The CEDR Guide to Employee Classification and Wage Compliance
Wage and Hour mistakes are becoming more of an enforcement priority at the US Department of Labor (DOL). In fact, in January of 2019, the DOL increased the penalty for a single classification error to more than $2000 per offense — and that doesn’t even include the back wages, taxes, fines, and fees you’ll face if a classification error is discovered during an audit of your business.
This guide is meant as a tool to help employers understand how to keep their businesses compliant with all relevant wage and hour laws. If used correctly and in conjunction with help from an HR professional, it may also help you to avoid the nightmare of a DOL audit and the financial burden that comes with it.
Table of Contents
Independent Contractors Are Not Employees
Exempt or Non-Exempt: Getting Employee Classification Right
The Cost of Non-Compliance
The Legal Way to Pay (and Limit) Overtime
Sick Leave Laws and Your Business
The Legality of Timekeeping (What You Can and Cannot Do as an Employer)
Getting Final Pay Right
Independent Contractors Are Not Employees
Exempt or Non-Exempt: Getting Employee Classification Right
The Cost of Non-Compliance
The Legal Way to Pay (and Limit) Overtime
Sick Leave Laws and Your Business
The Legality of Timekeeping (What You Can and Cannot Do as an Employer)
Getting Final Pay Right
Are Not Employees
One of the most common wage payment mistakes made by employers is classifying employees as independent contractors. But independent contractors are not employees, and your employees are not independent contractors. Before you can learn about how to pay your employees correctly, you need to ensure you’re capturing everyone who should be included in the category of “employee.”
Because employers are not required to offer things like benefits or worker’s compensation insurance to independent contractors, nor are they required to withhold taxes on behalf of independent contractors, mistakenly classifying an employee as an independent contractor can cost you big when the Department of Labor (DOL) or Internal Revenue Service (IRS) eventually catches on.
In fact, the federal government has strict guidelines that dictate who can and cannot be considered an independent contractor. These guidelines generally relate to the amount of control you as an employer have over that person’s work. Some states (including California, New Jersey, Illinois, and Massachusetts) have even more stringent guidelines for determining if a worker can be classified as an independent contractor.
If you are not sure how your state handles Independent Contractor classification, reach out to CEDR for guidance.
Employee or Independent Contractor? Here’s How You Know:
The treasury inspector general estimated that employee misclassification costs the US $54 billion in underpayment of employment taxes and $15 billion in unpaid FICA and unemployment taxes.
One of the challenges with proper independent contractor classification is the fact that there is not one set of rules to play by. While the analysis generally falls into the three main categories outlined below, the IRS and DOL each have their own tests, and, as stated above, state agencies often apply even more strict standards. The three main considerations, and examples of factors falling into each category, are as follows:
1. Behavioral Control
How much control and direction do you expect to have over the worker’s duties?
- Contractors set their own hours.
- Contractors bring some or all of their own tools and/or employees.
- Contractors use their own techniques, plans, methods, and skills.
- Contractors have the freedom to work for other businesses.
The more you care about the means rather than the end result, the more likely it is that the worker is an employee. Compare this to when you hire an IT person as a contractor to perform maintenance on your computer systems. You probably don’t care how the job is done as long as your systems are working.
2. Financial Control
How dependent is the worker on you as their source of income? Does the worker perform the same service for a variety of businesses? Do you pay the worker a flat fee for the job, or do you pay them an hourly rate like your other employees? Does the worker have “skin in the game”, with the ability to realize profit and loss?
- Contractors are not solely reliant on you for income. They perform similar services for different businesses, just like any other service company.
- Contractors have the ability to realize profit or loss, meaning you do not typically guarantee them a base salary, provide paid time off, or guarantee a minimum number of patients or customers.
If there is any question left as to whether a worker should be classified as an employee or an independent contractor after you’ve gone carefully through all of the above categories, they’ll probably fall under the heading of “employee,” which is the more conservative option. Still, it’s in your best interest to look closely at your state laws for additional guidance, and to then reach out to your employment attorney or a professional HR advisor (like those at CEDR) for more help.
For a summary of the content found in this section, see this article on independent contractor classification. To learn how to properly classify and pay your employees, read on.
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Exempt or Non-Exempt:
Once you’ve determined who should and should not be classified as employees, it’s time to move on to classifying your employees for wage-payment purposes.
