For a practical example, recently Power Line Services was sued in federal court in Texas (Thurmon, et al. v. Power Line Services Inc., et al.) under the terms of the Fair Labor Standards Act, alleging the company took improper deductions from the paychecks of exempt employees, thereby proving those employees were actually non-exempt.

Apparently, the company’s policy was to deduct from employee’s paychecks any amounts they charged on their company credit card but for which they failed to provide an itemized receipt. The lawsuit claims these deductions ranged from $3.44 for a lost receipt from a convenience store to $2,500 for repairs to a company issued truck.

The company moved for a dismissal, but their motion was denied.

The problem is, back in 2006, the US DOL issued an opinion letter that declared “any employer policy that requires deductions from the salaries of its exempt employees to pay for the costs of lost or damaged tools or equipment” results in improper deductions that invalidate the employees’ classification as exempt. While the opinion letter addressed a specific situation related to lost or damaged tools, many legal experts expect the DOL to invalidate any exempt employee payroll deductions that could be viewed as a penalty for violating company policy.

Does this mean you have to just “let it go” when your exempt employees commit an infraction? Not at all. You are permitted to discipline employees for violating your policies. You just can’t dock their pay. (At least, not if they’re classified as exempt and you’d like them to stay that way.)

Otherwise, you risk having not only the employee you docked, but all similarly-situated exempt employees reclassified as non-exempt… and you potentially being on the hook for overtime pay. As satisfying as it might be on one level to dock their pay and recoup money you might think they’ve cost you, the docking will cost you a lot more in the long run.

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You know, I’ve seen time and attendance software that will automatically calculate hours worked and export time records directly to your payroll software or service… starting at less than $100.

One wonders how little DCP is devoting by way of resources for payroll processing for it to take them over two months to pay the stagehands.

Do they really think it’s better to pay the legal fees of defending against a lawsuit like this? Wouldn’t it have been smarter to just ante up for some decent time tracking software, and pay your people on time?

I’m just sayin’…

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Of course, you don’t have to specify non-exempt employees’ compensation as an hourly wage. Many clerical-level office employees, for instance, are paid a salary — or at least, it’s called a salary. And if they work their usual 40 hours a week, they get that “salary”… but if they work more, they get time-and-a-half overtime based on their equivalent hourly rate… and if they work less, they probably find their pay docked for the hours they were gone. Which, in the final analysis, makes their pay more like hourly and less like an actual salary, since in reality they are paid based simply on the number of hours they work.

Did you know there’s an alternative?

The Fluctuating Work Week

In a dark, seldom-visited corner of the Fair Labor Standards Act (FLSA) lurks a provision commonly known as the “fluctuating work week” method of calculating overtime (FWW).

In order to use the FWW for calculating overtime, you and your employees have to follow certain criteria:

• The employee’s hours must fluctuate from one week to the next. The law doesn’t specify what exactly this means, but it does say typically this would apply to workers who do not have a set schedule of hours from one week to the next. If someone has a regular assigned schedule but occasionally works some overtime, they may not be eligible. (You’ll want to check with your employment law advisor to make sure your employees qualify.)

• You must pay the worker a straight salary for all the hours they work in a week, regardless of how many (or how few). For instance, you can’t dock their pay if they leave early one day for a doctor’s appointment. As with your salaried exempt workers, as long as they work even part of a week, you have to pay them their full salary for the week. This is one of the downsides of a FWW arrangement: you have to pay the employee the entire week’s salary whether they worked a full 40 hours or not.

• The salary must be enough that the employee earns the equivalent of minimum wage or more. In other words, assuming your state uses the Federal minimum wage and the employee can work as much as a 55 hour week, their weekly salary must be at least $398.75 (before withholdings). (That’s the current Federal minimum wage of $7.25 an hour multiplied by 55 hours. Note, however, the actual minimum wage in your state may be higher.)

  You’ll want to make sure your salary covers this minimum wage requirement based on the maximum number of hours the employee might reasonably work during a week. Allow some leeway; it’s probably best to not play it too close to the line or you risk slipping below minimum if the employee puts in a particularly long week.

• You and your employee need to both understand and agree to this compensation arrangement.

So what about overtime?

The employees covered by a FWW arrangement are still overtime eligible. So what do you do about overtime pay when they do work over 40 hours in a week?

That does require a bit of calculation — and this is another one of the downsides of the FWW method: the extra calculations you have to go through whenever one of these employees works over 40 hours a week.

In most states, for someone who’s paid by the hour, you pay them their regular hourly rate for the first 40 hours. Then you take their hourly rate and multiply by 1.5, then pay them that amount for all hours worked over 40 in that week. (Note that some states have slightly different rules for how to calculate overtime.)

