“White-collar” exemptions

• Three basic tests must be successfully met for any worker to receive a “white-collar” exemption.
• A rule took effect in January 2020 that establishes a higher level of salary for white-collar exempt employees.

“White-collar” exemptions fall into several categories. The following are the most common:

• Executive, typically applied to supervisors and other managers.
• Administrative, for employees with a substantial amount of authority and discretion.
• Learned professional, covering employees who analyze facts and draw conclusions.
• Creative professional, which can be applied to actors, musicians, and similar occupations.
• Computer employees, for programmers, software engineers, and similar occupations.
• Outside sales, for employees who mostly travel to make sales.

To qualify for a white-collar exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis not less than the required minimum salary per week. However, the salary requirement does not apply to outside sales or computer employee exemptions, nor to teachers, nor to practitioners of law or medicine.

In order for employees to qualify for this type of exemption, they must meet three basic tests:

1. Salary level test,
2. Salary basis test, and
3. Duties test.

Overtime rule finalized: DOL sets a higher minimum salary level

On September 24, 2019, the U.S. Department of Labor (DOL) announced a final overtime rule to update the earnings thresholds necessary for white-collar exempt employees (i.e., executive, administrative, and professional employees) from the Fair Labor Standards Act (FLSA) minimum wage and overtime pay requirements. The rule took effect January 1, 2020.

Basic provisions of the rule include:

• Raising the “standard salary level” from the previously enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
• Raising the total annual compensation requirement for “highly compensated employees” from the previously enforced level of $100,000 per year to $107,432 per year;
• Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
• Revising the special salary levels for workers in U.S. territories and the motion picture industry.

Salary level test

With a few exceptions, exempt employees must be paid not less than the required minimum salary per week. Employees paid a salary at or above the minimum level are exempt only if they also meet the salary basis and duties tests.

To qualify as an exempt executive, administrative, or professional employee, the worker must be compensated on a salary basis at a rate of not less than the required minimum salary per week, exclusive of board, lodging, or other facilities. Administrative, professional, and computer employees may also be paid on a fee basis, as defined in 29 CFR 541.605.

The minimum weekly salary is one of several tests applied to determine if exemptions are applicable; it is not a minimum wage requirement. No employer is required to pay an employee the salary specified unless the employer is claiming an exemption.

If an employee’s exempt status is subject to the salary basis test, but the worker is paid less than $684 per week, the employee is not exempt. If an amount is paid for a period longer than one week, the weekly equivalent of the amount paid must be computed to determine if the amount equals or exceeds $684 per week.

The minimum salary must be paid “free and clear.” That is, the salary cannot include the value of any non-cash items an employer may furnish to an employee, such as board, lodging, or other facilities (e.g., meals furnished to employees of restaurants).

To qualify as a guaranteed salary, payment of a fixed, predetermined amount is required for each workweek an exempt employee performs any work. Bonuses and commissions do not generally qualify as fixed, predetermined amounts paid “free and clear” because they are normally subject to variations based on the quality or quantity of work performed.

Note that some states have established higher minimum salary requirements or have laws that could result in a salary above the federal minimum requirement.

Salary basis test

In addition to the salary level test, exempt employees must also be paid on a salary basis. This basis means the employee regularly receives a predetermined amount of compensation each pay period, and the predetermined amount cannot be subject to reduction because of variations in either the quality or quantity of work the employee performs.

This salary must be paid on a weekly or less-frequent basis (semi-monthly, monthly, etc.). Exempt employees must receive the full salary for every week they perform any work, regardless of the number of days or hours worked. However, they need not be paid for weeks they perform no work.

Except for seven situations specifically cited in the regulations, an exempt employee must receive the full salary for any week that employee performs any work. If the employer makes improper deductions from the employee’s predetermined salary, the employee is not paid on a salary basis.

Duties test

The regulations have a duties test for each type of exempt employee. These are divided into the categories of executive, administrative, professional, computer, and sales employees.

To qualify for an exemption, the employee’s primary duty must be the performance of exempt work. Each classification uses the term “primary duty,” and the term is defined by regulation. Job titles do not determine exemption status.

The term “primary duty” means the principal, main, major, or most important duty the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with major emphasis on the character of the employee’s job as a whole. Factors to consider include, but are not limited to:

• The relative importance of exempt duties compared with other types of duties,
• The amount of time spent performing exempt work,
• The employee’s relative freedom from direct supervision, and
• The relationship between the employee’s salary and wages paid to other employees for the kind of nonexempt work performed by the employee.

The salary level is an important consideration because if an allegedly exempt employee does not earn much more than nonexempt employees, this may suggest the position does not require much additional responsibility.

Nonexempt employees and independent contractors

• Though they are normally paid by the hour, nonexempt employees can receive pay by the mile, by number of units produced, or by a weekly salary.
• Acquiring the services of an independent contractor can bring superior skills or expertise for a limited time, cutting an employer’s costs and lowering its liabilities.

A nonexempt employee is one who is entitled to overtime. They are commonly called “hourly” employees and are usually paid by the hour. However, a nonexempt employee can be paid using other methods (for example, by the mile, the number of units produced, or a weekly salary). The important thing is that “salaried” does not necessarily mean “exempt from overtime.” It is possible to pay a nonexempt employee a salary, but the employee is still legally entitled to overtime.

The exempt classifications are exactly what they sound like — an exemption from the employer’s duty to pay overtime. Employers are not required to classify an employee as exempt, and where this is done, the company bears the burden of proving that the exemption was properly applied.

There have been court cases of misclassified employees suing their employers for past overtime wages. Think of nonexempt employees as the “default” position — if an employee does not qualify as exempt, that employee must be nonexempt and is entitled to overtime.

Although some employees can be exempt, the criteria for meeting a particular exemption are fairly specific, and the employer bears the burden of proving that an exemption applies. If an employee was improperly classified as exempt and should have received overtime, the individual can file a wage claim to recover back overtime pay.

If employers are in doubt regarding proper status, the nonexempt status should be applied. Employees cannot claim they were wrongly paid overtime.

Independent contractors

Independent contractors are individuals hired on a contract basis to perform specialized work at another employer’s workplace. They can include engineers, writers, systems analysts, and many other specialized or highly skilled workers.

Obtaining the services of an independent contractor is a good way of securing highly skilled or specialized expertise for a short period of time, rather than permanently employing someone with those skills. Choosing an independent contract can save a lot of costs (e.g., in employee benefits) and reduce some legal liabilities.

On the downside, if an independent contractor is incorrectly classified and is really an employee, then problems can arise. This is why it is critical for employers to make sure a person really qualifies as an independent contractor, spell out all terms of the contract, and abide by those terms.

When hiring an independent contractor, an employer needs to be sure its relationship with the contractor meets requirements of several agencies. These include:

• The Internal Revenue Service (IRS),
• The U.S. Department of Labor (DOL),
• State unemployment compensation agencies,
• State workers’ compensation agencies, and
• State tax agencies.

Each agency has different tests for distinguishing between employees and independent contractors.

What one agency may define as an employer/employee relationship, another might define as an independent contractor relationship. Although the criteria provided by the IRS and the DOL are the most well-known and commonly used, it is possible for an individual to meet those criteria for independence, but still be considered an employee by a state agency (e.g., for workers’ compensation or unemployment compensation).

Joint employment

• If two entities use the services of one employee, all hours worked for both entities would be combined to calculate overtime pay.
• The WHD outlines specific associations that determine joint employment.

If a nonexempt employee works two or more jobs for the same employer, all hours worked must be combined for purposes of overtime. But what exactly constitutes the “same” employer? If the entities are separate, the employee would have two distinct employers, and hours worked for each employer could be considered individually. However, if two entities share an employee, then all hours worked for both companies would have to be combined for overtime.

Obviously, if someone owns two restaurants and sets employee schedules for both locations, then an employee who holds jobs at both locations works for the same employer. Similarly, if an employee’s schedule can be adjusted by one company to consider the needs of the other company, the employee would be shared. All hours worked in both locations must be counted toward overtime.

Unfortunately, not all situations are obvious. In many cases, an employer may have multiple facilities that appear to operate independently, but the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) might still deem them to be joint employers (see 791.2, Joint employment), and if so, all hours worked in all locations must be counted toward overtime.

Factors that employers might be tempted to consider may not actually affect the joint employment determination. For instance, many employers believe that if each location has a different Federal Employer Identification Number (FEIN), or if each location hires and schedules its own employees according to need, then the facilities must be separate. However, the real questions should be whether the entity could share control over the employee, as well as the level of control by company officers.

The regulation gives a few factors to consider, but applies a fairly restrictive standard. Moreover, that standard is interpreted rather liberally by the WHD. The regulation says that if both facilities are “acting entirely independently of each other and are completely disassociated with respect to the employment of a particular employee,” then each job may stand alone for overtime.

The phrase “entirely” independent imposes a higher standard than “some” independence, and the phrase “completely disassociated” does not allow for limited association.

For example, an employer requested an opinion letter (FLSA2005-15) regarding possible joint employment and stated that each facility “has its own Human Resources (HR) Department, employee handbook, payroll system, retirement plan, and Federal [Employer] Identification Number. There is no regular interchange of employees among the facilities.” Nevertheless, the WHD found that the parent company was a joint employer, based on other information provided. Clearly, the distinctions in HR functions, payroll, and FEINs were not determinative.

The WHD has previously stated that if one business entity controls another through stock ownership, or through common corporate officers, then employees are jointly employed by the entities. Other factors that have been evaluated by the WHD include the following:

• The two entities share a common president and board of directors,
• One HR department provides administrative support for another entity,
• Senior executives and senior managers are responsible for more than one entity,
• Personnel policies are the same (even if different handbooks are printed),
• Employees share a common health plan, and
• Job vacancies are posted at multiple facilities before being publicly advertised.

If these types of associations exist, the entities are not “completely disassociated” as required by the regulation. The WHD will typically determine that these factors outweigh issues such as separate payroll systems or FEINs.

Employers that operate multiple locations will need to carefully evaluate joint employment requirements and determine if any individuals (especially part-time employees) have taken jobs at more than one location. If so, and if total hours worked exceed 40 per week, overtime pay is likely required.

Temporary workers and interns

• Under certain laws, employer coverage and employee eligibility must include temporary workers.
• Working relationships involving interns are guided by a ruling from the Ninth Circuit Court of Appeals.

Temporary workers

Temporary staffing services provide employees to other businesses to support or supplement the workforce in special situations, such as employee absences, temporary skill shortages, and varying seasonal workloads. Temporary workers (temps) are employed and paid by the staffing agency but are contracted out to clients for either a prearranged fee or an agreed hourly wage. Some companies use temps full-time on an ongoing basis, rather than regular staff.

Essentially, the employer/employee relationship exists between the individual and the staffing agency. The host company merely leases the agency’s employees. However, the host company can be a joint employer, and can be responsible for (or held liable for) certain violations of the Fair Labor Standards Act (FLSA).

Temps must be counted in determining employer coverage and employee eligibility under certain laws. For example, an employer with 15 workers from a temp agency and 40 permanent workers may be covered by the Family Medical Leave Act (FMLA), which applies to employers with 50 or more employees in 20 or more workweeks in the current or preceding calendar year.

Temps and co-employment

Many employers have unfounded fears of “creating” a co-employment relationship with a temp who was hired through a staffing agency, even though it cannot be avoided in many cases (and doesn’t necessarily impose additional obligations on the employer). There is no single source for information on co-employment, in part because the concept applies differently depending on the relevant law. The term is often used interchangeably with the concept of “joint employment.”

In most cases where a host company uses temporary workers from a staffing agency, certain co-employment obligations will automatically exist. For example:

• A temp is protected by discrimination laws, which include protection from actions of the host company, even if the staffing agency is the employer of record. The Equal Employment Opportunity Commission (EEOC) has a guide on Application of EEO laws to contingent workers and temps.
• A temp is considered a joint employee for purposes of the FMLA, where 29 CFR 825.106, states that “joint employment will ordinarily be found to exist when a temporary placement agency supplies employees to a second employer.”

Employers cannot avoid creating a co-employment relationship under these laws because that relationship is assumed to exist.

The FLSA also recognizes joint employment where an individual works at multiple jobs for the same organization or works to benefit more than one employer. Typically, the FLSA is concerned with overtime where an individual performs duties for multiple locations of the same employer. For example, if an individual works at two grocery stores owned by the same company, all hours worked at both locations must be combined for overtime.

However, the FLSA regulation is somewhat open to interpretation, stating, “Where the employee performs work which simultaneously benefits two or more employers . . . a joint employment relationship generally will be considered to exist” (791.2, Joint employment).

As an example, a host employer could be liable for recordkeeping violations or back pay if it asks a temp to work without recording hours, denies a lunch break while still deducting 30 minutes for a meal period, or misclassifies a temp as exempt from overtime. Temps should report the problem to the staffing agency, but if a lawsuit arises, the host company could still face liability.

Interns

The U.S. Department of Labor (DOL) has issued new guidance to help employers decide whether workers can be unpaid under their internship programs. This new guidance comes after the Ninth Circuit Court of Appeals rejected previous guidance issued by the DOL.

The latest ruling from the Ninth Circuit joins similar rulings by the Second, Sixth, and Eleventh Circuits, holding that the rules were too rigid. With its new guidance, the DOL indicated it will use the “primary beneficiary” test developed by the Second Circuit to determine the status of potential interns under the FLSA.

With the precedent set by the Second Circuit’s decision, the Ninth Circuit outlined a new seven-factor test that was less rigid than the DOL’s six-factor test. Under prior guidance from the DOL, a worker could be considered an unpaid intern only when all six factors were met. The new primary beneficiary test used by the Ninth Circuit is less restrictive, leading the court to conclude that this test “is therefore the most appropriate test for deciding whether students should be regarded as employees under the FLSA.” (Benjamin v. B&H Education)

In an effort to consider the primary beneficiary and economic reality of a working arrangement, the DOL’s new test considers seven key factors to determine whether the intern or employer receives a greater benefit. Under the new guidelines, employers should consider the extent to which:

1. The intern and employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests the intern is an employee. However, clearly explaining no monetary compensation will be received suggests the intern is not an employee.
2. The internship provides training similar to that given in an educational environment, including clinical and other hands-on training provided by educational institutions.
3. The internship is tied to the intern’s formal education program by integrated coursework or receipt of academic credit.
4. The internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The intern and employer understand that the internship is conducted without entitlement to a paid job at its conclusion.

While employers were previously required to meet the criteria of all six factors, they may now evaluate each factor individually. As a result, the new test allows more flexibility when assessing the intern-employer relationship. Note that each case must be evaluated individually on its unique circumstances.

“Rounding” practices and disregarding time

• “Rounding” of timecards is permitted as long as the average of the actual number of working hours is achieved.
• By disregarding time, employers run the risk of “shorting” employees or attempting to avoid paying overtime.

Fair Labor Standards Act (FLSA) regulations discuss the “rounding” of timecards. Here is the applicable paragraph:

29 CFR 785.48 Use of time clocks — (b) Rounding practices. It has been found that in some industries, particularly where time clocks are used, there has been the practice for many years of recording the employees’ starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour. Presumably, this arrangement averages out so that the employees are fully compensated for all the time they actually work. For enforcement purposes this practice of computing working time will be accepted, provided that it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.

This regulation says rounding is allowed as long as it averages out to the actual number of working hours. However, if rounding is only done to the “disadvantage” of the employee, it would not be legal because it would result in paying the employee for fewer hours than the employee worked.

For example, employers might use a “seven-minute” rule, where a time punch within seven minutes of the nearest quarter-hour is rounded to the nearest interval, whether down or up. Thus, if an employee punches in at 7:54 a.m. and punches out at 5:12 p.m., that worker would be paid from 8:00 to 5:15 (rounding down and up in each case).

If the timecard was rounded down in this example (ending at 5:00), the employee would be “shorted” 15 minutes of pay. Of course, this assumes the employee worked during that time. If the employee finished working at 5:02 but simply didn’t punch out for another 10 minutes, the employer does not have to pay for that time. However, the late punch-out should not be rounded down, but instead the employee should be required to initial a timecard change.

Disregarding time

The sad fact is that some employees arrive early (or even on time), punch in, but don’t begin working right away. Although this time can be disregarded, the regulation warns that employer’s records should reflect hours worked as accurately as possible. Regular changes to timecards may create the impression that the company is shorting the employees or unlawfully trying to avoid paying overtime.

Early or late punching (or loitering) is a disciplinary issue, not a rounding issue. Employees can be told that if they are clocked in, they are expected to be working. They can be disciplined or terminated for falsifying timecards (knowingly punching in without intending to work) or for wasting time when they should be working.

For example, if two employees arrive early, punch in at 7:46 (which would normally be rounded to 7:45) but then stand around until 8:00 talking about a recent sporting event, the employer could speak to them about removing the extra minutes from their timecards. If they would have punched in at 7:59 (or did not start working until then), this corrected starting time would be rounded to 8:00.

The issue of whether work was performed is critical because employers cannot refuse to pay for services. Employers cannot “sit back and accept the benefits” of an employee’s labor without compensating for the time. If an employer does not want employees to work, the organization must actively enforce rules against doing so.

In other words, if employees arrive early and start working (and even incur overtime) that time must be paid. It cannot be rounded off or disregarded because only non-working time can be disregarded. Even then, the rule for disregarding time is limited to early or late punching. For example, employees who stand around talking in the middle of the workday cannot normally have this time excluded. The one exception might be if this was an unauthorized extension of a normal rest period.

Shift work

• Extra compensation for employees working outside of a standard day shift, or shift differential, should be included when calculating overtime pay.

Shift differential refers to extra compensation an employee receives for working outside of a standard day shift or, in some cases, on weekends. As an example, an employer might pay one employee, who works from 6 a.m. to 2 p.m., Monday through Friday, a base wage of $10.50 an hour. That employer might also pay a second employee, who works a 2 p.m. to 10 p.m. shift, $11.50 an hour, offering the extra dollar per hour for working on second shift.

Another employer might pay double time on Sundays. Organizations might also offer premium compensation for employees who work on holidays. Beyond applicable overtime pay, shift differentials aren’t required, and employers decide how much or little extra pay to provide.

Employers use shift differentials as an incentive to attract employees to less-desirable shifts or reward them for working outside of their normal hours. For example, a manufacturer might offer a higher hourly rate to those who regularly work second or third shift, or to employees who are asked to work on Christmas Day to meet production demands.

