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The Fair Labor Standards Act (FLSA) sets forth requirements for employers including, but not limited to, minimum wage, overtime pay, and recordkeeping for covered employees. These requirements are not as simple as they may appear on their face, which leads many employers to fall into compliance issues that they did not realize even existed.

To help employers navigate the FLSA, we have identified five common pitfalls employers fall into and how to avoid them below:

1. Failing to account for travel time in an employee’s hours worked. The FLSA defines a workweek as a period of 168 hours during 7 consecutive 24-hour periods.[1] Covered employees must be paid for all hours worked in a workweek.

The Pitfall: Employers frequently fail to account for the full amount of time that qualifies as “hours worked” in a day for purposes of determining an employee’s wages. In general, “hours worked” is measured from the beginning of the first principal activity of the workday to the end of the last principal work activity of the workday. Under 29 C.F.R §785.38, an employee’s time spent traveling as part of her principal activity must be counted as hours worked.

How to Avoid It: Imagine an employee is a technician who commutes to the employer’s premises each day to pick up equipment and receive her job assignments for the day before driving to her first assigned job site. The employee must report back to her employer’s premises after the last job of the day to return the equipment and submit an end-of-day report before she drives home.

Is the time the employee spends driving from the last job site of the day back to the employer’s premises compensable work time? The correct answer is yes. Because the employer requires the employee to report back to the employer’s premises, the time the employee spends driving from the last job site of the day back to the location specified by the employer is still work time for which the employer must compensate the employee.[2]  

2. Misclassifying employees as independent contractors. An employment relationship must be present between an employer and a worker for the worker to be entitled to the minimum wage and overtime pay protections under the FLSA.

The Pitfall: Independent contractors are not covered under the FLSA. As a result, many employers believe that a worker classified as an independent contractor is not a covered employee under the FLSA regardless of the worker’s means and methods of performing the work or the nature of the relationship between the worker and the employer. While there is no singular test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA, the U.S. Supreme Court has found the following factors to be significant: (1) the integral nature of the services rendered to the employer’s business; (2) the permanency of the relationship between the worker and the employer; (3) the worker’s investment in the facilities and equipment required to perform the job; (4) the nature and degree of control the employer exerts over the worker; (5) the worker’s opportunities for profit and loss; (6) the amount of initiative, judgment, or foresight in open market competition with others that is required for the success of the worker; and (7) the degree of independent business organization and operation by the worker being classified as an independent contractor.[3]

How to Avoid It: Imagine an employer hires a driver for the employer’s transportation service. The driver signs an employment agreement stating that he is an independent contractor. To perform the job, however, the driver is required to work at least 40 hours per week, use the employer’s vehicle, and report to one of the employer’s supervisors to receive his route assignment for the day. Is this worker truly an independent contractor?

The correct answer is most likely no. While the employer may have signed a document stating that he considers himself to be an independent contractor, the realities of his employment suggest otherwise. The employer, rather than the worker, controls the means and methods of performing the job, the employer and the worker appear to be in a full-time working relationship, and the worker does not make any investment in the vehicle used to perform the work. Moreover, the worker does not appear to be required to compete with other drivers in the open market for the work. These factors strongly suggest that the worker is actually an employee who has been improperly classified as an independent contractor.

3. Failing to include bonuses when calculating overtime pay. Employers are required to pay covered employees overtime at a rate of at least one and one-half times the employee’s regular rate of pay for each hour worked in a workweek in excess of the maximum allowable for the employee’s type of employment.

The Pitfall: All non-discretionary bonuses must be included in calculating the employee’s regular rate of pay unless they are excludable for one of the reasons set forth under the FLSA. A non-discretionary bonus is any predictable, promised, or pending payment made because an employee meets a certain tenure, quality of work, quantity of production, or efficiency of operations. Section 207(e)(1)-(8) of the FLSA sets forth information about payments that can be excluded from the regular rate of pay.

How to Avoid It: In this example, assume that the employer runs a factory and offers a production bonus of $100 for exceeding a specified quota in a week. The employee exceeds the production quota in a week where the employee works 50 hours, thus earning the $100 bonus. The employee is non-exempt and paid at an hourly rate of $20 per hour, and the employee is subject to a maximum 40-hour workweek. What is the employee’s regular rate of pay for purposes of calculating her overtime rate?

The tempting answer is $20 per hour, but that is incorrect. Instead, the $100 bonus is evenly attributed across the work week. This means that the employee’s rate of pay is calculated by dividing the additional $100 by the 50 hours worked, which adds an additional $2 per hour to the employee’s regular rate of pay (i.e., $100/50 hours = $2 per hour). In turn, the employee’s overtime premium is increased by $1 per hour (i.e., $2 x 0.5 = $1 per hour). Accordingly, the employee is owed $1,100 in regular pay ($22 x 50 hours = $1,100) and $110 in overtime pay ($11 x 10 overtime hours = $110) for a total paycheck of $1,210 for the workweek.

Let’s assume this same employee works 50 hours the next week but does not earn the production bonus. The employee’s regular rate of pay is $20 per hour, and the overtime premium is $10 per hour (i.e., $20 x 0.5 = $10). Accordingly, the employee is owed $1,000 in regular pay and an additional $100 in overtime pay for a total paycheck of $1,100.

