Wage and Hour Problems for The Post-Industrial Workforce

20 min


Under amendments made to the minimum wage law during the 1996 congressional session, section 6(a) of the federal Fair Labor Standards Act now requires as of September 1997 that every covered employer pay a minimum wage of $5.15 per hour to employees who are considered "non-exempt employees" under the Act. Section 7 of the FLSA requires that employers pay time and one-half the employee's regular rate of pay for all hours worked in excess of 40 in a workweek. The base wage for tipped employees remains at $2.13. However, the employer must ensure that tipped employees are paid at least the minimum wage. The recent change also allows for the payment of a training wage of $4.25 per hour to newly hired employees under the age of 20. However, employers are prohibited from replacing current workers with workers under the age of 20 for purposes of paying the workers the lower training wage.


Overtime must be paid for all hours worked in excess of 40 in a workweek. The overtime rate is one and one-half times the employee's regular rate. The "regular rate" is defined as an hourly rate roughly equal to the straight time earnings divided by the number of hours worked. Certain premiums must be included in the regular rate in computing the overtime rate of pay. For example, premium pay for night shift work, on-call pay, undesirable work, bonuses for attendance, and incentive bonuses must be included in the regular rate of pay for purposes of computing overtime.

A. Time Not Worked

Any time not worked, unless required by a collective bargaining agreement or some other arrangement, is not required to be included in the regular rate of pay for purposes of computing overtime. For instance, holiday pay, jury duty pay, sick pay, vacation pay, and funeral pay, are some examples of pay for time not worked which is not required to be included in the regular rate of pay for the purposes of computing overtime. In addition, certain payments may be credited against Fair Labor Standards overtime. Thus, if the practice is to pay employees time and a half for all hours worked in excess of 8 in a workday, the overtime paid on a daily basis may be credited against weekly overtime. In a similar vein, premium payments of time and one-half for Saturday work or Sunday work may also be credited against the Fair Labor Standards overtime.

B. The "Regular Rate"

    1. Computing the Regular Rate

Non-exempt employees who work on a weekly salary basis must be paid overtime at the rate of time and one-half their regular rate, which is computed by dividing the salary by the number of hours that the salary is intended to compensate. For example, if an employee is hired at the salary of $206.50 per week and it is understood that the salary compensates the employee for a regular workweek of 35 hours, the employee' s regular rate of pay is $206.50 divided by 35, or $5.90 per hour. When the employee works overtime, he is entitled to receive $5.90 for each of the first 40 hours and $8.85 (time and one-half times $5.90) for each hour over 40. If an employee receives $206.00 per week for a 40-hour workweek, his hourly regular rate of pay is $5.15 [$206.00 divided by 40].

    2. What Payments to Include in the Regular Rate

The general rule is that the regular rate of pay includes all remun-eration for em-ployment except certain payments excluded by the law itself.

Payments which are not part of the regular rate include:

  • Reimbursement for expenses incurred on the employ-er's behalf
  • Premium payments for overtime work and the premium portion of time and one-half paid for work on Saturdays, Sundays and Holidays
  • Discretionary bonuses
  • Gifts and payments in the nature of gifts on special occasions
  • Payments pursuant to certain profit sharing, welfare, or thrift and savings plans
  • Payment for occasional periods when no work is performed due to vacation, holiday, illness, or similar payments in amounts approximately equivalent to the employee's normal earnings for a similar period of time. Payments which are part of the regular rate include:

  • The value of awards and prizes, won by employees for quantity, quality, or efficiency in the performance of their usual work activities during regular work hours
  • Bonuses and incentive payment based on quality, quantity, or efficiency
  • Bonuses that depend on hours worked
  • Commission payments
  • Shift differentials and "dirty work" premiums
  • Tip credits taken by an employer to fulfill minimum wage requirements Bonuses: A Special Problem

    A bonus that is paid in recognition of services during a given period is excluded from the regular rate for purposes of calculating overtime only if:

      a. the bonus is based on a percentage of each employee's total earnings (including overtime); or
      b. the payments and amounts are at the sole discretion of the employ-er at or near the end of the period that the bonus covers, and the payments are not made pursuant to any prior contract, agree-ment or prom-ise which would lead the employee to expect the bonus regularly.
    C. Agreements Concerning Overtime Liability

