Wage and hour litigation seems to growing into a big business for employees and their attorneys; especially, if they can smell a class action potential. All employers can take steps to avoid getting themselves into these types of lawsuits by paying careful attention to the law. Here is the basic rule and some common problem areas.

The Basic Rule
To be classified as exempt you must be â??primarily engaged inâ? exempt work as defined in the labor code and earn at least 2 times the minimum wage (this currently amounts to $640 per week in CA). There are 3 main types of exemptions (Executive, Administrative, and Professional) and each have very specific criteria assigned to them.

Trap 1: â??Comp Timeâ?
Never give a non-exempt employee â??comp timeâ? instead of overtime pay. The basic rule in CA is overtime (time and a half) must be paid for any time worked in excess of 8 hours in a day and 40 hours in a week. There are some minor exceptions (formal make-up time and alternate work schedules) to this but you cannot let employees bank overtime to be taken at a later date.

Trap 2: Pay a Salary – Classify as Exempt
Pay a person a salary as opposed to paying them by the hour has no bearing on their eligibility for overtime pay. To be exempt from overtime pay for almost all jobs, you must meet the criteria for either the administrative, executive or professional exemption. These criteria are strict and not easily attained. It is the job duties that determine eligibility for overtime pay not how they are paid or what their job title is.

Trap 3: Not Paying Overtime on all Earnings
Properly paying non-exempt employees for overtime in a week where they earn additional nondiscretionary compensation beyond their base pay is complicated but itâ??s the law. Basically, you must roll into their base pay any additional earnings for the week and recalculate an â??adjustedâ? hourly rate. For example; if an employeeâ??s base pay is $10 per hour and they work 50 hours for the week, they would be paid $15 per hour for their overtime work. Now letâ??s say they earned a production bonus of $50 for the week. Their total earnings are now $550 or an â??adjustedâ? average of $11 per hour. For overtime work during this week, their overtime pay would now be based on $11 per hour rather than $10 per hour. Therefore you would have to pay them $16.50 for each hour of overtime worked.

Trap 4: Call It a Sales Job â?? Classify as Exempt
Just because the person is selling doesnâ??t necessarily mean they are exempt. Again it is the job duties that determine the exempt status not how you pay them. To be eligible for the sales exemption you must primarily be doing â??outsideâ? sales. That means sales at the customerâ??s place of business. If you are making sales from your office or even from your home or by mail, internet or telephone, you are not eligible for the sales exemption. Keep in mind that exempt sales staff must still be paid at least the minimum wage for time worked regardless of their amount of sales commission earned.

Trap 5: Pay a Commission â?? Classify as Exempt
Just because you pay someone a commission doesnâ??t mean that you donâ??t have to pay them overtime. Some inside sales commissioned employees may be exempt but they must work for a retail or service business and earn at least 1.5 times the minimum wage and over 50% of their pay must come from commissions. Also, in CA you can only be exempt as a commissioned employee if you meet all the above tests and are covered under wage orders 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations) or 7 (Mercantile Industry). For any other wage order an inside sales commissioned employee would automatically be non-exempt and eligible for overtime pay. Therefore if you have a full time employee that earns only $250 in a given week (commission plus base pay), and otherwise meets the criteria for this exemption, you still must pay them $480 for the week (40 x $12.00) for them to be exempt.

Trap 6: Call Them an Independent Contractor â?? Pay as Exempt
Just because you call someone an independent contract (IC) doesnâ??t make them one. Once again it is the job duties that determine independent contractor status (see my blog on ICs for more information on this topic). If it is determined that the person in question was not an IC, the IRS or the Labor Board would then determine if they should have been classified as exempt or non-exempt. If it is determined that they should have been non-exempt, you will owe them overtime for all excess hours worked in addition to all the penalties associated with not paying them as an employee.

Getting It Wrong Is Expensive
Generally, for wage and hour violations, there is a 3 year look back plus penalties, interest and attorney fees. So even getting 3 hours a week, wrong for a $15 an hour job for a couple of years could wind up costing you upwards of $10,000 per employee. You donâ??t want to get this wrong!

If you are interested in getting an outside opinion on how your employees should be classified, Human Resources 4U can help.

Human Resources 4U is a full service Human Resources consulting company specializing in small and midsize businesses. Note: This article is presented with the understanding that we are not engaged in rendering legal advice. If legal advice is required, the services of a competent attorney should be sought.