The Fair Labor Standards Act: Minimum Wage, Overtime and Travel Time
The purpose of this white paper is to provide an overview of the Fair Labor Standards Act and related laws in the context of the requirement of paying minimum wage, overtime and travel time for many employees.
The Fair Labor Standards Act (the "Act" or "FLSA") was enacted in 1938 as part of President Franklin Roosevelt's "New Deal" legislation. The goal of the Act is to maintain the "minimum standard of living necessary for health, efficiency, and general well-being of workers." 29 U.S.C. § 202(a). Essentially, the FLSA provides a floor under wages and a ceiling over hours.
At present more than 130 million workers in more than 7 million workplaces are protected or "covered" by the Fair Labor Standards Act (FLSA), which is enforced by the Wage and Hour Division of the U.S. Department of Labor. Employers covered under the Act must comply with any federal, state or municipal laws, regulations or ordinances, or collective bargaining agreements or employer implemented policies that provide greater benefits than those established by the FLSA. While FLSA standards may be exceeded, they cannot be waived or reduced. Overnight MotorTransp. Co. v. Missel, 316 U.S. 572 (1942)
The FLSA applies to almost any relationship where there is an "employer" and "employee". The Act applies to enterprises with employees who engage in interstate commerce, produce goods for interstate commerce, or handle, sell, or work on goods or materials that have been moved in or produced for interstate commerce. For most companies, the test is $500,000 or more in annual dollar volume of business (i.e., the Act does not cover enterprises with less than this amount of business). 29 U.S.C. §203(s)(1).
However, the Act also covers the following industries regardless of their dollar volume of business: hospitals; institutions primarily engaged in the care of the sick, aged, mentally ill, or disabled who reside on the premises; schools for children who are mentally, or physically disabled or gifted; preschools, elementary, and secondary schools and institutions of higher education; and federal, state, and local government agencies. 29 U.S.C. §203(r)(2)(a).
The Act exempts some employees from its overtime pay and minimum wage provisions, and it also exempts certain employees from the overtime pay provisions alone. The determination of who is covered and who is not covered is a political determination, made by Congress as it adopted and revised the FLSA and by the Department of Labor, which administers and enforces it.
Under the Act, it often occurs that some employees in an industry may be covered while others are not. 29 U.S.C. §206 and 207. Therefore, it is necessary to determine whether each individual employee is covered under the applicable rules.
II. Federal Minimum Wages - The Basics
The FLSA establishes a minimum wage that applies to all covered non-exempt workers. Effective July 24, 2009 the minimum wage became $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). This means that every covered, non exempt employee must be paid at least this minimum wage for all hours worked. Each employee must receive the minimum wage for each pay period and an employer cannot use a pay period to correct a previous violation. See Dove v. Coupe, 759 F.2d 167 (D.C. Cir. 1985); Reich v. Giaimo, 1 Wage & Hour Cas. 2d (BNA) 1681, 128 Lab. Cas. (CCH) ¶33092, 1993 WL 724662, 1 (E.D. Mo. 1993).
While minimum wage is a fairly simple concept, there are a few issues that often arise. In order to fully understand the application of minimum wage under the FLSA and avoid violations, three primary issues should be examined.
A. What Qualifies as Compensation
The first issue to be addressed is what qualifies as compensation when computing minimum wage. Under the Act, an employer must pay an employee adequate compensation to meet the minimum wage required. In determining whether minimum wage requirements are met an employer must divide the hours worked in a week by the total compensation earned in a week. Wages, commissions, tips received by eligible employees, and reasonable cost of room and board are included in total compensation. 29 U.S.C. § 203(m). Wages include monies paid as salary, hourly rates and piece rate. Id.
Generally, deductions are not allowed from wages if their primary purpose is for the benefit of the employer and the deduction reduces earnings below the minimum wage. Common examples of illegal deductions include deducting for tools used for work, uniforms required by employer and financial loss due to customers. However, 29 U.S.C. § 203(m) provides that the reasonable cost of providing an employee with board, lodging, or other facilities can be included in the calculation of wages so long as it is reasonable. The reasonableness of the lodging is based on the average cost to the employer or to employers similarly situated. 29 C.F.R. § 531.2. The parties can exclude the cost of lodging as part of wages under a bona fide collective bargaining agreement. 29 C.F.R. § 531.2. Also, the employee must voluntarily accept the facility and receive the benefits of it in order for it to be included in the computation of minimum wage. 29 C.F.R. § 531.30; see Williams v. Atlantic Coast Line Railroad Co. (E.D.N.C.). 1 W.H. Cases 289.