      1. Straight Time Overtime

    Part 778.114 of Title 29 of the Code of Federal Regulations provides that, if there is an understanding between the employer and employee that the employee will receive a fixed salary for all hours worked the employee is only entitled to one-half of his regular rate of pay for overtime hours. In such a situation, the employee must receive half time for all pay over 40 hours in a workweek. For example, an employee receives $226.60 for a 44-hour workweek. The statutory straight time workweek applicable to him is 40 hours. His regular hourly rate is $5.15 [$226.60 divided by 44 hours]. The employee is entitled to a weekly wage of $236.90 determined as follows: $226.60 + [1/2 X $5.15 X 4 (44-40)]. The additional $10.30 ($236.9 - $226.60) is only "half-time" as the employee has already received straight time compensation under the employment agreement for the overtime hours worked. All hours worked in excess of 44 per week, however, would have to be paid at one and one-half times the regular hourly rate, or $7.26 per hour.

      2. Fluctuating Work Week-Belo Agreement

    In certain very limited situations employees will be paid a salary covering up to sixty hours worked in a work week with no definition of the amount of time that the salary is to cover. These agreements commonly referred to as "Belo" agreements, have four distinct requirements:

  • There must be a bona fide independent agreement, agreed to in advance as to the method of compensation. This agreement may be either oral or written;
  • The duties of the employee must necessitate irregular hours. This cannot be at the discretion of the employee or the employer. Further, the hours must fluctuate above and below 40 hours in a significant manner;
  • The agreement must specify a weekly regular rate of pay not less than the statutory minimum wage; and
  • The agreement must provide a weekly guaranty of pay for not more than sixty hours based on the rates specified. The employee is not entitled to overtime compensation, except for hours worked over the agreed maximum. D. Compensatory Time Off

      1. Wage and Hour Administrator Interpretations

    The Fair Labor Standards Act does not contain any specific language allowing compensatory time off in lieu of overtime pay. However, the Wage and Hour Administrator has made various interpretations that allow compensatory time off in limited situations.

    Under the Wage and Hour Administrator's interpretations, three factors must be present before compensatory time off program will be upheld. First, employees must be either hourly rated or salaried - i.e., not pieceworkers. Second, the employment agreement must provide a fixed number of working hours per week. Finally, the pay period may not be weekly; rather, it must be either bi-weekly, semi-monthly, or monthly. After meeting these requirements, a plan may be drafted which would give compensatory time off for an employee who worked overtime in one week in the pay period and receives the overtime in the other week of the pay period. The compensatory time off must be given at one and one-half times the hours of overtime worked in the previous week. However, time off can be the equivalent of overtime hours worked, and not one and one-half times the hours worked, where there is a contractual workweek which is longer than the statutory maximum of 40 hours and where the employee is already being compensated at the statutory overtime rate for the contractual overtime.

    It is advisable to have a compensatory time off procedure reviewed by the Wage and Hour Division of the U. S. Department of Labor prior to its implementation. In addition, it should be noted that this requires considerable record-keeping and has the possibility of causing some confusion among the employees. It should also be noted that, if the overtime is worked in the last week of the pay period, it would make it impossible to grant compensatory overtime unless it was anticipated in the first week of the pay period. Before such a program is instituted, it is recommended that it be very carefully reviewed for the numerous pitfalls that can be involved.

      2. Proposed Changes Allowing Employees to Accept Compensatory Time in Lieu of Overtime Wages

    A change in the nation's wage payment law to allow employees to receive compensatory time off instead of receiving overtime wages is working its way through congress. The Senate Bill is entitled the "Family Friendly Workplace Act." Under the Senate Bill an employee who worked 48 hours during the course of a week could elect to receive 12 hours of paid time off instead of receiving 12 hours of overtime wages. For employees covered by a collective bargaining agreement, compensatory time off may be received only according to the procedures specified by the collective bargaining agreement. Whether or not an employee is covered by a collective bargaining agreement, the decision to accept compensatory time off in lieu of overtime wages must be a voluntary one on the part of the employee. Limits are provided to an employee's ability to accumulate compensatory time. The act provides that an employer may provide monetary compensation for an employee's unused time in excess of 80 hours, if the employer provides 30 days notice. The bill also sets the maximum amount of compensatory time an employee may accumulate at 240 hours.

