjunction with legal counsel. In addition to reviewing the company’s written pay policies, the company should examine whether employees are properly classified as exempt or nonexempt.
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