Dangerous Waters: Surviving the Rapids of Employment Compensation
By Cory J. King
What's the difference between an exempt or nonexempt employee? Do commissioned employees get overtime pay? Find out the answer to these and other dilemmas facing shop owners regarding employee compensation.
Editor's Note: This article provides general information about labor and employment laws. It is not a legal opinion or legal advice. Readers should confer with competent legal counsel on the application of the law to their own situations. In addition, any references to salary or wage amounts are hypothetical and not a suggestion of employer wages. These hypothetical earnings are provided for the purposes of showing formulas and calculations only.
Every year adventurous souls climb into canoes, kayaks and rafts to enjoy running the rapids of mighty rivers. To "save a buck," many venture into the dangerous waters alone and with good fortune smiling upon them, they make it through without incident. However, having an experienced guide with knowledge of the river greatly increases both the enjoyment level and the chances that everyone will arrive safely.
In this era of the Entitlement Generation - where every misstep seems to trigger an expensive lawsuit - wise employers seek out experienced "guides" before venturing into the dangerous waters of employment compensation. This article is designed to help guide employers through some of the rough waters and help them stay off the rocks that can tear holes in their company or capsize the entire operation.
Every shop should exercise caution and get detailed advice regarding the laws that apply in its state, but federal wage and hour law is found in the Fair Labor Standards Act ("FLSA"). This law was originally passed in 1938 and was designed to protect oppressed employees in the post-depression era. It has been amended over the years, but generally remains the same. Many states have adopted the FLSA as their state's wage and hour law, either in whole or in part, but other states have adopted their own wage and hour laws that are much more rigorous than the FLSA.
The "White Collar" Overtime Exemptions - What Are They? Do They Apply
to Your Employees?
When it comes to compensating employees, the general rule is that employees who work hours in excess of established daily or weekly limits are entitled to overtime compensation unless they qualify for one of the established "overtime exemptions." Federal and state laws, though they may differ slightly in their definitions, all recognize overtime exemptions for certain classes of employees. Employees who are paid a certain minimum salary and meet all of the requirements of a specific duties test may qualify for one of the three "white-collar" exemptions.
The two "white collar" exemptions that frequently apply to employees in the automobile industry are the "executive" and "administrative" exemptions. (Note: Because of the duties required for applicability, the "professional" exemption typically does not apply to employees in the automobile industry and will not be addressed in detail here.) As a threshold requirement, both require that the employee make a guaranteed salary of at least $455 per week.
Presuming that the salary requirement is met, to qualify for the "executive" exemption, the employee also must (1) have "management" as their primary duty, (2) customarily and regularly direct/supervise two or more other workers and (3) have the authority to hire or fire other employees, or make suggestions on employee status that are given particular weight. This is the "white collar" exemption that is most likely to apply to employees in the automobile industry. However, beware that simply giving an employee the title "manager," or placing them "on salary," does not make the employee exempt from overtime. The employee still must meet all of the exemption requirements.
To qualify for the "administrative" exemption, the employee's primary duty must be nonmanual work directly related to the management or general business operations of the employer or the employer's customers. The employee must also exercise discretion and independent judgment with respect to matters of significance. Because these requirements seem rather simple to satisfy, it is very tempting to apply this exemption to all sorts of employees. As a result, misclassification is extremely common. Since liability can escalate quickly, employers are urged to obtain the advice of experienced employment counsel before classifying any employee as "administrative" exempt.
The "Other Exemptions" - Commissioned or Flag/Flat-Rate, Parts Person, Mechanic, Outside Sales
In addition to the "white collar" exemptions, there are other overtime exemptions under the FLSA (and many state laws) that cover auto industry employees. For example, most employers in this industry may take advantage of what is known as the "retail sales" or "7(i)" exemption. This exemption comes from section 7(i) of the FLSA and, in sum, states that if an employee works for a "retail establishment," makes more than half his/her income from "commissions," and makes more than one and one-half times minimum wage for all hours worked, then the employee is exempt from the overtime regulations. That sounds simple enough, but it can take some detailed analysis to determine whether the exemption applies.
The first step is to determine whether the 7(i) exemption applies in the employer's state. Some states restrict the applicability of the exemption to commissions earned through the sale of "products" and exclude commissions related to "services," such as repairing vehicles. Other states do not have the 7(i) exemption at all.
Presuming that the employer qualifies as a "retail establishment," under applicable law, the next step is to make sure the employee is receiving at least one and one-half times minimum wage for all hours worked. This typically isn't a problem because of how well commissioned or flat-rate employees are paid, but there are pitfalls. For example, one court held that because an employer did not maintain accurate clock hour records for its employees, the employer could not prove that those employees made the requisite one and one-half times minimum wage for all hours worked and thus refused to consider those employees to be exempt. The lesson in that case - make sure you keep accurate clock hour records for your commissioned/flat-rate employees!
The final step is to make sure that at least half the employee's compensation comes from "commissions." Fortunately, flat-rate payments are considered "commissions on goods or services" for purposes of the 7(i) exemption. However, be careful with employees who receive a "guarantee" or a "salary plus commission." Unless the "commission" or flat-rate compensation exceeds the "salary" or "guarantee," the employee likely will not be exempt from overtime. As a result, extreme care must be taken in drafting the employee's pay plan to properly characterize their earnings, otherwise the employer could inadvertently negate the exemption for that employee.
