WASHINGTON — Dry cleaners and other small-business owners who do not stay compliant with federal, state and local wage and hour laws, including changing regulations, are putting their business at unacceptable, and avoidable, risk.
This was the message of Bradford Kelley and Mike Paglialonga of Littler Mendelson P.C., a national law firm that specializes in labor and employment law. The pair recently spoke in the presentation “Wage and Hour Compliance for Small Business,” hosted by the National Federation of Independent Business (NFIB).
In Part 1 of this series, we examined the differing minimum wage laws on the federal, state and local level. Today, we’ll continue by exploring the rules around overtime. While some are common sense, owners can become lost in the weeds with rules that might not be as clear.
Going Into Overtime
“The Fair Labor Standards Act (FLSA) requires for pay for time-and-a-half over 40 hours in a workweek,” Kelley says. “So, this means that, for anybody who goes beyond those 40 hours, you've got to calculate overtime.”
The 40-hour workweek might not be something that employers can just take for granted, Kelley adds.
“There have been a lot of proposals recently,” he says. “There was a proposal in the Senate recently to reduce the 40 hours down to 32, to get it down to a 32-hour workweek.”
The prospect of artificial intelligence becoming part of the workplace is also under consideration, Kelley says.
“If AI provides so much productivity value, and it saves on efficiency and all that, it brings in a question,” he says. “How does that impact the 40 hours if you're able to get your work done in a much faster way because of the use of technology?”
The Fair Labor Standards Act was first developed in 1938, Kelley says, “where the idea of new technology, especially AI, wasn't even on anyone's radar.”
Much like minimum wage laws, the federal government has set a base level for overtime, where states and some municipalities can increase the requirements of business in the workers’ favor.
“There are states that have adopted greatly higher and more stringent rules for overtime,” Kelley says, “including daily overtime after eight hours in a day, and double-time after 12 hours. There are also requirements that arise, commonly under prevailing wage state laws, that have shift differentials for working certain hours, as well as requirements for overtime on holidays or working on a seventh day.”
The overtime rules we currently have were created during an American crisis, Kelley says.
“This law was adopted in 1938 and overtime’s clear and stated intention was to create jobs,” he says. “This was a job creation rule, because instead of having to pay somebody time-and-a-half for working what the government said was an unhealthy number of hours, it encourages employers to hire additional workers. In the late 30s, that was a critical piece. This has continued for the last nearly 90 years, and it continues to change.”
Regular Rate of Pay
One of the most important facets of calculating overtime pay is first coming up with the employee’s regular rate of pay.
“With regular rate of pay, there are rules for what amounts must be included and amounts that are allowed to be excluded,” Kelley says. “We all are pretty familiar with health insurance or sick leave that are allowed to be excluded from regular rate, but the list goes quite a bit on from there.”
According to information provided by the U.S. Department of Labor, other items excluded from the regular rate include:
- Gifts and payments in the nature of gifts on special occasions
- Payments for occasional periods when no work is performed due to vacation, holidays, or illness; reimbursable business expenses; and other similar payments
- Discretionary bonuses
- Profit-sharing plans
- Employer contributions to benefit plans
- stock options
Exempt vs. Non-exempt
An employee being paid on a salary basis does not automatically mean that they are exempt.
“That is one of the toughest issues we see,” Kelley says. “The employers will say, ‘Oh, I'm paying them a salary. I don't need to worry about their work hours.’”
The crux behind wage and hour laws when they pertain to employees is the type of work that employee does for the company.
“When we're talking about overtime exemptions, our most common are the white-collar exemptions,” Kelley says. “Those are for administrative employees who are supporting the business and have discretion with the business.”
This includes professionals such as doctors, lawyers, CPAs and others are operating with a high degree of knowledge and training, as well as executives who are running businesses, managing and supervising others and running departments and areas, and then certain sales positions.
Kelley gives the example that attorneys would be considered a white-collar exemption from overtime, but their paralegals might not. “It’s a finer line as to whether their duties are sufficient,” he says.
Salary Thresholds
The overtime rules also take into account how much that employee makes per year, and that amount has recently changed and is going to change again in the near future.
Effective July 1, 2024, the overtime salary threshold increased “to the equivalent of an annual salary of $43,888 and will increase to $58,656 on Jan. 1, 2025,” according to a release from the U.S. Department of Labor.
“While legal challenges to the new rule are expected,” Kelley says, “it's really important not to wait for the legal challenges to be resolved before assessing how the overtime rule will impact your operations and you should consider potential changes.”
Because federal law and guidelines can be affected by politics, Kelley stresses that owners should make a point to keep track.
“It's tricky because you see this pendulum swing so often,” he says. “There was a Trump overtime rule. There had been an Obama overtime rule that had been shot down. Now there's the Biden overtime rule. And, depending on what happens in the election, we may see more changes. It's a very uncertain environment.”
“State laws around the country have set higher thresholds for these salary requirements for a number of years,” Paglialonga adds. “In New York state, we're already above the $58,000. In New York City, it’s $62,400 for the same threshold. That line changes every year in New York State, and now it's set to the urban inflation index.”
Clocking In?
Determining when an employee is “at work” is also proving to be a bigger challenge than it has been in the past.
“There are a lot of risks from this we're seeing from working from home,” Paglialonga says. “This could be non-exempt and hourly employees responding to emails, having text messages with their supervisors. That could just be a couple minutes, but when they come in with a claim and show, ‘Yeah, my supervisor sent me 600 texts last year asking about work,’ it becomes a tough thing to defend. What we look at is whether we are paying employees for working ‘off the clock.’”
Breaks should also be taken into account when it comes to overtime.
“State laws require that certain rest periods and certain meal periods be provided, but federal law generally doesn't require even a basic lunch period,” Paglialonga says. “However, under the federal hours-worked rules, short 15-20 minute breaks are supposed to be common and treated as compensable time, whereas a ‘bona fide meal period’ that is completely relieved of duties is not. Employees can leave the work site. They're able to use their time. Those generally do not need to be compensated.
“Short breaks” are a grey area, Paglialonga notes.
“We always get the question of, ‘well, what about 25 minutes? What about 23? What about 28?’ There isn't a great perfect line or a perfect rule. The federal regulations are very high level, and there hasn't been a clear definition.”
We’ll conclude this series on Thursday, when we’ll look at where independent contractors, interns and others fall in the wage and hour spectrum, along with ideas for employers who want to stay on the happy side of the discussion. For Part 1, click HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