It’s an extremely common misconception that paying someone on a salary basis means that they aren’t eligible to receive overtime. The reality is that you can put anyone on a salary. But how someone is paid is completely separate from how they are classified for overtime purposes. In other words, salary alone doesn’t get you off the hook from tracking hours and paying overtime.
Who Is and Is Not Eligible for Overtime Payments?
Under the federal Fair Labor Standards Act (FLSA), the rule is that an employer is required to track and keep records of an employee’s time, pay the employee at least minimum wage for all hours worked, and pay overtime if they work over 40 hours in a workweek (certain states have additional overtime rules which can be even more strict than those outlined by the FLSA).
What is the Fair Labor Standards Act and Who Does It Affect?
Passed in 1938, the FLSA is the legislation responsible for creating the worker’s right to a federal minimum wage and overtime for hours over 40 in a workweek.
The FLSA applies to employers whose annual sales total more than $500,000, and/or who engage in interstate commerce, meaning that, with very few exceptions, nearly all businesses in the US are subject to its guidelines.
This means that you can only avoid those requirements if an employee’s position fits an exception to the FLSA requirements, making them exempt from those rules. There are very specific tests that must be met for someone to be exempt, and the requirements go beyond salary.
Generally speaking, most employees are non-exempt.
Exempt Employees are exempt from the FLSA. They meet one or more of the tests described in this section for falling into an exception to the FLSA rules. Therefore, the employer does NOT have to follow FLSA rules for that employee, such as paying overtime or tracking hours worked.
Non-Exempt Employees are not exempt from the FLSA. They do not meet the tests for falling into an exception to the FLSA rules. Therefore, the employer DOES have to follow all of the FLSA rules for that employee, including paying overtime and tracking hours worked.
There are 3 tests that must be met for an employee to qualify as “exempt”:
- They must be paid a fixed salary each pay period,
- They must be paid a minimum salary level (currently set at $684/week or $35,568/year), and
- They must meet the job duty requirements for being classified as an Administrator, Executive, or Professional (other exceptions exist, but these are the most common exemptions affecting CEDR Members and healthcare professionals).
We will go over each of the tests in detail below.
Employers in some states, including Alaska, California, Colorado, Maine, New York, and Washington should note that your states have some additional requirements that need to be met and your employees are therefore subject to different tests. For more on what this means to you, reach out to CEDR for guidance.
Test 1: Paid a fixed salary each pay period
To be exempt, the employee must be paid on a set, consistent salary each pay period. This means that they get the same amount of pay regardless of actual hours worked – since an exempt employee is being paid for the job they perform rather than the hours they work.
There is only one unique exception to this rule – licensed, practicing doctors and lawyers can be exempt even if they are not paid a salary.
If the employee is not a doctor or a lawyer, the fixed salary requirement is non-negotiable. If the employee is paid using any method other than salary, they are non-exempt (hourly rate, commission, daily rate, per diem, etc.).
Test 2: Paid a minimum salary level
Under federal law, an exempt employee must receive a salary of at least $684 per week ($35,568 per year). The only exception to this is for employees in certain states, including Alaska, California, Colorado, Maine, New York, and Washington, where the salary amount has to be higher.
There’s no way to get out of the minimum salary requirement unless the employee falls within the exception for doctors and attorneys mentioned above. If the employee’s salary doesn’t meet the required minimum, they’re non-exempt.
Test 3: Meets the job duty requirements for being an Administrator, Executive, or Professional
There are specific rules for each of the categories in this section, which are covered below. When considering someone’s exemption status, it’s important to ensure you are looking at the position and not the person. If three people have the same job description but you are only calling one of them exempt, something’s probably wrong.
The Department of Labor (DOL) is going to look at whether the job duties and authority of a position meet the exempt requirements, as that shouldn’t vary based on the individual in the role.
1. Administrative Exemption
A word of caution: this is NOT an easy catchall for your administrative team. It may be called an “Administrative” exemption, but it is not in any way referring to basic administrative work.
Instead, this exemption covers employees whose work directly relates to the administration of high-level business processes: being actively engaged in big picture strategic planning related to the direction of the company, its finances, marketing strategies, large-scale budgeting, compliance, quality control, auditing, etc.
This type of work should be the employee’s primary duty. This exemption is generally for high-level employees who are most often an administrator of a department or an officer of a company.
A common risk area in this category is employees who make big decisions but are restricted to certain guidelines when making those decisions. You need to be able to show actual discretion — where the employee is using independent judgment — in order to meet the Administrative test. Before making a decision about this exemption, we recommend you also review the DOL’s guidance on all of the Administrator requirements.
