Wage-Hour Standards in the Auto Repair Industry, Part 2Posted 9/11/2007
By Brian Farrington
In part two of this three-part series, we look at minimum wage, overtime, regular rate of pay, etc.
The minimum wage was recently increased by $2.10 from $5.15 per hour. The increase is effective in three increments over the next two years. On July 24, 2007, the minimum goes up to $5.85. On July 24, 2008, it goes to $6.55, and on July 24, 2009, it goes to $7.25.
Workweek Basis of Enforcement
Almost everything in the Fair Labor Standards Act (FLSA) is enforced on a workweek basis. The workweek is a fixed and recurring period of seven consecutive 24-hour days. The employer can designate any workweek he or she wants to, but once selected, the workweek may not be changed unless the change is intended to be permanent. So the workweek could be Monday through Sunday, Thursday through Wednesday, or any other 168-hour period.
To be paid in compliance with the minimum wage (MW) provision of the Act, the employee must average at least MW for all hours worked in any workweek. There are two typical scenarios in which the workweek basis of enforcement can create violations. These are earnings and deductions. Earnings
Employees must earn MW for each hour worked in the workweek. Usually this isn't a problem for hourly or salaried employees, but employees paid on a contingent basis, such as piece rate or commission, can have a bad week and not receive minimum wage in that particular workweek. Say that an employee is paid weekly on a commission basis and works 40 hours per week and in three successive workweeks earns the following:
Week 1: $500
Week 2: $200
Week 3: $800
In the three workweeks, the employee has earned $1,500 in 120 hours, for an average of $12.50 per hour. But the law doesn't permit the averaging of workweeks. The employee was paid in compliance in weeks 1 and 3, but in week 2 when total earnings for the week are divided by total hours worked, the employee only averaged $5 per hour, and that's a violation. The employer would have to pay the employee an additional $6 in week 2 to bring his average up to $5.15 (as the MW increases, the deficiency would obviously be greater).
If the employer's pay period is longer than a workweek, however, the U.S. Dept. of Labor's Wage and Hour Division allows the employer to allocate earnings evenly over the workweeks in the designated pay period to determine minimum wage compliance. So if the employer paid every two weeks, and the employee earned $1,000 in the pay period and worked 80 hours, the employer can divide the biweekly earnings of $1,000 by the 80 hours worked in the pay period to yield $12.50, which is obviously more than minimum wage. (Note: this isn't true of overtime, which is determined on a workweek basis regardless of the length of the pay period - see below).
Many employers who appear to pay MW actually wind up paying less than minimum because of certain types of deductions. The FLSA does not address the issue of employee consent to wage deductions. That is a state law issue. But the FLSA does address the effect on compliance when deductions "for the employer's benefit" are made. Deductions for the employer's benefit include things like deductions for cash shortages, tools or equipment, damage to company or customer property, and the like. If the effect of such a deduction is to reduce an employee below MW in a particular workweek, to that extent it's illegal.
Assume, for example, an employee working 40 hours per week and paid $6.15/hour when the MW is $5.15. The employee does $100 worth of damage to a customer's car. Since the employee makes only $40 over MW in the week [40 x ($6.15-$5.15)], deducting the full $100 in a single workweek would leave the employee $60 short of MW. The employer could, however, deduct $40 in one week, $40 in the next week, and $20 in the third week. By doing so, the employer would have recouped the $100 without ever bringing the employee below MW in any workweek.
Deductions for the employer's benefit cannot reduce any part of compensation for overtime. If, in the example above, the employee worked 50 hours at $6.15 per hour, the employer would still be limited to deducting the difference between the employee's rate and the MW for the first 40 hours only. No deduction can be made from the compensation for the overtime hours.
Some deductions are not restricted by the FLSA. An obvious example would be legal deductions - employees can gross MW, and net less after taxes. Court-ordered child support, and, where legal, other types of garnishments, can reduce employees below MW. USDOL/WH also allows deductions for advances of wages, or unaccrued paid leave, and for freely negotiated purchases from the employer, as well as for bonafide fringe benefits such as health insurance, even if the employees are left with less than MW. Note again that while FLSA does not require employee consent for any deductions, most states do, and employers should be aware of state law in every jurisdiction in which they operate.