Moreover, under the wage requirement of the Act an employer cannot take employee kickbacks that cut into the minimum overtime wages paid. 29 C.F.R. § 531.35. An example would be for an employer to require employees to purchase tools or uniforms and the purchase of the tools off set against their wage earned would decrease the wage to below the minimum wage requirement under the Act.
B. Tipped Employees and Wages
Another issue that commonly arises under minimum wage is how to calculate tipped employees' wages. A tipped employee is "any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips." 29 U.S.C. § 203(t). Customarily and regularly must be more than an occasional frequency. 29 C.F.R. § 531.57. A tipped employee's wages must meet the minimum wage requirements. Congress has established a minimum direct wage of $2.13 an hour that employers must pay tipped employees. 29 U.S.C. § 203(m). Employers are also responsible for making up the difference if the direct wage and tips do not meet the general minimum wage requirement. 29 U.S.C. § 203(m).
A tip under the Act is "a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. 29 C.F.R. § 531.52. A tip is solely at the discretion of the customer as to what amount is to be given, if any. 29 C.F.R. § 531.52. Gifts, in forms other than money, are not classified under the Act as a tip. 29 C.F.R. § 531.53. If tip splitting is practiced a person retaining the tip is the person who claims it. 29 C.F.R. § 531.54. A few exceptions to items not classified as tips are:
A compulsory charge on an amount on a bill imposed by the establishment, even if distributed to employees;
Required amounts for distribution to employees as a result of a banquet facilities negotiation; and
Where amounts are collected as tips by employees but must be turned over to the employer.
29 C.F.R. § 531.55.
Another caveat under tip wages is employees who work dual jobs. An employee who has dual jobs is a tipped employee only with respect to the job for which they regularly receive at least $30 a month in tips. 29 C.F.R. § 531.56.
Thus, under the Act a tipped employee must still receive minimum wage, but estimated tips can be used to offset a direct wage from an employer.
C. Hours Worked
Another issue that often arises under the Act is what qualifies as hours worked under the statute. The FLSA provides that the term employ means "to suffer or permit to work." 29 U.S.C. § 203(g). Section 3(o) limits hours worked to exclude time for clothes changing and wash up time. 29 U.S.C. § 203(o). However, that is the extent of clarification as to hours worked provided within the statute. The Supreme Court has further clarified that a work week includes "all the time during which an employee is necessarily required to be on the employer's premises, on duty or at a prescribed work place" 29 C.F.R. § 785.7; citing Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946). The Portal-to-Portal Act provides an exception to this rule for preliminary and postliminary activities. 29 C.F.R. § 785.7. The workday means the period from "the time on any particular workday at which such employee commences (his) principal activity or activities and the time on any particular workday at which he ceases such principal activity or activities." 29 C.F.R. § 785.7.
Therefore, hours worked can include activities outside the regular scope or job description of an employee so long as there is a relationship to the jobs principal activities. An employer may be required to compensate employees for waiting time, on-call time, rest time, travel time, training time, and sleep time.
Employers must keep records on wages, hours, and other information as set forth in the Department of Labor's regulations. Most of this data is the type that employers generally maintain in ordinary business practice.
III. OVERTIME BASICS
The second major provision under the FLSA is overtime pay. According to the FLSA, all employees are entitled to overtime pay unless they are classified as exempt. There are two primary criteria that are looked at when determining if a position is exempt from overtime: salary and job duties.
A. The Salary Test
In order for a position to be classified as exempt, the position must be paid on a salary basis, with a minimum salary of $455 weekly or an annual salary of $23,660, excluding computer professionals who must be paid $27.63 hourly in order to be classified as exempt. 29 C.F.R. § 541.600. This will be increased to a minimum salary of $913 weekly or an annual salary of $47,476 on December 1, 2016.
However, certain types of professional employees do not need to be paid a salary, including teachers, lawyers, and doctors. 29 C.F.R. § 541.600(e) and see § 541.303. However, the salary test does apply to these professionals: pharmacists, nurses, therapists, technologists, sanitarians, dietitians, social workers, psychologists, psychometrists, and other professions which service the medical profession (id.). In other words, if these types of professionals are paid hourly, then they must be paid overtime for hours over 40 in any week.
Paying a salary means the employee must be paid a predetermined amount of compensation each pay period. The compensation cannot be reduced because of variations in the quality or quantity of work performed. Additionally, non-exempt employees must be paid the full salary for any week in which the employee performed any work. For instance, if a manager works 45 hours one week and the very next week only works 37 hours, that position must still paid the same weekly salary regardless of hours worked. 29 C.F.R. § 541.603(a).