    The compensatory time is accrued on a calendar year basis. No later than January 31 the employer must provide monetary compensation for all compensatory time which the employee had not used during the preceding year. The employer cannot either coerce an employee to accept compensatory time in lieu of overtime wages or interfere with an employee's right to request compensatory time in lieu of overtime wages. The Act provides a cause of action against employers who violate the Act and includes provisions for damages in the amount of twice the wages for compensatory time involved. The only restriction on an employee's use of the compensatory time is that it must not "unduly disrupt the operations of the employer." The Act is essentially applicable to all employers.

    The Bill addressing the same issue in the House is entitled the "Working Families Flexibility Act of 1997." It was approved by a narrow margin in late March. Although it is very similar to the Senate Bill, three important amendments were made in order to ensure that the bill would be approved by the full House. First, the House bill has a five year sunset provision. Second, the House Bill limits the total number of hours of compensatory time an employee may accumulate to 160. Third, employees must have worked for at least 1,000 hours for the employer before they become eligible to receive compensatory time.


    The FLSA contains specific exemptions from both the minimum wage and overtime requirements of the Act for certain types of employees. Other exemptions pertain only to the overtime provisions. The particular exemptions that generally apply to most employees would be the exemptions for executive, administrative, or professional employees. These groups are exempt from both the minimum wage and overtime provisions.

    A. Salary Basis

    In order to be considered an exempt employee, an individual must be paid on a salary basis. Employers must avoid at least two major pitfalls when paying exempt employees their salary. First, no deductions may be taken from exempt employees wages for disciplinary reasons. Second, exempt employees may not be paid wages for a partial day for an absence.

    Deductions from wages for disciplinary reasons are not permitted, with narrow exceptions, for exempt employees. If an employer deducts wages from an employee's salary for disciplinary reasons or has a policy which allows it to do so, the employee will be considered a non-exempt employee who must be paid overtime wages. In February of 1997 the Supreme Court upheld this policy in Auer v. Robbins, 117 S.Ct. 905 (1997).

    In Auer several sergeants and a lieutenant employed by the St. Louis Police Department filed a suit for overtime pay claiming that they were not exempt employees under the FLSA. They claimed that the St. Louis Police Manual allowed for deductions from their pay for disciplinary reasons. In order for an employee to be considered exempt that employee must be paid on a salary basis. When as a "practical matter" that employee may be paid in a manner inconsistent with a salary basis, the employee cannot be considered exempt. In order to be paid on a salary basis, the employee must received "each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his compensation which amount is not subject to reduction because of variations in the quality or quantity of the work performed." There does not need to be an actual deduction in salary for the employee not be paid on a salary basis. There only needs to be an employment policy that creates a "significant likelihood of deductions for the quality or quantity of work performed." Thus, employers need to ensure that they have no policies in place which would allow for deductions related to the quality or quantity of work performed.

    In addition to not taking deductions for disciplinary reasons in order to maintain an employee's salaried status, an employer may not take deductions for fractional days of leave without pay. For example, if a new employee has no vacation or personal time takes half of a day off, the employer may not deduct a half day's wages from that employees salary if that employee is exempt. In a recent case before the federal district court in Virginia, a former employee sued for overtime wages claiming he was not an exempt employee. The basis for this claim was a company policy which provided unpaid time off would be calculated based "on the percentage of working hours that an employee actually worked in that pay period." The federal court found that such a policy took an employee out of the exempt employee category. Employers must thereby be certain that they neither actually make deductions for partial days nor have a policy which allows them to do so.

