Headlines about employment law typically involve sexual harassment or racial discrimination lawsuits. For many businesses and employees, the field conjures thoughts of background checks and severance agreements. While these are important components of this diverse area of legal practice, they are not necessarily the subjects which have the greatest societal and economic impact. If importance is measured by pervasiveness and the cost of potential legal exposure, than wage-hour law is the clear winner. While the phrase “wage-hour law” may not be a household term, every employer is required to comply with its technical requirements on a daily basis, and “collective action” – which is a component of employment law — has resulted in several of the largest judgments awarded in the past decade, including a single suit where the damages totaled more than 7 million.
Wage-hour law is the legal field regulating how wages are paid to employees. While state and even local law affect wage regulations, the Federal Labor Standards Act (“FLSA”) is the principal law which affects Virginia employers and employees. The FLSA sets both age limits for certain jobs and minimum standards for the amount and manner in which wages are calculated and paid. While most employers are careful not to hire underage workers and to pay employees no less than the federally mandated minimum wage, they tend to be less conscientious about ensuring employees are paid the appropriate wage for the hours they actually work.
One area where employers often make mistakes is in classifying workers. Generally speaking, workers fall into one of three categories: independent contractors, exempt workers, and non-exempt workers. Classification errors can be expensive because the amount and manner in which an employee must be paid is determined by their classification. When employees are incorrectly classified they are entitled to the payment of up to three years of back wages. When these back wages are multiplied by the number of incorrectly classified employees it becomes clear why wage-hour lawsuits or enforcement actions can become very costly.
Independent contractors are not employees, and therefore do not fall within the FLSA’s protective scope. However, an employer may not use this classification or title to avoid potential wage-hour liability. Labels do not matter; the economic reality of the parties’ relationship does. The hallmark of an independent contractor is the worker’s control of the manner in which a job is completed.
Exempt workers are defined as employees who perform special workplace duties. Exempt workers must be highly paid (at least $455.00 per week) on a salary basis – not an hourly basis. Additionally, the salaries of this classification may not be docked for intermittent absences. Finally, exempt employees must be allowed to exercise independent judgment when performing their work duties. Referred to as “white collar workers,” exempt employees must serve their employers in an executive, administrative, or professional capacity.
Executive employees must manage either several employees or the operations of customarily recognized department or subdivision. Administrative employees must perform office or non-manual work directly related to the management or general business operations of the employer or its customers. Professional employees must perform work requiring advanced knowledge customarily acquired by a “prolonged course of specialized intellectual instruction”.
All remaining employees are referred to as non-exempt workers. Unlike exempt workers, this classification of employees must be paid a minimum hourly wage and overtime (time and a half) for all hours worked over forty hours within a week. While there are several exceptions to these requirements, they apply to a very limited sub-set of employees.
As noted above, a failure to properly classify and pay employees can be very costly. If it is found that an employer cannot substantiate both their employees’ classifications and the sufficiency of the total wages paid, it is liable for two years of back wages. If the employer intentional withholds owed wages, it is liable for three years of back wages.
Employment law is a very complex and important consideration – for both businesses and employees – and classifications are simply the tip of the “wage-hour iceberg”. If an employer or employee has questions about how their wages are being calculated, it is important for them to confer with qualified legal counsel. Wage-hour audits can be performed to ensure compliance and efficiency. While there are several wage-hour pitfalls, most of them can be easily avoided if the proper precautions are taken. In this area of wage-hour law, an ounce of prevention is truly worth much more than a pound of cure.
Patrick Kelly is an associate with Glenn, Feldmann, Darby & Goodlatte specializing in Employment Law. Visit www.gfdg.com to learn more.