The monetary provision of the FLSA that has the greatest impact on the typical auto repair shop is overtime. Unless an exemption applies, all employees must get time and a half of their regular rates of pay for hours worked over 40 in a workweek.
Workweek Basis of Enforcement
Like the MW, overtime ("OT") is determined on a workweek basis. As noted above, the workweek is a fixed and recurring period of seven consecutive 24-hour days. It begins when the employer determines, and ends 168 hours later. The workweek can only be changed if the change is intended to be permanent. No matter how often employees are paid, hours worked over 40 in a workweek are overtime hours.
There are several consequences of the workweek basis of enforcement:
Typical OT Calculation
The simplest overtime calculation involves hourly employees who exceed 40 hours. Take, for example, an employee who makes $10 per hour, and works 50 hours. His OT calculation will probably look like this:
40 x $10 = $400
10 x $15 = $150
There's nothing wrong with this, but the better way to think about overtime is to remember that even in overtime hours, the employee gets a straight time payment, which is the same thing he gets in the hours under 40. In the overtime hours, however, we add an additional half-time premium, which is half of the straight-time rate, so that the total overtime payment is one and one-half times the regular rate. So the above calculation should really look like this:
50 x $10 = $500
10 x $ 5 = $ 50
The employee gets $10 per hour straight time pay for all 50 hours. Then, for the 10 overtime hours, he gets a premium of one-half of the $10 rate, or $5, for a total of $50 in overtime premium.
The two computations above are equivalent ways to express the same calculation. When we compute overtime for employees paid on any basis other than hourly, however, we'll find it more useful to use the second approach.
Regular Rate of Pay
One of the most common violations involves failure to pay OT on bonuses, commissions, and other "extras." Overtime is time and a half of the regular rate of pay. The term "regular rate" means the total compensation for a particular workweek divided by the total number of hours worked in that workweek.
Take, for instance, an employee paid $10 per hour base rate, who also gets $20 per car for doing inspections. In a particular week, he works a total of 50 hours, and earns another $200 for inspections. We can't compute overtime on his base rate of $10, because overtime is based on the regular rate, and when we paid him an extra $200, we changed his regular rate. To compute overtime for this employee, we have to compute the regular rate first:
RR = [(50 x $10) + $200] / 50 = $700 / 50 = $14
So the employee has averaged $14 per hour, straight time pay, for all 50 hours. The employer owes him another one-half of $14 for the 10 OT hours:
$14 / 2 = $7; $7 x 10 OT hours = $70
The employee's gross pay for the week is thus:
$ 70 OT premium
Even if the employees are paid via a method that has nothing to do with hours worked, the FLSA requires that the regular rate be computed and overtime paid. Take for example an employee paid commissions (note: an overtime exemption for certain commissioned employees will be discussed below) who earns $600 and who works 50 hours.
$600 / 50 = $12; $12 / 2 = $6; $6 x 10 OT hours = $60
The employee must be paid another $60 for overtime on his commission earnings.
While OT must be paid on almost all types of compensation, there are a few payments that are excluded from the regular rate - that is, OT need not be paid on these types of compensation. The most common regular rate exclusions include:
Employers must be careful about classifying bonuses as "discretionary" to avoid paying overtime on them. A bonus is only discretionary if both the fact that a bonus is to be paid at all, as well as the amount of the bonus, are only determined at or near the end of the period the bonus is intended to reward. When an employer announces in advance that employees will get a bonus if they accomplish certain goals or meet certain targets, etc., the bonus is not discretionary.
Next month, part three of the article will cover recording and paying for hours worked, child labor, exemptions and the retail commission exemption.
AutoInc. Web Site |
ASA Web Site |
U.S. Court of Appeals Affirms District Court Ruling in Allstate Insurance Case |
Alternative Fuels, Part 2 |
Don't Leave the Back Door Open |
Avoiding a Rush Job |
Wage-Hour Standards in the Auto Repair Industry, Part 2 |
Guest Editorial |
Tech to Tech |
Tech Tips |
News Briefs |
Taking the Hill |
Around ASA |
Shop Profile |
Net Worth |
Stat Corner |
Copyright (c) 1996-2011. Automotive Service Association®. All rights reserved.