Positions that may qualify for an “Administrative Exception” include Chief Operating Officer, Financial Director, Human Resources Director, Financial Consultant, Supply Chain Manager, and those on the company’s Executive Team.
2. Executive Exemption
An employee meeting the Executive exemption test is most commonly a high-level manager. However, be careful not to assume that anyone in a supervisory role can meet this test.
It’s critical that management is the employee’s primary duty. According to the DOL’s findings, a manager supervising only two other employees rarely spends 50% or more of their time primarily engaged in managerial duties. Therefore, we only recommend using this exemption if the “Executive” is truly engaged in high-level management work during the majority of their work day, and they have at least three full-time employees who they are managing.
Here are some examples of managerial duties that may count toward executive exemption in which management is a primary duty:
- Interviewing, selecting, and training employees;
- Setting rates of pay, hours of work, and planning work schedule;
- Maintaining production or sales records (beyond the merely clerical);
- Appraising productivity, handling employee grievances or complaints, or disciplining employees;
- Determining work techniques;
- Planning the work;
- Apportioning work among employees;
- Determining the types of equipment to be used or materials needed in performing work;
- Planning budgets for work;
- Monitoring work for legal or regulatory compliance;
- Providing for the safety and security of the workplace.
A common risk area in this category is an employee who is a “working manager” — someone who may supervise others but spends most of their time completing productive tasks (as opposed to spending most of their time completing managerial tasks). Before making a decision about this exemption, we recommend you also review the DOL’s guidance on all of the Executive requirements.
Positions that may qualify for an “Executive Exemption” include Office Manager, Department Manager, Practice Manager, Store Manager, and Clinic Administrator.
3. Professional Exemption
The Professional exemption classification is often referred to as the “Learned Professional” exemption because it focuses on a high level of education in fields such as medicine, law, science, accounting, engineering, and architecture. Note that four years of college education is usually NOT prolonged enough to meet this educational standard.
This category has a unique exception applying to doctors and attorneys only: they do not necessarily need to be paid on a salary basis, and can be paid by another method (commission, fee, hourly, etc.). Note that in California a licensed physician’s pay must equate to a minimum of $84.79 per hour.
We frequently receive questions about whether the following positions can fit into the Professional exemption:
Registered nurses may meet the Professional Exemption, except in California. However, licensed practical nurses and other similar healthcare employees generally will not meet the requirements because having a specialized advanced degree is not a standard requirement for those occupations.
CEDR does not recommend classifying a hygienist as a Professional. Federal law states that a hygienist could potentially meet the Professional exemption if they meet strict educational requirements, but in practice the DOL repeatedly finds that a hygienist’s work is more of a routine, mechanical nature than that requiring the discretion used by a high-level provider such as a dentist. In California, state law is clear that hygienists are not “practicing medicine,” so a hygienist can only be exempt if they meet the requirements of the Administrative or Executive exemptions.
Positions that may qualify for a Professional Exemption include Dentist, Doctor, Lawyer, Accountant, Scientist, Physician Assistant, and Nurse Practitioner.
Though employee classification may seem like a simple subject on the surface, a deep dive into what determines whether a worker should be classified as an independent contractor, an exempt employee, or a non-exempt employee exposes a world of nuance. And mistakes in that regard, though common, tend to be costly for employers.
For more guidance on how your employees should be classified, or for more state-specific insights, reach out to CEDR HR Solutions here or by calling (866) 414-6056.
The Cost of
The DOL’s Wage and Hour Division collected a record $304 million in back wages for workers in 2018, which averages out to more than $835,000 per day and about $1150 per worker.
Learning to maneuver the various federal, state, and local laws pertaining to employee and worker classification can be dizzying. In fact, it might be tempting to simply check off a box in order to get your employees working or, worse, to put off thinking about these issues for a later time.
But be careful about kicking the wage-compliance can down the road. Wage consequences are cumulative: the longer you are paying someone wrong, the more your liability snowballs (think: back payment of wages, taxes, fines, penalties, interest, and attorneys fees).
Independent Contractor Misclassification – “How are they going to know?”
Imagine you’re sitting down with a candidate and the person tells you that they “want to be classified as an independent contractor.” Maybe their old boss paid them that way and they grew accustomed to the higher level of take home pay. Maybe they don’t need benefits, or they get sufficient health benefits from a spouse. Do you comply? What’s the problem, right? The worker agrees, you agree. How would the IRS or DOL even know this is happening?