    B. Specific Exemptions

    While it may be clear that some employees fall into the exempt categories, other employees, such as working foremen, high level administrative or clerical employees, may be in a gray area and may require specific review of the particular job in question. There are two types of tests to determine whether an employee is an exempt employee--the long test and the short test. The long test may always be used. However, under the short test, employees are more likely to be considered exempt.

    The short test applies to employees who earn a minimum salary of $250 per week. For example, in order to be considered an exempt ADMINISTRATIVE EMPLOYEE under the short test an employee must:

  • Be paid on a salary basis;
  • Must have primary duties which consists of the performance of office or non-manual work directly related to the management policies or general business operations of the employer or the employer's customer, and;
  • Must perform work which requires the exercise of discretion and independent judgment. Under the short test an EXECUTIVE EMPLOYEE must:

  • Be paid on a salary basis;
  • Spend a majority of time in management activities, exercising some discretion and judgment; and
  • Supervise at least two full-time employees. Under the short test a PROFESSIONAL EMPLOYEE must:

  • Be paid on a salary basis;
  • Exercise discretion and independent judgment in a position requiring knowledge of an advanced type in a filed of science or learning or works in a position requiring invention, imagination, or talent in a recognized field of artistic endeavor. The regulations also contain more rigorous "long" tests for each of these exemptions for employees who earn less than $250.00. However, given the fact that this cut off is $40.00 more than the minimum wage for an employee who works 40 hear in a week, the "long" tests are rarely applied.

    "Computer professionals" who are paid at least $27.63 per hour are not subject to the overtime wage provisions of the Fair Labor Standards Act. Prior to the 1996 increase in the minimum wage, the exception was for computer professionals who were paid at least 6.5 times the minimum wage. The 1996 bill which increased the minimum wage froze this amount at $27.63 per hour.


    Employers subject to the FLSA must keep records concerning wages, hours, and other employment practices and specify personnel employee data. The records required are as follows:

      1. Employee's full name, number or identifying symbol.
      2. Home address.
      3. Date of birth if employee is under l9 years of age.
      4. Sex and occupation in which employed.
      5. Time and day on which workweek begins.
      6. Regular hourly rate of pay, the basis on which wages are paid and regular rate exclusions.
      7. Hours worked each workday and the total hours worked each workweek.
      8. Total daily or weekly straight time earnings or wages.
      9. Total overtime excess compensation for the workweek.
      10. Total additions to or deductions from wages paid in each pay period.
      11. Total wages paid each pay period.
      12. Date of payment and the pay period covered by the payment.
    Records are also required for employees who are not covered by the FLSA minimum wage and overtime requirements such as exempt employees. The records for exempt employees do not have to be as detailed and extensive as those for the covered employees, but they should be sufficient to carry the burden of proof in the event of an enforcement question, which is whether a worker actually qualifies for an exemption.

    The FLSA requires an accurate record of hours worked. This does not require that a timeclock be utilized, although it is probably the most accurate method of recording hours worked. Time sheets or some other methods of time-keeping may be utilized. The payroll and other records containing the information required above should be kept for three years.

    Employers in various industries, such as retail sales, automotive sales, commission sales, and other specialized industries, should check the law, its requirements and exemptions to insure that they are in full compliance with and are taking advantage of such requirements and exemptions of the federal Fair Labor Standards Act.


    The Fair Labor Standards Act prohibits certain deductions from the wages of an employee. An employer may take a credit against the wages paid for facilities and meals, if they are provided as an accommodation to the employee, and the employer does not directly or indirectly derive any profit or benefit from the transaction. The employer may not make other deductions. For example, a restaurant may not require an employee to eat at the restaurant and deduct an amount from his wages for cost of meals, if the employer makes a profit on the meals.

    Shortages, such as cash register shortages, may not be made up to the extent that they reduce the pay of the employee below the minimum wage or the amount of overtime pay that the employee was entitled to received. A Court of Appeals has held that, where an employee has taken money and had the use of it and is required to return it, there would be no violation of the act because the employee had taken more than the amount of his wage and the return could in no way reduce his wages below the minimum. This would indicate that if employees are guilty of theft of money from an employer, the employer may deduct that money from the employee's wages.


