Employees are essential to your small business. Hiring and retaining workers is one of the biggest challenges that business owners face. In this highly competitive labor market, employers are looking for competitive edges to attract—and keep—employees.
While many workers currently place a greater emphasis on job attractors other than compensation, pay remains highly important to candidates. Any problems associated with their compensation may cause them to sour and seek greener pastures. Payment issues can also violate wage laws, resulting in fines, penalties, and lawsuits.
Even when employers avoid major violations, such as missing a paycheck or withholding pay, they can still run afoul of the law if they do not keep proper payroll records.
Federal and State Wage Laws
You may have started your small business in the early days using little more than personal resources and ingenuity. But when your business grows past a certain point, it usually becomes necessary to hire help.
There are numerous laws applicable to hiring employees, but after the employment paperwork is signed and work begins, employers must comply with federal and state labor laws. With some exceptions, businesses that employ full- and part-time workers are subject to the following laws, which, along with other provisions, set standards for paying employees.
- The Fair Labor Standards Act (FLSA), administered and enforced by the Department of Labor (DOL), establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for public and private sector workers.[1] It requires that most employees be paid at least the federal minimum wage for all hours they work and receive overtime pay of at least 1.5 times their regular rate of pay for every hour worked over forty hours per workweek. Covered employers must also keep records for each nonexempt worker for a minimum of three years.[2]
- The FLSA does not establish payday requirements, but mandates that required wages are due on the regular payday for the pay period covered. [3]
- The FLSA also does not regulate holiday, vacation, severance, or sick pay; meal or rest periods; holiday or vacation periods; holiday or weekend premium pay; pay raises or fringe benefits; or discharge practices, such as notices and reasons given to terminated workers or immediate payment of final wages owed to terminated workers.
- The FLSA does not mandate meal periods and rest breaks but imposes rules on employers that choose to offer them.
- Under the FLSA, employers may not make wage deductions for cash or merchandise shortages, uniforms, and work tools if they reduce wages below minimum wage or reduce overtime pay.
- Certain executive, administrative, professional, outside sales, and computer-related occupations may be exempt from overtime pay under the FLSA. Other salaried employees may be exempt from FLSA minimum wage and overtime pay rules as well.
- State labor laws may have provisions that are stricter than the FLSA.[4] For example, many states have a higher minimum wage than the federal minimum wage, and some states have daily overtime pay laws that take effect at eight Some states also have laws about overtime exemptions; payday requirements;[5] meal periods and rest breaks; deductions for uniforms, tools, and equipment; sick leave and vacation; and recordkeeping requirements that are more stringent than the FLSA.
In cases in which state and federal labor laws conflict, employers generally are obligated to comply with the law that offers the greatest protection to workers.
Employers should be aware that they may need to comply with other laws in addition to the FLSA and similar state laws. There are other employment-related legal requirements under the Occupational Health and Safety Act (OSHA), the Family and Medical Leave Act (FMLA), the Employee Retirement Income Security Act (ERISA), workers’ compensation statutes, and employment discrimination laws. Employers additionally must comply with Internal Revenue Service (IRS) payroll regulations.
Common Employee Payment Violations
Wage theft, which the Economic Policy Institute (EPI) describes as “any time employees do not receive wages to which they are legally entitled for their labor,”[6] is a drag on the American economy.
EPI reports that millions of workers nationwide are victims of wage theft each year, to the tune of billions of dollars in lost wages.[7] EPI gives the following examples of wage theft:
- Paying workers less than the legally required minimum wage
- Not paying workers for overtime worked
- Asking employees to work off-the-clock before or after their shift
- Denying meal breaks to workers
- Making illegal wage deductions
- Taking tips from workers or not paying the difference between tips and the legal minimum wage
- Misclassifying employees as independent contractors in order to circumvent wage and hour laws
Another practice that can result in a wage and hour violation is withholding or deducting payment from employees, apart from withholdings required by law. Lawful wage deductions can include taxes, employee benefit programs, union dues, and other costs that are authorized in advance and have employee consent. Wage garnishment for unpaid consumer debt is permitted, but only up to a point.[8] And some states have their own wage garnishment rules.[9]
The FLSA does not prohibit an employer from reducing the hourly wage of a nonexempt worker for violating company policy if the reduction does not result in the worker receiving less than the minimum wage. However, the employer may not refuse to pay an employee for hours already worked. Under state law, the employer who reduces an employee’s hourly wage may be required to inform the employee of the rate change, and the employee has the right to accept or reject it.
