Taxpayers who have endured a lengthy Internal Revenue audit and employers who have felt the microscopic scrutiny of the Department of Labor understand the power of the federal government. It can crush them like a bug.
“When the Department of Labor comes to talk about the Fair Labor Standards Act, they will be in your face to make sure that you have complied with this law,” said Lon R Williams Jr, partner in Bracewell & Patterson, a Houston, Texas, law firm, and head of the North Texas labor and employment law practice. “If you have one employee complaint, they can interview your entire work force. Without records that disprove what an employee says, the employee can win.”
Williams spoke at the 2002 Dairy Distribution and Fleet Management Conference in San Antonio, Texas.
The most frequent, most high-dollar damage calculation DOL conducts relates to unpaid overtime, Williams said. Unpaid overtime may be significant, but that sum may be doubled as liquidated damages. The time period can go back at least two years and even three years for willful violations, which carry civil fines and criminal penalties.
“It's probably a good idea to call a lawyer and determine if you have any liability,” he said. “Companies often think they haven't done anything wrong and have no need for an attorney. They show all their timesheets to the investigator who then brings out the calculator and presents a bill for unpaid overtime. That's when I get the frantic call saying this is going to put the company out of business.”
Interstate commerce
The US Department of Labor enforces the Fair Labor Standards Act of 1938, which mandates for most employers (public or private) minimum wage requirements, overtime pay (payment of time and a half for each hour worked over forty hours a week), child labor restrictions, and recordkeeping requirements. In essence, it applies to all employers and employees in interstate commerce.
“With very few exceptions, the courts have interpreted interstate commerce to encompass virtually every employer in the United States,” Williams said. “The labor standards act is designed to protect full and part-time employees who are not specifically exempted by their job duties from the act.”
It does not apply to independent contractors or consultants. The IRS, the National Labor Relations Board applying the National Labor Relations Act, and the courts have developed guidelines to help companies determine whether a worker meets the independent contractor standards.
Companies that don't want to pay overtime and try to change employee work status may find themselves facing an IRS audit. “Changing the status of any employee is extremely difficult to do,” Williams said. “The IRS has a 20-step test to determine whether a worker is an employee or an independent contractor. Miscategorization of an employee as a consultant can result in substantial liability.”
Businesses also have used a temporary employment agency or employee leasing company to stop paying overtime, he said. “The courts and Labor have ruled that temporary or leased workers may be classified as contingent workers. If a temporary agency violates the labor standards act, its client can be found liable as a joint employer.
“Labor doesn't care that you have an understanding with longtime employees,” Williams said. “It doesn't care that employees love their jobs. It doesn't care that employees are satisfied with their compensation. It only cares about enforcing the law.”
As one example, a telephone answering service with four employees generated about $70,000 in annual revenues, he said. In lieu of regular hourly and overtime payments, the owner gave employees room and board and other benefits. After the labor department calculated overtime payments of $60,000, the employees lost their jobs because the business was forced to close.
In addition to federal laws relating to overtime pay, state laws often allow state departments of labor to ensure that employees are being properly compensated. Federal law dominates except in cases where state law is more favorable to the employee. Most state laws track the Fair Labor Standards Act fairly closely.
A significant case was decided January 31, 2002, in New Jersey. The decision of New Jersey Department of Labor and the International Brotherhood of Teamsters vs Pepsi-Cola was rendered by the Appeals Court of the State of New Jersey. The court said that Pepsi's route salesmen, also known as customer representatives and bulk customer representatives, were entitled to overtime wages from 1993 through the present, plus interest on the overtime payments due.
Pepsi required employees to deliver product and display it at retail. Pepsi argued that these employees were exempt from the New Jersey wage and hour laws as outside sales persons. Although the case only involved 13 people filing the initial claim, the case was expanded to hundreds in that job category from 1993 onward. In addition to the overtime amount owed plus interest, significant administrative penalties and administrative fees were awarded. Damages totaled millions of dollars.
New Jersey wage and hour law has a restriction on its outside sales exemption, which excludes employees who drive and only occasionally make sales calls. Route sales people were responsible for adding point-of-purchase material and had numerous supervisors reviewing their activities. They were required to clean, load, and fill shelves. They were told when to start work and were disciplined when they did not start on time. They were limited to a half hour for lunch. They were told that they could not leave the route to sell to other customers, and that they could not change the route order. They were even told by Pepsi that the target workweek was 50 hours a week.
On the sales side, prices were set by management with no involvement of the route people. They could not introduce new products without the authorization; they could not negotiate incremental expansion of display space; and they were not allowed to open new accounts.
Employee commissions were primarily based upon the volume sold, but in some instances commissions were based on a percentage of net revenues. Commissions were substantial, representing between 50% and 90% of employee income.
Pepsi also had a policy of deducting eight hours from employees if they were absent for five workdays regardless of whether they had been sick or had taken personal time. Commissions were reduced by 20% for each workday missed.
Looking at the evidence, the New Jersey Department of Labor decided that the outside sales exemption did not exist because of the lack of freedom and the lack of control by employees over sales efforts. The New Jersey Department of Labor also determined that the employees did not spend 80% of their time in actual sales.
The first review of the Labor Department decision was held by an administrative law judge who found that no exemption existed because drivers only spent one to two hours per day doing sales work. The labor commissioner, as the ultimate administrative reviewer, agreed that there was no outside sales exemption and added a prejudgment interest figure. The Court of Appeals affirmed the commissioner's decision.
