A common belief is that employees are the business’s greatest asset and greatest liability. While employees are critical to business success, being an employer is becoming more complex by the day. One area of concern, which can become very expensive if not done correctly, is employee pay. Failure in properly paying your employees can potentially erode employee trust and morale and expose the business to significant liabilities. These liabilities can include lawsuits, back wages and interest, statutory fines and penalties, audits and investigations, reputational harm, and more.
Following is a summary of roadblocks to avoid when paying your employees to ensure you pay them properly.
Treating employees as independent contractors.
One of the most common mistakes that we come across is misclassifying employees as independent contractors. There are specific tests that a worker must meet to classify as an independent contractor. One easy way to think of this relationship is actually painfully obvious — an independent contractor should be… independent. Independent contractors run their operations, file their taxes, and control the manner and methods of performed work. To quote a brilliant attorney, “If the role is one where you want to manage the what, where and how of the work, the worker is likely an employee.”
Misclassifying employees: Exempt vs. Non-Exempt status.
Many are familiar with the terms “Exempt” and “Non-Exempt” but don’t actually know what these terms mean. The Fair Labor Standards Act and state minimum wage laws classify employees as either exempt or non-exempt. On paper, “Exempt” means that the employee’s pay is not subject to minimum wage and overtime requirements under those laws. In practice, employers do not have to track the working hours or pay overtime for exempt employees.
An employee must qualify for exempt status under both the federal and state tests. These tests have two parts: The Duties Test and the Salary Basis Test. Each employee must meet both tests in order to be exempt. The Duties Test says that the employee must perform certain job responsibilities based on the type of position they hold. The Salary Basis Test says employers must compensate employees on at least a weekly basis in a predetermined amount. Additionally, that salary must meet the then-current minimum salary threshold. Interestingly, federal and state salary thresholds differ. Currently, the federal threshold is slightly higher, but this will change come January 1, 2021.
It is important to keep up with these changes. An employee that qualified as exempt may not qualify if they do not reach the updated salary threshold, for example.
Improper Commission Structures.
Paying your employees on a salary or production basis can be beneficial for some positions. A commission structure can be a win-win for both the employer and employee. The structure incentivizes employees to generate revenue for the company, resulting in higher pay if they perform well.
But commission structures can be tricky. They must still comply with minimum wage and overtime laws if employees do not qualify as “Exempt.” Employers then have a decision to make. Should they pay employees a base salary meeting the minimum threshold to qualify as exempt? Or, have employees track all hours worked and pay overtime (1.5x) for any hours over 40 in a given workweek? For some employers, the latter option defeats the purpose of the commission structure. For employees paid on a straight commission basis, the employer must true-up the hours worked to at least minimum wage in addition to paying overtime.
Finally, some jobs require extra attention when paying your employees on a commission or production basis. For instance, physician compensation must comply with Stark and Anti-Kickback laws.
Not paying your employees for all “Hours Worked.”
Employers must pay non-exempt employees for all hours worked. While it may seem like a simple question, it is important to understand what qualifies as “hours worked.” In Washington, “hours worked” means “all hours during which the employee is authorized or required, known or reasonably believed by the employer to be on the premises or at a prescribed workplace.” Depending on the circumstances, hours worked can include travel, training, time on-call, temperature checks, or putting on PPE.
Must employees be paid for hours worked or overtime that was not authorized by the employer in advance? The answer here is, yes. One way to mitigate this concern is to clearly state in writing your policy requiring authorization prior to working overtime. Create a disciplinary procedure for employees who violate this policy.
Finally, with the rise of remote work, the US Department of Labor has issued guidance. The guidance clarifies the responsibilities of employers for tracking and paying employees who are working remotely. Employers must exercise reasonable diligence to determine the hours worked. A time tracking system that prevents or discourages employees from accurately reporting time worked is prohibited.
Employers should perform an annual assessment of employee pay and company hiring practices. This ensures that the company is not running afoul of equal pay and discrimination laws. There are a number of laws that govern equal pay and discrimination against employees. These laws include the Equal Pay Act, Title VII, the Age Discrimination in Employment Act, and the Washington Equal Pay and Opportunities Act.
The bottom line is that employers cannot discriminate against employees based on their membership in a protected class. This translates to equal pay – employees must be given equal pay for substantially equal work, regardless of job title. “Equal pay” not only refers to salary, but all other forms of compensation, including bonuses, stock options, vacation, etc.
Assessing company hiring practices and employee wages will allow employers to make adjustments. Any discrepancies in wages that the company cannot adjust should attribute to bona fide differences in education, experience, performance, seniority, or some other merit-based factor. It is also an opportunity for employers to review hiring practices through the lens of diversity, equity, and inclusion. Identify ways to improve these practices to make the workplace a more diverse, equitable, and inclusive space.
You are not alone – Speak with an attorney to discuss your employee pay compliance, classifying employees, pay policies, disciplinary policies, hiring practices, and more. Contact us at 425-250-0205 or firstname.lastname@example.org.
Legal Disclaimer: This article contains general information. Do not view this article as legal advice. Talk with counsel familiar with your unique business needs before taking or refraining from any action.