For someone covered by a FWW agreement:

• Divide their salary by the number of hours they actually worked that week. This gives you their “equivalent hourly rate.” Note this must be no less than $7.25 an hour (or more, depending on the minimum wage effective in your locale).

• Multiply one-half of this equivalent hourly rate by the number of hours worked over 40 that week. This is the employee’s overtime pay.

So why would anybody adopt this crazy scheme?

Given the fact you have to pay the employee a full week’s salary regardless of how few hours they work… and give the extra calculations you have to go through to figure overtime when they work over 40 hours… you may be wondering why on earth any employer would agree to such a cockamamie arrangement.

There are a couple of reasons:

• It can be important for some employees’ morale to be considered “salaried” or “white collar” workers, but because of the nature of their work they are not exempt from overtime regulations. This allows you to pay them on a salaried basis, but still keep on the right side of the law. It’s a win-win: good employee relations and compliance with overtime regulations.

• If these employees typically work 40 hours or more a week, this method of overtime calculation can represent a potentially significant cost savings to you. Since they’re paid a fixed salary for all hours worked, their equivalent hourly rate goes down the more hours they put in. And their overtime pay is simply one-half that equivalent hourly rate.

  (Of course, you need to balance this against the fact that if they work less than 40 hours a week, their equivalent hourly rate goes up. If the calculated equivalent rate turns out to be more than what you would have paid them on an hourly basis, it will cost you more than if they were simply paid by the hour. A FWW arrangement is probably not for you if your employees often work fewer than 40 hours a week.)

• It’s a way to limit your exposure if you have employees you consider salaried (and who otherwise meet the eligibility criteria for FWW), but whose job duties are “borderline” for overtime exemption — without having to pay a full time-and-a-half overtime. In the event a DOL audit determines they truly are not exempt, they’ve already been paid overtime by an acceptable method of calculation.

Not for everybody

As noted, this is probably not the best arrangement for you if your fluctuating-hours employees often work less than 40 hours a week. And your employees may not be eligible under the rules, so you might not be able to use this method even if you want to.

Worse, set up an FWW agrrangement incorrectly, and your employees could be reclassified as hourly — potentially making your liable for hefty additional overtime payments, fines and penalties.

But for those who meet the criteria and implement an FWW arrangement correctly, it can represent a cost savings as well as an employee morale-booster.

As always, check with your employment law attorney to make sure you are eligible and you’ve set things up right. A little bit of time spent with your advisor now can save you significant money, time and headaches on down the road.

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After overtime payments in the Garbage Division exceeded the budget by approximately $650,000, auditors with the city Finance Department reviewed payroll records and concluded there was “blatant time and attendance fraud to employees earning overtime despite the fact of not working any regular hours during the pay period.”

While the audit only covered fiscal year 2009, the auditors further said they believe the issues could go back as far as 2002.

Apparently part of the problem was that review and approval of timesheets had been delegated to a staff assistant, who “was changing [and making changes to] time and attendance information for her sister, her spouse and another employee who had not worked shifts but who had received regular pay.”

Why Automate?

So how could an automated system have helped? Well…

• An automated system would have allowed easy review and approval of time records directly by supervisors, instead of delegating reviews to the one staff assistant.
• An automated system would have calculated regular hours and overtime pay automatically, eliminating both intentional miscalculations and inadvertent clerical errors.
• An automated system can automatically upload time records to the payroll system or service, further reducing the changes of fraud or mistakes.
• An automated system (at least, the good ones) will retain records of all original employee punches and will maintain an audit trail of any edits or insertions made to the time records, helping discourage abuses in the first place, and making it easier to track them down in the event they do occur.

Plus, if the automated system includes a biometric component, employees will have to be physically present to clock in or out.

Lead Us Not Into Temptation

I know you like to think your own employees are all honest. I’m sure the people in authority at the Department of Public Works thought the same thing about their people — I feel certain if they knew what the staff assistant was up to, they never would have delegated timesheet approval to her.

Of course, it’s likely she might not have started out thinking she was going to help her friends and relatives cheat the city out of money, either. I’m certainly not out to “blame the victim” here, but the city made it almost too easy for her. Even basically well-intentioned people can be tempted.

And it may be true your employees are exceptionally honest. The point is, even honest employees can make unintentional mistakes. And whether the problem is dishonesty or simple human error, an automated system makes it less likely to happen in the first place, and easier to detect and correct when it does.

Still think those handwritten timesheets are good enough for your business?

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1. 3478% ROI? Wow.