“This should be a warning to all employers who use route sales people and try to operate under the outside sales exemption,” Williams said. “Give as much freedom as possible to employees towards the goal of selling product. They should not be involved in non-sales activities. To avoid any surprises years later if the exemption is disallowed, the employer should take care in reviewing all incentive compensation plans to make certain that they do not become included in the employee's regular rate of pay.”
Labor standards coverage
Employees can be covered by the labor standards act in two ways: enterprise coverage and individual coverage. The act covers all employers with workers engaged in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved or produced in interstate commerce. To be considered an enterprise under the statute, the employer must be involved in interstate commerce, have at least two employees, and do at least $500,000 a year in business.
Employees also may be covered by the act if their work regularly involves them in or production in interstate commerce. Such employees include those who:
(1) Regularly use the mails, telephones, or telegraph for interstate communication, or keep records of interstate transactions; (2) Work in communications or transportation; (3) Handle, ship, or receive goods in interstate commerce;(4) Regularly cross state lines during work; or (5) Work for independent employers who contract to do clerical, custodial, maintenance, or other work for firms in interstate commerce.
White collar employees may be exempt from the labor standards act. Jobs with managerial, professional, administrative or outside sales responsibilities are exempt. In addition, employees in certain industries may be exempt. Such exemptions may include agricultural, transportation, fishing, automotive sales, amusement, communication media, or certain retail or service employees.
Employers should constantly examine the job functions of all employees to make certain that each employee is properly categorized. The best rule of thumb is simply to determine if the job falls into one of the four following categories: (1) managerial, (2) professional, (3) administrative, or (4) outside sales.
Outside sales exemption
An outside sales exemption is not granted by the labor department. The employer must make the decision based on a good faith determination. The most important factor is whether the employee's primary duty is sales.
If the outside sales exemption criteria are met, then the employer does not have to pay overtime when the hours worked exceed 40. On the contrary, if an employer has a sales person categorized as exempt when the employee is not exempt, the wage and hour division will calculate the overtime that has not been paid.
An outside sales person customarily and regularly works away from the employer's place of business while making sales; and whose time spent performing those tasks are at least 80% of the workweek.
“Employees who spend the day on the phone at the office won't meet the criteria for outside sales,” Williams said. “Without visiting your companies, I'm sure your outside sales people are involved in selling. But do they do it 80% of the time? Driving a delivery truck and reshelving products are not selling.”
Certain criteria indicate whether an employee falls under the outside sales exemption. These include
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A significant portion of compensation based upon commissions;
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Employer sales training for employees;
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Employer provides minimal supervision of the employee;
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Job title reflects a sales function;
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Deliveries, collections, and other duties are incidental to the outside sales function or the employee's efforts;
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Employee provides the only contact between the employer and the customer;
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Employee receives compensation commensurate with the volume of product sold;
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Employee determines the starting time, route, and number of hours to be worked along the route;
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Employee solicits orders from individuals who have the authority to commit to the purchase;
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Employee is allowed to call on new customer prospects along the route; and
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Employee calls on established customers and persuades these established customers to increase purchases.
On the other hand, certain duties are not part of an outside sales effort, such as promotional work that relates to sales by other employees; employees efforts relate to increasing company sales versus their own sales; or employees delivering to a customer to whom they did not make the original sale or in prearranged amounts. A route driver who primarily engages in delivery and performing promotional activities such as point-of-sale or advertising materials, pricing, arranging shelves, rotating or cleaning display cases is not likely to be categorized as exempt.
Driver exception
To be eligible for the driver exemption, the employee and the employer/motor carrier must be subject to US Department of Transportation jurisdiction. The carrier must be engaged in interstate or foreign commerce and the employee's duties involve the safe operation of the carrier's motor vehicles. Typically, this exemption applies to over-the-road drivers.
Local drivers may be eligible for the exemption when employed as a driver making local deliveries, and compensated on a trip basis or other delivery payment plan with maximum weekly hours worked by averaging 40 hours or less. This exemption also requires that the labor department issue a specific exemption.
Overtime pay is calculated at not less than one and one-half times the employee's regular rate of pay. It is possible to avoid paying time and a half overtime to non-exempt employees if the employer and employee agree on a guaranteed wage each week. This amount must not be subject to reduction if the employee works less than 40 hours a week.
The regular rate of pay should not be confused with the employee's hourly rate of pay. The regular rate is computed by dividing the employee's total pay during the workweek by the number of hours worked.
All compensation paid during workweek must be included in the determination of the regular rate of pay except for gifts, paid leave, expense reimbursement, discretionary bonuses, and overtime premium payments for work on weekends and holidays. Commission payments are included in the regular rate of pay as are all nondiscretionary bonuses and most other incentive compensation.
Incentive compensation
Incentive plans may be used in calculating overtime pay if the position has not been properly categorized. Three incentive compensation plans may be excluded from calculating the regular rate of pay for purposes of determining overtime:
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Stock options, which were excluded by the Worker Economics Opportunity Act;
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Discretionary bonuses, which must be truly discretionary as to the amount and whether paid at all; and
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Bonuses based upon an employee's total earnings — a bonus that is a percentage of the employee's straight and overtime pay. This is not available when an employee has been miscategorized as an exempt employee because the employee would not yet have been paid overtime due.