On the other hand, certain deductions are allowed without losing a salary status. Deductions from pay are permissible when an exempt employee: is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness; to offset amounts employees receive as jury or witness fees, or for military pay. See, 29 C.F.R. §541.602(a)(1)
B. Job Duties and Exemptions
One the position has passed the salary test, it must also be a position that is exempt based on the job duties. Currently, the primary categories are exempt from a requirement of overtime: executive, administrative, computer professional or outside sales. These exemptions are often referred to a White Collar Exemptions.
Executive employees are defined as employees who "whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; Who customarily and regularly directs the work of two or more other employees; and Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight." 29 C.F.R. §541.100.
Administrative Employees are defined as employees "Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance." 29 C.F.R. §541.200.
Professional employees are defined as employees "whose primary duty is the performance of work: (i) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or (ii) Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor." 29 C.F.R. §541.300.
Computer professionals are defined as employees "whose primary duty consists of:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills. 29 C.F.R. §541.400.
Outside sales are defined as employees whose primary duties consist of "making sales" or "obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer"; and "Who is customarily and regularly engaged away from the employer's place or places of business in performing such primary duty. 29 C.F.R. §541.400.
There are other exemptions and the FLSA should be examined carefully to determine them. So long as the employer meets the applicable salary test and the employee fits within one of the exemptions, then there is no requirement to pay overtime to that employee.
C. Establishing a Workweek
Under the FLSA an employer is required to compensate non-exempt employees for hours worked in excess of the workweek. Generally, a workweek is considered 40 hours, and so any hours worked in excess of this must be compensated accordingly. 29 C.F.R. 778.101. Compensation for overtime hours must be "at a rate not less than one and one-half times the regular rate at which he is employed." 29 U.S.C. § 207 (a)(1).
However, the Act does not limit the amount of hours in which an employee can work and the Act also does not pertain to hours worked in excess of eight a day or holiday or weekend pay. For example, an employee may work 12 hours one day and not be entitled to overtime, as long as the total hours worked in that week do not exceed 40. Also, the Act does not relieve Employers of any contract provisions pertaining to such. Instead, the Act simply sets forth the compensation required for overtime pay for hours worked in excess of 40 per workweek.
Similar to provisions in section 6 each workweek is compensated individually, no matter the pay period of the employer. 29 C.F.R. § 778.104. For example, if an employee works 30 hours one week and then 50 hours the next week the employer must compensate the employee for 10 hours of overtime for the second workweek. The fact that the time averages out to 40 hours a week or the fact that the pay period is every two weeks has no effect on overtime compensation.
Yet, the employer does have some flexibility in establishing workweeks. The workweek must be a fixed and reoccurring workweek of 168 hours over 7 consecutive 24 hour periods. 29 C.F.R. § 778.105. This does not need to coincide with a calendar week or month, but must be fixed. It can be changed if the change is intended to be permanent. 29 C.F.R. § 778.105. Also, the employer may establish different work weeks for different employees or groups of employees. 29 C.F.R. § 778.105.
D. Calculating Overtime Pay
Once it has been established that the employee is entitled to overtime pay the employer must compensate for overtime hours at a rate not less than one and one-half times the regular rate he is employed at. 29 U.S.C. § 207(a)(1). The Supreme Court has stated that the regular rate is normal, non-overtime workweek for which an employee is paid. Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 419 (1945). The regular rate includes all remuneration for employment paid to the employee with the exception of:
- Payments for occasional periods when no work is performed (i.e vacation, holiday, illness, etc.);
- Bonus (so long as they are not pursuant to a prior agreement);
- Retirement and Health Insurance Payments
- Extra compensation for holiday pay or weekend;
- Extra pay provided at a premium rate established by an employment contract or collective bargaining agreement; or
- Any value of income derived from stock options or employee stock purchase program.
- 29 U.S.C. § 207(e).
The regular rate includes commissions as well. This is true no matter the frequency, formula or regularity of computing the commission. 29 C.F.R. § 778.117. If commissions cannot be ascertained on a weekly basis they can be deferred until a time at which they can be ascertained and then apportioned back accordingly. 29 C.F.R. § 778.119. If it is not possible to allocate the commission among the workweek another reasonable and equitable method must be adopted. 29 C.F.R. § 778.120.
The regular rate also includes prizes and bonuses where they are paid to an employee as remuneration for employment. 29 C.F.R. § 778.330. Where it is not clear that the prize is paid as an remuneration for employment, factors that will be considered in a determination include, "the amount of time, if any, spent by the employee in completing, the relationship between the contest activities and the usual work of the employee, whether the competition involves work usually performed by other employees for employers, whether an employee is specifically urged to participate or led to believe that he will not merit promotion or advancement unless he participates." 29 C. F.R.§ 778.330.