Before you reach for your 1099 form, understand that it only takes a single complaint to the DOL by an employee or former employee who believes that they have been incorrectly classified as an independent contractor (at the state or federal level) to send an auditor knocking on your door. Or, if you have misclassified an employee as an independent contractor, any attempt by that employee to file for unemployment benefits or worker’s compensation could trigger an audit.
And, if that audit shows that a single employee at your business has been classified incorrectly, it’s generally a safe bet that other faux pas to the same effect will be discovered during that process.
At the beginning of a working relationship, a worker, just like our candidate above, might tell you they’re perfectly happy being classified as an independent contractor. But let’s say that worker’s circumstances change — their spouse loses their insurance benefits, or they are in need of a leave of absence.
The worker does not waive their right to seek recourse for unprovided wages or benefits just because they agreed to an incorrect worker classification at the start. In fact, the responsibility for proper independent contractor classification sits squarely on the shoulders of the employer, as does the liability for any missed wage payments, taxes, and more.
Still, the majority of Independent Contractor misclassifications occur by accident, though innocent classification mistakes can still be costly. Consider the following close call by a CEDR Member:
Case in point:
During a recent call to the CEDR Solution Center, a CEDR Member made a request for an “independent contractor form” for a temporary employee. The plan was for the new hire to work for about three months on data entry and overdue account collection tasks.
Because the tasks were not those ordinarily performed in the office, and because of the temporary nature of the position, the Member was under the impression that it was fine to classify this individual as an independent contractor. After a thorough analysis with a Solution Center Advisor, however, it became clear that the worker was, in fact, an employee. The worker did not have a separately established business, they would be using the employer’s systems, equipment, and following strict instructions for completing their work.
In the end, that brief phone call to a CEDR Advisor saved this Member from a simple classification mistake that could have ultimately ended up costing thousands of dollars in fines, penalties, and taxes. And, perhaps more importantly, the call also saved them the time and headache that would have accompanied an audit by the DOL and/or IRS.
Exempt Classification Mistakes — How Oversight Can Cost You Big
Imagine: you onboard an office manager who you pay on a salary basis. They’re very well compensated — making $75,000 per year for a workweek that is always at least 40 hours, but sometimes they put in time at home and on the weekends, pushing them over 40 hours. They do not receive overtime for the hours worked at home.
The office manager is responsible for opening the business in the mornings, performs high-level marketing tasks to ensure your business stays busy, and acts as a backup for the phones. The office manager also participates as a partner with you in hiring, firing, and other general management duties. This person sets the schedule for your team, but you are a “hands-on” owner, and so the final say on anything that happens with your staff rests with you rather than your office manager.
You’re under the impression that everyone is happy in this arrangement, until one day, your office manager approaches you asking for unpaid overtime amounts.
This scenario is a classic exempt misclassification. Many owners assume that if they’re paying a high enough salary, and if the position sounds like it fits into one of the exempt classification categories, that they’re in the clear to label the employee as exempt from FLSA requirements. If your situation is even a little unclear, like our example above, any disagreement will usually be resolved in favor of the employee.
The consequence for mistakenly classifying an employee as “exempt” from FLSA guidelines is that many employers accrue liability for unpaid wages, additional fines and penalties, the employee’s litigation costs, the employee’s attorneys’ fees, and the employer’s own litigation costs and attorneys’ fees. And the longer the mistake goes unnoticed, the larger these figures become.
In addition to litigation costs and fines and fees from the DOL, offending employers will also likely be subject to an IRS penalty of 1.5 percent of wages paid to misclassified employees, as well as 20 percent of the employees’ unpaid social security tax, and 100 percent of the employer’s required match amount. If the misclassification is deemed to have been willful, employers can expect those percentage figures to double.
What’s more, employees may band together to file a collective action if misclassification has happened to more than one individual in the workplace. In the end, what may seem like a few harmless hours of missed overtime can quickly balloon into a several-thousand-dollar nightmare.
Clearly, the IRS and DOL are serious about enforcing classification rules, including cracking down on employers who misclassify employees by accident (ignorance of the law is not a legal defense). And though it might save your business a few bucks in the short run, employers who operate outside the guidelines of employment law are eventually brought to their knees in painful (and costly) fashion.
If you’re not sure if your employees are classified correctly, or you think that you may have made classification mistakes that need to be corrected, reach out to a CEDR Advisor for guidance — there is no time like the present to bring your business into compliance.