Since a shift differential is traditionally added to hourly pay, it will generally have to be included when calculating overtime. For example, if a position would normally pay $12 per hour (with overtime at $18 per hour) but employees on second shift are given a differential of an extra $1 per hour, they are treated as earning $13 per hour, and overtime must be paid at $19.50 per hour.

In some cases, a differential is provided in the form of a daily or weekly bonus. However, it still affects the regular rate upon which overtime is calculated. This is because the payment was made under a contract or agreement, and was provided as consideration for hours worked, production, or efficiency.

For example, if an employee works a 10-hour shift, it does not matter whether the employer provides an extra $1 per hour or a flat $10 bonus for working that shift. Both forms of compensation are provided as consideration for hours worked, so both affect the overtime rate.

Occasionally, an employee may work a “split shift” where some hours get the differential, and others do not. For example, an employee who works the day shift might work a double shift to cover for someone on the night shift who called in sick, and get the differential during the night shift. In this case, the employee may be paid overtime based on the average hourly rate for the week.

Alternative assignments

Since employers are not required to offer shift differentials, company policy will control when they must be paid. This can create potential conflicts when, for example, an employee is temporarily assigned to a different shift or voluntarily works another shift. This may occur when a transfer is needed to cover for another employee’s absence or when an employee is reassigned to another shift for light duty.

If the policy states that anyone who works a particular shift will receive the differential, an employer will likely be obligated to follow that policy, even if the company did not intend to provide the differential in that situation.

Some employers even provide a differential for working on weekends, and an employee may voluntarily work on a weekend, then expect the differential for that time. A strict reading of the policy may show that the employee is entitled to the differential, and state labor agencies will often enforce the terms of company policy.

For these reasons, employers should consider writing exceptions into the policy. For instance, the policy may state the differential is only available when employees are assigned to work another shift, or when the requirement to work another shift (or a weekend) is mandated by the company. The provision may clarify that employees who request a temporary transfer for their own convenience, or who voluntarily work during another shift without having been assigned to do so, will not be eligible for the differential.

Similarly, the policy may include a provision that if an employee is temporarily reassigned to another shift for light duty, the shift differential will not be available for that light-duty assignment.

Activities before and after work

• “Principal activities” performed before an employee begins regular job duties must be counted as work time.
• Employers can exclude activities such as changing clothes from being paid under an FLSA provision.

Employees must be paid for all working time, but the Fair Labor Standards Act (FLSA) does not specifically define work. However, the regulations do describe activities that count as hours worked, including certain preparatory and concluding activities.

Generally, activities performed before or after the employee engages in regular job tasks must be counted as work if they are “principal activities.” This term is not specifically defined, but the regulations give these examples:

• A lathe operator will frequently, at the start of the workday, oil, grease, or clean the machine or install a new cutting tool. These are principal activities; they are necessary for the job and benefit the employer, so the employee must be paid for time spent performing these tasks.
• A garment worker in a textile mill must report 30 minutes before other employees to distribute clothing at workstations and prepare the machines for operation by other employees. These are principal activities, and the employee must be paid for the time.
• If an employee in a chemical plant cannot perform principal activities without putting on certain clothes, then changing clothes at the beginning and end of the workday is a principal activity.

Principal activities

If changing clothes is merely a convenience to the employee and not directly related to that employee’s principal activities, it is not a principal activity. For example, if a carpenter chooses to change clothing to keep that worker’s street clothes from getting dirty, this is done for the employee’s own benefit, not the employer’s benefit. Time spent changing clothes (for the employee’s own benefit) would not count as working time.

Two cases decided by the U.S. Supreme Court further illustrate activities that are considered an integral part of employees’ jobs. In one case, employees changed their clothes and took showers in a battery plant where the manufacturing process involved extensive use of caustic and toxic materials. In another, workers in a meatpacking plant sharpened their knives before and after their scheduled workday. In both cases, the Supreme Court held that these activities are an integral and indispensable part of the employees’ principal activities.

Employees who dress to go to work in the morning are not working while dressing even though the uniforms they put on at home are required to be used in the plant during working hours. Similarly, any changing that takes place at home at the end of the day would not be an integral part of the employees’ employment and is not working time.

In short, activities must be counted as hours worked if they are indispensable to the performance of the employee’s work or are required by law or by the rules of the employer, such as Occupational Safety and Health Administration (OSHA) regulations that require personal protective equipment. If preparatory and concluding activities are necessary for a job, and are performed for the benefit of the employer, they are regarded as work and are compensable under the FLSA.

Excluded by custom or contract

The FLSA contains a provision that allows employers to exclude activities such as changing clothes. Specifically, this provision says:

“There shall be excluded any time spent in changing clothes or washing at the beginning or end of each workday which was excluded from measured working time during the week involved by the express terms of or by custom or practice under a bona fide collective bargaining agreement applicable to the particular employee.”

Note that time spent in such activities can be excluded only if those activities are not compensable under federal law. If the FLSA requires paying for time spent in certain activities, employers must pay for that time. Employers cannot refuse to pay for work activities by creating an agreement that such time won’t be paid. Similarly, employees cannot agree to forego wages for compensable activities, and courts have found such an agreement to be invalid.

Where time is excluded from hours worked by custom or contract, the agreement should primarily serve to provide clarification about when the workday begins. As an example, a company might clarify that employees who change into coveralls before the workday are doing so for their own benefit and will not be paid for this time. However, if employees must put on personal protective equipment at the beginning of the day, this would be compensable working time, and it could not be excluded by custom or contract.

In some instances, an employee of a newspaper or radio or television station will read a particular book to possibly do a book review for use in the newspaper or on the air. This presents no problem if reading is done at the establishment or at the employer’s request. However, the reading may be done away from the employer’s establishment and outside of duty hours, such as at the employee’s home in the evening, and on a speculative basis — that is, with the thought that a book review might be prepared.

In such cases, there is a question as to whether the reading was done for the benefit of the employer or for the pleasure of the employee. The U.S. Department of Labor (DOL) Wage and Hour Division (WHD) will not assert that such reading is hours worked even though the book is subsequently reviewed in the newspaper or on the air.

Travel time as working time

• Four kinds of travel time are considered under federal regulations.
• Employees must receive pay for unusual travel that is significantly longer than their normal commute.

In most cases, travel time counts as working time. When travel is considered as hours worked, the time must also be counted toward overtime. Most state laws do not address travel time, and those that do primarily mirror federal requirements. Federal law mainly addresses four types of travel:

1. Commuting to and from work (which is not usually working time),
2. During a normal workday,
3. To another city in the same day, and
4. Overnight travel to another city.

Commuting time

A normal commute to work and back home is not paid working time. However, there are some cases where such time has to be paid. For example, if an employee must report to a business location to pick up tools, equipment, or even a company vehicle before proceeding to the job location, the workday begins at the first business location. Although the employee does not have to be paid for driving from home to the business location, the travel from that location to the job site is work-related travel.

Also, if an employee commutes from home in a company vehicle, the time might have to be counted as working time. Most company vehicles do not impose this obligation. However, certain vehicles (such as semi-trailer trucks, cement trucks, or cranes) may require the employee to drive a different route or may be significantly more difficult to operate than a company vehicle. If so, the drive time may have to be paid, even if the employee is traveling home from work.

Travel time spent carrying heavy, burdensome equipment, as contrasted with light hand tools, is hours worked. On the other hand, carrying light hand tools between an employee’s home and the work site, involving no appreciable burden or inconvenience, is not hours worked. In determinations of this kind, some consideration must be given to the custom in the industry. For example, a carpenter who carries a typical toolbox from home to the worksite is commuting, not working or engaged in principal activities of employment.

However, an employee who is required regularly to carry heavy mail or bulky packages to the post office en route from the factory to that employee’s home, is working. A different situation exists if an employee carries only light mail to and from the post office on the way to or from work, and generally such time is not hours worked.

Although employees do not have to be paid for an ordinary commute to and from work, they may have to be paid for unusual travel that is substantially longer than an ordinary commute. However, the ordinary commuting time may be subtracted from hours of work.

The first issue is whether the driving time or distance is within the employer’s usual or customary business area. If an employee drives from home to the first customer location of the day, this initial drive may be as much as an hour, yet still be within the normal business area and could be unpaid — even if the employer assigns work locations each day.

The second issue is the frequency of changes in reporting locations. If an employee is only occasionally required to report to a distant location (perhaps once per month or less), then the additional drive time may have to be paid. State and federal regulations refer to travel that is “substantially” longer than a usual commute, but do not define this term. Part of the challenge may be that each employee’s commute is different; some employees may commute regularly for only a few minutes, while others may commute for an hour or more.

Employers might consider a commute to be “substantially” longer if the additional time can reasonably be recorded (such as 15 minutes or more). While a few extra minutes could be ignored, and there is a regulation that allows employers to disregard small amounts of time that cannot be practicably recorded, that regulation also warns that:

“This rule applies only where there are uncertain and indefinite periods of time involved of a few seconds or minutes duration, and where the failure to count such time is due to considerations justified by industrial realities. An employer may not arbitrarily fail to count as hours worked any part, however small, of the employee’s fixed or regular working time or practically ascertainable period of time he is regularly required to spend on duties assigned to him.” (785.47, Where records show insubstantial or insignificant periods of time)

Thus, assigning an employee to an alternate location infrequently, knowing that the assignment will involve additional travel time, could well be viewed as part of the expected working day. Disregarding that time may not be defensible.

Frequency of changes in reporting locations may become a consideration if the employee reports to alternative locations so regularly that it becomes a normal or expected part of the job. For example, a maintenance employee who is responsible for three locations, and visits each location at least once per week, may be taking a normal (unpaid) commute even if the driving distance varies by a half-hour or more. Conversely, if this employee regularly reports to one location and is only occasionally called to other facilities, the additional drive time may have to be paid.

Off-duty periods

• The length of time that can be used for personal pursuits is critical in establishing whether that time should be paid.
• Restrictions on movement and response time are typical factors in assessing the use of personal time.

Periods when an employee is completely relieved from duty and that are long enough to enable the time to be used effectively for the employee’s own purposes are not hours worked. The employee is not completely relieved from duty and cannot use the time effectively for personal purposes without being allowed in advance to leave the job and not commence work until a specified time. Whether the period is long enough to use the time effectively for personal purposes depends upon all the facts and circumstances of the case.

Employees who are allowed to leave a message where they can be reached are not working (in most cases) while on call, but additional constraints on their freedom could require this time to be compensated.

Typically, the issue comes down to the degree of control imposed by the employer. For example, if an employee on call is asked to refrain from drinking alcohol and to remain within 50 miles of the worksite, that employee is not under substantial control. The time spent on call is probably not considered working time.

Some employers choose to compensate employees anyway, often at a lesser hourly rate or per day rate. Such compensation is permitted, but it does have to be credited toward overtime.

The more limitations that are imposed, the more likely that the on-call time will be working time. For instance, if an on-call employee is expected to respond in person (arrive at the business location) within 10 minutes, the employee might be working while on call, and if so, all hours would have to be counted as work time.

On the other hand, if an on-call employee is simply expected to assist in resolving any problems over the telephone, the employee is probably not working while on call, and only the actual time spent conducting business (i.e., the duration of the phone call, or any work conducted between calls) would have to be counted as work time.

As more restrictions are placed on employees, an employer might limit how their time can be used. Too many limitations means their time is controlled by the employer and must be paid as working time. Typically, restrictions such as carrying a cell phone and refraining from alcohol consumption do not generally prevent the employee from engaging in personal activities. Most of the issues are addressed in an opinion letter (FLSA2008-8NA) that states the following:

“The federal courts evaluate a variety of factors when determining whether an employee can use on-call time effectively for personal purposes, such as whether there are excessive geographical restrictions on an employee’s movements, whether the frequency of calls is unduly restrictive, whether a fixed time limit for response is unduly restrictive, whether the employee could easily trade on-call responsibilities, whether use of a pager could ease restrictions, and whether the on-call policy was based on an agreement between the parties.”

Among the most common factors listed are restrictions on movement and response time. A short response time, such as 10 minutes to report in person, might prevent the employee from traveling or otherwise engaging in personal activities. Obviously, a longer response time, such as one hour, or having the ability to handle issues over the phone would allow more freedom in personal activities.

Frequency of calls is also important, since an employee who regularly gets interrupted could be restricted from engaging in personal activities, even if the time for responding is reasonable. As an example, if an employee can expect to receive three or four calls during a Saturday, and must respond in person to each call, the employee may not be able to use any portion of that Saturday for personal activities. Frequent interruptions are even more limiting when combined with a short response time.

The ability to trade on-call responsibilities can also ease the burden and lessen restrictions. For example, if two or more employees are on call, and the first one contacted is not immediately available, then contacting the second person would effectively relieve the first of any obligation and allow more freedom for personal activities.

The nature of the agreement between parties might be an issue if, for example, the employees agree to certain restrictions or are required to comply with certain conditions before going “off call.” For example, if the employee is expected to remain at home while on call, but agrees that this is not unduly restrictive (and this “agreement” was not a requirement imposed by the employer), then the on-call time should be less likely to be deemed as hours worked.

Similarly, an agreement might include a requirement to contact the employer regarding availability if the employee must attend to personal matters, and the employer might retain the right to refuse permission. That additional obligation might be considered (along with other factors) in evaluating whether the employee can use on-call time effectively for personal pursuits.

In other words, if the employer retains the right to prevent the employee from attending to personal matters, this may be a consideration in whether the employee is acting under the employer’s direction or control.

Emergency call-ins

• In cases of emergency call-ins, the time when an employer must “start the clock” for the employee remains a gray area.

If an employee is called in after hours for an emergency, is that worker paid from the moment of leaving home, or does the employer “start the clock” when the employee arrives at work?

If the employee is traveling to a customer facility, the clock must be started when the employee leaves home. However, if the employee is reporting to a regular company location, the answer is unclear. The U.S. Department of Labor (DOL) Wage and Hour Division (WHD) has refused to take a position. The “safe” option is, therefore, to start the clock when the employee leaves home. Here is the applicable regulation from 29 CFR 785.36, Home to work in emergency situations:

There may be instances when travel from home to work is overtime. For example, if an employee who has gone home after completing his day’s work is subsequently called out at night to travel a substantial distance to perform an emergency job for one of his employer’s customers, all time spent on such travel is working time. The Divisions are taking no position on whether travel to the job and back home by an employee who receives an emergency call outside of his regular hours to report back to his regular place of business to do a job is working time.

The WHD’s Field Operations Handbook offers some clarification on the requirement to pay employees for traveling to a customer location. Specifically, Section 31c06 says that “where an employee is given prior notice, as for example, he is told on Friday that he will be required to work at a customer’s place of business on Saturday, it will not be considered an emergency call outside of his regular working hours.”

The reference to the WHD “taking no position” on travel to the regular work location is interesting because such travel once was considered to be hours worked. Again, the Field Operations Handbook clarifies that “such time will no longer be counted as hours worked” (31c06) but recognizes that this position could change again.

Essentially, the issue has been left up to states (or courts) to decide on a case-by-case basis. Most state labor agencies will accept wage claims for unpaid working time and could rule either way. Often, state agencies take a position that is most favorable to the employee.

The safest course of action, therefore, is to start the clock when the employee leaves home. However, this travel might be excluded as a normal, unpaid commute if the employee was on call, or was otherwise given notice of the potential expectation for reporting to work.

Breaks and meal periods

• Federal regulations dictate when time for breaks and meal periods must be paid.

Fair Labor Standards Act (FLSA) regulations do not require employers to provide breaks or meal periods, but many state laws do require them.

Although federal regulations do not require break or mealtimes, they do define when such time must be paid, or when it can be unpaid.

Rest periods of short duration, usually 20 minutes or less, are customarily paid for as working time. These short breaks must be counted as hours worked.

Bona fide meal periods (typically 30 minutes or more) need not be compensated as work time if employees are completely relieved from duty to eat regular meals. Employees are not relieved if they are required to perform any duties, whether active or inactive, while eating. Such duty could include “voluntary” work, as may happen if a machine operator chooses to review the instruction manual for a machine while eating lunch. Employees should not only be relieved of duty, but also informed that no work should be performed during unpaid meal periods.

Many states have more specific laws regarding rest and meal periods. These laws generally require employers to provide employees with time off for meals or to simply cease work. The laws may also indicate when such breaks are required, usually based upon how many hours are worked. For example, a state law may indicate that a rest break is required for every four hours worked, or may require a meal period if the employee is scheduled for more than six hours per day.

State and federal laws also have different, and usually additional, requirements for minor employees under 18 years of age.

Waiting time as working time, and on-call pay

• When employees are relieved of duties long enough to use that time for personal activities, that time does not have to counted.
• Requirements for performing work in an on-call capacity are specific and varied.

Most jobs involve some waiting. A secretary waits for the boss to revise a letter. A truck driver waits in line to deliver a load. Such waiting is part of the job and must be counted as hours worked. However, where employees are relieved of duties for a period long enough that they can use the time for their own purposes, the time need not be counted.

Employees may be required to report to work, then end up waiting for something to happen (e.g., for supplies to arrive) before they begin their assigned tasks. In other cases, employees are placed on call in case they are needed for unexpected problems. These situations raise the question of when waiting time or on-call time must be counted as hours worked (compensable working time). In some cases, even time spent sleeping must be counted as working time.

For nonexempt employees, any hours worked must be credited toward overtime. Also, total hours worked may affect other entitlements. For example, an exempt employee only gets the same salary each week and need not be given extra compensation for on-call time. However, if the on-call time counts as working time, those hours must be credited toward eligibility under the Family and Medical Leave Act (FMLA).

Waiting time

Whether waiting time is time worked depends upon the circumstances. Generally, the facts may show that the employee was “engaged to wait” (which is work time), or the facts may show that the employee was waiting to be engaged (which is not work time).

For example, a secretary who reads a book while waiting for dictation or a firefighter who plays checkers while waiting for an alarm is working during such periods of inactivity. These employees have been engaged to wait. Their time belongs to the employer and cannot be used for their own purposes.

The waiting time rule also applies to employees who work away from a facility. For example, a repair person is working while waiting for a customer to get the premises ready. The time is worktime even though the employee is allowed to leave the premises or job site during such periods of inactivity. These periods are unpredictable and usually of short duration. However, the employee is unable to use the time effectively for that employee’s own purposes. It belongs to and is controlled by the employer. The employee is engaged to wait.