Finally, for those shops that have employees who regularly work away from the shop, if that employee's primary duty is to make sales and take orders, that employee may qualify for the "outside sales" exemption.
Caution - Pitfalls of Overtime Exemptions
While classifying an employee as "exempt" may save an employer thousands of dollars in overtime, "misclassification" is extremely common and can create tremendous liability. The problem is compounded because many employers do not keep track of clock hours for employees they (rightly or wrongly) consider "exempt." If the employee has been misclassified, the employer is then at the employee's mercy because it is the employer's obligation to maintain clock hour records. The "safe paddling" tip here is to closely examine an employee's duties before classifying them as "exempt," and even then, consider having all employees, exempt or not, "punch the clock" so if it ever becomes an issue, there will never be a question about how many hours each employee worked.
Calculate Overtime Properly
If an employee is entitled to overtime, the overtime must be calculated on all compensation earned during the time period when the overtime hours were worked - the key is to know how to calculate the overtime. Overtime calculations are simple mathematical calculations, but employers get in trouble all the time because they try to "bend" those mathematical rules. Here is how it works under the FLSA (beware that some states use dramatically different calculations):
• Hourly - This calculation is simple and every employer knows it. The employee gets "time and one-half" for all hours worked over 40 in a week.
• Salary, Commission or Flat Rate - This calculation is a bit more complicated, but is the same regardless of whether the employee is paid a salary, commission or flat rate. This calculation uses the "fluctuating workweek method." The employee's total compensation for the workweek (the sum of all salary, commission, flat rate, bonuses, etc.) is divided by the total number of clock hours to arrive at the employee's "regular rate." That "regular rate" is then multiplied by ".5" to arrive at the "overtime rate." That "overtime rate" is then multiplied by the number of overtime hours worked during the workweek to arrive at the "overtime premium." The "overtime premium" is then added to the employee's compensation for that workweek. For example, a flat rate employee earned $900 in a given workweek by flagging 75 "hours" at $12 per "flag hour." He worked 50 clock hours during that workweek. His "regular rate" for that workweek was $18 [$900 ÷ 50]. His "overtime rate" for that workweek was $9 [$18 X .50]. Thus his "overtime premium" was $90 [$9 X 10 OT Hours]. And his complete compensation for that workweek was $990 [$900 + $90].
• "Hourly plus Bonus" - This calculation requires a two-step process. First, calculate the overtime on the hourly rate as set forth above. Then, treat the "bonus" as if it were a "commission" and calculate the overtime premium on the bonus amount using the fluctuating workweek method.
What Do I Do If My Shop Isn't in Compliance?
Perhaps after reading this article you find yourself heading for the rocks. In today's litigious world where television and radio advertisements are educating employees about how to sue their employers over these issues, employers cannot hide their heads in the sand.
The key to remember is that if your shop is not in compliance with wage and hour laws - do not panic. First, determine the full extent of your liability exposure by conducting an internal wage and hour audit. This process takes time and hopefully the company is doing the audit on its own terms and not having the timing and scope dictated by a court or government agency.
Once the limits of the liability exposure are determined, it is then time to make a very important, and sometimes very difficult, decision. This decision is typically driven by the financial realities of the company. Depending on the extent of the liability exposure, some companies elect to simply pay out all the unpaid back wages and eliminate the exposure. This option usually is not a financial possibility for most companies, which brings us to the other options.
It also is important to understand that there is a statute of limitations on how many years of back wages the out-of-compliance employer will be liable to pay. Once an employer gets into compliance, every day that passes deducts from their liability exposure, so it behooves them to get into compliance sooner rather than later. There are many strategies for getting into compliance, but the complexity of those strategies is best served through consultation with employment counsel experienced in such matters because the mere act of getting into compliance can trigger employees to file claims. As with navigating a raging river, an experienced "guide" (legal counsel) is recommended for this voyage.
Paying an employee a "fair wage" is no longer good enough. Employers also must comply with a host of wage/hour laws, and ignorance of those laws is no excuse. Thus, when it comes to the dangerous waters of employment compensation, save the thrill ride for the river and be sure to team up with a good guide, get into compliance and enjoy the ride.
Editor's Note: For further reading about this topic, please see the three-part series, "Wage-Hour Standards in the Auto Repair Industry," in the August-October 2007 issues of AutoInc. by Brian T. Farrington. Farrington conducts ASA's Wage and Hour Attorney program. Under an arrangement with ASA, members can receive brief telephone consultations from Farrington, ASA's wage-hour attorney, at no cost. Members wishing to benefit from this service can call (800) ASA-SHOP, ext. 295, and ASA will arrange to have Farrington call the member. Employers requiring more extensive assistance can retain Farrington at their expense.
Cory J. King is a partner at the employment law firm Fine, Boggs, & Perkins LLP. He is a frequent presenter at the International Autobody Congress and Exposition and other auto industry events. He can be reached at (760) 931-9070 or email@example.com.
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