Correcting Employee Classification Mistakes
It should go without saying that the best way to deal with employee or worker classification mistakes is to avoid making them in the first place.
But, if you do find that a classification mistake has occurred for one or more workers at your business, correcting that mistake is not going to be as simple as filling out the proper form and forgetting it ever happened. Correcting classification mistakes will involve assessing your existing risk and determining the best course of action to mitigate that risk.
Here are a few steps you can take to avoid making classification mistakes, or to correct them when you discover you might have a problem:
1. Familiarize yourself with the correct tests.
Review the standards in the first two sections of this resource and make sure you are confident about the employee classifications you settle on. You can also consult these official IRS and DOL resources on the subject:
When in doubt, consult a professional for guidance and err on the side of caution by selecting the classification type that most favors the employee (usually “non-exempt” and “employee”).
2. Conduct an internal audit to assess your risk and liability.
If you aren’t sure whether or not you have classification mistakes on your books, take a deep dive into your records to see if you’ve left yourself vulnerable to a potential audit. If you do find classification mistakes, determine the extent of the damage.
Was this a mistake that happened with just one employee, or might it affect others? Has the issue persisted for a month, or is this a problem that’s been compounding for years? Using versatile and robust timekeeping software for your office can help with this process by making it easy to pull and compare records and, if used correctly, it can also help prevent classification mistakes from happening.
3. Work with a professional to correct existing issues and mitigate liability.
Your level of liability will dictate how involved this process ultimately turns out to be. Sometimes a simple classification issue can be corrected without much trouble, but not always. Be careful to ensure that you’re handling the process compliantly so as not to compound the initial mistake and avoid making any rash decisions.
4. Prevent issues going forward.
Train your management team to recognize and avoid classification mistakes. When in doubt, reach out to an HR professional or local employment counsel to get clarity before making a decision.
The Legal Way to Pay
(and Limit) Overtime
Between 2009-2018, the DOL handled 108,599 cases of overtime payment violations, which resulted in a total of more than $1.4 billion in back wage payments over the ten-year period.
Overtime. It’s probably the main reason that you’re here looking for information on wage and hour compliance, the Fair Labor Standards Act (FLSA), and exempt vs. non-exempt status.
Once you know that an employee is considered “non-exempt” (and the vast majority of your employees are likely non-exempt employees, per the FLSA), you have to consider how you will handle overtime payments — and deciding not to deal with them at all is not an option, for the record.
Legal vs. Illegal Overtime Policies
Many employers are under the impression that having a policy stating that they “will not pay overtime” or that “unapproved overtime will not be paid” is sufficient to protect them from legal claims of unpaid overtime from employees.
Unfortunately, this is incorrect.
The fact is that, under the FLSA, overtime in the amount of 1.5-times an employee’s regular rate of pay MUST BE PAID for any and all hours worked in excess of 40 in a single workweek (with certain special stipulations for employers in some states, including California, Colorado, Kentucky, and Alaska).
A sneaky concept hidden in this rule is the “workweek,” which must be a defined 7-day consecutive period of time. For example, your workweek can be Sunday through Saturday, or Monday through Sunday, or even Tuesday through Monday.
Whatever you decide, your “workweek” needs to be consistent from week to week — it cannot be an arbitrary or variable 7-day period, it will never be “Monday through Friday”, and it also cannot be viewed simply in terms of the total number of hours worked in a pay period (though an 80-hour pay period may not seem to necessitate overtime payments at a glance, it will include overtime if more than 40 of those hours were worked in the same workweek). Ideally your policy will define the regular workweek, and that policy should be consistent with the workweek used in your timekeeping and payroll systems.
Having a policy about overtime or the relevant workweek that is not consistent with the FLSA is very dangerous. In fact, the very existence of such a policy is liable to be used as evidence against you should an employment claim relating to overtime payment ever find you in court.
So What Can You Do to Legally Limit Overtime?
Here at CEDR, we generally recommend that employers include an overtime policy in their employee handbook stating that if overtime proves necessary for an employee to complete a specific task or duty, then the overtime must be approved by a manager or administrator. The policy should also state that working unapproved overtime can be met with disciplinary action up-to-and-including termination.
Click here to download CEDR’s Overtime Request Form for use in your office.
Such a policy will not end your liability to pay overtime hours that are worked, but it can give employers recourse to address an employee who appears to be abusing your business’ overtime policy. Still, even with an overtime approval policy in place, overtime worked must be paid, even if it wasn’t subject to the approval process.
