Mistakes Were Made: How Small Businesses Commonly Get Into Trouble with the Fair Labor Standards Act
Over my legal career, I have represented many small businesses. Very often, that representation becomes necessary after a business finds itself embroiled in employment litigation battles over alleged violations of the myriad employment laws or regulations. Such actions are costly and burdensome to small businesses, and distract them from their core activities. More often than not, these civil actions could be avoided if the business had adopted and followed some basic protective policies and procedures.
While there are many opportunities for a small business to err, I have developed an insight into some of the more common errors that small businesses make, which inexorably lead to litigation. In this article, I discuss three of the most common mistakes that these businesses, and the lawyers representing them, can avoid making and thereby minimize the risk of charges and litigation. The first error is a failure to learn, understand, and adhere to the complicated federal minimum wage and overtime regulations contained within the Fair Labor Standards Act (FLSA) and its attendant U.S. Department of Labor (DOL) regulations. The second common error is misclassifying an employee as an independent contractor in an effort to avoid overtime and other benefits obligations. Finally, small businesses often fail to stay aware of changes in employment law, which is influenced more than other areas by regulatory changes and court decisions.
Exempt Employees and Non-Exempt Employees Under the FLSA
One of the most common mistakes by employers is requiring, permitting, or not preventing their employees from working in excess of 40 hours in a workweek without receiving overtime. Often, this mistake arises out of the belief that an employee is “exempt” because he or she is paid a fixed salary as opposed to an hourly rate. This is a dangerous assumption.
The federal minimum wage and overtime requirements are codified in the FLSA at 29 U.S.C. §203, et seq. In addition to those statutes, the DOL has promulgated myriad regulations interpreting, limiting, and expanding the FLSA. The result is a complicated set of laws and regulations with numerous exemptions and exceptions. Many small businesses lack the time or resources to learn and understand these rules. If you advise such clients, here is how you could help them understand the rules.
• The FLSA Minimum Wage and Overtime Requirements —The FLSA is codified at 28 U.S.C. §201, et seq. There are two main operative sections to the FLSA, §206 (the minimum wage), and §207 (pertaining to overtime requirements). Section 206 mandates that employers must pay their employees no less than a specified hourly amount per 40-hour workweek. While that rate is currently $7.25 an hour, per Florida’s minimum wage law,1 in Florida, it is $8.25. Section 207 provides that employers may not employ employees who are engaged in commerce, or the production of goods for commerce, or employees who are employed in an enterprise engaged in commerce or the production of goods for commerce for longer than 40 hours per week unless the employee is paid one and half times their regular rate for each hour, or portion of an hour, in excess of 40.2
• Certain Employees Are FLSA Exempt —The FLSA includes various exemptions to the minimum wage and overtime requirements. Such exemptions include “any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center”3; “any employee employed in the catching, taking, propagating, harvesting, cultivating, or farming of any kind of fish, shellfish, crustacea, sponges, seaweeds, or other aquatic forms of animal and vegetable life…”4; “any employee employed in connection with the publication of any weekly, semiweekly, or daily newspaper with a circulation of less than [4,000] the major part of which circulation is within the county where published or counties contiguous thereto…”5; and “any switchboard operator employed by an independently owned public telephone company which has not more than  stations…”.6
However, one of the most common exemptions, and the exemption that may be the most likely to catch a small business in a violation, is the executive, administrative, or professional exception, codified at §213(a)(1). Section 213(a)(1) exempts from the minimum wage and overtime provisions any employee who is employed in “a bona fide executive, administrative, or professional capacity….”7 It also exempts academic administrative personnel, teachers in elementary or secondary schools, and outside sales personnel. Many small business owners may erroneously believe their employees fall within the 213(a)(1) exception when in fact they do not. As a result, the business may require its employees to work in excess of 40 hours in a week while not paying them overtime for those hours. To avoid wage and hour complaints, it is critical for businesses to have a strong knowledge of which of their employees are within the 213(a)(1) exemptions.
One of the most valuable resources for small businesses and the lawyers who counsel them to understand the scope of the FLSA’s exemptions is the Code of Federal Regulations. The DOL has promulgated rules interpreting the FLSA, including guidance on which employees fall within and outside 213(a)(1) exemptions. Below is a summary of that guidance.
1) Executive: Section 29 C.F.R. §541.100 defines “employee employed in a bona fide executive capacity.” In order to qualify, the employee must meet four criteria. First, the employee must be paid on a salary basis in an amount set by a complicated formula. (Under §541.600(1), the current minimum salary is $455 per week). Second, the employee’s primary duty must be management of the company or a department of the company. It is not enough to simply refer to an employee as a “manager.” Titles alone will not satisfy this requirement. Instead, “the [c]ourt must examine the surrounding facts to determine whether [the employee’s] most critical duties to the enterprise were his [or her] exempt managerial duties.”8 Third, the employee must regularly direct the work of two or more subordinates. Finally, the employee must either have the explicit authority to hire or fire other employees, or the ability to make recommendations as to the hiring, firing, advancement, or promotion of other employees. If an employee lacks any one of the four criteria, that employee is not within the purview of the executive exemption. In resolving the exemption question, “how an employee spends [his or] her time working is a question of fact, while the question of whether the employee’s particular activities exclude [his or] her from the overtime benefits of the FLSA is a question of law.”9
2) Administrative: Section 541.200 pertains to the “administrative” exception. It defines “employee employed in a bona fide administrative capacity….” In order to qualify for the administrative exemption, the employee must meet three criteria. First, the employee must be paid a salary according to the same formula as the executive exemption. Second, the employee must be primarily engaged in “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers….” Finally, the employee’s duties must include the exercise of discretion and independent judgment on important business matters. As with the executive exemption, lacking any one of these three criteria renders the employee non-exempt with respect to the administrative exemption.