    The Fair Labor Standards Act also prohibits an employer from transporting in interstate commerce, goods that were produced by minors under the age of 18, under certain conditions and under the age of 16 under other conditions. Part 579 of the Administrators Rules and Regulations provides for investigation of such cases and the assessment of civil money penalties by the administrator. These assessments are subject to an appeal to an administrative law judge for hearing and final determination of the penalty.


    The bill which increased the minimum wage in 1996 also made changes to an "interpretation" of the FLSA by the Wage and Hour Administrator. The Administrator had interpreted the FLSA to mandate time spent commuting in a company owned vehicle as hours of work. Most individuals who drive company owned vehicles are exempt employees and were not affected by the interpretation. However, companies which provided any sort of transportation to non-exempt employees were penalized for providing a benefit to their non-exempt employees. The 1996 change mandated that commuting time in company owned vehicles is not considered hours of work under the FLSA.

    Employees who are permitted to come in early or stay late must be paid for any extra time worked, even if there are "un-der-stand-ings" that those employees will not be paid for the extra time. Even where the employee agrees to the understanding and may benefit from a transportation stand-point, the employer is exposed to the threat of later litigation if the association "suffers or permits" the employee to work more than 40 hours per week without paying over-time.

    Even if the employer orders a non-exempt employee not to work outside normal hours, and the employee voluntarily disobeys the order with the employer's knowledge, the employer is required to pay for the hours worked. To avoid this result, the employer is expected to use its disciplinary procedures to prevent the employ-ee from accumulating unwanted hours of work (or else pay the overtime). Allowing employees to work through lunch may result in the same problem.

    Employers must also be sensitive to hours spent by employees away from the office on work-related matters such as seminars or meetings. Attendance at a meeting is not counted as hours worked if the meeting is held outside working hours and attendance is voluntary. Attendance is not considered voluntary, however, if the employee is led to believe that non-attendance would adversely affect his employment. (29 C.F.R. 785.28)

    Travel time can also present an issue. Ordinary home to work travel does not count as hours worked under the FLSA. However, all time spent traveling once an employee starts the workday must be counted as hours worked. Time spent on emergency or call-back travel is consid-ered hours worked if the employee has completed their day's work and must travel a substantial distance. (29 C.F.R. 785.36). If an employee is required to travel overnight, all time spent traveling during the hours corresponding to normal working hours must be counted as time worked, even if they occur on a weekend or holiday. Bona fide meal periods may be excluded. (29 C.F.R. 785.39) When an employee is required to make a special one-day trip that requires travel to another city, all travel time counts as hours worked. Meal periods and time spent traveling from home to the point of departure (airport, train station...) may be excluded. (29 C.F.R. 785.37).

    In the event of litigation, the burden is placed on the employer to support its position as to an employee's true hours worked through adequate records. Evidence that an employer has directed employees not to write down time actu-ally worked will be used against the employer, and personal records kept by the employee without the employer's knowl-edge may be particularly damaging if the employer has no means of proving the hours kept by its workers. Time clocks are not required for non-exempt workers, but some comparable means of keeping records of hours worked are essential for these reasons.


    State and local wage and hour laws should be reviewed to insure that the company meets the requirements of the jurisdiction in which the company is located. Some jurisdictions have requirements that are more restrictive than the federal law. For example, the minimum wage in a particular state or city may exceed the federal minimum wage. Some exemptions allowed by federal law may not be allowed by state law. The law that will prevail in such a situation is the law that is most favorable to the employee.

    Further, employees who may be working under federal contracts which are covered by the federal Davis-Bacon Act, the Service Contract Act, the Walsh-Healey Act, or any state prevailing wage laws, should check those laws and the contracts under which they are performing for the requirements pertaining to the payment of wages and benefits and the record-keeping that is required.

    State and local laws should also be reviewed to insure that the company is not withholding any money from employees' pay illegally. Many states prohibit withholding of money for breakage, shortages in cash drawers, etc., without the written authorization of the employee.


    This outline is not exhaustive of all requirements under the FLSA. Specific questions regarding various occupations and industries should be researched to determine whether there is a specific exemption or requirement pertaining to that industry or occupation.