Periods when an employee is completely relieved from duty and that are long enough to use the time effectively for that employee’s own purposes are not hours worked. An employee is not completely relieved from duty and cannot use the time effectively for that worker’s own purposes without being told in advance of being allowed to leave the job and not having to resume work until a specified time. Whether the time is long enough to use it effectively for one’s own purposes depends upon all the facts and circumstances of the case.

On-call time

An employee who is required to remain on call at the employer’s premises or so close to them that the worker cannot use the time effectively for personal purposes is working while on call. An employee who is not required to remain on the employer’s premises, but is merely required to leave word with company officials about where to be reached, is usually not working while on call. Similarly, employees who are at or near their workstations waiting for a machine to be repaired or materials to be delivered are working.

Where an on-call employee performs services for the employer at home and yet has long periods of uninterrupted leisure during which that employee can engage in personal activities, the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) will accept any reasonable agreement of the parties for determining the number of hours worked.

As an example, this might apply to an on-call employee required to remain at home to receive telephone calls from customers when the company office is closed. The agreement should take into account not only the actual time spent in answering calls, but also some allowance for the restriction on the employee’s freedom to engage in personal activities resulting from the duty of answering the phone.

Meetings and training time as working time

• Four criteria determine whether attendance at meetings or training sessions can be regarded as working time.
• A federal regulation provides examples of when training is related to an employee’s job.

In most cases, time spent in training or meetings is considered hours worked that must be paid. The federal regulation at 785.27 reads as follows:

Attendance at lectures, meetings, training programs, and similar activities need not be counted as working time if the following four criteria are met:

1. Attendance is outside of the employee’s regular working hours;
2. Attendance is voluntary;
3. The course, lecture, or meeting is not directly related to the employee’s job; and
4. The employee does not perform any productive work during such attendance.

Note that all four of these criteria must be met. If not, the time is paid working time. In most cases, training and meetings are required by the employer, and on that basis alone will not meet all four criteria. This can include certain tests required for employment, although it would not include applicant screening tests.

The question of whether the meeting or training program occurs outside of normal working hours is usually simple to answer. Most employees have regularly scheduled hours.

The question of whether productive work was performed is also usually simple to answer (although many employees might feel that time spent in meetings is not productive). Employees do not have to be engaged in creating a product or selling a service, however. If the meeting discusses business strategy, or if the training is necessary for the job, this would be considered “productive” work.

The other two issues of voluntary attendance and whether the meeting is directly related to the job, however, require some explanation.

Voluntary attendance

Attendance is not voluntary if employees believe that failure to attend would adversely affect their working conditions or employment. In other words, an employer might claim that attendance is voluntary, but if employees would suffer in employment by not attending, then they must still be paid if they show up.

Also, training is not voluntary because employees could complete it on their own time. For example, if an employer requires that everyone complete an online training class, but an employee chooses to complete the class from a home computer, the time must be paid. Taking the online class at home does not excuse the employer from the obligation to pay for mandatory training.

Time spent participating in fire or other disaster drills, whether voluntary or involuntary or during or after regular working hours, is considered substantially to the benefit of the employer and is compensable hours of work. Such time may be compensated at the minimum wage rather than the employees’ regular rates, however.

Related to the employee’s job

The question of whether training is related to the employee’s job is best answered by looking at the regulation, which is fairly straightforward and includes examples. Section 785.29 says:

“The training is directly related to the employee’s job if it is designed to make the employee handle his job more effectively as distinguished from training him for another job, or to a new or additional skill. For example, a stenographer who is given a course in stenography is engaged in an activity to make her a better stenographer. Time spent in such a course given by the employer or under his auspices is hours worked. However, if the stenographer takes a course in bookkeeping, it may not be directly related to her job. Thus, the time she spends voluntarily in taking such a bookkeeping course, outside of regular working hours, need not be counted as working time. Where a training course is instituted for the bona fide purpose of preparing for advancement through upgrading the employee to a higher skill, and is not intended to make the employee more efficient in his present job, the training is not considered directly related to the employee’s job even though the course incidentally improves his skill in doing his regular work.”

If an employee freely decides to attend an independent school, college, or independent trade school after hours, the time is not hours worked even if the courses are related to the worker’s job. For example, a manager might choose to take courses in business management for skills and knowledge improvement. Since this training is undertaken on the employee’s own initiative, and the company does not require attendance, the employee does not have to be paid wages for time spent in classes, even if training is related to the current job.

Many employers conduct training during a “lunch and learn” session where employees may bring a lunch (or food may even be provided) and employees are learning information related to the job. The fact that such training occurs during a meal period does not allow the employer to refuse payment for the time (and since employees are not relieved of duty, the lunch session cannot be counted as an unpaid meal period). Also, providing food to employees does not excuse the employer from paying wages during that time.

Recordkeeping

• A listing of basic records for employees must be maintained by employers, according to the FLSA.
• Certification of timecard records filled out by workers can prove beneficial when questions of falsified or disputed hours arise.

Under the Fair Labor Standards Act (FLSA), every covered employer must keep certain records for each nonexempt worker. The FLSA requires no particular form but does require that records include certain identifying information about the employee and data about hours worked and wages earned. The following is a listing of the basic records:

• Employee’s full name and Social Security number;
• Address, including ZIP code;
• Birth date, if younger than 19;
• Sex and occupation;
• Time and day of week when employee’s workweek begins;
• Hours worked each day;
• Total hours worked each workweek;
• Basis on which employee’s wages are paid (e.g., “$9 an hour,” “$1,000 a week,” “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; and
• Date of payment and the pay period covered by the payment.

According to the FLSA, employers need not keep records of hours worked by exempt employees. It may be beneficial, however, to do so, since such records are evidence of wages and hours, and can be called into question should a lawsuit be brought alleging inappropriate pay or scheduling activities. Also, state laws may require keeping such records for exempt employees.

Some companies require all employees, exempt and nonexempt, to use the same type of forms for recording hours and wages. Others have separate forms for exempt employees. One such form is commonly referred to as an “exception report.” This report indicates exempt employees’ normal working hours and is provided to such employees every pay period. If the employees have deviated from the indicated schedule, they are given the opportunity to make changes on the form to reflect the deviations. The form is signed whether changes were made or not.

Form or format

There is no specified form or format for FLSA records. In theory, an employee could verbally report hours worked, and the employer (or supervisor) could write down that number to document hours worked. However, employers generally require the employee to follow some procedure for recording hours, whether punching a clock, filling out a time sheet, using a computer program, or some other method. Such records may be stored on paper or electronically, as long as all required elements are available and retrievable.

Even when the duty to record hours worked has been placed on employees, the organization remains responsible (and potentially liable) for ensuring that records are complete and accurate. For example, an employee’s failure to turn in a timecard is not an excuse for failing to create the required record.

Similarly, that failure is not an excuse for failing to pay the employee for work performed. The regulations of the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) state that if an employer “knows or has reason to believe” that an employee is working, the time must be counted as hours worked (785.11).

Recording hours worked

One reason for having employees fill out their own time sheets is to provide a statement that the record is a true and accurate reflection of hours actually worked. Where paper records are used, employees are often required to sign timecards. An actual signature may not be possible in electronic records, but employees can still be informed (and even reminded via a statement in the software) that by submitting the records, they are certifying the records are accurate.

These certifications can be useful if the employee falsifies a timecard, which can result in discipline. Reporting time that was not actually worked, and attempting to collect wages for that time, is commonly considered a form of theft.

Conversely, an employee who certifies the reported time is accurate may face a greater challenge in claiming back wages for unpaid hours. An employee who certified the records were accurate may have to offer a contrary story to claim unpaid time, which can harm the employee’s credibility, unless the employee can show, for example, that the company knowingly allowed or required submission of a false timecard.

Properly recording hours worked (and subsequently calculating wages, overtime, etc.) requires understanding which hours must be counted as working time. In short, employees are working whenever they are acting under the direction or control of the employer, or acting primarily in the interests of the employer. It is not necessary that they be engaged in specific job tasks at all times.

For instance, short rest periods or “coffee breaks” are counted as time worked. Similarly, employees who are engaged by the employer to wait for some event (such as delivery of materials) before starting their tasks must be paid for waiting because their time is controlled or required by the employer, and cannot be used for their own pursuits.

In some cases, the employee will need to make changes to recorded hours worked. If changes to an employee’s timecard become necessary, a best practice is to make the change conspicuously and to include the employee’s initials to verify the change. Ideally, the time will be accurately recorded, but mistakes sometimes happen, or an employee gets called to work after turning in a time sheet, and revisions may be necessary.

In other cases, employers will make changes to an employee’s recorded time, perhaps because of an error, or even because the employee falsified the timecard.

A best practice is to discuss the situation with the employee, explain the need or reason for the change, and have the employee initial the timecard or authorize the change. If the employee refuses to cooperate, as may happen in cases of suspected fraudulent time reporting, the employer can at least make a notation of the reason for the change and the fact that the employee was offered an opportunity to sign the change.

Time off and leave

• Vacation policies should be written or otherwise made clear to workers to facilitate equal treatment for all employees.
• Even states that permit “use it or lose it” vacation systems offer employees some recourse to receive their time off.

Employers commonly have different vacation or sick leave policies for exempt and nonexempt employees, such as accrual rates or terms of use. Otherwise, the requirements for using the time can be similar for both categories. The following sections discuss some common types of leave provided by employers.

Vacation

Organizations have a variety of vacation systems. Some award vacation time upon hire, while others require employees to work for a specified waiting period to earn the time. Formal vacation arrangements or written policies help make employees aware of how much vacation they have, and when they may take such days off. This allows for more equitable provisions, as all employees are treated equally.

Some policies may allow employees to carry over unused vacation time, while others may require using the allotted vacation time within a certain period. For example, a company may require that employees use all their vacation days within one year of receiving them. Alternatively, employers may allow employees to carry over unused vacation for a specified time, such as two months. After that, employees lose their vacation time or are credited for the time with a cash payment.

Although the Fair Labor Standards Act (FLSA) does not require or regulate vacation pay or other paid time off, employers are expected to follow any established policies or past practices. State laws don’t require vacations either, though some require other types of leave, whether paid or unpaid. In many cases, if a vacation policy does not explicitly state that vacation time will not be paid out when an employee leaves the company, the company may be required to pay out any earned vacation time that hasn’t been used.

Even if employees are exempt, an employer can require vacation or sick leave use for partial days, just as for nonexempt employees. This was most directly addressed by the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) in opinion letter FLSA 2005-7, which offers the following:

“Where an employer has a benefits plan (e.g., vacation time, sick leave), it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, whether the absence is a partial day or a full day, without affecting the salary basis of payment, if the employee nevertheless receives in payment his or her guaranteed salary.”

However, if an exempt employee is absent for less than a full day, the employee must still receive payment of the full guaranteed salary even if that employee has no remaining vacation. This letter also warns that deductions are not allowed for partial days, stating:

“Payment of the employee’s guaranteed salary must be made, even if an employee has no accrued benefits in the leave plan and the account has a negative balance, where the employee’s absence is for less than a full day.”

The employer may deduct from the salary of an exempt employee for being absent a full day for personal reasons. In addition, the exempt status would not be affected if the employer pays a portion of the daily equivalent salary when the employee has insufficient leave available to cover the full-day absence.

For example, if a full-day absence could otherwise be unpaid, the employer may apply the last remaining four hours of vacation, which only partially covers a full-day absence. This partial day of payment is not a deduction from pay because the entire absence could have been unpaid.

For more information, see the personal absence portion of the deductions from pay section.

Payout at termination

In most cases, an employer’s policy and past practice dictate when and how paid time off (PTO) can be used. Generally, employers are expected to follow any established policies or practices. In many cases, if a vacation policy does not explicitly state that vacation will not be paid out when an employee leaves the company, the company may be required to pay out any earned vacation that hasn’t been used.

Employers should check the laws of each state in which they operate for specifics. Some states don’t consider vacation to be a wage, but will still require payout at separation.

“Use it or lose it” policies

Many states consider earned vacation to be a “wage” that cannot be taken away. Other states allow for loss of time or denial of payout, but only if forfeiture provisions are clearly communicated in writing.

Most states allow employers to “cap” vacation accrual once a certain number of hours have been earned, but some do not allow a “use it or lose it” policy that takes away unused vacation at the end of the year. For example, an employer might be able to establish a policy that once an employee earns 200 hours of vacation, no further vacation will be earned until some of the earned time has been used. In essence, further earnings can be halted, but time already earned cannot be lost.

Other states may allow “use it or lose it” policies but expect that employees will have reasonable opportunities to use vacation time. If several vacation requests were denied, an employee may be able to file a claim for earned vacation time that couldn’t be used, even if the state doesn’t consider vacation to be a “wage.”

Minimum wage

Federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA), and the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) administers and enforces the federal minimum wage law. The current federal minimum wage is $7.25 per hour, and has been since July 24, 2009.

The federal minimum wage does not increase automatically. The U.S. Congress must pass a bill that the president signs into law in order for the minimum wage to go up.

Many states also have minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages. Employers must comply with both federal and state wage laws.

Sub-minimum wage

The FLSA provides for employment of certain individuals at wage rates below the statutory minimum. Note that state laws may not recognize these federal provisions, and states may still require the full minimum wage for employees who could have been paid sub-minimum wages under federal regulations.

Various exceptions to the minimum wage apply under specific circumstances to tipped workers, workers with disabilities, full-time students, employees under age 20 in their first 90 consecutive calendar days of employment, and student-learners.

• Disabled workers
  Included under sub-minimum wage provisions are individuals whose earning or productive capacity is impaired by a physical or mental disability, including those related to age or injury, for the work to be performed. Employment at less than the minimum wage is authorized only under certificates issued by the WHD.
  
  This does not apply unless the disability impairs the worker’s earning or productive capacity for work being performed. The fact that a worker may have a disability is not in and of itself sufficient to warrant payment of a special minimum wage.
  
  Any individual whose earning or productive capacity is impaired by a physical or mental disability, including those related to age or injury, may be paid sub-minimum wages when the impairment is certified by the DOL. The sub-minimum wages must be comparable to wages paid to non-disabled workers. The DOL authorizes employment at less than the minimum wage to increase opportunities for disabled workers to be employed.
  
  Employers interested in applying for a sub-minimum wage certificate for disabled workers should contact the WHD office in their region.
• Youth wages
  The FLSA allows employers to pay a youth minimum wage of not less than $4.25 an hour to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.
  
  The eligibility period runs for 90 consecutive calendar days (not scheduled working days), beginning with the first day of work for an employer. It does not matter when the job offer was made or accepted, or when the worker was considered hired. The 90-day period starts with (and includes) the first day of work for the employer. It does not matter how many days during this period the employee performs any work.
• Full-time students
  The Full-time Student Program is for full-time students employed in retail or service stores, agriculture, or colleges and universities. The employer that hires students can obtain a certificate from the DOL that allows the student to be paid not less than 85 percent of the minimum wage.
  
  The certificate also limits hours that the student may work to eight hours in a day and no more than 20 hours a week when school is in session and 40 hours when school is out. It also requires the employer to follow all child labor laws. Once students graduate or leave school for good, they must be paid the statutory minimum wage.
  
  There are some limitations on the use of the Full-Time Student Program. For information on the limitations or to obtain a certificate, contact the nearest WHD office.
• Student learners
  This program is for high school students at least 16 years old who are enrolled in vocational education (shop courses). The employer that hires the student can obtain a certificate from the DOL that allows the student to be paid not less than 75 percent of minimum wage, for as long as the student is enrolled in the vocational education program.
  
  Employers interested in applying for a student-learner certificate should contact the WHD office with jurisdiction over their state.

Tips

• Employees receiving tips must be informed by their employer of any tip credit or tip pooling arrangements.
• The FLSA bans systems where any part of a worker’s tip is received by an employer.

Though they may be paid less than minimum wage, tipped employees must be informed (preferably in writing) of how the tip credit works, and they must retain all tips. Where tip-pooling is used, employers must be aware that individuals eligible to receive distributions from the pool will differ based on whether the tip credit provision is used.

Tipped employees are those who customarily and regularly receive more than $30 a month in tips. Tips received by these employees may be counted as wages under the Fair Labor Standards Act (FLSA) as a credit toward the minimum wage, but the employer must pay not less than $2.13 an hour in direct wages. If an employer elects to use the tip credit provision, that employer must:

1. Inform each tipped employee about the tip credit allowance (including amount to be credited) before the credit is used;
2. Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined; and
3. Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except when the employee participates in a valid tip pooling arrangement.

If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the minimum hourly wage, the employer must make up the difference.

Note that some states (or municipalities) may have a higher minimum wage. Also, some states may not allow a tip credit at all, and instead require a full minimum wage for all employees — even if they receive tips. Other states may limit the amount of tip credit that can be taken to a certain percentage of minimum wage.

Employee requirements

Tips that employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips the employer paid to the employee for charges to customers and tips the employee received directly from customers.

Employees must report tip income on the Internal Revenue Service (IRS) Form 4070, Employee’s Report of Tips to Employer, or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:

• The employee’s name, address, and Social Security number;
• The company’s name and address;
• The month or period the report covers; and
• The total tips received.

No report is required from an employee for months when tips are less than $20.

Employer requirements

In order to take a tip credit against the minimum wage obligation, employers must provide certain notices to employees. An employer is not eligible to take the tip credit unless it has informed tipped employees in advance of:

• The employer’s use of the tip credit;
• The amount of the cash wage that is to be paid to the tipped employee by the employer;
• The additional amount by which wages of the tipped employee are increased on account of the tip credit claimed, which may not exceed the value of tips received by the employee; and
• The fact that all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement.

The tip credit cannot by applied to any employee who has not been informed of these requirements.

Employers must collect income tax, employee Social Security tax, and employee Medicare tax on tips reported by employees. These taxes can be collected from an employee’s wages or from other funds that employee makes available.

Retention of tips

The FLSA forbids any arrangement between the employer and tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee. Where an employer does not strictly observe tip credit provisions of the FLSA, no tip credit may be claimed and employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may/should have received.

Service charges

A compulsory charge for service (e.g., 15 percent of the bill for large groups) is not a tip. Such charges are part of the employer’s gross receipts. Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime required by the FLSA.