How to Calculate Overtime Correctly
When considering a basic overtime calculation, the rule is very simple — it’s 1.5 times the employee’s “regular rate” of pay. If your employee is normally paid $10.00 per hour, and she works 41 hours in a workweek, she will receive 40 hours at her normal $10.00 rate of pay ($400.00) and one hour at 1.5 times that rate of pay ($15.00). Her gross pay will be $415.00 for that week.
The most complicated part of the overtime rule is the phrase “regular rate.” The “regular rate” includes, not just an employee’s basic hourly rate, but also commissions, bonuses, and any other form of compensation (note that overtime calculations will look slightly different for California residents). As a result, when we start to add other forms of payment into the mix, the overtime rule starts to look a lot less simple.
When trying to determine if a bonus should be included in overtime calculations for an employee, you first need to determine if the bonus was outcome-based or discretionary.
Outcome-based bonuses are those which are tied to performance, business goals, or outcomes. If the bonus is given as a reward for doing something well or meeting a specific goal, that bonus is outcome-based and should therefore be included in overtime calculations.
Discretionary bonuses are those that are not based on performance or business goals and are simply given out at the discretion of the employer. A prime example of a discretionary bonus is a holiday bonus, as it is in no way tied to an employee’s performance on the job. Discretionary bonuses do not need to be included in overtime calculations.
Having a policy that says all bonuses and incentives paid to your employees are “discretionary” does not make it so. If a bonus is given as a result of a particular outcome, that bonus is, by definition, outcome-based — not discretionary.
Calculating Overtime with a Bonus
To calculate overtime payments when an employee has earned a bonus, start by calculating their total weekly pay, including hourly/salary wages and additional compensation such as outcome-based bonuses and commissions.
As with most adventures in math, this concept is best demonstrated by example. Let’s say you have an employee who works 50 hours in the workweek. Her normal hourly wage is $10.00 per hour. During the workweek, she earned a $100 bonus for her performance. Follow the chart below for a detailed breakdown:
In essence, the bonus increases the overtime rate of pay, because it increases the “regular rate of pay.”
When calculating overtime payments that include “additional pay” such as commissions and bonuses, it’s a good idea to work closely with a competent payroll company or financial advisor, and to use a robust timekeeping system that allows you to flag overtime hours.
To see more overtime calculation examples, check out our two-part training series on the subject:
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Sick Leave Laws
& Your Business
The codification of sick leave laws is on the rise.
There is very little that can be said about sick leave laws that is standard for readers across the nation. As of the publication of this resource, there are no federal laws in existence mandating or governing sick leave accommodations outside of those pertaining to employees who are considered to be in a protected class, including employees with disabilities.
Still, sick leave laws are increasingly common across the nation, and nearly all of them require sick leave to be PAID with a handful of exceptions for small employers.
The first mandated sick leave accommodations in the US went into effect in San Francisco in February 2007. Washington, D.C. was next, enacting their own guidelines in November 2008, and unique sick leave regulations have been rolling out in states and localities across the nation ever since.
In most cases, managing mandated sick time is not as simple as front-loading the correct number of total hours allotted for your employees. Many states and localities have specific rules regarding the accrual rate of sick hours, how unused time is to be paid out, as well as guidelines about whether or not unused time can rollover into the next year.
And, in places like California and Washington where both state and local sick leave laws exist, employers are forced to comply with multiple sets of laws simultaneously. In these areas, managing sick time correctly can get complicated quickly.
How Sick Leave Policy Affects You
It’s important that you work with an HR professional to make sure that your current sick leave policies are in line with the state and local laws where you live and work.
At CEDR, we find that business owners often think that offering an equivalent amount of PTO to their employees as the amount of sick leave required by law absolves them of the need to look into their state or locality’s specific laws. But sick leave laws all go much further than the basic directive to provide a certain number of hours to employees, often including guidelines about how and when those hours are to be applied, how they can be used, and much more.
Policies between states and even between localities within the same state can differ greatly. Some, such as Michigan’s state-wide policy, only apply to businesses with a large number of employees. Others, including the laws governing sick leave in New York City, the state of Vermont, and the state of California, apply to employers with just one employee. The vast majority of sick leave laws apply to ALL employers in a jurisdiction.
Some states distinguish between requirements for paid and unpaid leave (Massachusetts, Maryland, Oregon, and Rhode Island, for example), while others require all mandated sick leave be paid (examples include Michigan, California, and Vermont). Even the minimum and maximum amount of time that can be accrued and whether or not unused time must be paid out at the end of a calendar year can differ from state to state and from city to city.
