The Fair Labor Standards Act (FLSA) is best known as the law determining the exempt or nonexempt status of jobs and overtime requirements. Under Federal law, overtime claims are governed by the FLSA.
FLSA entitles employees who work over forty hours a week to receive wages at one-and-a-half times their regular rate of pay for any overtime. The law does not apply to certain salaried employees – but to qualify as exempt, employees must satisfy three tests:
- The “Salary-Basis Test” – Employees must be paid on a salary basis;
- The “Salary-Level Test” – Employees must earn above a certain minimum salary level per week; and
- The “Duties Test” –Employees must perform certain duties.
Being paid on a salary basis means an employee regularly receives a predetermined amount of compensation each pay period. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. An exempt employee must receive the full salary for any week in which they perform any work, regardless of the number of days or hours worked.
The current federal salary level is $913 per week, but different rates apply, based on location and how many employees an employer has. For example, in New York, the salary level for employers of eleven or more employees is $975 per week.
Exempt employees must engage in duties that are considered “white-collar” work, and must have some level of independent judgment and discretion in making decisions on behalf of the company. Job titles are not taken into consideration when determining if duties meet the standard.
Not all salaried employees are created equal under the FLSA, and employers in New York State must review the wages they pay their workers.
Class Action Wavers and the FLSA
For employers in New York, having a well-drafted class action waiver as part of the onboarding for new employees is one of the easiest ways to limit exposure to FLSA wage & hour claims.
Imagine one day, a disgruntled employee alleges that you failed to properly pay overtime or minimum wage. The employee speaks with an attorney who agrees to take the case on a contingency basis. The attorney files a lawsuit and persuades the Court to certify a class action – allowing every single employee hired in the last three years to join in the lawsuit. A $15,000 claim turns into a $150,000 claim overnight!
Now imagine, that the same disgruntled employee signed an alternative dispute resolution agreement that included a collective action waiver. Any claims involving overtime or minimum wage, which could have been brought on a class-wide basis, may now only be pursued on an individual basis via mediation or arbitration.
Including class-action waivers in new hire agreements prevents employment class actions, and forces employees to prove the merits of their own claims. If the employer takes such a step requiring individual claims to be brought and proven separately, many claims never come to fruition, which results in tremendous savings to employers.
Mediation and arbitration have lower overall costs compared to going to court, and carry the added benefit of confidentiality. Legal costs are traditionally lower in these proceedings because discovery disputes are usually resolved through phone conferences or letter motions.
FLSA and Spread of Hours Pay
While federal wage and hour laws cover certain employees when it comes to minimum wage and overtime pay, many states have adopted additional wage laws that provide more employee protections than the FLSA.
For example, under the New York labor department’s current hospitality regulation, an employee must receive one additional hour of pay at the current basic minimum hour rate when the employee’s “spread of hours” exceeds 10 hours in the workday. In the hospitality industry, spread of hour pay is defined as the length of the interval between the beginning and end of an employee’s workday, which includes working time plus time off for meals and for intervals off duty.
An example of a spread of hours greater than 10 hours: employee is scheduled to work from 7:00 a.m. to 10:00 a.m. and 7:00 p.m. to 10:00 p.m. – a total of 6 hours worked but a 15-hours spread.
Outside the hospitality industry, if an employee’s hourly rate of pay is greater than the current minimum hourly rate, the excess earned can be credited against the extra hour of minimum wage that might otherwise be due because of a spread in hours. As you can see, over time spread of hours can be a serious liability for employers.
Tip Credit & Tip Pooling
FLSA compliance in the hospitality industry presents unique challenges because many industry employees receive tips—and tips raise special issues with respect to wage and hour law.
So long as an employee is customarily and regularly tipped, business owners may take a tip credit against the normal minimum wage. To take advantage of the tip credit, employers must follow very specific rules. For instance:
- Employers must inform tipped employees about the tip credit;
- Employers must maintain and preserve detailed records; and
- Unless there is an established tip pool in place, employees can not be forced to share tips with anyone.
A legal tip pool allows employees who are customarily and regularly tipped to share tips among themselves. Thus, an employer should never require employees who are customarily and regularly tipped to share tips with management, supervisors, or back-of-house staff.
Until recently, some employers choose to pay tipped employers the regular minimum wage in lieu of taking a tip credit. In these instances, the employers argued that the FLSA did not control the tips, and tips could be shared with management, supervisors or back of house staff.
On March 23, 2018, the President and Congress passed legislation making employer, management, or supervisor retention of tips illegal under the FLSA, regardless of whether or not the employer took a tip credit. Although the new law provides more guidance on how employers should handle tips under the FLSA, some ambiguity continues to exist. For example, it is unclear how the new law applies to employees with marginal supervisory duties.