Fair Labor Standards Act – HR Compliance

The Fair Labor Standards Act of 1938 (FLSA) promulgates rules related to minimum wages, compensation related to overtime, and record keeping requirements. The Act also defines the terms ‘Exempt’ and ‘Non-Exempt’ employees related to overtime. Most recently Congress added to the Act some notification requirements related to the Affordable Care Act.

This article is designed for small business operations and their Human Resources manager or department. It is merely an introduction to the requirements and it contains links to the appropriate sources and aids to comply.

Covered Employers

To fall within the Act’s domain your business must meet one of these three requirements:

Sales must be greater than $500,000 per year, OR
Must be involved in interstate commerce, OR
Have two or more employees.

Initially many small employers would think they do not qualify as the second requirement seems to eliminate them. What Congress did to make the Act more inclusive was to use the terms ‘Affect’ or ‘Engaged’ in interstate commerce. The minute your business operation buys some form of supplies such as a cleaning agent or office supplies, your business AFFECTS interstate commerce. The reality is that the second requirement is really moot and you should not rely on this as your exemption.

The real exemption is the requirement for minimum sales of $500,000 per year. To make this requirement more inclusive Congress modified the requirement to state that this is defined as GROSS SALES and not net sales which affects many types of businesses.

The two or more employees requirement seems a little preposterous as the Act is designed to provide rights to employees. If you are self-employed then the Act isn’t applicable to you. Be careful here, the Act does define an employee differently than how the IRS defines an employee. The Supreme Court has ruled that there is no single definition used to define an employee for application of the FLSA. Factors to consider include:

Is the work an integral part of the employer’s business?
Do the managerial skills of the worker affect opportunity in profit and loss?
Is there a risk of loss related to the equipment owned and operated by the worker?
Does the worker exercise independent judgement related to their skills?
Is there a tendency towards permanency for the worker with the employer?
Who controls the work hours and compensation?

The best source of information related to this issue is FACT SHEET #13 from the Wage and Hour Division of the Department of Labor.

The first requirement of annual sales of at least $500,000 does eliminate quite a few small businesses from application of the FLSA. But I will throw out a couple of insights.

First, the Act uses the $500,000 threshold to also include ‘Business Done’ which includes other types of non-revenue based transactions. These include purchase of equipment, borrowing of money, or receiving capital resources of some sort. The standard is relatively easy to achieve and therefore many small business are unable to qualify for the exemption. Secondly, the FLSA broadens the definition further by using the clause to identify ‘Enterprise Coverage’ and defines other enterprises as government agencies, medical facilities or operations, education based operations. Thus, even a small independent private school with one teacher falls within the scope of this coverage related to this rule.

The Act is so inclusive that they even defined those one person business operations so the minimum wage is mandatory. Examples include domestic help, babysitters and cooks. In general, there are really no exclusions related to this Act. If you believe you are excluded, you should contact the local office of the Department of Labor.

Now that you realize that you are included in the Act’s rules and regulations; what exactly is required? First up, the minimum wage standards are reviewed.

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Minimum Wage Standards

On July 29, 2009 the minimum wage increased to $7.25 per hour. The Department of Labor states that if your state law has a higher minimum wage, then you must follow the state or local law minimum wage standards. If none exist, then you must comply with the FLSA. If you are wondering what your state mandates, the Wage and Hour Division of the DOL has a webpage with the information.

There are poster requirements and quite honestly there are a lot of folks out there that want to sell a poster. But really, just go to the DOL’s website for poster requirements and print theirs. For the particular poster involving minimum wage; go here. It’s free!

Before I explain about overtime compensation, you first need to understand exempt and non-exempt employees.

Exempt and Non-Exempt Employees

I have an article on this website that covers this issue in depth. But in summation, exempt employees are not covered by FLSA related to overtime compensation whereas non-exempt employees are covered by the regulations related to overtime compensation.

Exempt employees are typically your professionally licensed individuals with advanced degrees in the field of science such as medicine, law, accounting, and teachers. In the field of medicine the threshold of knowledge is drawn at the level of Registered Nurses. LPN’s are considered non-exempt employees.

For the executives, owners of businesses and salesmen, the status of exempt is assigned.

Non-exempt employees are your traditional blue collar workers and first responders (police officers, EMT’s, fire fighters etc.). In addition the FLSA includes journalists and reporters as non-exempt employees.

The key here is that the overtime compensation rules only apply to non-exempt employees.

Overtime Compensation

Overtime is defined as any time in excess of 40 hours in a period of seven days. This means physical work not hours as a benefit derived from vacation or sick time. The key is to follow a work pattern as what day constitutes the start of the seven day work week. Any time worked in excess of 40 hours must be paid at time and half for compensation purposes.

Now for some guidance; I’ve seen some employers try to get around this by using the concept of compensation time. What the try to do is to award time off to the employee in exchange for the extra hours worked. You see this in some professions that have seasonal or sudden increases in workload (inventory, cleaning up, completing paperwork) or in industries where there may be a sudden demand requiring more time commitment by the staff (restaurants, tourist based operations, and construction). Well, the law is clear – ‘Compensation must be paid for overtime work’ the only exception applies with public agencies. They are granted the ability to compensate overtime with compensation time at the rate of time and half. Basically, private employers are not allowed to ‘Comp’ an employee with time off.

Another issue that I’ve seen relates to salaried employees. If they fall within the non-exempt group, they must be paid time and half for their additional time worked after 40 hours in a calendar week. Often salaried employees do not report their time nor do they indicate when they worked past 40 hours in any calendar week. As the employer you should install a documenting system to compensate salaried employees for their overtime. Remember this is applicable to your non-exempt employees. If you fail an audit; which is easy to do because the auditor will simply ask a salaried employee if they worked over 40 hours in any given week, then the penalty for a violation of the FLSA can run upwards of $11,000. A second failure is considered criminal and may result in imprisonment for the owner.

The next section explains the minimum record keeping requirements related to the FLSA.

Record Keeping

Straight from the Wage and Hour Division of the Department of Labor, the following are the required records and employer must keep related to an employee:

Employee’s 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., “$9 per hour”, “$440 a week”, “piecework”)
Regular hourly pay rate.
Total daily or weekly straight-time earnings.
Total overtime earnings for the workweek.
All additions to or deductions from the employee’s wages.
Total wages paid each pay period.
Date of payment and the pay period covered by the payment

I implore upon the owner and the human resources manager to have a separate file for each employee and insert any copies of documents signed, letters of reprimand or evaluations, performance issues, benefit documents and any other personnel item related to the respective employee. The primary key is to demonstrate proper documentation and management procedures related to personnel.

Summary – Fair Labor Standards Act

The Fair Labor Standards Act of 1939 establishes a minimum wage for all employers to pay to employees. Small businesses are not exempt from this Act. In addition the Act requires overtime work receive no less than one and half times the normal wage for each hour physically worked in excess of 40 in any calendar work week. In addition there is an onus on the employer to maintain proper records related to employees. Act on Knowledge.