You have been in business for many years. You have built the business from the ground up with your blood, sweat and tears. You have good employees, many who have been with you for years. You never give a second thought to whether or not one of those employees will file a wage claim against you because you pay them a fair wage for their work and they “make good money.” Does this describe your shop?
I am a “management side” employment lawyer and have worked closely with employers in the automobile industry (collision centers and dealers) since 1999 to try to help them do things the “right way.” I also represent employers who find themselves facing claims or litigation because they didn’t do things the right way. The information I will share in this article will make you uncomfortable, but if it stirs you to examine your wage/hour practices and causes you to get in compliance with the legal requirements, then the discomfort will be worth it.
The description I presented above comes from real life. I hear that description from clients on a weekly, if not daily basis. The fortunate companies are those who seek help before they have a problem, while the less fortunate are those who fail to discuss these issues until they are faced with a lawsuit by a current or former employee.
During my discussions with these clients, I hear the same questions over and over. This article will share those questions, and some brief answers, so that you can learn from the experiences of others.
Why do I need to worry about paying overtime, my people are on commission and flat rate?
This is probably the number one question I receive regarding wage and hour compliance. The answer is relatively simple but requires a basic understanding of federal and state laws. In addition, the answer varies by the state where the employer has its business, so caution should be taken to get detailed advice regarding the law in your state.
Federal wage/hour law is found in the Fair Labor Standards Act (“FLSA”). This law originally was passed in 1938 and was designed to protect oppressed employees in the post-depression era. It has been amended over the years, but generally remains the same. Many states have adopted the FLSA as their state’s wage/hour law, either in whole or in part, while other states have adopted their own wage and hour laws that are much more rigorous than the FLSA.
Now, to answer the question, an employer needs to make sure their commissioned or flat-rate employees meet the requirements for what is known as the “7(i) exemption.” Otherwise they need to worry about paying those employees overtime. The 7(i) exemption comes from Section 7 of the FLSA and, in sum, states that if an employee works for a “retail establishment,” makes more than half his/her income from “commissions,” and makes more than one and one-half times minimum wage, then the employee is exempt from the overtime regulations. That sounds simple enough, but it can take some detailed analysis to determine whether the exemption applies.
The first step is to determine whether the 7(i) exemption applies in the employer’s state. Some states restrict the applicability of the exemption to commissions earned through the sale of “products” and exclude commissions related to “services,” such as repairing vehicles. Other states do not have the 7(i) exemption at all.
Once an employer determines that they can use the 7(i) exemption in their state, they then must make sure they qualify as a “retail establishment” under that law. The good news is that under the FLSA, and most states that have adopted a version of the FLSA, collision repair facilities and dealerships are considered to be “retail establishments.”
The next step, presuming that the employer qualifies as a “retail establishment,” is to make sure that the employee is receiving at least one and one-half times minimum wage. This typically isn’t a problem because of how well technicians, painters and other commissioned or flat rate employees are paid, but there are pitfalls. For example, one court recently held that because an employer did not maintain accurate clock hour records for its employees, the employer could not prove that those employees made the requisite one and one-half times minimum wage and refused to consider those employees to be exempt.
The lesson of that case—make sure you keep accurate clock hour records for your commissioned and flat rate employees!
The final step in the analysis is to make sure that at least half the employee’s compensation comes from “commissions.” It also should be noted that, according to the Field Operations Manual from the Department of Labor, flat rate payments to technicians and painters will be considered “commissions” for purposes of the 7(i) exemption.
One major mistake I regularly see in this area is the employee who receives a “guarantee” or a “salary plus commission.” The problem is that unless the “commission” exceeds the “salary” or “guarantee,” the employee likely will not be exempt from overtime. There are ways to make sure a commissioned employee has consistent income while still meeting the requirements for the exemption, but care must be taken in drafting the employee’s pay plan to properly characterize their earnings.
A final note to those in California, ignore everything you just read! California does not do things the way the rest of the country does (I hear non-Californians chuckling). California does not recognize the 7(i) exemption for independent collision repair centers. It does recognize the 7(i) exemption for dealerships, and technically collision centers that are part of dealerships, but case law makes it clear that technicians and painters are not covered by California’s version of the exemption.
Do I have to worry about meal and rest periods?
The FLSA itself does not require meal and break periods, but if they are provided then federal regulations demand certain requirements be met. Be aware that most states have very detailed meal and rest period laws. That said, the short answer is “yes,” you have to worry about meal and rest periods. Recent cases against Wal-Mart and other large companies have brought the issue of meal and rest periods to the forefront of national news. These laws do not apply just to mega-companies, they apply to companies of all sizes. With the huge awards in the news on an almost daily basis, employees are looking at their own situations and plaintiff’s lawyers, who get their attorney’s fees and costs paid by the employer if they recover even a penny for the employees, are looking for those employees.