If you still need convincing…

If you have any employees at all, tracking time and attendance is a good idea, for several reasons:

• Human nature. People tend to be more careful about how they spend their time when they know somebody else is watching. In survey after survey, a distressingly high number of employees admit to “time theft” (taking extra-long lunches or breaks, coming in a few minutes late and/or leaving a few minutes early, that sort of thing). That can add up to days (even weeks) worth of lost time over the course of a year — time you’re paying for, but that they’re not working.
• The law. The law requires if you have employees who are eligible for overtime, you must accurately track their time. Because if you don’t, how do you know when (and how much) to pay overtime? Makes sense, eh? And what’s the one charge I see in common across almost all wage and hour actions brought by the DOL? That the employer wasn’t keeping good records of employee time worked. If you don’t track hourly and salaried non-exempt employee time adequately, you’re just setting yourself up for trouble. (Don’t forget: the US DOL is hiring up to 250 additional investgators to tackle wage and hour inspections. They’re not messing around. You shouldn’t either.)
• Employee retention. Even if you aren’t required to pay your employees overtime because they’ve been classified as salaried-exempt, it’s still a good idea to keep track of how much time they’re putting in. If you find all your exempt workers are generally putting in many, many hours of unpaid overtime week after week, you could be looking at an under-staffing issue (or an over-work issue, which is pretty much the same thing when you think about it). Too much work and too little staff eventually leads to burnout, then turnover… which leads to increased expenses for you to recruit and train replacements. Not a good thing.
• Employee utilization. If, on the other hand, you’ve got people sitting around waiting for work, maybe you’ve got too much staff… or maybe you can step up your initiatives, start on a few more of those projects you’ve got waiting in the wings, get people working a little harder to grow the company’s business.

The point is, unless you’re tracking employee time, you’re flying blind.

Start sooner rather than later

Even if you only have a few employees — even if it’s just you — there’s no time like the present to start tracking time. People don’t like change, so it’s important to start good business habits as early on as possible. The more you build accurate time tracking into your corporate culture, the more likely it is the process will “stick” as the business grows.

Easier and more affordable than you might think

Fortunately, automated time and attendance tracking is affordable — maybe a LOT more affordable — than you might think. You don’t need a five- or six-figure investment… for as little as $100 or so, you can get started with an entry-level installed software based employee time tracking system.

For even less up-front cash out of pocket, you can sign up for a hosted web-based time and attendance system where you pay-as-you-go on a month-by-month basis. Even sophisticated biometric systems can be had for only a few hundred dollars these days.

And with the technologies available today, recording your time can be as simple as logging in to a website, or pressing your finger on a small reader, or even simply firing up your computer. Some systems even include the ability to clock in from a remote location using a cell phone. Easy and hassle-free, seriously.

(And I know from personal experience — my employer has everybody clock in and out every work day. We use a finger-scan biometric terminal. Takes me all of about 10 seconds, tops.)

Saving the best for last

What’s the best part? Because these automated systems automatically calculate your hours worked (for employees who get paid overtime) and download everybody’s data directly to your payroll software or service bureau, it takes less time to prepare payroll, and clerical errors are virtually eliminated. Between the savings on payroll prep and the reductions in “time theft,” these systems typically save hundreds of dollars a year on payroll prep — enough that the typical automated time and attendance system has paid for itself within a few months.

So, if you’re not formally tracking employee time yet, what’s your excuse? And if you are, what method are you using?

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Turns out, there are probably more instances than you might think when the federal rules and the state rules are out of sync — which can be a puzzle for employers trying to do the right thing. How do you decide what the right thing is when you’re getting two different stories, one from the state and one from DC?

When is minimum wage not the minimum?

From the Zanesville Times Recorder comes the story of Angels Learning Centers, which is reportedly learning the hard way how those conflicts are solved. Following an investigation, the Attorney General of the state of Ohio recently filed a lawsuit seeking back pay of over $408,000 plus $817,000 in damages for the company’s 150 employees. The company stands accused of not paying their employees the correct minimum wage. (And they seem to have compounded the problem by not paying up or filing a “satisfactory response” — trying to “stonewall” the investigators is another issue I’ve talked about before.)

ANYway, seems in Ohio, there’s a higher state minimum wage ($7.30 an hour) than the one mandated at the federal level (currently $7.25 an hour). So which one should the employer have used?

Now, normally, the rule is that whichever rule is more to the benefit of the employee is the one employers have to follow. I can see the logic of this. While there are exceptions for employees who have skills that are in extreme demand where the employee might wield more than typical power in the employment transaction, in most cases the employer holds most of the cards. For instance, if an employee — especially the low-wage employees for whom minimum wage laws would be applicable — quits or is fired, they can usually be fairly easily replaced — presumably by someone who will be less likely to complain about wage and hour violations.

So in most cases the law says, since the employer already has a built-in advantage, whenever there’s a conflict between the federal and the state law, the law that’s more beneficial to the employee applies.

Minimum wage, with a twist

In this particular case, the legislature in Ohio has seen fit to add a tiny twist or two to the equation. While there is a higher state minimum wage, it only applies to companies that gross over $267K a year. Those that gross less simply follow the federal minimum wage. And the state minimum wage will get adjusted every January 1 to account for inflation, based on the Consumer Price Index.

