Just Compensation: Common FLSA Violations that Small Businesses Make

The Fair Labor Standards Act (FLSA), passed in 1938, was designed to protect American workers. But do you know how the FLSA impacts your small business? 

In recent years, FLSA lawsuits have been on the rise, often aimed at small businesses that made simple mistakes rather than intending a violation. Simple mistakes can have you facing workplace investigations, penalties, and legal fees. 

Consider this article as your crash course in how the FLSA impacts small business owners in Arizona and how you can avoid violations that negatively impact your business.

What Is the FLSA?

The FLSA created the U.S. Wage and Hour Division and set specific standards regarding the workplace. These standards include: 

  • Setting a federal minimum wage
  • Requiring employers to pay the federal or the state minimum wage (whichever is higher)
  • Requiring overtime pay for non-exempt workers who work more than 40 hours per week
  • Requiring employers to maintain records of employee time and pay
  • Limiting the number of hours that minors can work
  • Distinguishing between exempt and non-exempt employees, as well as independent contractors 

Since the FLSA was enacted nearly a century ago, specific provisions have continued to evolve. For example, minimum wage continues to increase at both the federal and state levels, which can have a dramatic impact on the way you run your business.

Common FLSA Violations

Not every FLSA violation is intentional, but that doesn’t mean you won’t be held responsible if a violation occurs. Some of the most common FLSA violations we see include:

Treating Non-Exempt Employees as Exempt

One of the most common errors is the misclassification of exempt and non-exempt employees. Exempt employees don’t receive the same protections under the FLSA as non-exempt employees and are therefore excluded from overtime pay, minimum wage requirements, and other protections.

  • Exempt employees (for example, an individual performing executive work is generally not eligible for overtime pay, a minimum hourly wage or hours tracking) must earn at least $684 per week (or $35,568 annually) according to the U.S. Department of Labor’s standards for 2022. 
  • Non-exempt employees (for example, an individual performing as a cashier is generally eligible for overtime pay, a minimum hourly wage and hours tracking) must be paid overtime, as well as the standard minimum wage. 

For business owners, this means ensuring that non-exempt employees receive their overtime pay and earn minimum wage (which is currently $12.80 for employees in Arizona).

One of the biggest violations we see with this portion of the law is employers wanting to avoid paying overtime wages by designating their employees as exempt. There are very specific rules for qualifying as an exempt employee and the Department of Labor knows this and is regularly auditing businesses to ensure they are in compliance. 

Treating Contractors as Employees

Employees and contractors occupy very different roles. Contractors have control over when and where they work. They are only paid for the work they do. Business owners must also provide a contractor with Form 1099 in order to file taxes. 

On the flip side, employers have full responsibility for direction and control of their employees. Annually, employers must distribute a Form W-2 that records income and taxes that have been withheld. 

Problems creep in when business owners try to exert control over contracted workers in a similar way they do their employees. If you place too many requirements on your contractors, they may be reclassified as employees. If this is the case, they’ll be entitled to worker’s compensation insurance, employee benefits and other legal protections. This is another area of the FLSA that is heavily abused and DOL officials have increased their audit frequency to find employers who are out of compliance. Penalties and fines, , including backwages, payroll taxes, employee benefits can be significant and costly.

Improper Record Keeping

Employers are required to maintain demographic data on each employee, including: :

  • Employee’s full name and Social Security number
  • Address, including ZIP code
  • Birthdate, if younger than 19
  • Sex and occupation
  • Time and day of the week when employee’s work week begins
  • The basis on which employee’s wages are paid (e.g., “$9 per hour” or “$684 a week,” or “piecework”)
  • Regular hourly pay rate
  • Total daily or weekly straight-time earnings
  • Total overtime earnings for the workweek
  • All additions to or deductions from the employee’s wages
  • Total wages paid each pay period
  • Date of payment and the pay period covered by the payment

For non-exempt employees, you must also track:

  • Hours worked each day
  • Total hours worked each workweek

These records should be kept for inspection by the Department of Labor for at least three years. Failing to do so can result in fines or even imprisonment.

Ignoring Overtime Laws

The FLSA entitles non-exempt employees to overtime pay equal to 1.5 times regular pay (also known as “time and a half”) for any hours worked over 40 hours per week. 

Some employers attempt to redefine the workweek as 50 or 60 hours, but this is illegal and can result in hefty penalties.

Failing to Pay for Work Breaks

According to the Department of Labor, employers are not federally required to provide lunch or meal breaks. However, when employers do offer short breaks (usually five to 20 minutes), employees must be compensated at the same rate as when they are working. 

Meal breaks (usually 30 minutes or more) are considered to be the employee’s time and do not count for compensation.

Incorrectly Docking the Pay of an Exempt Employee

Exempt workers must be paid a predetermined amount, but employers can dock their pay for days off and for safety violations. However, employers may not dock employee pay for absences caused by jury duty, absences that last less than a full workday, or for poor job performance. 

Likewise, you cannot dock pay of exempt employees when your workplace is closed for a holiday or for a weather-related emergency.

Request a Free Consultation

Failing to abide FLSA requirements can result in severe penalties. Focus HR is a Tucson-based, woman-owned company offering unparalleled human resources support to keep you FLSA compliant and your employees happy and engaged. If you want HR assistance from leading experts, request a free consultation by filling out the form below. 

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