The Bottom Line Is This:
As an employer, you must either be familiar with the state and local laws governing sick leave everywhere your business operates, or you need to work closely with someone who is. Like with the majority of the laws governing employment in the US, sick leave laws are subject to frequent changes which may affect the legality of policies you already have in place — especially if those policies were “borrowed” from a handbook made from a template or those that were made for any business other than your own.
If your state or locality currently provides guidelines regulating the accrual rate of sick leave, whether paid or unpaid, or there is a chance that your state or locality will enact such a law in the future, you’ll want to make sure that your employee handbook is up-to-date and legally compliant.
Not sure if your current sick leave policy is in compliance with state and/or local laws? Have your employee handbook reviewed for free by the policy experts at CEDR.
You’ll also want to make sure you are using a customizable timekeeping system that is robust enough to accommodate the regulations specific to your business and keep track of your employees’ time off as it accrues.
Watch our informational webinar to learn more about CEDR’s PTO & Time Tracking system.
The Legality of Timekeeping
(What You Can and Cannot
Do as an Employer)
Payroll takes time. And if you’re still calculating payroll by hand, or are still using an analog punch clock to track your employee hours, it can take you several hours each pay period to complete (assuming that everything goes the way it’s supposed to, of course).
And what about when things don’t go to plan? Employees miss punches. They forget to clock out for breaks and, if you don’t have them at hand when you’re trying to aggregate and submit their information to your payroll provider, you might find yourself trying to “guess” when your employees showed up to work, clocked out, or returned from lunch. But “guessing” when it comes to wage and hour compliance could cause your business to commit a violation of the Fair Labor Standards Act (FLSA).
The more timekeeping mistakes that happen in a pay period, the more of your (or your manager’s) time those tedious payroll tasks will require, and the more likely it will be that incorrect information is ultimately entered and submitted on behalf of your business.
Case in point:
Over the years at CEDR, we’ve heard many cautionary tales of timekeeping software causing employers both headaches and risk. In one particularly outstanding case, an employer was sued by an employee for back wages from missed lunch breaks in a state where lunch breaks are required.
Prior to hearing from the employee’s attorney, the employer had no idea the employee had missed their lunches. While the missed wages for the lunch violations totaled to less than $1,000, by the time the employer had settled up with the employee and paid their attorney, they were out almost $10,000!
So, then, the $10,000 question becomes, will your timekeeping software tell you when an employee misses a required lunch? Will it alert you to an employee who clocks in late? Or early?
Quality timekeeping software can help you do a lot of things.
Robust timekeeping software can help you process payroll information and pull reports in a fraction of the time it takes to prepare the same data using an analog system. It can help you aggregate your company schedule and make processing time-off requests a breeze.
More thorough timekeeping systems can automatically track time off as it accrues in accordance with your company’s specific policies and the laws pertaining to your city or state. Some systems can even send notifications to employers when employees clock in late, clock out early, or fail to take a legally mandated break on time.
But not all timekeeping software is created equal. And, just because the timekeeping system you use for your business may allow you to do something, it does not necessarily mean that everything the system allows you to do is legal.
Leveraging Your Timekeeping System as a Compliance Tool
First, because overtime and sick leave laws can differ so much from state to state, you should know that if your timekeeping software does not take into account the state and city in which you live and work, there’s a good chance that it is handling some portion of your recordkeeping incorrectly, and potentially even performing tasks for your business that are actually illegal.
In order for your timekeeping software to accurately calculate things like overtime pay, accrued time off, and (in some states) so-called “report to work pay,” it needs to include fields that allow you to indicate if each of your employees are paid on a salary or hourly basis, as well as if they are exempt or non-exempt from the requirements of the Fair Labor Standards Act (FLSA).
Despite a common misconception to the contrary, hourly employees can, in some cases, qualify as exempt, and salaried employees can be classified as non-exempt, which is a distinction that can get your business into trouble if misapplied when you set up your timekeeping system.
Some timekeeping systems even include an ability to tag non-exempt employees as ineligible for overtime, which is illegal (only exempt employees can be denied overtime pay), or the ability to set your own overtime rate, which also goes against federal wage and hour guidelines under the FLSA (unless you intended to set an overtime rate that is more than the federally-mandated time-and-a-half calculation).