Now, I don’t know what the annual gross income of the Angels Learning Centers might be, but I’m guessing it was probably enough to kick in the higher state minimum wage. And this is likely where the problem arose. I don’t know the specifics of what they were supposedly paying people, but, if they were — just as a for instance — paying the federal minimum wage of $7.25 an hour, but the company was grossing more than $267K annually, they should have been paying at least $7.30 an hour.

And if they weren’t even paying the federal minimum, well, shame on them.

So what have we learned?

First, it’s a good idea to check with your employment law attorney to make sure you (and if you use one, your payroll processing service) are set up to compensate your employees correctly according to both federal and state laws. Even if you’re following one set of laws to the letter, being out of compliance with the other can still come back to bite you, big time.

Second, when there’s a conflict, whichever law is better for the employee generally wins.

And finally, whether you’re in the right or the wrong, stonewalling the investigators is usually a losing tactic.

So what do you think? When there’s a conflict between the feds and the state, how should that conflict be resolved?

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NETtime is a web-based time and attendance system targeting small and mid-sized businesses (SMBs). The system, which is available by monthly subscription, offers an array of time and attendance features including multiple data entry options, benefit time accruals and interfaces with popular HRIS and payroll applications and services.

Interestingly (well, interestingly to me, at least) is that — while the NETtime website says the company’s flagship product is targeted toward SMBs, the press release mentions clients such as Delta Air Lines, F.A.O. Schwarz and Aramark. Maybe their definition of “mid-sized” is more liberal than mine…

Anyway, I don’t think this will make much difference to current customers of NETtime, except that, now they’ve got new owners, the company is apparently planning a big customer recruitment push — saying their “poised” to double their customer base this year — and preparing to release what they call “a powerful upgrade” in early 2010.

Party on, dudes.

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Today, I came across two articles that illustrate just why wage and hour implications are (or at least should be) such a concern to employers contemplating these sorts of things. Do it wrong, and you face substantial risks.

Basically, if you’re talking about a furlough or a temporary shutdown or reduced hours for non-exempt and hourly workers (that is, those who are overtime-eligible, so you’re already tracking their hours and their pay depends at least in part on how many hours they work)… well, you’re most likely in the clear. Although it would still be an excellent idea to check with your lawyer just to make sure.

But when you start trying to save money by cutting hours, cutting pay or instituting a furlough for salaried exempt workers, that’s when you enter tricky legal ground. Not to say that it can’t be done — just that it requires some careful planning an execution, not just in what you do and when and how you do it, but even in the words you use to describe it.

The consequences? You could risk the “exempt” classification of not only the employees covered by the furlough, pay cut or reduced hours… but of every other exempt employee in that classification (which, depending on how your payroll is set up, could very well be every other exempt employee you’ve got).

No point in trying to save a few bucks on payroll, only to have to turn around and pay even more in fines and penalties because the cost-reduction measure you chose was illegal… not to mention having all your formerly non-overtime-eligible salaried exempt employees reclassified to non-exempt or even hourly. (Either way, you’d have to start tracking their hours and potentially paying overtime.)

Can you afford that? I didn’t think so.

Take-away lesson: before you do anything to mess with your salaried exempt employees’ work schedule or pay rate, check with your friendly neighborhood employment law attorney to make sure what you want to do is acceptable under the laws applicable to your jurisdiction. Remember, you’ve got to satisfy both the state and the feds, and their rules might be different. Don’t mess around with this… it might be your business’s very survival at stake.

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But here’s the weird part. According to the survey, a majority of respondents still use pretty old-fashioned methods for tracking time… things like hand-written timesheets and Excel spreadsheets. Not too surprising for regular readers of this blog, nearly 20% also said they encouter errors pretty much every payroll cycle.

Now, put that together with the increase in wage and hour lawsuits and DOL enforcement and you’ve got yet another reason to automate your time and attendance tracking. Those data downloads directly to your payroll processor or software can really cut out those clerical errors (not to mention saving you a ton of time on payroll prep).

Food for thought, eh?

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1. 3478% ROI? Wow.
2. Maybe They Should Have Used Automated Time & Attendance Software
3. Go Virtual, Save a Tree

According to the Risky Business blog, every Employment Practices Liability they reviewed excluded coverage for wage and hour claims. They said they found a few that provided up to $100,000 for defense against wage and hour claims — which isn’t a whole lot, really — but not a one covered judgments.

Might be a good idea to check with your insurance agent to see what kind of coverage — if any — you have, and what kind of coverage is available. After a complaint has been filed is not the time to find out you’re on your own.

Kinda puts those six and seven figure judgments I keep reporting in a whole new light, eh? Another reason to make sure you’re on the right side of the laws and regulations, I would say.

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