The lesson here is that employers must make sure that employees are not only provided with the requisite meal and break periods, employees also must be relieved of all duties while they are on their meal and break periods. This undoubtedly sounds like a major hassle to some reading this article, but considering that the penalties for non-compliance accrue on a daily basis and can add up tremendously over time, it is worth it to get in compliance. With the dramatic rise in this type of claim, it is not a question of “if” an employer gets hit with a claim, it is a question of “when” and how prepared the employer is to defend itself.
Well, that person is a manager: Do I have to pay them overtime?
The answer here is “maybe.” This question raises issues with what are known as the “white collar” exemptions. Federal and state laws, though they may differ in their definitions for each type of exemption, recognize overtime exemptions for “professional,” “administrative,” and “executive” employees. Volumes have been written regarding these exemptions and when they apply, so this article will not address that topic. However, employers should note that simply giving an employee the title “manager,” or placing them on a salary, does not automatically make the employee “exempt” from overtime. The employee still must meet the all the requirements for exemption. Beware also, that an employee may qualify for the exemption when they are hired, but if their duties change they may no longer qualify. Thus, it is critical for employers to conduct regular audits of their “exempt” employees to ensure that they meet all the criteria for exemption.
The “miss-classified” manager situation is extremely common and can create tremendous liability for a company. The problem is compounded because many employers do not keep track of clock hours for “managers” or salaried personnel. Remember, it is the employer’s obligation to track clock hours, not the employee’s. Again, periodic self-audits and tracking hours can significantly minimize liability exposure.
OK, so I have to pay overtime: How do I calculate it?
Overtime calculations are simple mathematical calculations, but I see employers get in trouble all the time because they either do not understand, or try to “bend” those mathematical rules. Here is how it works under the FLSA (beware that some states use dramatically different calculations):
- Hourly – This calculation is simple and every employer knows it. The employee gets “time and one-half” for all hours worked over 40 in a week.
- Salary, commission or flat rate – This calculation is a bit more complicated, but is the same regardless of whether the employee is paid a salary, commission or flat rate. One effective way to do this calculation is to use the fluctuating workweek method. Here the employee’s total compensation for the workweek (the sum of all salary, commission, flat rate, bonuses, etc.) is divided by the total number of clock hours to arrive at the employee’s “regular rate.” That “regular rate” is then multiplied by “.5” to arrive at the “overtime rate.” That “overtime rate” is then multiplied by the number of overtime hours worked during the workweek to arrive at the “overtime premium.” The “overtime premium” is then added to the employee’s compensation for that workweek.
For example:
A flat rate technician earned $900 in a given workweek by flagging 75 “hours” at $12 per “flag hour.” He worked 50 clock hours during that workweek.
- His “regular rate” for that workweek was $18 [$900÷50].
- His “overtime rate” for that workweek was $9 [$18 X .50].
- Thus his “overtime premium” was $90 [$9 X 10 OT Hours].
- And finally, his complete compensation for that workweek was $990 [$900 + $90].
OK, so I am not in compliance: What do I do next?
The first bit of advice I give companies that are not in compliance with wage/hour laws is to not panic—we will get through this. The next step is to determine the full extent of their liability exposure by conducting an internal wage/hour audit. This process takes time and hopefully we are doing the audit on our own terms and not having the timing and scope dictated by a court or government agency.
Once the limits of the liability exposure are determined, it is time for the company to make a very important, and sometimes very difficult, decision. This decision is frequently driven by the financial realities of the company.
A key point to remember is that there is a statute of limitations on how many years of back wages the out-of-compliance employer will be liable to pay. Therefore, once an employer is in compliance, every day that passes deducts from their liability exposure, so it behooves them to get into compliance sooner rather than later.
Depending on the extent of the liability exposure, some companies elect to simply pay out all the unpaid back wages and eliminate the exposure, though this option usually is not a financial possibility for most companies. There are myriad strategies for getting into compliance, but the complexity of those strategies is best served through consultation with employment counsel experienced in such matters, as the mere act of getting into compliance can trigger employees to file claims. Experienced legal counsel can guide you through this minefield.
A final thought
The days are long gone when paying an employee a “fair wage” was good enough. You still must pay them a “fair wage,” but you must do it in compliance with a host of federal and state laws and ignorance of those laws is no excuse. The law holds employers to a high standard in this area. The companies that will prosper in the future are those that recognize the value of learning the law and working within its boundaries, while companies that hide their heads in the sand or blatantly ignore such laws will find they are spending more blood, sweat and tears dealing with lawsuits than building their company. It is time to give wage/hour issues a second thought.