Bankruptcy may not be an excuse for not paying employees. Although the FLSA does not address bankruptcy, a bankruptcy court will prioritize employee wages and salary over many other types of debt, regardless of whether the business continues to operate or shuts down.[10] This does not guarantee that an employee will recover wages or salary that is due if the employer does not have the funds to pay them, however.
Employee pay violations can result in several different employer consequences:
- The U.S. Department of Labor, state departments of labor, and state attorneys general can take legal action on behalf of workers to recover unpaid wages.
- Employers can face civil monetary penalties and criminal penalties.
- Workers can file a class action lawsuit to recover past due wages.
EPI says that, from 2017 to 2020, legal action resulted in more than $3 billion in stolen wages being returned to workers.[11]
Employers that do not keep detailed payroll records are at risk of losing a wage-and-hour action. FLSA recordkeeping requirements entail tracking information such as each employee’s name, address, Social Security number, occupation, regular hourly pay rate, overtime earnings, total wages paid, payment dates, and hours worked.[12]
Businesses should be prepared for a DOL audit at any time. Employee complaints often trigger an FLSA audit, but the DOL has the right to conduct random audits. During an audit, be prepared to provide documentation as requested and expect to have records scrutinized.
Wage and Hour Compliance Is a Team Effort
Employees are among a company’s most valuable assets, but there is no denying that hiring employees creates a greater compliance burden. Employers must comply with labor laws, both at the state and federal levels. Keeping detailed records is important in case a wage dispute arises. But even the most meticulous records cannot protect an employer from the consequences of payment violations, even if they are unintentional. And a small business may not be able to survive the financial and reputational costs of a wage and hour action—even if the claim proves to be meritless.
Our small business attorneys can provide guidance to help you comply with all applicable laws that govern employee pay and treatment. To set up a meeting with our team, call or contact us today.
[1] U.S. Dep’t of Labor, Handy Reference Guide to the Fair Labor Standards Act, https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa (last visited July 25, 2023).
[2] U.S. Dep’t of Labor, Records To Be Kept by Employers, https://www.dol.gov/agencies/whd/fact-sheets/21-flsa-recordkeeping (last visited July 31, 2023).
[3] U.S. Dep’t of Labor, Basic Wage Standards, Handy Reference Guide to the Fair Labor Standards Act, https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa#:~:text=Wages%20required%20by%20the%20FLSA,for%20the%20pay%20period%20covered (last visited July 25, 2023).
[4] See, generally, U.S. Dep’t of Labor, State Labor Laws, https://www.dol.gov/agencies/whd/state (last visited July 31, 2023).
[5] U.S. Dep’t of Labor, State Payday Requirements (Jan. 1, 2023), https://www.dol.gov/agencies/whd/state/payday.
[6] Ihna Mangundayao, et. al, More than $3 billion in stolen wages recovered for workers between 2017 and 2020, Economic Pol’y Inst., https://www.epi.org/publication/wage-theft-2021/ (last visited July 26, 2023).
[7] Id.
[8] U.S. Dep’t of Labor, Federal Wage Garnishments, https://www.dol.gov/agencies/whd/wage-garnishment (last visited Aug. 1, 2023).
[9] Lyle Daly, Which States Are Protecting Citizens From Wage Garnishment? (Oct. 27, 2021), https://www.fool.com/the-ascent/research/states-wage-garnishment/
[10] 11 U.S.C. § 507.
[11] Ihna Mangundayao, et. al, More than $3 billion in stolen wages recovered for workers between 2017 and 2020, Economic Pol’y Inst., https://www.epi.org/publication/wage-theft-2021/ (last visited July 26, 2023).
[12] U.S. Dep’t of Labor, Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA), https://www.dol.gov/agencies/whd/fact-sheets/21-flsa-recordkeeping (last visited July 26, 2023).