A service charge differs from a tip because the customer does not decide whether to pay or how much to give. The payment is made to the employer, not the employee, and the employer could choose whether to pass the amount (or only a portion of it) along to the employee. Thus, even where a compulsory service charge is later given to the employee, it is part of the wages paid by the employer, not a tip received from the customer.

Since the service charge distribution is part of the wages paid by the employer, it counts toward the minimum wage obligation. It can also be counted toward the overtime rate.

Overtime pay

• The regular rate of pay, which cannot be less than minimum wage, must be determined first before calculating overtime.
• When an employee is performing two separate jobs for the same employer, all hours worked in both jobs must be credited toward overtime.

For covered, nonexempt employees, the Fair Labor Standards Act (FLSA) requires overtime pay to be at least 1.5 times an employee’s regular rate of pay after 40 hours of work in a workweek. Some exceptions apply under special circumstances to police and firefighters and to employees of hospitals and nursing homes.

Extra pay for working weekends or nights is a matter of agreement between the employer and employee (or the employee’s representative).

Some states have overtime laws. In cases where an employee is subject to both state and federal overtime laws, the employee is entitled to overtime according to the higher standard (i.e., the standard that will provide higher overtime pay).

Regular rate of pay

Before calculating overtime pay, an employer must first determine the regular rate of pay. The regular rate of pay cannot be less than minimum wage and includes all remuneration for employment except certain payments excluded by the FLSA.

When thinking of wages paid to employees, an employer probably thinks of the dollar amount listed on the paycheck. However, the FLSA recognizes non-cash items as wages if the items are provided as consideration for employees’ efforts. Where non-cash payments are made (such as prizes and gifts), the reasonable cost to the employer or fair value of such goods must be included in the regular rate. For instance, if an employee receives a gift card as a reward for perfect attendance, this must be counted as wages and would affect the overtime rate.

In one case, employees of a beer bottling company sued for additional overtime pay, claiming that the free beer they received each month was part of their wages and therefore increased their average hourly rates of pay. Since overtime must be calculated using the regular hourly rate, an increase in the regular rate would also increase the overtime rate.

Certain gifts and payments are not wages and do not impact the overtime rate, although the value can still be taxable income. For example, holiday bonus gifts (if not de minimis) and vacation pay count as taxable income, but do not affect the amount of overtime owed. Payments that are not part of the regular rate include:

• Pay for expenses incurred on the employer’s behalf;
• Qualifying premium payments for overtime work;
• Qualifying premiums paid for work on Saturdays, Sundays, and holidays;
• Discretionary bonuses;
• Gifts and payments in the nature of special occasions; and
• Payments for occasional periods when no work is performed due to vacation, holidays, or illness.

Regular rate includes non-cash payments

The FLSA allows an employer to pay a portion of wages in forms other than cash. For example, the wages of a food service employee may include the reasonable cost of meals furnished by the employer. An apartment complex employee may be given an apartment and utilities in addition to an hourly wage or salary. In such cases, the employer is allowed to count the reasonable cost of meals, lodging, or other facilities toward the minimum wage that would normally be required.

If the compensation includes such non-cash payments (also called “wages in kind”), the reasonable cost of the non-cash items must be included in the employee’s regular rate for overtime purposes. The employee’s straight-time hourly earnings or salary would be added to the reasonable cost of the non-cash payments, and that total would be divided by the number of hours worked for the workweek in order to calculate the regular rate.

Employees working at two or more rates

In some cases, an employee who already works for an employer will accept a second job with the same company (perhaps working two part-time jobs that pay different rates). This is acceptable, but since there is only one employment relationship, all hours worked in both jobs must be credited toward overtime.

In other cases, an employer will assign additional duties and choose to pay a different rate, or perhaps define certain duties such as travel or training to be paid at a lower rate.

If an employee works two different jobs at two different rates of pay, the FLSA allows two different methods of computing the regular rate for overtime calculation purposes:

1. The weighted average, as described in the regulation at 778.115, Employees working at two or more rates; or
2. The regular rate associated with the job that caused the overtime to occur, as described in the regulation at 778.419, Hourly workers employed at two or more jobs.

Debt collection practices

• A debt collector’s communication with a consumer is regulated by an act passed by the U.S. Congress.
• A QDRO establishes the right of an “alternate payee” to all or part of an employee’s retirement plan benefit.

Sometimes employees get into debt that they cannot immediately pay off, and they may receive collection calls at work. The U.S. Congress anticipated this situation and created the Debt Collection Practices Act. In particular, 1692c, Communication in connection with debt collection, includes the following provision:

(a) Communication with the consumer generally

Without prior consent of the consumer given directly to the debt collector or express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt:

1. At any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer. In the absence of knowledge of circumstances to the contrary, a debt collector shall assume that the convenient time for communicating with a consumer is after 8:00 a.m. and before 9:00 p.m. local time at the consumer’s location;
2. If the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney’s name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer; or
3. At the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.

In other words, if an employee is getting harassing calls from a debt collection agency, and the employee informs the agency that company policy prohibits the employee from taking such calls at work, the agency is required by law to stop calling the person at work.

Note, however, that the act applies primarily to third-party collection agencies, not organizations attempting to collect their own debts. For example, the law does not apply to a property manager attempting to collect a tenant’s overdue rent or to a utility attempting to collect an overdue electric bill. See the definition of “debt collector” in 1692a, paragraph (6).

Qualified Domestic Relations Order

Often as a result of a divorce settlement, all or a portion of a participant’s retirement plan benefit — whether from a defined contribution plan or defined benefit plan — is determined to be split and paid to the former spouse or “alternate payee.” An alternate payee may be a spouse, former spouse, child, or other dependent of a participant. A court order that creates the existence of an alternate payee’s right to receive all or a portion of benefits payable with respect to a participant under a qualified retirement plan is referred to as a Qualified Domestic Relations Order (QDRO).

• Components
  Just the fact that a property settlement in a divorce situation is agreed to and signed by the parties does not necessarily cause the agreement to become a QDRO. It must be issued by a state authority, generally a court, before it qualifies. Basic information must be included in a QDRO such as name, mailing addresses of both parties, name of the plan, dollar amount or percentage to be paid to the alternate payee, and the number of payments or time period to which the order applies.
  
  Every pension plan is required to establish written procedures for determining whether a domestic relations order is a QDRO and for administering distributions under it. An employer can process each QDRO in-house or pay an attorney, recordkeeper, or actuary to process it.
• How to process
  For those processing the court orders in-house, there are certain things to keep in mind:
  • Plan administrators may develop a “model” QDRO form with acceptable language to assist attorneys in preparation of a QDRO.
  • Upon receipt of a “draft” copy of the QDRO, the plan administrator should make sure all the information is complete and accurate. The proposed QDRO cannot require a benefit or form of benefit not otherwise provided under the plan.
  • The plan administrator must promptly notify the participant and each alternate payee of the draft copy, as well as provide a copy of the plan’s procedures to them.
  • Once the plan administrator has determined the draft to be “qualified”, the approval should be sent to the attorney for final revisions and submission to the court.
  • Upon receipt of the final court order, the plan administrator is required to notify participants and each alternate payee promptly.

• Timeframe
  Processing of the retirement plan benefit per the stipulations of the QDRO should be done within a reasonable time period upon receipt of final court documentation. These are mandatory orders that a plan sponsor must abide by and should be conscientiously followed.

Garnishment of wages

• The CCPA and many states restrict the amount of a worker’s earnings that can be garnished in any particular week.
• Several types of wage garnishments other than creditor garnishments can be applied to employees.

A wage garnishment occurs when some portion of a person’s earnings is required to be withheld by an employer for payment of a debt. Most garnishments are made by court order. Other types of garnishments include Internal Revenue Service (IRS) or state tax levies for unpaid taxes, or levies for non-tax debts owed to the federal government (such as student loans). Some agencies can issue garnishment orders without going through court. For example, the U.S. Department of Education can issue an administrative order to garnish an employee’s wages for unpaid student loans, even without a court order.

Wage garnishments do not include voluntary wage assignments, where employees voluntarily agree that their employers may turn over some specified amount of their earnings to a creditor, or agree to repay a loan or wage advancement to the employer.

Title III of the Consumer Credit Protection Act (CCPA) and many states limit the amount of an employee’s earnings that may be garnished in any one week. Title III applies to all employers and individuals receiving earnings for personal services (including wages, salaries, commissions, bonuses, and income from a pension or retirement program, but ordinarily not including tips).

Under Title III, an employer is prohibited from discharging an employee because that employee’s earnings have been subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect it. The rule does not protect an employee from discharge if the employee’s earnings have been subject to garnishment for a second or subsequent debt. However, some state laws do offer protection from discharge for additional garnishments.

The amount to be garnished and termination provisions are administered by the U.S. Department of Labor (DOL) Wage and Hour Division (WHD), which has no other authority with regard to garnishments.

Questions about issues other than amounts and termination provisions should generally be referred to the court or agency initiating the withholding action. Compliance with a garnishment order is critical because if an employer fails to withhold funds as required, the organization can be held responsible for amounts that should have been paid.

A common question involves the priority of garnishments. Generally, tax debts and child support obligations must be satisfied before creditor debts. This sometimes means a creditor’s garnishment cannot be followed because the maximum allowable garnishment is being used for child support or tax debts. If an employee has garnishment orders for both taxes and child support, the employer should contact the agencies that issued the orders for guidance on priority.

Types of garnishments

The CCPA applies to creditor garnishments, where an employee has an unpaid debt. However, employees may be subject to other types of wage garnishments. These might include:

1. Chapter XIII bankruptcy,
2. Federal taxes owed to the IRS,
3. Family or child support,
4. Federal student loans,
5. State or local taxes,
6. State student loans, or
7. Creditors.

An employee might have more than one type of garnishment, which raises questions about priority. Which order must be satisfied first? In general, garnishment types are listed in order of priority. For garnishments of the same type (e.g., two orders from creditors) the priority is usually “first come / first paid.” Unfortunately, determining priority for different types of garnishments is not that simple.

For example, state laws will usually give priority to family and child support, and those orders might even “bump” lower orders (such as creditors) until the higher obligation is satisfied. However, federal debts are not subject to state laws. This means federal tax debts (or even something lower on the list, such as federal student loans) might be deemed to have priority over state debts.

If an employee has more than one type of garnishment, contact the issuing agencies for guidance. In some cases, an agency with legal priority (such as the IRS) may defer payment or may agree to take an amount after the other garnishment.

Adding to the confusion is the fact that different garnishments have different permissible maximum deductions. This might allow employers to partially satisfy a secondary order. For example, creditor orders are limited to 25 percent of disposable income, but federal student loans are limited to only 15 percent of disposable income. Therefore, an employee with a federal student loan garnishment (fairly high priority) might still have 10 percent of disposable income available to pay a creditor debt.

Compounding the confusion is the fact that not all garnishment orders are issued by courts. For example, the U.S. Department of Education has the authority to issue administrative orders for overdue student loans without obtaining a court order. Employers should be wary of ignoring an order because it wasn’t signed by a judge; the employer can often be held liable for payments that should have been made under the order.

Since family or child support orders can be up to 50 or 60 percent of disposable income, these orders might prevent payments toward any lower-priority orders. Also, these support orders might be in place for years, so other entities may have to wait a long time for their payments.

Federal tax debts from the IRS don’t have a maximum deduction. Instead, the IRS issues annual guidance for how much income the employee must be allowed. This is based on the employee’s filing status and number of exemptions claimed. The IRS updates this amount annually and provides it in Publication 1494.

Salary deductions

• Nonexempt employees are not entitled to be paid for time that they did not work.
• The distinction between a uniform and a dress code leads to questions of payment for and provision of garments.

While the Fair Labor Standards Act (FLSA) allows nearly any deduction for nonexempt employees, there are some restrictions for exempt employees who must be paid on a salary basis. In addition, even nonexempt employees who are paid a salary may be subject to more restrictions than hourly employees.

Nonexempt (hourly) employees

The first issue to address is whether a failure to pay an employee constitutes a deduction from wages. For example, nonexempt employees are not entitled to wages during an absence because they are only paid for hours worked. If a nonexempt employee doesn’t report to work because of bad weather, the employer does not have to provide wages for that day because the employee didn’t work (regardless of whether the business was open or closed). This is not a deduction from pay because no wages were earned.

As noted previously, deductions are normally either for the employer’s benefit (such as tools, uniforms, or damages) or for the employee’s benefit (such as retirement plans or health insurance premiums). A deduction for the employer’s benefit cannot reduce employees’ wages to less than minimum wage.

Items primarily for the benefit or convenience of the employee may include deductions for health insurance, retirement plan contributions, charitable donations, and purchases of the employer’s goods or services via payroll deductions. In addition, meals provided by the employer are regarded as primarily for the benefit and convenience of the employee.

The question of which entity benefits is important because a deduction for the employee’s benefit can usually reduce the employee’s wages below minimum wage. For example, an employee who earns minimum wage could still elect to participate in a 401(k) plan, even though deferrals reduce the paycheck below minimum wage. Similarly, an employee who earns minimum wage could choose to purchase health insurance from the employer, even if premiums take up most of the wages earned.

On the other hand, expenses for the employer’s benefit (such as making the employee purchase a uniform) cannot be taken as a credit toward the minimum wage obligation. The FLSA recognizes that wages in-kind (that is, non-monetary compensation) can be applied toward the minimum wage.

Remember that the FLSA was passed in 1938, so it even lists items such as coal and lumber that might be given to employees in lieu of cash. However, providing an employee with a uniform does not benefit the employee, so if the employer requires the employee to bear the cost, it may not reduce the employee’s wage below minimum wage, nor may that cost cut into overtime compensation required.

For example, if an employee is paid the minimum wage of $7.25 per hour (effective July 24, 2009), the employer may not make any deduction from wages for the cost of the uniform nor require the employee to purchase the uniform out of pocket. However, if the employee were paid $7.75 per hour and worked 30 hours in a workweek, the employer could deduct $15.00 ($0.50 X 30 hours), or the amount above minimum wage.

Employers may prorate deductions over several paydays, provided the prorated deductions do not reduce the employee’s wages below the required minimum wage or overtime compensation in any workweek.

Items other than uniforms are treated much the same. Again, the question is usually which entity benefits: the company or the employee. Examples of items for the benefit or convenience of the employer include tools used in the job, damages to the employer’s property, financial losses due to customers not paying bills, and theft of the employer’s property by the employee or other individuals.

Employees may not be required to pay for any such items if, by so doing, their wages would be reduced below the required minimum wage or overtime compensation. This is true even if an economic loss suffered by the employer is due to the employee’s negligence.

Dress code or uniform?

Since employers may have to pay for a uniform but can generally establish any dress code they choose, this raises the question of the difference between a uniform and a dress code. For example, if employees are required to wear black or tan pants and a blue polo shirt, is this a uniform?

Probably not, because under federal and state wage laws, the term “uniform” has a specific meaning. It generally does not include “street clothing” such as khaki pants or similar articles commonly worn. Typically, the term refers to unusual items not suitable for daily wear.

For example, office employees could be expected to wear “business casual” clothing such as dress slacks and dress shirts, but this isn’t a uniform. However, if an employer requires something unusual (such as a bartender wearing a tuxedo shirt or Hawaiian shirt as part of the bar’s image), then the clothing may be considered a uniform because it’s unusual and not commonly worn as street clothing.

Many states restrict employers from making employees purchase or maintain a uniform (unless the employee agrees in writing to do so). However, if employees are required to wear black or tan pants of their own choosing, without a company logo or unusual style required, then it probably isn’t a uniform, just a dress code requirement.

The U.S. Department of Labor (DOL) Wage and Hour Division (WHD) has an opinion letter (FLSA2004-1NA, Garments as uniforms under FLSA) that determined khaki pants and a blue polo shirt were ordinary clothing and not uniforms under the FSLA. State agencies generally apply a similar standard, where a uniform means clothing of distinctive design or including a company logo.

So even though some laws restrict an employer’s ability to make employees purchase or maintain a uniform, a clothing requirement that describes common street clothes probably isn’t a uniform under such laws. Rather, it is a dress code, and employees can be required to provide or pay for their own clothing under a dress code.

In fact, providing an allowance to purchase street clothing can even be taxable income to the employee. According to the Internal Revenue Service (IRS), employers may reimburse employees (or directly pay for) distinctive uniforms or unusual apparel such as high-visibility clothing without increasing the employees’ taxable income.

However, giving employees money to purchase clothing suitable or readily adaptable for street wear could be taxable income to the employee (even if the article has a company logo, such as a polo shirt with a small logo).

Employees of public agencies

• Established pay systems might necessitate public agency employee pay cuts or unpaid leave for absences of less than one day.
• Multiple factors are weighed to tell if an employer has an “actual practice” of making improper deductions.

Under 29 CFR 541.710, an employee of a public agency who otherwise meets salary basis requirements will not lose the exemption if the employee is subject to salary deductions for partial-day absences, whether for personal reasons or because of illness or injury. These deductions for partial days are allowed if imposed according to a pay system established by statute, ordinance, or regulation, or by a policy or practice established according to principles of public accountability.

Under such plans, the employee might accrue personal leave and sick leave, but the policy may require the employee’s pay to be reduced, or the employee to be placed on leave without pay, for absences of less than one day. This may occur when accrued leave is not used by the employee because:

1. Permission for its use has not been sought, or has been sought and denied;
2. Available accrued leave has been exhausted; or
3. The employee chooses to use leave without pay.

Deductions from the pay of an employee of a public agency for absences due to a budget-required furlough do not disqualify the employee from being paid on a salary basis except in the workweek in which the furlough occurs and for which the employee’s pay is accordingly reduced.

Prohibited deductions for exempt employees

Certain deductions cannot be made from the salary of an exempt employee without jeopardizing the employee’s exempt status. The regulation at 541.603 begins by stating:

“An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis. An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.”

Essentially, if a deduction is not specifically permitted by the salary basis rule at 541.602, then it violates the requirement and may threaten the exempt status. The deductions specifically authorized have been covered previously. If the exempt position is not subject to the salary basis rule (such as outside sales, computer employee exemptions, teachers, or those who practice law or medicine), then deductions cannot be in violation of that rule.