Don’t Set Up Your System to Clock Employees Out Automatically
Some timekeeping systems allow users to set a time at which employees are automatically clocked out from work. This is generally marketed as a way to control overtime worked by your employees, to ensure that employees are kept from “milking the clock” at the end of a work day, or to enable employers to mandate lunch breaks.
But clocking employees out automatically can create legal problems for employers. Employees must legally be paid for any time that they spend working, and you as an employer are legally required to keep track of all time that your non-exempt employees spend doing their jobs. Your timekeeping software is meant to help you fulfill your end of that employer/employee agreement per federal, state, and local laws — not to protect you from having to do so.
Timekeeping software can help your practice run more smoothly, it can save you hours that would otherwise have to be spent on repetitive payroll tasks, and it can help you to manage your team and keep your business practices compliant with relative ease — so long, that is, as you’ve set the system up with compliance in mind and you’re using it in accordance with federal, state, and local laws.
For this reason, it’s generally a good idea to make sure you have professional guidance from a qualified HR expert and/or employment attorney when setting up your timekeeping system to reflect your company’s policies. And keep their contact information on hand in case the laws where you live ever change in a way that could affect your timekeeping policies and functionality of your system.
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Though getting paychecks correct for your employees regularly is important, it’s absolutely crucial to ensure that you get the final paycheck right when that employment relationship comes to an end.
On the surface, the concept of a final paycheck seems easy — you just cut a check for the amount that you owe the employee, right? Don’t be deceived. There are actually quite a few important points to consider when issuing that final check.
If you’ve just terminated an employee, for instance, chances are good that they’re not going to be bursting with positive feelings about you or your business. You can bet that a newly-fired employee is going to take a close look at their final paycheck and, should they feel that anything is amiss, it will be more likely that they report any “last straw” mistakes you may have made on that check to the state than with any other payment made to them previously.
Case in point:
Imagine after a long, difficult struggle with an employee over their poor performance and attendance, you decide to terminate. During the termination meeting, you hand the employee her paycheck along with other final paperwork.
A few days later, you receive an angry text message from the employee saying that you forgot to include two weeks of unused vacation time in her final paycheck and she’s hired an attorney to recover that payment.
The next day you receive a records request from the employee’s attorney, who subsequently sniffs out several other minor wage violations that occurred over the years — 15 minutes of missed overtime, miscalculated bonuses, and similar mistakes.
Several weeks later, the legal battle concludes with you settling with the employee for several thousand dollars and you owe your own attorney several thousand more — all of which could have been avoided by consulting with a professional before that initial termination meeting.
Here are a few simple steps to help you get that final paycheck right:
1. Follow your state law on timing of the final paycheck.
Each state has rules about when you must issue an employee’s last paycheck. Some states require that you issue final pay on the last day worked. Others allow you to wait until the next regular payday. What’s more, some state rules differ based on whether the employee was terminated or if they resigned, so be sure to consult with an expert when planning any separation.
2. Include all forms of payment due.
Final pay is not always as simple as covering the salary or hourly payment for hours worked. Remember the section above on non-discretionary bonuses? Those pesky little bonuses matter at termination time, too.
If an employee has earned a bonus, be sure it’s included in their final check. To that point, at CEDR we often recommend that employers include a policy in their employee handbooks stating that an employee needs to work an entire bonus period to be eligible for that bonus, which can help mitigate potential final pay mistakes related to bonuses.
You should also be aware that many states have “report to work” pay laws, requiring you to issue a minimum amount of pay when an employee shows up at (or even calls in to) the office. If you bring the employee in for a 20 minute termination meeting, depending on where you live, it’s possible that you will owe that employee for several hours of work.
3. Include any vacation or sick leave due.
Refer to your written policies and state and local laws about whether or not you need to pay out for vacation and sick leave balances. Work with a professional to get accurate figures for these final amounts due, as state laws can be extremely specific about how leave balances should be handled.
4. Check on required methods of delivery.
Depending on where you live, state and local laws can be rather particular about how employers are supposed to deliver a final payment to an employee. Some states require that a live check be issued, or they might direct employers to obtain special permission from an employee to offer direct deposit.
Especially with regard to terminations, we generally recommend that employers have the final paycheck ready to go on an employee’s last day at the time of a termination meeting. Hand the check to the employee directly at the conclusion of that meeting, along with your Exit Interview form in a self-addressed, stamped envelope and eliminate the need for future interactions with your former employee.
Ready to work with an HR Expert to get Wage and Hour considerations right for your business? Talk to a CEDR Account Specialist today!
Updated February 2, 2022; originally published April 15, 2019.