by Gary S. Fealk

The federal Fair Labor Standards Act (FLSA) regulates the payment of overtime. Here are four common overtime mistakes.

Mistake #1: misclassifying employees

Some employers classify workers as independent contractors and pay them by way of the 1099 process. Employers must be very careful when treating workers as independent contractors. Courts look at whether an individual is "economically dependent on the business to which he renders service or is, as a matter of economic fact, in business for himself," and they use a variety of factors to determine whether an individual is an employee for FLSA purposes. If you use independent contractors, make sure you know which factors courts consider, and ensure workers are properly classified.

Mistake #2: exemption confusion

Paying an employee a salary does not necessarily make him exempt. Most employees who are exempt from overtime fall under the executive, administrative, or professional exemptions (also known as the white- collar exemptions), which require payment on a salary basis. However, for the white-collar exemption to apply, an employee must meet the duties test and be paid a minimum salary of $455 per week. There are some exemptions (e.g., bona fide computer professionals and outside salespersons) that do not require that employees be paid a salary.

Mistake #3: deducting from salaried employees' pay

Be very careful when making deductions from a salaried employee's pay. An employee is paid on a "salary basis" if he receives a predetermined amount of pay at least weekly and his pay is not subject to reduction because of the quality or quantity of work. You may make deductions from an exempt employee's pay only in specific situations set forth in the regulations. Here are some general rules for making sure you don't jeopardize employees' exempt status:
 

1. Make sure exempt employees' pay is the same every week, regardless of hours worked.
2. Use nonmonetary means of disciplining exempt employees, and avoid disciplining exempt employees for attendance or performance problems by docking their pay.
3. Never dock exempt employees' pay for partial day absences.
4. Make sure exempt employees are paid for all days they are ready, willing, and able to work, and avoid making deductions based on lack of work.

Before deviating from those rules, make sure a specific exception in the regulations applies. Also, make sure you have a written policy that allows you to correct mistakes if you discover that you have made an improper deduction.

Mistake #4: calculating the regular rate

Make sure you properly calculate employees' regular rate of pay. Overtime is calculated at 1.5 times an employee's regular rate, which is not necessarily the same as the hourly rate. If an employee's only compensation is his hourly rate, the regular rate is the same as his hourly rate, and the overtime rate is 1.5 times that amount. If you provide any compensation over and above straight hourly wages, calculating the regular rate becomes more complicated. Make sure you know which bonuses or other compensation must be included in the calculation of the regular rate.

Bottom line

Determining which employees are exempt and complying with overtime regulations are complicated tasks. If you have not done so recently, consider auditing your pay practices to make sure you are in compliance. Also, keep an eye out for new regulations because the U.S. Department of Labor (DOL) has proposed regulations that would make it easier for employees to qualify for overtime.

Gary is an attorney and shareholder at Vercruysse Murray, P.C., in Detroit. You can reach him at gfealk@vmpclaw.com or 248-433-8708.