4. Miscalculating wages due to tipped employees. A tipped employee is any employee engaged in an occupation in which the employee regularly receives more than $30 a month in tips.[4] Under the FLSA, an employer must pay a tipped employee at least $2.13 per hour, and the employer can take a tip credit towards the employer’s minimum wage and overtime obligations equal to the difference between the federal minimum wage and the direct wage the employer pays the employee.

The Pitfall: The employer must be able to show that tipped employees are actually receiving at least the full federal minimum wage each workweek when direct wages and the employees actual tips are combined. If not, the employer must make up the difference. Importantly, where state law differs from the FLSA, the employer is required to follow the standard that is the most protective of employees. That means that in states where employers are prohibited from taking a tip credit or in states that require a higher direct wage for tipped employees than the $2.13 required under the FLSA, the employer must be sure to follow state law regarding direct wages due to tipped employees.

How to Avoid It:  An Ohio employer that generates more than $400,000 in gross receipts per year wants to take a tip credit for the bartenders and servers that work in the employer’s restaurant. The employer is sure these employees receive more than $30 per month in tips, so the employer pays the tipped employees $2.13 per hour and takes a $5.12 tip credit. The employer doesn’t ask employees to report their tips because these employees are engaged in roles that customarily receive tips. As a result, the employer has no record of how much the employees are actually making in tips and whether those tips and the direct wage paid by the employer add up to the appropriate minimum wage.

This example contains several errors that could become very costly for the employer if the U.S. Department of Labor Wage and Hour Division launched an investigation. First, this employer relied upon the minimum wage standard with the least protection for the tipped employees rather than the greatest protection. Under Ohio law, an employer with annual gross receipts greater than $372,000 is required to pay a minimum wage of $10.10 per hour and a minimum direct wage for tipped employees of $5.05 per hour.[5] This means the employer in our example is actually required to pay the tipped employees a minimum direct wage of $5.05 per hour and can only claim a maximum tip credit of $5.05 per hour.

Additionally, the employer in our example commits another potential FLSA violation by failing to record the tips actually received by tipped employees to ensure those employees are receiving the applicable minimum wage of $10.10 per hour when the employees’ direct wages and actual tips are combined. If this employer were subject to a Wage and Hour investigation, it would have very limited evidence (if any) to prove that its employees were receiving the requisite minimum wage as required under the FLSA.

5. Failing to maintain adequate employment records. One of the primary requirements of the FLSA is that employers maintain certain basic records for all employees. This serves as an accountability mechanism in the event an employee alleges that an employer has violated one or more FLSA requirements.

The Pitfall: As demonstrated by the previous examples, employers are responsible for ensuring that employees are properly classified as such, adequately compensated for travel time during the work day, paid the appropriate amount of overtime earned in light of a non-discretionary bonus, and paid the appropriate direct wage based upon tips earned in occupations that regularly receive tips. The only way for an employer to prove that it has satisfied all of these requirements (and more) is to ensure that it maintains accurate, up-to-date employment records.

How to Avoid It: The checklist below sets forth the basic records that an employer must maintain for each of its non-exempt employees under the FLSA.[6] Do you know where to find these records for all of your employees? If not, now is the time to audit your recordkeeping systems to ensure you are accurately and consistently capturing this information:

• Employee 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., hourly, weekly, etc.)
• Regular hourly pay rate
• Total daily or weekly straight-time earnings
• Total overtime earnings for the workweek
• All additions to or deductions form the employee’s wages
• Total wages paid each pay period
• Date of payment and the pay period covered by the payment

Note that there is no requirement that these records be maintained in any specific form.[7] Rather, the record must be clearly viewable and must be identifiable by date or pay period.[8] Employers are required to maintain these basic records for a minimum of 3 years from the last date of entry.[9]

The examples above are relatively simple illustrations of common pitfalls employers may fall into when trying to balance their legal obligations against the realities of operating a business or other type of organization. BMD’s Labor and Employment attorneys are here to answer any questions employers may have about specific employees and to provide guidance to employers that may find themselves at the center of a Wage and Hour investigation.

[1] https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa#:~:text=The%20FLSA%20requires%20employers%20to,with%20other%20laws%20and%20regulations.

[2] See 29 C.F.R §785.38.

[3] https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship.

[4] https://webapps.dol.gov/elaws/whd/flsa/docs/tipped.asp?_ga=2.143125685.1004156238.1679267282-1554813002.1676497730.

[5] The U.S. Department of Labor Wage and Hour Division provides a table of minimum hourly wages for tipped employees that is organized by state at https://www.dol.gov/agencies/whd/state/minimum-wage/tipped#foot5.

[6] See 29 C.F.R. §516.2(a).

[7] See 29 C.F.R. §516.1(a).

[8] Id.

[9] See 29 C.F.R. §516.5(a).

BMD’s Employment Law attorneys are here to answer any questions employers may have about compliance FLSA. If you have any questions about this topic or wish to discuss any other employment related issues, please contact Bryan Meek at bmeek@bmdllc.com, Adam Fuller at adfuller@bmdllc.com or Hayley Kick at hekick@bmdllc.com.