The regular rate is compensated on an hourly basis no matter the pay basis of the employer. 29 C.F.R. § 778.109. An employer that does not compensate on an hourly basis must derive an hourly pay based on the form of compensation they employ. 29 C.F.R. § 778.109. For example, if an employee is salaried and makes $500/week and works 42 hours ($500/40 = $12.50, $12.50 * 1.5 = $18.75) the employee would be entitled to $37.50 for the two hours of overtime worked in that workweek.
A piece rate employee's regular rate wages are slightly more complicated to calculate. "When an employee is employed on a piece-rate basis, his regular hourly rate of pay is computed by adding together his total earnings for the workweek from piece rates and all other sources (such as production bonuses) and any sums paid for waiting time or other hours worked (except statutory exclusions): This sum is then divided by the number of hours worked in the week for which such compensation was paid, to yield the pieceworker's "regular rate" for that week." 29 C.F.R. § 778.111. Once the regular rate has been established the piece rate overtime is compensated at 1 ½ times that regular rate for hours in excess of 40 that week.
The general rule, as deductions pertain to the regular rate of pay, is that it is treated as if they had never arisen. 29 C.F.R. § 778.304. Therefore, deductions for items such as room and board, tools, uniforms, taxes, and dues would not affect an employee's overtime pay. The regular rate of pay would be calculated prior to deductions.
There are special overtime exceptions that apply to hospitals or establishments engaged in the care of the sick, aged, or mentally ill. Under certain circumstances the employer can set a 14 day work week. In order to qualify for the exception the employer and employee must reach an agreement before performance of the work and the employee must be compensated with overtime for hours worked in excess of eight a day and eighty in a workweek. 29 C.F.R. § 778.601.
Collectively, the above provisions provide that an employee must be compensated for hours worked in excess of 40 per week. No matter the frequency or method of payment an employee is entitled to overtime pay at 1 and one-half time their regular pay rate.
IV. TRAVEL TIME - THE BASICS
In discussing travel time it is essential to revisit hours worked and the Portal to Portal Act, 29 U.S.C. § 251 et seq. This act was passed in 1947 and was intended, in part, to clarify various principles of the FLSA, including various time limits, travel time and other matters. See discussion at 29 C.R.F. § 790 ("General Statement as to the Effect of the Portal-To-Portal Act of 1947 on the Fair Labor Standards Act of 1938").
As previously mentioned, "hours worked" is defined as the time in which a non-exempt employee is required or permitted to work. 29 U.S.C. § 203(g). Normally this means that all hours from the beginning of the workday to the end of the workday are considered hours worked, except for time when the employee is relieved of all duties such as at lunch time.
Non-exempt employees must be paid for all hours worked. For purposes of minimum wage and overtime pay, section 254(a) of the Portal to Portal Act states that the following activities are not considered "hours worked":
"walking, riding, or traveling to and from the actual place of performance of the employee's principal activity or activities", and
activities which are preliminary to or postliminary to said principal activity or activities that occur either prior to the time on any particular workday at which such employee commences or subsequent to the time on any particular workday in which he ceases such principal activity or activities. 29 U.S.C. § 254(a).
According to the FLSA, commuting from home to work and work to home is considered "ordinary home to work travel" and does not constitute hours worked. 29 C.F.R. § 785.38.
However, travel between job sites during the work day is considered "hours worked" or rather work time and requires appropriate payment. For example, during regularly scheduled work hours if a non-exempt employee is required to leave the employer's premises and travel to another job site to perform work the travel time spent between the employer's premises and other location is considered hours worked and the employee must be compensated. If the employee leaves the job site and is required to return to the employer premises, that too is considered hours worked. Nevertheless, if the employee leaves the job site and travels home, this is not considered hours worked. It is considered ordinary home to work travel and does not constitute paying the employee. 29 C.F.R. § 785.35.
On occasion, employers have to send their employees to other cities for a one day special assignment. Since the assignment is at the request of the employer and to the employer's benefit, the employer is responsible for paying for travel time. However, all time involved must not be counted. The normal home-to-work travel time may still be deducted. For example an employee normally drives to a Park & Ride Lot and then takes a bus to work. Today, however, being on special assignment he is taking the bus to Tucson; the drive from the employee's home to the Park & Ride Lot would be considered "home-to-work" and the employee need not be paid for this time. Alternatively, the bus ride to Tucson would be considered hours worked and constitute payment. 29 C.F.R. § 785.37
When an employer has to send a non-exempt employee on an out of town assignment that requires staying overnight, the travel time is called "travel away from home" and is considered work time when it cuts across the employee's workday. This includes hours worked on regular working days during normal working hours and on non-working days, such as weekends. For example, if an employee regularly works from 9 a.m. to 5 p.m. from Monday through Friday the time spent traveling between 9 a.m. to 5 p.m. on any day of the week, including the weekends, is considered hours worked and requires payment. 29 C.F.R. § 785.39.