An example of an improper deduction would be for damage or loss of company equipment. An opinion letter (FLSA2006-7) from the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) offers the following:

“... deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations. Such impermissible deductions violate the regulation’s prohibition against reductions in compensation due to the quality of the work performed by the employee. Consequently, any deductions made to reimburse the employer for lost or damaged equipment would violate the salary basis rule.”

However, the situation gets more complicated for employees who also earn commissions above and beyond their guaranteed salary. Another opinion letter (FLSA2006-24) states the following:

“The final rule at 541.600(a) requires only that exempt employees be paid a guaranteed salary of at least $455 per week, and any additional compensation above this salary amount is generally something that may be agreed upon between the employer and the employee. The prohibition against improper deductions from the guaranteed salary under 541.602(b) does not extend to any such additional compensation provided to exempt employees. Therefore, it is our opinion that cash shortage deductions may be made from a salaried exempt employee’s commission payments without affecting the employee’s exempt status ...”

If an exempt employee is given extra compensation “above and beyond” guaranteed salary, such as bonuses or commissions, those extra payments can be denied without violating the salary basis rule, even if such deductions would not be permitted from the salary itself.

Effect of improper deductions

An employer will lose the exemption if facts demonstrate that the employer did not intend to pay employees on a salary basis. An “actual practice” of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.

Factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to:

• The number of improper deductions, particularly compared with the number of employee infractions warranting discipline;
• The time period during which the employer made improper deductions;
• The number and geographic location of employees whose salary was improperly reduced;
• The number and geographic location of managers responsible for taking improper deductions; and
• Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

If facts demonstrate that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which improper deductions were made for employees in the same job classification working for the same managers. Employees in different job classifications or who work for different managers do not lose their exempt status, however.

For example, if a manager routinely docks the pay of engineers for partial-day personal absences, all engineers at that facility whose pay could have been improperly docked by that manager would lose the exemption. Engineers at other facilities or working for other managers, however, would remain exempt.

“Isolated” or “inadvertent” improper deductions will not result in loss of the exemption for any employees if the employer reimburses the employees for improper deductions. Whether deductions are isolated is determined according to an analysis of factors given previously. Inadvertent deductions are those taken unintentionally (e.g., as a result of a clerical or timekeeping error).

Salary adjustments

• An employee must receive notice from an employer before agreeing to do any work under a new adjusted salary.
• Good-faith compliance with the salary basis rule can be demonstrated by an employer in several ways.

Although salary deductions are restricted, employers can make reductions in salary, assuming the employee is given notice before working any hours at the new salary. The Field Operations Handbook from the U.S. Department of Labor (DOL) includes the following on this:

“A prospective reduction in the predetermined salary amount to not less than the applicable minimum salary due to a reduction in the employee’s normal scheduled workweek is permissible and will not defeat the exemption, provided that the reduction in salary is a bona fide reduction that is not designed to circumvent the salary basis requirement.”

For example, if an employee will be moved from full-time (five days per week) to part-time (four days per week), the employer could reduce the salary by 20 percent to account for reduced expectations. This assumes the new salary will still meet the weekly guaranteed minimum requirement.

Similarly, an employer might expect a reduction in work for a period of several months and might reduce everyone’s working time, along with a commensurate reduction in salaries. This is acceptable, but such changes should be in place for a substantial period of time (a minimum of eight weeks is a best practice).

However, unpaid time off cannot be mandated for increments of less than a full workweek where the time off is imposed “after the fact” (rather than prospectively). This would be an improper deduction and would result in a violation of the salary basis rule. For example, employers cannot establish a different schedule of working hours at the start of each pay period and designate a “salary” for that pay period.

Although prospective salary adjustments are allowed, making regular changes should be avoided. A few changes per year should not create problems, but adjustments every few weeks (or every few pay periods) may imply that the employee is paid by the amount of work performed rather than on a salary basis.

Safe harbor

The regulation at 29 CFR 541.603(d) provides a safe harbor for employers that have a clearly communicated policy prohibiting improper deductions. A clearly communicated policy includes a mechanism for employees to file complaints, reimburses employees for any improper deductions, and makes a good-faith commitment to comply with the salary basis rule in the future. With such a policy, an employer will not lose the exemption for any employees except for willfully violating the policy by continuing to make improper deductions after receiving employee complaints.

These policy violations will cause the exemption to be lost during the time period in which improper deductions were made for employees in the same job classification working for the same managers responsible for the improper deductions.

Although a written policy is the best evidence of the employer’s good-faith efforts to comply with the salary basis rule, a written policy is not essential. However, the policy must have been clearly communicated to employees prior to the impermissible deduction. The “clearly communicated” standard can be met, for example, by providing a copy of the policy to employees when they are hired, publishing it in an employee handbook, or distributing it over the employer’s intranet.

The safe harbor provision is available regardless of the reason for the improper deduction, whether made for lack of work or other reasons.

For example, where an employer has a clearly communicated policy prohibiting improper deductions, but a manager engages in an actual practice (neither isolated nor inadvertent) of making improper deductions, regardless of the reasons for deductions, the exemption would not be lost for any employees. This is only if, after receiving and investigating an employee complaint, the employer reimburses employees for improper deductions and makes a good-faith commitment to comply in the future.

There are several ways in which an employer could show its good-faith commitment to comply in the future including, but not limited to:

• Adopting or republishing the policy prohibiting improper pay deductions,
• Posting a notice of the commitment on a bulletin board or intranet,
• Providing training to managers and supervisors on the policy,
• Reprimanding or training the manager who took the improper deductions, or
• Establishing a telephone number for employees to file complaints concerning improper deductions.

An employer should be allowed a reasonable amount of time to look into and correct a matter after receiving an employee complaint of improper deductions. While the amount of time it will take an employer to complete an investigation will depend upon the circumstances, an employer should begin such an investigation promptly. However, the fact that the employer receives other complaints before timely completion of the investigation should not, by itself, defeat the safe harbor.

Paydays

• Immediate payment of an employee’s final paycheck is not a requirement for an employer under the FLSA.
• Commission wages are due and payable when they can be reasonably calculated, regardless of whether the employee receiving them still works at the company disbursing them.

Federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). The U.S. Department of Labor (DOL) Wage and Hour Division (WHD) administers and enforces the federal minimum wage law.

The minimum wage does not increase automatically. The U.S. Congress must pass a bill that the president signs into law in order for the minimum wage to go up.

Many states also have minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.

Final pay

Employers are not required by the FLSA to give former employees their final paycheck immediately. Some states, however, do require immediate payment or payment within a few days after termination. The DOL suggests that if the regular payday for the last pay period an employee worked has passed and the employee has not been paid, that employee should contact the WHD or the state labor department.

The DOL and the Equal Employment Opportunity Commission (EEOC) also have mechanisms in place for recovery of back wages. A common remedy for wage violations is an order that the employer make up the difference between what the employee was paid and the amount that should have been paid. The amount of this sum is often referred to as “back pay.”

Among other programs, back wages may be ordered in cases under the FLSA or various federal discrimination statutes.

Unclaimed paychecks

In some cases, employees will fail to pick up a final paycheck even after the employer has made it available. It may happen that a mailed final check will be returned to the company as undeliverable.

Many state wage and hour laws address payment of wages, but not an employee’s failure to collect that payment. However, this does not mean employers get to keep the money. Typically, the employer will need to hold the check for a period of time, and later turn it over to a state agency for unclaimed property. Employers may contact their state unclaimed property agency for guidance.

Paying out vacation

Employees commonly believe they must be given payment for any earned but unused vacation time upon separation of employment. In most states, however, payout of earned vacation time is entirely at the employer’s discretion, subject only to company policy. A handful of states, though, consider earned but unused vacation to be a “wage” that must be paid to departing employees.

Commission and bonus final pay

In some instances, commission wages cannot be determined at the time of a sale and must be calculated based on later developments (e.g., receipt of payment, shipping of product, or delays to allow for customer returns). In that case, commission wages become due and payable when they are reasonably calculable, even if the employment relationship ended before those conditions were satisfied.

Bonuses are sometimes confused with commission wages. Bonuses are not based on the price of a product or service, but are usually based on reaching some established criteria. Many times, a bonus is paid to individuals who are not engaged in sales at all.

Executive exemption

• Executive employees qualify for exemption under FLSA if their job duties and salary meet the criteria.

To qualify for the executive employee exemption, all of the following tests must be met. The employee must:

• Be compensated on a salary basis at a rate not less than $684 per week;
• Have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• Customarily and regularly direct the work of at least two or more other full-time employees or their equivalents; and
• Have the authority to hire or fire other employees; or, their suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

Challenges

Common challenges and issues related to this exemption include:

• Is the person really salaried? Inappropriate deductions or fluctuations tied to hours worked may result in the loss of salaried status and the exemption.
• Is the person really in charge? In order to be exempt, the person must be in charge of a department or subdivision, not an assistant.
• What is the person’s primary duty? For exemption, that duty must be managing, not production work.

Administrative exemption

• Administrative employees qualify for exemption under FLSA if their job duties and salary meet the criteria.

To qualify for the administrative employee exemption, all of the following tests must be met. The employee must:

• Be compensated on a salary or fee basis at a rate not less than $684 per week,
• Have the primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and
• Have primary duties that include using discretion and independent judgment with respect to matters of significance.

Challenges

Common challenges and issues related to this exemption include:

• Is the person really salaried? Inappropriate deductions or fluctuations tied to hours worked may result in the loss of salaried status and the exemption.
• Is the person’s primary duty work that is office or non-manual? This is a white-collar exemption. It does not apply to those who produce the product.
• Does the person have primary duties that include discretion and judgment? Highly specialized skills are not the same as judgment. Note that the judgment must relate to matters of significance.

Professional exemption

• Professional employees qualify for exemption under FLSA if their job duties and salary meet the criteria.

To qualify for the learned professional employee exemption, all of the following tests must be met. The employee must:

• Be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
• Have a primary duty of performance of work requiring advanced knowledge (defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment);
• Have advanced knowledge in a field of science or learning; and
• Have advanced knowledge that was customarily acquired by a prolonged course of specialized intellectual instruction.

To qualify for the creative professional employee exemption, all of the following tests must be met. The employee must:

• Be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week; and
• Have a primary duty of performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Computer employee exemption

• Computer employees qualify for exemption under FLSA if their job duties and salary meet the criteria.

To qualify for the computer employee exemption, the following tests must be met. The employee must be:

• Compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour; and
• Employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field performing the duties described below.

The employee’s primary duty must consist of:

1. The application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional specifications;
2. The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
3. The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
4. A combination of the aforementioned duties, the performance of which requires the same level of skills.

Outside sales exemption

• Outside sales employees qualify for exemption under FLSA if their job duties and salary meet the criteria.

To qualify for the outside sales employee exemption, all of the following tests must be met. The employee must:

• Have a primary of making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
• Be customarily and regularly engaged away from the employer’s place or places of business.

This exemption is the focus of numerous suits. Note that this exemption applies only to sales personnel who are engaged in making sales away from the employee’s place of business.

Motor carrier overtime exemptions

• Workers employed by a motor carrier or those involved in the safe operation of motor vehicles can receive an overtime exemption.
• Overtime provisions affect motor carrier employees who meet the criteria for a small vehicle exception.

The Fair Labor Standards Act (FLSA) provides an overtime exemption for employees who are within the authority of the Secretary of Transportation to establish qualifications and maximum hours of service under the Motor Carrier Act, except employees covered by the small vehicle exception described in this section. The overtime exemption could apply to employees who are:

1. Employed by a motor carrier or motor private carrier;
2. Drivers, drivers’ helpers, loaders, or mechanics whose duties affect the safe operation of motor vehicles in transportation on public highways in interstate or foreign commerce; and
3. Not covered by the small vehicle exception.

Motor carriers are entities providing motor vehicle transportation for compensation. Motor private carriers are entities other than motor carriers transporting property by motor vehicle if the entity is the owner, lessee, or bailee of the property being transported, and the property is being transported for sale, lease, rent, or bailment, or to further a commercial enterprise.

The regulations in 29 CFR Part 782, Exemption from Maximum Hours Provisions for Certain Employees of Motor Carriers, contain the specific requirements summarized in the following sections.

Employee duties

The employee’s duties must include performance, either regularly or from time to time, of “safety-affecting activities” on a motor vehicle used in transportation on public highways in interstate or foreign commerce.

Employees performing such duties meet the duties requirement of the exemption regardless of the proportion of safety-affecting activities performed, except where continuing duties have no substantial direct effect on “safety of operation,” or where such safety-affecting activities are so trivial, casual, and insignificant as to be de minimis (as long as there is no change in the duties).

Transportation involved in the employee’s duties must be in interstate commerce (across state or international lines) or connect with an intrastate terminal (rail, air, water, or land) to continue an interstate journey of goods that have not come to rest at a final destination.

Safety-affecting employees who have not made an actual interstate trip may still meet the duties requirement of the exemption if:

• The employer is shown to have an involvement in interstate commerce; and
• The employee could, in the regular course of employment, reasonably have been expected to make an interstate journey or could have worked on the motor vehicle in such a way as to be safety-affecting.

The Secretary of Transportation will assert jurisdiction over employees for a four-month period beginning with the date they could have been called upon to, or actually did, engage in the carrier’s interstate activities. Thus, employees would satisfy the duties requirement of the exemption for the same four-month period.

The overtime exemption does not apply to employees not engaged in “safety-affecting activities” such as dispatchers, office personnel, those who unload vehicles, or those who load but are not responsible for proper loading of a vehicle. Only drivers, drivers’ helpers, loaders responsible for proper loading, and mechanics working directly on motor vehicles for use in transportation of passengers or property in interstate commerce can be exempt from overtime provisions.

The exemption does not apply to employees of non-carriers such as commercial garages, firms engaged in maintaining and repairing motor vehicles owned and operated by carriers, or firms engaged in leasing and renting motor vehicles to carriers.

Small vehicle exception

Despite the possible application of the exemption, overtime provisions will apply to an employee of a motor carrier or motor private carrier in any workweek that meets the following criteria:

1. The employee’s work, in whole or in part, is that of a driver, driver’s helper, loader, or mechanic affecting the safe operation of motor vehicles weighing 10,000 pounds or less in transportation on public highways in interstate or foreign commerce, except vehicles: (a) designed or used to transport more than eight passengers, including the driver, for compensation; or (b) designed or used to transport more than 15 passengers, including the driver, and not used to transport passengers for compensation; or (c) used in transporting hazardous material, requiring placarding under regulations prescribed by the Secretary of Transportation.
2. The employee performs duties on motor vehicles weighing 10,000 pounds or less.

The exemption does not apply to an employee in such workweeks even if the employee’s duties also affect the safe operation of motor vehicles weighing greater than 10,000 pounds, or other vehicles listed in the (a), (b), and (c) criteria, in the same workweek.

Avoiding misclassification

• Employees who perform “safety-affecting activities” can be subject to the overtime exemption.
• Though most states adhere to the motor carrier overtime exemption, some states stipulate unusual provisions.

The following tips can help ensure that workers are properly classified.

The overtime exemption may apply to all employees for whom the U.S. Department of Transportation (DOT) claims jurisdiction. In other words, the exemption can apply to employees ordinarily called upon (either regularly or from time to time) to perform “safety-affecting activities.” The exemption can apply in all workweeks when the employee is employed in such work, regardless of the proportion of safety-affecting activities performed in a particular workweek.

On the other hand, if continuing job duties have no substantial direct effect on operation safety, or where safety-affecting activities are trivial, casual, and insignificant, the exemption will not apply in any workweek as long as there is no change in duties.

Drivers, loaders, and mechanics

Where safety-affecting employees have not made an actual interstate trip, they may still be subject to the DOT’s jurisdiction if the employer is shown to have an involvement in interstate commerce and it can be established that the employee could have, in the regular course of employment, been reasonably expected to make an interstate journey or could have worked on a motor vehicle in a safety-affecting way.

If the employer can offer evidence of these safety-affecting activities and involvement in interstate commerce, the DOT will assert jurisdiction over that employee for a four-month period, starting on the date the employee could have been called upon to (or actually did) engage in interstate activities. Such employees would be exempt from overtime during that four-month period.

State laws

Most states recognize the motor carrier overtime exemption, but some have unusual provisions. For example, New Jersey and New York require that interstate drivers be paid at least 1.5 times the state minimum wage for hours in excess of 40 per week. This does not automatically mean employers must pay 1.5 times the driver’s usual hourly rate. It only means the employee or driver must receive 1.5 times the minimum wage after 40 hours.

Normally, overtime is paid at 1.5 times the employee’s regular hourly rate. Under these state provisions, the calculation is a bit different. If the driver’s base rate of pay is more than 1.5 times the state minimum wage, no additional increase would be necessary.

For example, if the New York minimum wage is $9 per hour, then a driver would have to be paid at least 1.5 times this amount (or $13.50) for any hours after 40 per week. But if the driver is already being paid $14 per hour for all working time, regardless of total weekly hours, then the employer would not have to increase the pay after 40 hours. The driver is already getting paid at least 1.5 times the state minimum wage for hours in excess of 40 per week.

However, if a driver was paid a lesser amount (e.g., a rate of $12 per hour), the employer would have to pay at least $13.50 for time after 40 hours in order to meet the state requirement.

State exemptions and salary differences: Alaska through Colorado

• Although more than half the states observe federal overtime regulations, certain states differ in their applications of such provisions.

Employers have faced lawsuits for wrongfully classifying employees as exempt. What may be less well-known is that employees can file claims under state or federal law. An employee can qualify for an exemption under federal guidelines but fail to meet exemption criteria under state law, and therefore be entitled to overtime under state law.

For example, federal regulations require that the “primary duty” consist of exempt work, even if the employee spends less than half the working time engaged in exempt duties. However, states may require that as much as 80 percent of working hours be spent performing exempt tasks.

Federal regulations require a minimum salary for many of the exempt categories, but a few states have established higher minimum salary requirements.

In addition, states may not allow the same deductions from salary as federal regulations do. For instance, federal revisions in 2004 allowed for unpaid suspensions of less than a full workweek in certain cases. However, some states do not recognize those revisions, so an unpaid suspension of less than a full workweek is not allowed in those states (the suspension could be imposed if the employee was paid a full salary for that week).

The following is a summary of state provisions that differ from federal regulations. More than half the states follow federal provisions, so only states with differences have been included.

