Mistakes Were Made: How Small Businesses Commonly Get Into Trouble with the Fair Labor Standards Act.

• Author: Chamberlin, Hunter
• Position: Labor and Employment Law

Over my legal career, I have represented many small businesses. Very often, that representation becomes necessary after a business finds itself embroiled in employment litigation battles over alleged violations of the myriad employment laws or regulations. Such actions are costly and burdensome to small businesses, and distract them from their core activities. More often than not, these civil actions could be avoided if the business had adopted and followed some basic protective policies and procedures.

While there are many opportunities for a small business to err, I have developed an insight into some of the more common errors that small businesses make, which inexorably lead to litigation. In this article, I discuss three of the most common mistakes that these businesses, and the lawyers representing them, can avoid making and thereby minimize the risk of charges and litigation. The first error is a failure to learn, understand, and adhere to the complicated federal minimum wage and overtime regulations contained within the Fair Labor Standards Act (FLSA) and its attendant U.S. Department of Labor (DOL) regulations. The second common error is misclassifying an employee as an independent contractor in an effort to avoid overtime and other benefits obligations. Finally, small businesses often fail to stay aware of changes in employment law, which is influenced more than other areas by regulatory changes and court decisions.

Exempt Employees and Non-Exempt Employees Under the FLSA

One of the most common mistakes by employers is requiring, permitting, or not preventing their employees from working in excess of 40 hours in a workweek without receiving overtime. Often, this mistake arises out of the belief that an employee is "exempt" because he or she is paid a fixed salary as opposed to an hourly rate. This is a dangerous assumption.

The federal minimum wage and overtime requirements are codified in the FLSA at 29 U.S.C. [section]203, et seq. In addition to those statutes, the DOL has promulgated myriad regulations interpreting, limiting, and expanding the FLSA. The result is a complicated set of laws and regulations with numerous exemptions and exceptions. Many small businesses lack the time or resources to learn and understand these rules. If you advise such clients, here is how you could help them understand the rules.

* The FLSA Minimum Wage and Overtime Requirements--The FLSA is codified at 28 U.S.C. [section]201, et seq. There are two main operative sections to the FLSA, [section]206 (the minimum wage), and [section]207 (pertaining to overtime requirements). Section 206 mandates that employers must pay their employees no less than a specified hourly amount per 40-hour workweek. While that rate is currently $7.25 an hour, per Florida's minimum wage law, (1) in Florida, it is $8.25. Section 207 provides that employers may not employ employees who are engaged in commerce, or the production of goods for commerce, or employees who are employed in an enterprise engaged in commerce or the production of goods for commerce for longer than 40 hours per week unless the employee is paid one and half times their regular rate for each hour, or portion of an hour, in excess of 40. (2)

* Certain Employees Are FLSA Exempt --The FLSA includes various exemptions to the minimum wage and overtime requirements. Such exemptions include "any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center" (3); "any employee employed in the catching, taking, propagating, harvesting, cultivating, or farming of any kind of fish, shellfish, crustacea, sponges, seaweeds, or other aquatic forms of animal and vegetable life ..." (4); "any employee employed in connection with the publication of any weekly, semiweekly, or daily newspaper with a circulation of less than [4,000] the major part of which circulation is within the county where published or counties contiguous thereto." (5); and "any switchboard operator employed by an independently owned public telephone company which has not more than [750] stations ...". (6)

However, one of the most common exemptions, and the exemption that may be the most likely to catch a small business in a violation, is the executive, administrative, or professional exception, codified at [section]213(a)(1). Section 213(a)(1) exempts from the minimum wage and overtime provisions any employee who is employed in "a bona fide executive, administrative, or professional capacity...." (7) It also exempts academic administrative personnel, teachers in elementary or secondary schools, and outside sales personnel. Many small business owners may erroneously believe their employees fall within the 213(a)(1) exception when in fact they do not. As a result, the business may require its employees to work in excess of 40 hours in a week while not paying them overtime for those hours.

To avoid wage and hour complaints, it is critical for businesses to have a strong knowledge of which of their employees are within the 213(a)(1) exemptions.

One of the most valuable resources for small businesses and the lawyers who counsel them to understand the scope of the FLSA's exemptions is the Code of Federal Regulations. The DOL has promulgated rules interpreting the FLSA, including guidance on which employees fall within and outside 213(a)(1) exemptions. Below is a summary of that guidance.

1) Executive: Section 29 C.F.R. [section]541.100 defines "employee employed in a bona fide executive capacity." In order to qualify, the employee must meet four criteria. First, the employee must be paid on a salary basis in an amount set by a complicated formula. (Under [section]541.600(1), the current minimum salary is $455 per week). Second, the employee's primary duty must be management of the company or a department of the company. It is not enough to simply refer to an employee as a "manager." Titles alone will not satisfy this requirement. Instead, "the [c]ourt must examine the surrounding facts to determine whether [the employee's] most critical duties to the enterprise were his [or her] exempt managerial duties." (8) Third, the employee must regularly direct the work of two or more subordinates. Finally, the employee must either have the explicit authority to hire or fire other employees, or the ability to make recommendations as to the hiring...