Top 5 small business wage and hour mistakes

Top 5 mistakesWage and hour claims can be financially devastating for small businesses when economic experts calculate substantial damages. Human Resources specialist and president of North Carolina based Employers Advantage LLC, Deanna Arnold, shared her view of the top five wage and hour mistakes small businesses make. I have incorporated case examples relevant to each type of mistake.

The Fair Labor Standards Act and state wage and hour laws dictate that employers must keep thorough records on employees, follow minimum wage laws, and pay for overtime work. Arnold points to the importance of this topic for small business owners because the cost of paying unpaid wages and legal fees associated with wage and hour suits can bankrupt a small company. The case examples highlight the role of damages in each type of wage and hour claim.

First, all people who work for a small business are either employees, or independent contractors. It is important for employers to correctly classify individuals who perform work for them, as misclassifying employees as independent contractors can result in substantial damages. Arnold states that “the penalties associated with this practice are far beyond what needs to be paid for being in compliance from the beginning.”

A complaint filed in Manhattan in March against Rainbow Limo claims the employer misclassified drivers as independent contractors. The plaintiffs are seeking damages for unpaid overtime and compensation for unauthorized deductions. The alleged damages include compensation for being paid less than minimum wage and thousands of hours of overtime pay.

Some small businesses will make deductions from an employee’s pay to cover cash shortages or store purchases. It is important that these deductions are made within the guidelines of the law. Many states require that an employee authorize a deduction in writing to make it legal. Making unauthorized deductions can lead to substantial damage awards.

The Oregonian reports that Portland dancers are suing a strip club for violating the FLSA by not paying minimum wages, and for unauthorized deductions for dancers who didn’t pay penalties within 24 hours for “kickbacks”. This included fines for late arrival, fees for stage rental and security, or as penalties for interacting with a bouncer in a way not allowed by management. The plaintiffs are suing for $32K in back wages, and $25K in additional damages.

Misclassifying non-exempt employees as exempt is a common factor in wage and hour suits, and can be a costly mistake for small businesses. Non-exempt employees are usually paid an hourly rate and must be compensated for overtime work. Some salaried employees are entitled to overtime pay, which leads to a common mistake small businesses make in misclassification. An employee being eligible for overtime exemption (or not) is based on the duties and responsibilities of the position, not how the compensation is paid.

Joel J. Greenwald, Esq. writes about New York’s Saigon Grill, which paid $4.6 million in damages based on just 36 employees. The case focused on delivery workers failing to be paid in compliance with federal and state labor laws for over a decade. Greenwald frames the case an example of the kind of impact an overtime pay suit can have on a relatively small business, explaining that plaintiffs are including “claims for unpaid overtime to wrongful discharge complaints to increase potential payouts.”

To account for any company property that an employee has after his or her termination, small businesses may threaten to hold the final paycheck. This can be problematic because most states have laws that regulate the process of providing an employee’s final paycheck, ranging between a 24 hour timeframe and the next pay cycle.

In this case, a former worker files charges against non-profit for libel and withholding his final paycheck after the plaintiff was accused of stealing materials. Although the charges were dropped, the employer did not release his final paycheck. The plaintiff is claiming damages between $100K and $200K for lost wages, harm to his reputation and ability to find employment as well as emotional distress and attorney’s fees.

The final mistake Arnold’s points to that small businesses make is broader – not fully understanding the FLSA and state wage and hour laws. This is relevant because ignorance of the law is not a defense. Employers can be held personally liable in a wage and hour suit, so it is crucial for small businesses to understand how the FLSA and state laws apply to their business. As is clear in the case examples above, claims in a wage and hour case often involve allegations of multiple FLSA violations. Obtain labor law posters at Labor Law Compliance Center.

Relevant resources

Labor Standards Information for New and Small Businesses’ from the Department of Labor Wage and Hour Division

Learn more about the role of economic experts in wage and hour claims from EmployStats director Dwight Steward, Ph.D.

Visit the Wage and Hour page of the National Federation of Independent Business

Get a second view on wage and hour mistakes with ‘5 Wage Law Mistakes Employers Need to Stop Making’ from Brittney Helmrich

 

J.R. Randall

J.R. Randall is an economist who resides in the Bay Area. He focuses his interest on range of economic topics. He has interest in deep sea fishing and art.