Alaska

Minimum salary: To qualify as an exempt executive, administrative, or professional employee, the individual must be compensated on a salary or fee basis at a rate of not less than two times the state minimum wage for the first 40 hours of employment each week, exclusive of board or lodging furnished by the individual’s employer.

The state minimum wage is revised annually on January 1.

As state minimum wage increases, so will the minimum required salary for exempt employees. Even though the minimum salary is based on a specified number of hours, the salary generally cannot be prorated for part-time exempt employees. The purpose of listing a number of hours is to ensure that the salary requirement will increase along with the state minimum wage.

California

Minimum salary: California requires a minimum weekly salary equivalent to 40 hours at twice the state minimum wage.

Effective January 1, 2023, the threshold is $64,480 per year or $5,373.34 per month.

Effective January 1, 2024, the threshold is $66,560 per year or $5,546.67 per month.

Even though the minimum salary is based on a specified number of hours, the salary generally cannot be prorated for part-time exempt employees. The purpose of listing a number of hours is to ensure that the salary requirement will increase along with the state minimum wage. If a part-time exempt employee does not earn the required salary, the individual cannot be exempt, even if the duties otherwise meet the criteria. Improperly classifying a part-time employee as exempt may not cause problems in most states because the employee is unlikely to work more than 40 hours per week, and therefore wouldn’t get overtime anyway. However, California requires overtime after eight hours in a workday, unless the employee is working under an approved alternative workweek schedule.

Employers using hourly rates under the computer employee exemption should also check the minimum hourly rate under state law, which is revised each year.

Duties test: California requires that exempt employees (executive, administrative, professional, and computer employees) spend more than one-half of their working time engaged in exempt duties. The state uses the term “primarily engaged in” exempt work, rather than the federal “primary duty” standard.

Also, the state does not recognize the “concurrent duties” provision adopted for the executive exemption under 2004 federal regulations (29 CFR 541.106). California applies an earlier rule that requires considering the purpose of the duty and whether that duty or task is “helpful in supervising employees.”

For example, supervisors in a retail establishment might observe employees while engaged in mundane or nonexempt tasks such as stocking shelves or working a cash register. However, they cannot have such time counted when determining if they are “primarily engaged in” exempt work.

In addition, California does not recognize the “highly compensated employee” category for those earning more than $107,432 per year.

Deductions: Federal law allows salary deductions imposed as a penalty for violations of major safety rules. However, California has no such provision and does not allow these deductions. Further, the state follows federal regulations in effect prior to the 2004 revisions and does not allow unpaid disciplinary suspensions of less than one week.

Colorado

Minimum salary: The state’s Department of Labor and Employment (CDLE) adopted the final rule for the Colorado Overtime and Minimum Pay Standards Order (COMPS), which went into effect March 16, 2020. COMPS replaced the Colorado Minimum Wage Order (CMWO). Three key components include:

Duties test: Colorado requires that executives/supervisors spend a minimum of 50 percent of the workweek in duties directly related to supervision.

Also, under federal regulations, an outside sales employee must be “customarily and regularly” engaged away from the employer’s place or places of business. In Colorado, these employees must spend a minimum of 80 percent of the workweek in activities directly related to their own outside sales.

Finally, Colorado does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

State exemptions and salary differences: Connecticut through Maine

• Kansas requires executive, administrative, and professional workers to spend at least 80 percent of their time performing exempt duties to qualify for overtime exemption.

Connecticut

Minimum salary: Connecticut requires a minimum salary of $475* for employees who must be paid on a salary basis, although there is a separate test for employees who earn at least $400* per week but less than $475* per week.

Duties test: Connecticut does not recognize an exemption for computer employees (although workers in that field might meet the professional tests), nor does the state recognize the “highly compensated employee” rule for those earning more than $107,432 per year.

If an employee earns less than the required state salary of $475* per week, an executive or administrative employee cannot spend more than 20 percent of working time (or 40 percent for retail or service employees) engaged in duties not directly and closely related to duties that meet the exemption.

In other words, these employees would have to spend at least 80 percent of their time engaged in exempt duties (or at least 60 percent for retail and service employees).

*These amounts may now be lower than required by federal regulations. Employers should adhere to whichever is higher.

Deductions: Connecticut does not allow unpaid disciplinary suspensions of less than one week.

Illinois

Duties test: Illinois does not recognize an exemption for computer employees (although workers in that field might meet the professional tests), nor does the state recognize the “highly compensated employee” rule for those earning more than $107,432 per year.

Also, Illinois has adopted a 2003 version of the federal regulations, before the “concurrent duties” rule was recognized for the executive exemption (29 CFR 541.106). This provision allows supervisors to engage in nonexempt tasks while simultaneously managing employees. The state may not recognize this rule.

Deductions: Although the state follows current federal regulations for matters including minimum required salary, it has adopted the 2003 version for other purposes, and therefore does not allow unpaid disciplinary suspensions of less than one week.

Iowa

Minimum salary: Iowa requires that exempt employees may not devote less than a specified percentage of their time performing exempt work. This minimum required percentage does not apply, however, if the employee is paid at least $500* per week.

Duties test: If an employee earns less than $500* per week, state law requires that executive, administrative, and professional employees cannot spend more than 20 percent of working time (or 40 percent for executive or administrative retail or service employees) engaged in duties not directly and closely related to duties that meet the exemption.

In other words, these employees would have to spend at least 80 percent of their time engaged in exempt duties (or at least 60 percent for retail and service employees). However, if the employee is paid more than $500* per week, the state uses the same definition for “primary duty” as the federal regulations.

In addition, an outside sales employee cannot devote more than 20 percent of working hours in duties other than those required for the exemption (which are otherwise identical to federal provisions).

Finally, Iowa does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

*This amount may now be lower than required by federal regulations. Employers should adhere to whichever is higher.

Deductions: Although the state follows current federal regulations for matters including the minimum required salary, it has adopted the 2003 version for other purposes, and therefore does not allow unpaid disciplinary suspensions of less than one week.

Kansas

Duties test: Kansas stipulates that executive, administrative, and professional employees cannot spend more than 20 percent of working time (or 40 percent for executive or administrative retail or service employees) engaged in duties not directly and closely related to duties that meet the exemption. In other words, these employees would have to spend at least 80 percent of their time engaged in exempt duties (or at least 60 percent for retail and service employees).

In addition, an outside sales employee cannot devote more than 20 percent of working hours in duties other than those required for the exemption (which are otherwise identical to the federal provisions).

Finally, Kansas does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

Maine

Minimum salary: Maine requires a minimum salary of either:

1. An annual amount equivalent to 3,000 hours at the state minimum wage, or
2. The amount required by federal regulations, whichever is higher.

At this time, Maine’s amount is higher.

Employers should keep in mind that if the state minimum wage increases, so will the minimum required salary for exempt employees. Even though minimum salary is based on a specified number of hours, the salary generally cannot be prorated for part-time exempt employees. The purpose of listing a number of hours is to ensure that the salary requirement will increase along with the state minimum wage.

Duties test: State law on the “primary duty” is similar to the federal rule but adds that the term means activities in which an employee spends “over 50 percent of his or her time.” While there are other considerations in evaluating primary duty, the state requires that at least one-half of working hours be spent in exempt duties.

In addition, Maine does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

State exemptions and salary differences: Michigan through Oregon

• New York mandates a minimum weekly salary equivalent to 75 hours at state minimum wage for executive and administrative employees to be overtime-exempt.

Michigan

Duties test: Michigan requires that executive and administrative employees in a retail or service establishment cannot spend more than 40 percent of their hours engaged in duties not directly and closely related to duties that meet the exemption. In other words, these employees would have to spend at least 60 percent of their time engaged in exempt duties.

In addition, Michigan does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

Deductions: The state presumably follows federal regulations for allowable deductions since it refers to payment on a “salary basis,” but does not define this term.

Minnesota

Duties test:To qualify for the outside sales exemption, the employee may not conduct more than 20 percent of sales on the employer’s premises. Effectively, at least 80 percent of sales must be away from the place of business, which is more restrictive than the federal provision for “customarily and regularly” making sales away from the place of business.

In addition, Minnesota does not reference (and therefore may not recognize) the “highly compensated employee” category for those earning more than $107,432 per year.

Montana

Duties test: Montana has adopted federal regulations by reference, but state law does not recognize a minimum wage or overtime exemption for certain computer employees. Employees in the computer field could still meet the professional exemption, however.

Nevada

Minimum wage exemptions: Nevada Revised Statute (NRS) 608.250 had listed the following categories of workers as exempt from minimum wage provisions: casual babysitters, in-house domestics, outside commissioned salespeople, certain agricultural employees, and taxi and limo drivers.

However, the state Supreme Court ruled on June 26, 2014 (in the case of Thomas v. Nevada Yellow Cab) that the state constitution limits the minimum wage exemption to employees under age 18 who either work for a nonprofit organization or who are employed in the first 90 days as a trainee. The court struck down minimum wage exemptions listed in NRS 608.250, so outside sales employees may be entitled to minimum wage.

Various exemptions from overtime appear in the state statute at NRS 608.018, including the white-collar exemptions under federal law. However, this statute does not explicitly list outside sales employees. Rather, it exempted them from overtime on the basis that they were “not covered by the minimum wage provisions of NRS 608.250.”

Since that statute was struck down, there may be some question of whether an outside sales employee is now eligible for overtime. Further guidance may be issued, or the Nevada law could be revised, or the statutory reference to the struck-down provision may be deemed to retain the overtime exemption even though the minimum wage exemption is no longer valid.

New Hampshire

Deductions: The state regulations are similar to federal regulations, except that the provision for unpaid disciplinary suspensions of less than one week appears to require notice to the employee during the pay period before suspension. The relevant state provision (Title XXIII, Chapter 275, Section 275:43-b) says the full weekly salary need not be paid:

When an employee receives a disciplinary suspension without pay in accordance with the Fair Labor Standards Act (FLSA), as amended, for any portion of a pay period, and written notification is given to the employee, at least one pay period in advance, in accordance with a written progressive disciplinary policy, plan, or practice and the suspension is in full-day increments.

New York

Minimum salary: State law requires a minimum weekly salary equivalent to 75 hours at the state minimum wage for executive and administrative employees. Minimum wage rates differ depending on the location of an employer’s operations. The minimum required weekly salary rates are as follows:

Even though the minimum salary is based on a specified number of hours, the salary generally cannot be prorated for part-time exempt employees. The purpose of listing a number of hours is to ensure that the salary requirement will increase along with the state minimum wage.

Duties test: New York law does not reference an exemption for computer employees (although workers in that field might meet the professional tests), nor does the state reference the “highly compensated employee” category for those earning more than $107,432 per year (and therefore may not recognize it).

Oregon

Duties test: For the outside sales exemption, Oregon specifies that no more than 30 percent of hours worked each week may consist of duties that do not qualify for the exemption. Effectively, the employee must spend at least 70 percent of working time in outside sales or related activities.

In addition, Oregon law does not reference an exemption for computer employees, but they can meet the professional exemption as long as they satisfy those criteria (such as holding an advanced educational degree).

Finally, the state does not reference the “highly compensated employee” category for those earning more than $107,432 per year (and therefore may not recognize it).

State exemptions and salary differences: Pennsylvania through Wisconsin

• In 2021, the state of Washington raised the minimum salary amount for executive, administrative, and professional workers to remain exempt from overtime.

Pennsylvania

Duties test: Under Pennsylvania law, executive, administrative, and professional employees may not spend more than 20 percent of their time (or more than 40 percent for executive or administrative employees of retail or service establishments) performing duties that do not qualify for the exemption.

In addition, the state’s criteria for the outside sales exemption requires the employee to spend more than 80 percent of work time away from the employer’s place of business, and not spend more than 20 percent of hours worked on duties not directly related to making sales (although incidental work counts toward the exemption).

Finally, Pennsylvania law does not reference an exemption for computer employees (although workers in that field might meet the professional tests), nor does the state law recognize the “highly compensated employee” rule for those earning more than $107,432 per year.

Washington

Minimum salary: Increases to the state minimum salary level for white-collar exempt employees began to be phased in July 1, 2020. On this date, the salary threshold increased to $675 per week ($35,100 per year). The salary threshold will incrementally climb through January 2028, when it is expected to reach about $1,603 per week (about $83,356 per year).

Salaried executive, administrative and professional workers, and computer professionals must earn a salary above a minimum specified amount to remain exempt. That amount rose in 2021.

The salary thresholds are now based on a multiplier of the minimum wage, and increased January 1, 2021. Because the new state thresholds will be more favorable than the federal threshold of $684/week ($35,568/year), Washington employers will have to adhere to state thresholds in 2021.

In 2021, those thresholds are:

• For small businesses with one to 50 employees, an exempt employee must earn a salary of at least 1.5 times the minimum wage, or $821.40 a week ($42,712.80/year).
• For large businesses with 51 or more employees, an exempt employee must earn a salary of at least 1.75 times the minimum wage, or $958.30 a week ($49,831.60/year).

For large businesses with 51 or more employees, an exempt employee must earn a salary of at least 1.75 times the minimum wage, or $958.30 a week ($49,831.60/year).

There are also changes in the thresholds for exempt computer professionals paid by the hour.

Duties test: Updates to Washington’s rules that spell out what type of workers don’t have to receive overtime pay took effect July 1, 2020. The rules establish criteria for certain workers to be considered exempt from getting overtime pay and other protections under the State Minimum Wage Act.

The July update primarily affects the part of the rules known as the “job duties test.” In general, it helps determine which workers are considered executive, administrative, and professional employees, as well as computer professionals and outside salespeople. Workers who fit into these categories based on duties they perform, and earn more than the required salary threshold, can be considered exempt.

Although Washington state previously used two job duties tests to determine if an employee could be classified as exempt, effective July 1, 2020, the state began using a single test aligned more closely with federal standards. The test for each exemption spells out what duties an employee must perform to be classified as exempt, regardless of the employee’s job title or job description.

The state does not recognize the “highly compensated employee” category for those earning more than $107,432 per year.

Deductions: Washington generally follows federal rules in effect before the 2004 revisions. The state therefore does not allow unpaid disciplinary suspensions of less than one week but does allow deductions for violations of major safety rules (which was part of the older federal rule).

Wisconsin

Duties test: Wisconsin law requires that executive, administrative, and professional employees cannot spend more than 20 percent of working time (or 40 percent for executive or administrative employees of retail or service establishments) engaged in duties not directly and closely related to duties that meet the exemption. In other words, they would have to spend at least 80 percent of their time engaged in exempt duties (or at least 60 percent for retail and service employees).

In addition, the outside sales exemption requires spending 80 percent of working time away from the employer’s place of business.

Finally, state law does not include the “highly compensated employee” category for those earning more than $107,432 per year (and therefore may not recognize it).

Minimum wage: Wisconsin law has one other unusual provision. While the state generally recognizes the same exemptions as federal regulations (executive, administrative, professional, outside sales), the state only applies these exemptions in the overtime law, not in the minimum wage law. Therefore, while exempt employees do not have to be paid overtime, they still have to be paid minimum wage. The minimum required salary will usually satisfy this requirement, however.

As of April 18, 2014, outside sales employees are exempt from the minimum wage, making Wisconsin law consistent with federal law. Another change at that time removed the state requirement to keep records of hours worked by exempt employees, though employers may choose to keep such records anyway.

WHD “economic realities” test factors

• A worker considered by the IRS as a contractor may be regarded as an employee by the WHD.
• Specific factors determine employment relationships under the WHD’s “economic realities” test.

Department of Labor guidance

The U.S. Department of Labor (DOL) Wage and Hour Division (WHD) uses a broad “economic realities” test to evaluate employment relationships, while the Internal Revenue Service (IRS) uses a narrower “common law” test. This means that even if the IRS deems a worker to be a contractor, the WHD may still deem that worker to be an employee.

According to the WHD, a worker who is economically dependent on an employer is an employee. The following is an overview of various factors the WHD will evaluate under the economic realities test.

Integral to the business

If the work is integral to the employer’s business, the worker is probably economically dependent on the employer and therefore an employee. For example, a construction company may hire carpenters, but they are employees because carpentry is an integral part of the business. That construction company may also contract with a developer to create software for tracking projects, which is not integral to the construction business, suggesting a contractor relationship.

Profit or loss

A contractor could make a profit or experience a loss. This factor goes beyond the mere opportunity for profit or loss; it requires examining whether the worker makes decisions that affect that opportunity. For example, the decisions to hire others, purchase materials and equipment, advertise, rent space, and schedule work would affect the opportunity for profit or loss beyond a single project or job.

Investments

The nature and extent of the worker’s investments also affect the risk for a loss. A contractor typically makes investments to support a business, not to handle a specific job. A contractor’s investments might expand the business’s capacity or attempt to reach new clients.

According to the WHD, comparing the worker’s investment with the employer’s investment is also important. A contractor’s investment should not be minor compared with the employer’s investment. For example, a worker who provides cleaning services may use the employer’s vehicle, equipment, and supplies. This indicates an employment relationship. In contrast, if the worker invests in vehicles and equipment needed to perform work for clients, this suggests a contractor relationship.

Skill and initiative

A worker’s business skills and initiative, not technical skills, determine whether the worker is economically independent. For example, a carpenter might provide services to a construction company, but might not determine the sequence of work, order materials, or think about bidding for the next job. The carpenter is simply providing skilled labor and would be an employee.

In contrast, a carpenter who provides a specialized service (such as custom, handcrafted cabinets that are made-to-order) may be demonstrating skill and initiative by marketing those services, purchasing materials, and deciding which orders to fill.

Relationship duration

A contractor typically works on a specified project, while an employee has an indefinite relationship with the employer. However, employers cannot assume that a short relationship, such as a few days, creates a presumption of a contractor relationship. If the duration is based on the nature of the business (such as seasonal work), this does not preclude an employment relationship. The lack of a permanent or indefinite relationship may indicate an independent contractor status only if the worker’s own independent business initiative affects the duration.

Degree of control

The degree of control retained by the employer is only one of the factors to consider. An employer need not actually exercise control over an employee, as long as the employer retains the right to do so. To be a contractor, the worker must retain control and actually exercise control over conditions that affect that worker’s own business.

If the nature of the work requires the employer to retain control, this indicates an employment relationship. The WHD notes that the reason for retaining control is not relevant; only the employer’s ability to control workers is relevant.

