Legal Speak By Renea I. Saade
Penny Wise—Pound Foolish: Wage & Hour Pitfalls Comply with labor laws now to save later
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t’s no secret—staying in compliance with all the laws that apply to employment relationships is like trying to round up a herd of cats. Or, here in Alaska—a family of lynx. Employers have to remain vigilant and monitor the constant influx of changes in federal, state, and local laws all while remaining mindful of employee expectations for the employment relationship and staying true to their company’s core values, mission, and business goals. The one area of compliance that routinely presents a challenge for most employers is wage and hour law. In recent years, the US Department of Labor (DOL) has routinely estimated that 70 percent to 75 percent of employers operating in the United States are not in full compliance with the Federal Labor Standards Act, the primary federal wage and hour law. DOL’s annual report for fiscal year (FY) 2017 disclosed that over the past five years it has recovered back wages due to more than 1.3 million workers. To put that in perspective, that is more than the population of Las Vegas, Nevada; Orlando, Florida; and Cincinnati, Ohio combined. Over the course of the past five years, the DOL has purportedly recovered more than $1.2 billion (yes—that’s billion with a “b”) on behalf of those workers. The agency asserts it recovered more than $270 million in FY 2017 alone. That equates to an average of $740,000 a day. And, by all accounts, these enforcement efforts at the federal level are on the rise. DOL conducted 3,200 outreach events in FY 2017 in order to educate workers of their wage and hour rights. The agency’s website has undergone significant upgrades and now contains a substantial amount of information to help both workers and employers better understand their rights and obligations; it was visited more than 35 million times in FY 2017. These educational efforts, while welcomed by most employers as they often help clear up misunderstandings employees and employers alike may have about applicable law, are inevitably also going to result in additional claims. In Alaska enforcement is also on the rise. The State of Alaska Department of Labor’s enforcement efforts continue to focus on identifying misclassifications of workers, unpaid overtime and payroll taxes, and unlawful disparities in pay practices. According to DOL, the industries with the most frequent violations continue to be healthcare, construction, agriculture, hospitality, temporary help, and retail. Needless to say, all of these industries are key components to Alaska’s economy. Thus, wage and hour compliance is an important issue for Alaskan employers. If an employer is found, after a federal or state agency audit or investigation of an employee raised claim, to have violated a wage 38
and hour law, the economic consequences are significant. In addition to any back wages found to be due, the employer often is required to pay interest on the wage assessment, a statutory penalty (that can equal the wages owed essentially doubling the amount due), and, to the extent the employee retained the services of a lawyer to help him/her bring the claim, all reasonable attorneys’ fees and costs incurred. Given the high probability of a compliance violation or employee claim and the significant potential financial exposure if one does arise, employers are well advised not to skimp on their compliance efforts or efforts to fairly and legally compensate their employees. While it may save a few cents up front to take shortcuts in pay practices and/or not to work with HR or legal professionals to ensure the company’s pay practices pass the compliance tests, those pennies saved can end up costing a pretty significant pound! To help review a company’s potential exposure for wage and hour issues, the following is a summary of some of the most common pitfalls. Minimum Wage: Unfortunately, employers cannot just set an hourly rate for their non-exempt/ hourly employees and check that issue off the compliance list. Minimum wage rates regularly change on both a federal and state level. And, in some cities such as Seattle, San Francisco, and others, on a local level as well. Indeed, pursuant to Alaska Statute 23.10.065(a), the Alaska minimum wage is adjusted annually for inflation using the Consumer Price Index (CPI) for the proceeding January-December calendar year. The CPI increased 0.4 percent in 2016 and as a result, the Alaska State minimum wage increased to $9.84 effective January 1, 2018. Alaska also recently eliminated the law that allowed employers to pay certain workers with disabilities a sub-par minimum wage rate. Because of the constant changes in minimum wages, employers are encouraged to check their minimum wage rate compliance annually. Overtime/Voluntary Flexible Work Hour Plan: Most employers are well aware that overtime pay here in Alaska is determined not only on a weekly basis (after 40 hours in a pre-set work week) but also on a daily basis (after 8 hours in a pre-set work day). Even still, many employers still fail to properly track when a workweek or work day starts (this occurs frequently for rotational workers) and have difficulty calculating the correct overtime rate if the employee’s regular rate of pay is not adjusted for certain bonus payments or other compensation. There are several resources available to Alaskan employees to help sort through and simplify these issues, including compliance specialists who are available to answer questions at both the DOL and State of Alaska’s Wage and Hour Division. Alaskan employers can also participate in the state’s Voluntary Flexible Work Hour Plan that allows an employer to avoid overtime pay obligations on
a daily basis if an employee voluntarily decides to work a consolidated work week (four 10-hour shifts, for example). The devil is, of course, in the details as eligibility for the plan requires pre-approval and strict conformance with the rules that apply to the approved plan, including ensuring that the employee’s schedule once working under the plan does not deviate more than 20 percent from the approved schedule. If a violation occurs, the plan can be invalidated, usually resulting in retroactive overtime liability. But, like with all these issues, such financial consequences can be eliminated or at least reduced if compliance is monitored. Misclassification of Independent Contractors: Many employers attempt to keep payroll and other overhead expenses down by engaging the services of independent contractors. Unfortunately, though, the majority of those independent contractors are misclassified. The legal test to have a true independent contractor relationship is difficult to meet. To add to the complexity of this issue, there are often different standards that must be met to qualify the person as an independent contractor for wage and hour purposes than there are for workers’ compensation and other legal liability exposure purposes. Calling a person an “independent contractor” does not suffice even if the worker agrees to that classification in writing. The proper classification will depend upon, among other things, the financial and liability risk each party takes on, how the work is directed and controlled, the terms and conditions of the arrangement, how the person is paid and so forth. If a worker is misclassified as an independent contractor, an employer could end up owing back wages, overtime pay, business reimbursements, payroll taxes, penalties, and workers’ compensation premiums. For these reasons, all employers are wise to be diligent to ensure that any independent contractor relationship meets the multiple tests and the relationship is frequently reviewed to ensure compliance. If an employer believes that a misclassification may exist, there are programs under which an employer can self-disclose the misclassification, cure any underpayments, and avoid penalties that an enforcement action would bring. Misclassification of Exempt Workers: In order for employees to be exempt from minimum wage and hour laws, including overtime pay, they must have certain minimum duties that fall within a specifically legally recognized exemption classification under federal or state law and be paid a minimum salary threshold. While there are specific classes of workers (for example, there are specific exemptions for certain minor workers, shrimp hand pickers, live-in child care workers, licensed guides, newspaper delivery workers, etc.), most exempt employees fall under the general executive, professional, or administrative classifications. Each of these classifications has its own minimum duties requirements. Compliance issues often arise because employers have not taken steps to ensure that their employee is
Alaska Business | April 2018 www.akbizmag.com