V. REMEDIES AND CONSEQUENCES
The FLSA provides a number of remedies if an employer fails to pay minimum wages or overtime.
A. DOL Enforcement The Department of Labor can enforce the FLSA its own name and it has a variety of remedies available to it. Willful violators may be prosecuted criminally and fined up to $10,000. A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to civil money penalties of up to $1,100 per violation. See, 29 U.S.C. §216(a) and (c).
B. Private enforcement The employee, too, can file suit and make a claim in their own name. Any employer who fails to pay minimum wage or overtime "shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages." 29 U.S.C. §216(b). In addition a plaintiff who prevails is entitled to mandatory attorney's fees and costs under 29 U.S.C. § 216 (b).
The doubling from the liquidated damage provision is not automatic. An employer who knows or should have known that an employee is or was working overtime must comply with the provisions of 29 U.S.C. § 207, even if the employee does not make a claim for the overtime compensation. Holzapfel v. Town of Newburgh, N.Y., 145 F.3d 516, 524 (2d Cir.1998). The FLSA does not require employees to make a demand for payment from their employer before bringing suit. Barrentine v. Arkansas-Best FreightSystems, 450 U.S. 728, 745 (1981). Moreover, once an employer knows or has reason to know that an employee is working overtime, it cannot deny compensation even where the employee fails to claim overtime hours. Town of Newburgh v. Holzapfel, cert. denied, 525 U.S. 1055, 119 S.Ct. 619, 142 L.Ed.2d 558 (1998). Liquidated damages are available to fully compensate employees who often have gone years without being properly compensated. Nellis v. G.R. Herberger Rev. Trust, 360 F.Supp.2d 1033, 1045 (D.Ariz.2005). Liquidated damages are the norm in FLSA cases. Local 246 Utility Workers Union of America v. Southern, 83 F.3d 292, at 297 (9th Cir 1996).
Willful Violations and Limitations
The statute of limitations for actions to enforce any cause of action for compensation due under the FLSA: is "two years after the cause of action accrued," unless the cause of action arises "out of a willful violation." 29 U.S.C. § 255(a). In the case of a willful violation, the limitations period is extended to three years. Id.; see McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132-33, 108 S.Ct. 1677, 100 L.Ed.2d 115 (1988). A new cause of action accrues at each payday immediately following the work period for which compensation is owed. See, e.g., O'Donnell v. Vencor Inc., 466 F.3d 1104, 1113 (9th Cir.2006) (addressing the statute of limitations under 29 U.S.C. § 255).
A violation of the FLSA is willful if the employer "knew or showed reckless disregard for the matter of whether its conduct was prohibited by the [FLSA]." McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133, 108 S.Ct. 1677, 100 L.Ed.2d 115 (1988); SEIU, Local 02 v. County of San Diego, 60 F.3d 1346, 1356 (9th Cir.1994) (quoting Richland Shoe ).
Mandatory Attorney's Fees
Fees are mandatory to a prevailing plaintiff employee. Thus, 29 U.S.C. § 216 (b) provides: "The court in such action shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney's fee to be paid by the defendant, and costs of the action." This section provides that an award of attorney's fee "shall" be made to the successful plaintiff. Houser v. Matson, 447 F.2d 860, 863 (9th Cir. 1971).
VI. PRIMARY SOURCES
Any practitioner working under the FLSA needs to be aware that the statute alone is 49 pages long and is found here: www.dol.gov
The regulations are detailed and are online here: www.dol.gov
The Department of Labor provides significant compliance assistance for employers here:www.dol.gov
Anyone litigating under the FLSA should not only review the statute, regulations and case law, but also the DOL interpretations about it, found here: www.dol.gov
Arizona has its own minimum wage laws, but they are outside the scope of this paper. If a minimum wage issue arises, the practitioner should also review A.R.S. 23-364 et seq, which became effective January 1, 2007, and the Industrial Commission of Arizona's website, since the ICA was given the authority to enforce and implement Arizona's Act.
About the author: Kraig J. Marton heads the employment law department at the Phoenix law firm of Jaburg & Wilk PC. He assists employers and employees in complying with the many laws affecting employers. He also assists health professionals and others with issues related to medical marijuana.