Clues that a worker might not be an independent contractor

• Four factors can distinguish an independent contractor from an employee, though the overall relationship must be assessed.
• State laws can characterize a worker as an employee (not an independent contractor) for purposes of obtaining various benefits.

The U.S. Department of Labor (DOL) and equivalent state agencies have been cracking down on employers that improperly classify workers as independent contractors. While the overall relationship must be evaluated to determine the worker’s status as an employee or contractor, there are a few red flags to watch for. If an employer claims to have an independent contractor relationship, but the relationship involves any of the following, that employer may have to reclassify the worker as an employee:

• The employer establishes the expected working hours. An independent contractor decides how and when to perform work. A company may set a deadline for completion of a project, but the contractor determines how to devote time and resources to achieve that outcome. If an employer sets the expected hours, a substantial amount of control has been taken from the worker. In fact, an employment relationship can be found if the employer has the right to control working hours, even if that control is not exercised.
• Wages, salary, or commissions are paid by the employer. A contractor should be able to make a profit or suffer a loss after balancing income and expenses. If someone is working for wages or commissions, the worker’s income depends on the amount of time or effort the individual gives to the company. While some contractors are paid by the hour (such as lawyers who bill by the hour), most are paid by the job, often at a fixed rate (e.g., a mechanic who replaces brakes on a car). If the worker is paid using a system traditionally used to compensate employees, such as commissions on sales, then an employer probably cannot justify independent contractor status.
• The employer did not contract for a specific project. A contractor is normally used for a specific project, such as the mechanic who replaces brakes. Even a lawyer who bills by the hour is engaged to handle specified cases. Also, contractors will usually provide a service that a company does not normally offer. If a worker is hired for an indefinite period to provide ongoing services (particularly when those services are part of a company’s core business, such as sales), the employer has probably hired an employee.
• The worker is asked to sign a non-compete agreement. An independent contractor must actually be independent. The contractor will normally have a business location, maintain bank accounts in the name of the business, file taxes as a business, and provide services to the market. Having a worker sign a noncompete agreement would strongly suggest the individual is an employee because it prevents the individual from offering services to other potential clients.

Facts of lesser or no importance

The following typically provide less useful evidence, and are generally already reflected in previous sections:

Part-time or full-time work

An independent contractor may work full-time for one business either because other contracts are lacking; because the contract requires a full-time, exclusive effort; or because the independent contractor chooses to devote full-time effort to a particular project. Also, many employees “moonlight” by working for a second employer. As a result, whether services are performed full-time for one business is not useful evidence.

Place of work

Whether work is performed on the business’ premises or at a location selected by the business often has no bearing. In many cases, services can be provided at only one location. For example, repairing a leaky pipe requires a plumber to visit the premises where the pipe is located.

The place where work is performed is most likely to be relevant where the worker has an office or other business location. However, such evidence was already considered in evaluating significant investment, unreimbursed expenses, and opportunity for profit or loss.

Hours of work

Hours of work has already been considered in connection with instructions. Some work must, by its nature, be performed at a specific time. Also, modern communications have increased the ease of performing work outside normal business hours.

Dual status/Split duties

A worker may perform services for a single business in two or more separate capacities. A dual-status worker may perform one type of service as an independent contractor but perform a different service for the same business as an employee.

State law characterization

State laws, or determinations of state or federal agencies, may characterize a worker as an employee for purposes of various benefits (e.g., unemployment benefits and workers’ compensation). These characterizations should be disregarded for Internal Revenue Service (IRS) purposes because they may use different definitions or be interpreted to achieve particular policy objectives.

Because the definition of employee for these purposes is often broader than under common law rules, eligibility for these benefits should be disregarded in determining worker status under IRS criteria. However, employers may still need to consider them under state agency definitions.

Control and autonomy both present

Some facts may support independent contractor status while other facts support employee status. This is because independent contractors are rarely totally unconstrained, while employees almost always have some degree of autonomy. Look at the relationship as a whole and weigh the evidence to determine whether evidence of control or autonomy predominates.

For example, a business may require the worker to be on site during normal business hours, but has no right to control other aspects of how work is to be performed; the worker has a substantial investment and unreimbursed expenses combined with a flat fee payment; and contractual provisions clearly show the parties’ intent that the worker be an independent contractor. In this case, one would logically conclude that the worker was an independent contractor despite instructions about hours and place of work.

Using a company vehicle

• If a vehicle is difficult to operate or necessitates taking an alternate route, a commute may be regarded as paid working time.
• The issue of contacting employees includes obtaining assignments or instructions, as well as reporting progress on a job.

The U.S. Department of Labor (DOL) has clarified that driving a company vehicle does not automatically obligate employers to pay for a commute to work. However, the commute might be paid working time if the vehicle is more difficult to operate than a normal vehicle (such as a cement truck) or if the vehicle requires taking an alternate route (e.g., because of weight limits on a bridge). In most cases, driving a common car or truck would not create a duty to pay for commute time.

In some industries, employers use vans or trucks for employees who perform service work at a customer’s home or business establishment. The vehicle allows the employee to transport needed tools or equipment to various worksites during the day. The employer may let employees drive the vehicle between home and work voluntarily.

Current enforcement policy is that employees who take a company vehicle home for their own convenience (even where the employee must bring that vehicle to the job site) are still engaged in an unpaid commute during the drive to and from work.

In certain situations, an employee is responsible for a vehicle and its equipment and for having it at the worksite at the proper time. The employer may permit the employee to drive the vehicle to and from home. In cases where permission is granted for the employee’s own convenience and travel is within normal commuting distance of employees in the area, time spent driving is not hours worked.

Where the vehicle is also used in connection with emergency calls outside of normal working hours, a determination must be made whether the use of the vehicle is for the convenience of the employee or primarily for the benefit of the employer. The frequency of emergency calls may indicate for whose convenience or benefit the vehicle is being used.

Contacting employees

Another issue is whether the employer must pay for a commute if the company contacts the employee (such as calling the employee’s cell phone) and informs the employee to report to an alternate location. A revision to Fair Labor Standards Act (FLSA) regulations was published April 5, 2011, to address this issue. The new provision at 785.9 reads:

“The use of an employer’s vehicle for travel by an employee and activities that are incidental to the use of such vehicle for commuting are not considered “principal” activities when meeting the following conditions: The use of the employer’s vehicle for travel is within the normal commuting area for the employer’s business or establishment and the use of the employer’s vehicle is subject to an agreement on the part of the employer and the employee or the representative of such employee.”

According to the preamble, this provision covers activities “such as communication between the employee and employer to obtain assignments or instructions, or to report work progress or completion.” The agency declined to provide further examples but stated that it may provide guidance at a later date to address issues such as commuting distance, costs, incidental activities, and the nature of the “agreement.”

For example, an employee may start a workday by calling the employer’s dispatcher from home, receiving work assignments, and traveling directly from home to the first worksite rather than traveling first to the employer’s establishment. At the end of the day, the employee may be required to call the dispatcher to advise that the last service call has been completed and the employee is leaving for home, where the employee parks and locks the vehicle. During this call to the dispatcher, the employee may or may not receive assignments for the next day.

Where the following circumstances exist, time spent traveling between the employee’s home and the first worksite, or between the last worksite and the employee’s home, need not be compensated:

1. Driving the employer’s vehicle between home and worksites is strictly voluntary and not a condition of employment,
2. The vehicle is the type of vehicle normally used for commuting,
3. The employee incurs no costs for driving the employer’s vehicle or parking it at the employee’s home or elsewhere, and
4. The worksites are within the normal commuting area of the establishment.

Travel during a normal workday, and travel to another city

• Travel time during a workday is regarded as work if it happens during normal work hours.
• Overnight travel to another city generally counts as paid working time.

Although a normal commute to work and back is not typically considered work time, travel during the workday is work. For example, if an employee normally works 8:00 to 5:00 and must drive 15 miles for a meeting at 3:00, the travel time counts as work (it takes place within normal work hours).

However, if the meeting ends at 5:00 and the employee goes straight home, this is probably a normal commute and does not count as hours worked, assuming the travel is not much farther than a normal commute (e.g., within the same city or community).

Travel to another city the same day

Travel time to another city is working time. However, travel from home to an airport or other terminal can be considered an unpaid commute.

For example, an employee might drive from home to a train station, take a train to another city for a conference, and return to the train depot before driving home (all the same day). Time spent driving to and from the train station can be considered a normal commute (assuming it is within the same community) and would not have to be paid working time.

However, all other travel time (on the train and at the destination) counts as hours worked that must be paid, even if those hours are outside of normally scheduled hours (i.e., the train leaves at 7:00 a.m. and returns at 6:00 p.m.). Of course, normal meal breaks do not count as hours worked.

Note that there is an exception for time spent as a passenger outside of normal working hours, but it only applies to overnight travel, not to travel for a single day.

Overnight travel to another city

In most cases, all travel time to another city for an overnight trip counts as paid working time. A federal exemption addresses time spent as a passenger on public transportation that occurs outside of the employee’s normal working hours.

To use the previous example, suppose the employee took a train to another city and stayed overnight. If this employee normally works from 8:00 to 5:00, any time spent as a passenger outside of normal working hours (i.e., after 5:00) does not technically have to be counted as working time and does not have to be paid.

The federal regulation on overnight travel (785.39, Travel away from home community) allows employers to exclude time spent as a passenger that occurs outside of regular working hours, stating, “As an enforcement policy the Divisions will not consider as worktime that time spent in travel away from home outside of regular working hours as a passenger on an airplane, train, boat, bus, or automobile.” However, states may not recognize this provision (it is only a policy) and some states have rejected it, while others may allow it.

Note that the “passenger” exemption is part of federal law only. States may not recognize this provision, and some states (including California) specifically reject the concept of “normal working hours.” Also, some states may take a hostile view to the use of this provision.

For example, if three employees travel in the same vehicle to a conference, and only the driver is paid while the others are denied compensation because they are passengers outside of normal working hours, a state agency could decide that all three employees were acting under the direction or control of the employer and should be paid for their time.

If state law requires counting all hours, including time spent as a passenger outside of regular working hours, those extra hours must be recorded and credited toward overtime.

Time spent waiting (e.g., waiting for a delayed flight at an airport) would not fall under the exemption for time spent as a passenger (even if it occurs outside of normal hours) and would count as working time. The employee is not actually a passenger during such time.

If travel to another city occurs during normal work hours on a non-workday (e.g., the employee takes the 11:00 a.m. train on Sunday), it also counts as hours worked.

At the destination

Any work performed at the destination is also working time. However, a hotel is a “home away from home,” and the employee’s time traveling from the hotel to the meeting location is a normal (unpaid) commute. This is not directly addressed by regulation, but it would not be an unreasonable assumption (though some states might consider this commute as time given to benefit the company).

Essentially, once the employee checks into a hotel and is relieved of duty until a specified time (such as the following morning), that employee’s time no longer belongs to the company. The employee may engage in personal activities.

Travel expense reimbursement

Under the Fair Labor Standards Act (FLSA), employers are not required to provide mileage reimbursement for any employees (exempt or nonexempt). However, state laws may require such reimbursement. The standard rates are established by the Internal Revenue Service (IRS), not the U.S. Department of Labor (DOL), for several reasons.

First, if employers provide mileage, the IRS rate presumes the amount provided is reasonable for actual costs. In the past, some employers would provide more “reimbursement” than employees needed, resulting in untaxed income (which tends to upset the IRS).

The second reason is that if employers do not pay for mileage, the employee might be able to claim a tax deduction for the business expense. This deduction may be available for business travel (e.g., to a conference) but is not normally available for a commute.

Employers are not actually required to use the IRS rate. They can reimburse less than the IRS rate, since they are not required to provide anything. In theory, the employee could still attempt to claim a tax deduction on the difference between the employer’s payment and the IRS rate.

Employers should also be aware that paying for mileage on travel that is not required by the employer (such as paying mileage for an employee’s normal commute to and from work) would not be deemed a “reimbursement” but would be taxable income.

Although federal regulations do not require expense reimbursement, an employee who incurs significant costs during a particular week may end up earning less than minimum wage for that week, which could be a violation. In addition, state laws may require employers to pay for expenses. In particular, California, New Hampshire, Massachusetts, and soon Illinois have state requirements to reimburse employees for business expenses.

Breaks for nursing mothers

The FLSA also gives nursing employees have the right to reasonable break time and a place, other than a bathroom, that is shielded from view to express breast milk while at work. This right is available for up to one year after the child’s birth.

While non-exempt employees were originally entitled to the provisions, effective December 29, 2022, the PUMP for Nursing Mothers Act (PUMP Act), extended this to exempt employees. Employers may not deny a covered employee a needed break to pump.

Although short rest periods are normally paid, these lactation accommodation breaks could be unpaid, particularly if provided beyond the usual designated rest periods.

Further, when employers provide paid breaks, an employee who uses such break time to pump breast milk must be compensated in the same way that other employees are compensated for break time. Therefore, when an employee is using break time at work to express breast milk they either must be:

• Completely relieved from duty; or
• Paid for the break time.

The frequency and duration of breaks needed to express milk will likely vary depending on factors related to the nursing employee and the child. Factors such as the location of the space and the steps reasonably necessary to express breast milk, such as pump setup, can also affect the duration of time an employee will need to express milk.

Employees who work from home are eligible to take pump breaks on the same basis as other employees.

The location provided must be functional as a space for expressing breast milk. If the space is not dedicated to the nursing employee’s use, it must be available when needed by the employee in order to meet the statutory requirement.

A space temporarily created or converted into a space for expressing breast milk or made available when needed by the nursing employee is sufficient provided that the space is shielded from view and free from any intrusion from co-workers and the public.

Employers with fewer than 50 employees are not subject to the pump break time and space requirements if compliance would impose an undue hardship. Factors to consider include the difficulty or expense of compliance for a specific employer in comparison to the size, financial resources, nature, and structure of the employer’s business. All employees who work for the covered employer, regardless of work site, are counted when determining whether this exemption may apply.

Special situations not considered as hours worked

• Attending instructional courses outside of working hours does not count as hours worked, even if directly related to an employee’s job.
• Renewal of a license or certificate necessary for a job may or may not be paid by the employer, depending on the circumstances.

There are some special situations where time spent attending lectures or training sessions is not regarded as hours worked. For example, an employer may establish (for the benefit of employees) a program of instruction that corresponds to courses offered by independent bona fide institutions of learning. Voluntary attendance by an employee at such courses outside of working hours would not be hours worked even if they are directly related to the employee’s job or paid for by the employer.

Employers may also offer programs for employees to voluntarily attend training (outside of working hours) on subjects unrelated to the current job.

For example, an employer might offer to help employees obtain a Commercial Driver’s License (CDL) or pay for courses on management. Employees may take these courses with the hope of getting a future transfer or promotion. Even if the employer pays for course materials or other fees, the employee is not engaged in work, so the time does not have to be paid.

Renewing credentials

Employees must be paid for attending mandatory training programs, and this can include training that occurs outside of work, such as online courses taken at home. However, some jobs require employees to hold a license or certificate, and they may have to renew that license or take education courses to maintain the certificate. If these courses are required by law (and not specifically required by the employer), does time spent on these courses have to be paid?

Regulations cannot cover every situation, so there is no simple answer. If the license or certificate is required by state or federal law, an employee’s efforts to maintain that credential would be related to the job. Also, the courses would not be voluntary. Therefore, it may seem the time must be paid. However, the employer does not control the employee’s time or compel the employee to take the course, and that can affect the answer.

First, ask what entity primarily benefits from the training. Related questions include whether the training is specific to the job (so the employer benefits) or if the credential could be used to obtain other employment (so the employee benefits), and whether the employee was asked to obtain the credential.

For example, if an employer hires a forklift operator, it must provide training under Occupational Safety and Health Administration (OSHA) regulations. This training must cover hazards specific to the workplace. Since the employer required the training to qualify the individual for the position, and since the training is specific to the job, time spent in training must be paid.

Conversely, an employer might hire an emergency medical technician (EMT) and expect applicants to already have an EMT certification (and to maintain that certification throughout employment). In that case, the employer might not have to pay for time the employee spends maintaining the certification. The employer derives some benefit from the employee’s efforts (the company does not have to hire a replacement), but the employee also derives some benefit (the employee can continue working). The individual could even use the certification to find other employment.

No single evaluation fits every situation, but a general best practice is to pay for training time unless it can be shown that:

• The employee is the primary beneficiary and the employer is an incidental beneficiary;
• The credential can be used for other employment;
• The employer expects applicants to possess the credential as a condition of hire, contrasted with allowing a new hire to earn the credential while on the job; and
• The individual obtains and maintains the credential as a professional certification, such as an EMT or certified public accountant (CPA).

Although these guidelines are common considerations, they are not written into law. A state labor agency could decide that the employer is a substantial beneficiary of the employee’s efforts and expect wages to be paid for time spent maintaining the credential. Even if the criteria have been met, another best practice is to contact the state labor agency for an opinion on whether time spent maintaining a specific credential should be paid. Each credential or situation may be unique.

Note that even if an employer must pay for the employee’s time spent renewing a credential, it might still make the employee pay for the cost of the course.

Quite a few states clarify that if the license or certification belongs to the employee and is not exclusive to one employer as a condition of employment, the employee can be required to pay for any course fees required to maintain that credential. The employee may even be able to claim a tax deduction for the business expense, according to Internal Revenue Service (IRS) guidance.

Communicating expectations for recording time

• Making sure that employees understand time-recording expectations can avert possible legal action.
• Federal law requires specific retention times for employment documents.

When the burden of keeping time records is placed on employees, the organization must communicate expectations and procedures for recording time. Creating written policies is also helpful, and employers should ensure that supervisors consistently enforce requirements and expectations.

As an example, state law might require a 30-minute meal period in the middle of a shift. If so, the employer needs to communicate that employees are expected to take meal breaks and record this break on the timecard. The organization must also ensure that employees actually have time to take the break. This does not mean employers must forcibly prevent employees from working during the designated mealtime. However, the employer should ensure, for example, that relief workers are available where needed so employees can take their mealtime.

Ensuring that employees understand expectations, and offering reminders about the policy or requirement, can help protect the company in case of future litigation. A common area for back pay lawsuits is unpaid mealtime, where employees claim the employer deducted 30 minutes from the daily hours worked, even if all employees did not actually take a break (or were not completely relieved from duty during breaks).

However, when employees have been informed of expectations, and the employer has not only provided reminders but also consistently enforced the expectation, potential litigation can sometimes be dismissed. If employees are aware of expectations for taking breaks and reporting time, but they voluntarily skip a break without telling the organization, those employees often have a much greater challenge in establishing a claim for back pay.

Essentially, the employer shows the employees were in knowing violation of company practices and communicated requirements, and failed to report the time worked, even to the point of certifying that the timecards were a true and accurate representation of time worked.

For these reasons, employers should have written policies on matters such as expected break or mealtimes, procedures for reporting time accurately, consequences for false reporting, and explanations of how to change a timecard if necessary.

When employees tend to work a fixed or regular number of hours that does not change from week to week, some employers have chosen to refrain from having daily or weekly timecards completed. The employer must still keep records of hours worked each week, but would simply record the same hours every week. While this practice can be acceptable, it does involve some potential risks.

First, in the event of an audit by the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) or an equivalent state agency, such a practice may cause the investigator to assume the employer is not capturing all hours that employees work. The investigator may have encountered other employers that recorded eight hours per day for each employee, regardless of whether some employees worked longer hours.

To overcome this assumption of inaccuracy, the employer should be able to show that employees have been informed of a procedure for reporting variances in hours worked. The employer may even have to show that employees used the procedure. For example, if an employee worked an extra 15 minutes during a particular week, the employee should have reported that extra time, and it should be included in the employer’s records.

Unless the company has strict controls for when employees start and stop working, it is almost inevitable that some employees will work slightly different hours during some weeks, such as staying late to finish a project or skipping an otherwise unpaid meal period.

Second, an employer that records the same hours every week may face a greater challenge in refuting employees’ claims that they worked extra hours without pay. Once again, a clear procedure for reporting exceptions may help overcome such a claim. An employer must pay for all hours it knows (or should have known) that an employee worked.

An employee’s refusal or failure to report additional hours may mean the back pay claim would be found to have no merit. However, such cases often hinge upon the employer’s diligence in communicating and enforcing the policy for reporting extra time.

Employers should have a stronger presumption that all time worked was properly captured when employees self-report hours worked by providing signed timesheets, by entering hours worked in an electronic timekeeping system, or by punching a time clock.

Records and retention

Employee files are a depository of many different documents, each with specific information required by certain laws and with different retention periods. The personnel file is where many records are customarily kept.

The following list is not all-inclusive, but represents some of the more common documents required by federal laws. The retention periods listed are the minimum. Many employers retain them for longer periods, and state laws may require longer retention.

• Time sheets: Keep for two years, potentially in the personnel file, but no specific location is required, as long as they are safe and accessible. 29 CFR 516.6
• Payroll records: Keep for three years, potentially in the personnel file, but no specific location is required, as long as they are safe and accessible. 516.5
• W-4s (copies) or other tax records: Keep for four years, potentially in the personnel file, but no specific location is required. However, if the Social Security number is included, records should be secure. FICA, FUTA 26 CFR Part 1
• Records of employment actions (hires, promotion, termination, etc.): Keep for one year from the date of the action or making of the record, whichever is later. Traditionally stored in the personnel file, but no specific location is required. If legal action occurs, keep these records for the duration of the action. Title VII, ADA, ADEA, 29 CFR 1602.14.

All employers should heed this decision and ensure that supervisors are verifying accurate reporting of all hours worked. A supervisor might have knowledge of unreported working time if an employee works late or takes work home with a supervisor’s knowledge but does not record the additional hours, or if an employee reaches a spending limit and asks to work “off budget” by not recording hours in order to finish the project within approved spending limits.

A supervisor who becomes aware of unreported or underreported working hours should address the situation immediately. The employee should be required to accurately report all working time in the future, and should be paid for all hours worked that can be reasonably ascertained.

Sick leave

• Unless required by law, providing sick leave remains a matter for the employer to decide.
• Employees should be made aware that a doctor’s opinion is not a valid excuse for missing time from work.

The Fair Labor Standards Act (FLSA) does not require paid sick leave. However, state law may require sick leave, and some municipalities have adopted laws on sick leave. Other states may require that any sick leave provided must be made available for certain uses, such as caring for a sick family member (rather than being limited to personal use).

In the absence of a legal requirement, sick leave may or may not be offered at the employer’s discretion. The employee’s eligibility, accrual, and other conditions of use may be defined by company policy, as the employer deems appropriate.

While employers commonly pay out unused vacation time, sick time is often “lost” when it hasn’t been used. Even states that require payout of earned vacation time do not require payout of earned sick time.

If employees are allowed to carry over sick time from one year to the next, employers should establish a maximum accrual cap to avoid situations where employees earn unusually large amounts of sick leave. For instance, an employee with many years of service could accumulate months of sick leave.

Even though a policy should establish the basic framework, situations may arise that have not been addressed by the policy. These might include:

• Excessive absences or abuse of sick leave,
• Expectations for providing a doctor’s note,
• Unusual situations such as a flu epidemic, or
• Suspected abuse of sick leave.

Some employees use every hour of sick leave provided, which leads employers to wonder if the employee is using the time as “bonus” vacation days. Other employees might call in sick, yet be seen out in public (or may call in sick after being denied vacation for a particular day). These situations must be addressed carefully.

Termination may not be appropriate since each case is unique. Considerations might include the employee’s duration and record of service, as well as the understanding of company policy and expectations. If an employer’s expectations regarding use of sick leave have not been clearly communicated, then termination may not be the best option.

If the employee has no prior write-ups for sick leave abuse, it might mean the employee has not previously been caught. There’s nothing inherently wrong with firing an employee for excessive absences. However, if a policy allows a certain number of sick days (through a point system, for example), this implies that employees won’t be subject to termination unless they exceed that number.

An immediate termination could result in a wrongful termination claim where the employee declares that termination occurred in violation of company policy. The employer might then have the burden of showing it was not merely absences but actual abuse of sick leave that resulted in termination.

Ideally, the employer would start with a discussion about intended use of sick leave (a similar discussion might be given to all employees). Workers should be told that sick days are not “free” days off, and that they are expected to refrain from using any sick leave, if possible. The costs of sick leave (and the effect of those costs on raises or other benefits) and the burden that an absence places on coworkers might also be explained.

In short, the fact that the company does not normally terminate until a certain number of absences does not prevent it from terminating for abuse of sick leave. If employees show up while obviously sick, the employer can always send them home and clarify that the absence will be excused because it was initiated by the company.

Where termination will be delayed, an employer can still:

• Put the employee on notice about the intended use of sick time;
• Document the conversation and the employer’s perception of abuse (the employee does not have to acknowledge the suspected abuse, but should understand the impression the conduct has created); and
• Inform the employee that any further use of sick leave will be closely scrutinized.

Hopefully, this discussion will help clarify the employer’s position and cause the employee to use greater care in the future. Then, if there are any further questionable absences, the next incident could be used as justification for termination (with the employer clarifying, both in discussion and documentation, that further abuse of sick leave will not be tolerated).

Providing a doctor’s note

Most sick leave absences will not qualify under the Family and Medical Leave Act (FMLA) or similar state laws. However, many employees seem to believe that if a doctor tells them to take time off, the employer is obligated to excuse the absences. This is not the case.

An employee can be terminated for excessive absences (or for abuse of a leave policy), as long as those absences are not otherwise protected by the FMLA (or implicitly excused, such as leave granted to accommodate a disability or religious practice).

Employers should inform employees that a doctor’s opinion is not a valid excuse for missing work (unless it relates to other job-protected leave). In other words, employees should decide for themselves if they can safely and effectively report for work.

Another issue to keep in mind is whether a doctor’s note is necessary to verify that an absence was legitimate. An employee with the flu might not visit a doctor and won’t be able to provide a note. However, the employer may not want that person in the office potentially spreading the condition. Allowing the person to stay home may be in the company’s best interests.

PTO as both vacation and sick leave

• Merging vacation and sick leave into one PTO bank of hours can help minimize time-off abuse by employees.
• Under state law, if a PTO policy doesn’t differentiate between vacation and sick leave, all earned time is regarded as vacation time.

Many employers offer vacation and sick leave as separate benefits. Vacation is for planned absences, while sick leave is typically used when an employee is unable to work. While this policy structure is common, it does have a few problems. One problem is that some employees rarely take sick leave while others use all their available time.

One solution is to pay out unused sick time at the end of the year. If employees are paid out for unused time rather than losing it, they may be less likely to abuse it. However, some employees will still use their sick leave because they prefer to have the “extra” time off.

Another solution is to allow sick leave to accrue from year to year. Over time, employees might earn weeks or months of sick leave for use during extended absences, such as Family and Medical Leave Act (FMLA) leave. To minimize abuse, employers with these policies often limit the number of “unscheduled” sick days. For instance, employees might earn 10 days of sick leave per year (to a maximum of 90 days), but more than five unscheduled sick days per year would be subject to discipline.

Pros and cons of combining

A third solution is to combine vacation and sick leave into a single bank of hours, usually called paid time off (PTO). Under a PTO policy, the time can be used as either vacation or sick leave. This can help minimize abuse because employees who call in for a sick day are reducing the amount of vacation available in the future.

There are some downsides to combining vacation and sick leave, depending on state laws. Many states define earned vacation as a “wage” that cannot be taken from employees. While some states permit “use it or lose it” vacation policies (where earned time is lost if not used by a defined deadline), other states prohibit these policies or require payout of earned time when an employee leaves the company, even if the employee was terminated for cause.

Most states that define vacation as a wage do not consider paid sick leave to be a wage, and do not provide any rights for employees to claim that time (it can be taken away). The problem is that state laws only recognize two types of benefits: vacation and sick leave. If a PTO policy does not distinguish between them, all the earned time is counted as vacation.

For example, if an employer offers 10 days of vacation and five days of sick leave, and combines them by offering 15 days of PTO that can be used for any purpose, all of those days may be considered “vacation” under state law and would have to be paid out to departing employees.

While there are advantages to replacing vacation and sick leave policies with a single PTO policy, employers should be sure to check state laws to understand the impact this may have on the ability to take away time.

Holiday pay and emergency closings

• Time off for holidays is not mandatory and is totally at the discretion of the employer.
• Paying employees for time off due to emergency closings hinges on the exempt status and the nature and length of the closing.

Paid holidays are not required under the Fair Labor Standards Act (FLSA). In fact, even where a holiday is nationally recognized, the FLSA does not distinguish that day from any other day. No extra pay is required, and employers are not obligated to provide the day off. Quite a few employers remain open for business 365 days of the year.

However, many employees expect to have time off to observe holidays. The most widely accepted holidays are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. For employees who work on weekends, Easter may also be included.

In addition, organizations may provide a “floating holiday” for each employee.

If a holiday occurs on a weekend, most employers observe it on the Friday before (if the holiday was on Saturday) or on the Monday after (if the holiday was on Sunday).

One thing to consider when planning holidays is that people from other national origins or cultures may have holidays that are distinct from those celebrated in the United States. Some of these holidays may be religious in nature, and employees have been known to file claims of religious discrimination when they were not allowed to observe their customs.

This does not mean employers must offer extra holidays (although some provide floating holidays for this purpose). Employees who want time off for a religious day that is not otherwise recognized by the company might be required to use vacation time, or might be allowed to take unpaid time off.

Floating holidays

Many employers choose to adopt floating holidays, and there are a couple of ways to do this. Some adopt a floating holiday designated by the company, while others provide a floating holiday for the employees to use whenever they choose.

Company-designated holidays

An employer might adopt a floating holiday designated on a particular day chosen by the company. Essentially, this is no different from any other holiday. For instance, many employers observe New Year’s Day, but it may occur on Thursday. Therefore, the company might designate January 2 (Friday) as a floating holiday.

In this case, the holiday policy can list the “regular” holidays and indicate that the company had adopted a floating holiday that it would designate. For example, a company might list its holidays (New Year’s Day, Memorial Day, Labor Day, etc.) and add “Floating holiday as needed, to be designated at the company’s sole discretion.”

Employers are not required to offer floating holidays and may instead simply close on certain days without providing holiday pay.

Employee’s choice

If the floating holiday can be taken at the employee’s discretion, it is essentially a bonus vacation day. The company could include language to this effect in either the vacation policy (if it has one) or the holiday policy — or in both, to ensure that employees are aware of it. This language should describe the terms of use and other restrictions such as how much notice is required, whether there are restrictions for scheduling, etc.

In some cases, a floating holiday may be provided to employees when they are scheduled to work on a particular holiday (if a business is open on holidays). In situations where a floating holiday is provided to “replace” a working holiday, the provisions for use should once again be described in the holiday policy.

For instance, a company might allow an employee to schedule the floating holiday (similar to a vacation day) and might even allow it to be taken on days that might otherwise be denied as vacation days. It would need to determined if the company can work with fewer staff members, or if someone with more seniority would be “bumped” to honor the floating holiday.

Alternatively, the company might reserve the right to designate a specific day off for the employee. In this case, it would be handled similarly to a company-designated floating holiday.

Emergency closings

Employers occasionally have to shut down for part of a day, or even part of a month, because of emergency situations such as severe weather, fires, equipment breakdowns, or other situations beyond the employer’s control. In these cases, employees are prevented from working. Whether they must be paid depends on their exemption status, as well as the nature and duration of the closing.

Since employers are not required under the FLSA to provide vacation time, there is no prohibition against mandating that vacation be taken on specific days. An employer may direct any employee (exempt or nonexempt) to take vacation or debit their leave bank account, whether for a full- or partial-day absence.

For nonexempt (hourly) employees, the situation is fairly simple. They only get paid for hours worked. If they are not working, even because of a closing, they do not have to be paid. The employer may require them to use vacation or other available paid leave, regardless of the employees’ preference, although many employers simply make the option available.

Even for exempt employees, administration of pay is a bit different. Employers may require using paid leave for periods of inclement weather, either in whole- or partial-day increments. Similarly, an employer may require exempt employees to use accrued vacation time during a plant shutdown of less than a workweek without violating the salary basis requirement.

For severe weather situations where the business remains open, the employer may make deductions from salary for one or more whole days of absence if the employee chooses to not report to work. This is considered an absence for personal reasons because work is available. However, if the company closes, the employer must pay the full amount of the salary due for any week in which the employee performs any work.

Compensatory time

• For private employers, comp time cannot include hours saved for future pay periods.
• Exempt employees who work a partial day legally must be paid for a full day.

Compensatory (comp) time refers to unpaid hours of overtime that are saved for use as paid time off (PTO) in the future. Comp time is time provided to employees in lieu of overtime pay. For example, an employee might work 44 hours in one week, but instead of getting paid overtime, would receive six hours of PTO for future use. For each overtime hour, the employee must be given 1.5 hours of comp time to meet the overtime obligation.

This practice is primarily limited to the public sector (such as government employers). Fair Labor Standards Act (FLSA) comp time provisions do not apply to private companies. Only government employers can establish comp time policies under these regulations (29 CFR Part 553, Subpart A).

Private employers cannot offer comp time arrangements where the hours are saved for future pay periods. Even if employees request this benefit, employers would risk a violation of the requirement to pay overtime.

Comp time can only be used by private employers if the time is used in the same week or same pay period. Comp time cannot be saved for future pay periods because this would result in a failure to pay for all hours worked during the applicable earnings period (state laws generally require that all wages be provided within a certain time, such as every two weeks).

Nonexempt employees

Private employers can offer comp time to nonexempt employees in two limited circumstances. First, employees who work overtime can be allowed to take time off during the same week. For example, suppose an employee normally works five days a week for eight hours each day. If this employee works 10 hours on Monday and Tuesday, the employer could allow (or require) the employee to work only four hours on Friday so the total time that week is still 40 hours.

Employers always have the right to adjust the number of hours worked by an employee, whether increasing or decreasing those hours, without notice. Changing the number of hours worked each day or each week might be better described as “flex time.” It does not violate overtime requirements because the employee does not work more than 40 hours in a single week.

Second, private employers may establish comp time policies if they follow two conditions. Comp time must be awarded at a ratio of 1.5 hours for each hour of overtime worked (to account for the overtime rate of pay). Also, the comp time must be used in the same pay period.

If overtime occurs during the second week of a pay period, the hours could be adjusted during that week, or the employee would have to be paid for the overtime. The hours could not be saved for a future pay period.

For instance, if an employee works 42 hours during the first week of a pay period, an employer would normally pay two hours of overtime at 1.5 times the regular rate (essentially three hours of pay). However, the employer can allow the employee to only work 37 hours during the second week and pay the three hours of comp time. The employee works a total of 79 hours and gets the same wages that would have been received for the hours worked with overtime.

These policies, while acceptable under federal law, may face challenges in certain states. For example, California law requires overtime pay for hours worked beyond eight in a single day. Thus, a California employee who works 10 hours on Monday would need to be given three hours of comp time.

Exempt employees

It would seem that comp time could be applied to exempt employees since overtime is not an issue. The problem is that the regulation for the salary basis of payment at 541.602 says “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.”

In other words, an exempt employee who works a partial day (say, five hours) is legally entitled to a full salary for that day. An employer can require an exempt employee to use sick time or vacation for a partial day, as long as the employee still gets the same weekly salary.

If establishing a comp time policy for exempt employees, an employer may create the impression that the salary is tied to the number of hours worked. This is different than an expectation that a full-time employee should work at least 40 hours, since all employees are subject to the same expectation (regardless of how many “overtime” hours they work).

For instance, by allowing an exempt employee to work a partial day (or take a day off) based on overtime previously worked, an employer may create the impression that the employee’s salary is dependent on the number of hours worked. This could jeopardize the exempt status. In a worst-case scenario, the exemption would be defeated and the employee would have to be paid back wages for previous overtime. This may not be likely if the employee agrees to the comp time policy, but there’s no reason to take the risk.

What can be offered is “flex time.” For example, an employer could state that the expected 40 hours per week can be worked at any time (including weekends). As long as the employee’s weekly total is 40 hours or more, the employee can set a flexible schedule.

An employer could also offer time off as a reward for working long hours, but it should not be in the form of comp time (an “hour for hour” relationship should not be created). Offering “bonus” vacation time would allow an employee to work a shorter week after a long week, or any other method for additional time off could be established. However, tracking comp time is risky because it implies that a shorter week is only allowed if the employee has a bank of previous working time to draw upon.