In Adams v. BSI Mgmt. Sys. Am., Inc. Case no. 13-10748 (11th Cir. 2013), the 11th Circuit, in considering whether an employee met the administrative exemption, noted that the employee “spent the vast majority of her time running a project for one of BSI’s clients, which entailed creating project tasks, putting together a project plan, and ensuring that the client’s expectations were satisfied.”10 The court noted that she also headed another project for the company, “on which she organized and managed the creation of BSI’s supply-chain-security solution for one of BSI’s clients.”11 Finally, the court noted that “she also conducted client meetings, marketed for BSI, served as the primary contact with prospective clients, and spent significant time researching industry trends.” As such, the court concluded that the employee came within the administrative exemption. “These duties directly related to the management or general business operations of BSI and its customers.”12
3) Professional: Section 541.300 expounds on the “professional” exception. It defines “employee employed in a bona fide professional capacity” as someone who meets two criteria. First, the employee must be paid a salary according to the same formula as that of the executive and administrative exceptions. Second, the employee’s job duties must either require advanced knowledge in the field of science or learning acquired from extended specialized education. Alternatively, the employee’s job must require the “invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” If the employee meets both requirements, the employee is within the professional exemption.
In Williams v. Genex Servs., LLC, 809 F.3d 103 (4th Cir. 2015), the court examined whether an employee’s work involved advanced knowledge in a field of science or learning that is customarily acquired by a prolonged course of specialized intellectual instruction. In considering the plaintiff’s duties, the court noted that she was responsible for assessing “injured worker’s medical condition and treatments in an effort to better understand the case and to look for opportunities to minimize the injured worker’s time away from work.”13 In order to do so, she interviewed patients, and analyzed their “pertinent medical information, including medical history, current status, diagnosis, prognosis, and current treatment plan.”14 Her responsibilities also included educating “both the injured worker and the insurance claims adjuster on the injured worker’s injuries and treatments, and sometimes [making] recommendations for alternative forms of treatment.”15 The court found the employee “performed work requiring advanced knowledge” and that she “uses her advanced knowledge to examine injured employees’ medical conditions and advises them on what to expect.”16 Another factor considered by the Williams court was that the employee “was not closely supervised and the fact that she regularly exercises judgment and discretion….” Based on these findings, the court held that the employee met the exemption.17
• Certain Employees Are Not FLSA Exempt —Just as the DOL has provided guidance as to employees for whom the executive, administrative, and professional exemptions do apply, it has also set forth professions where the 13(a)(1) exemption does not apply. For instance, the exemption does not apply to “manual laborers or other ‘blue collar’ workers who perform work involving repetitive operations with their hands, physical skill, and energy.”18
The department’s rational is that these employees should be protected by the FLSA because they “gain the skills and knowledge required for performance of their routine manual and physical work through apprenticeships and on-the-job training, not through the prolonged course of specialized intellectual instruction required for exempt learned professional employees….”19 Such employees include “non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers….”20
Section 541(3)(b) provides another lengthy but non-exhaustive list of professions that are outside the scope of the 13(a)(1) exemptions. That list includes police officers, probation officers, park rangers, fire fighters, and paramedics. According to the regulation, these occupations are outside the scope of the 13(a)(1) exemptions because employees engaged in these occupations do not manage a business; they are not involved in work directly related to the management of a business; and their work does not require “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor….”21
• Fluctuating Workweek Method Of Calculating A Non-Exempt Salaried Employee’s Regular Rate —Applying the FLSA and DOL regulations creates a category of employees who do not fall within the 13(a)(1) exemptions and, thus, are entitled to be paid overtime for any hour or portion thereof they work in excess of 40 in any given week. However, those employees may be paid a salary as opposed to an hourly wage, and they may work more than 40 hours only occasionally. So, once an employer determines an employee is outside the scope of the 13(a)(1) exemptions and, thus, entitled to overtime, how does the employer calculate what the overtime pay should be when that employee is paid a salary? According to the regulations, an employer may use the Fluctuating Work Week (FWW) method to calculate the overtime to which the employee is entitled.
As explained in Lewis v. Keiser Sch., Inc. (S.D. Fla. 2012), the employee must meet five criteria in order for the employer to be able to use the FWW method. First, the employee’s hours must fluctuate from week to week. Second, the employee must receive a fixed weekly salary that remains constant irrespective of the actual number of hours the employee works. Third, the amount the employee receives must be at least enough to pay the employee for all hours worked not less than the federal minimum wage. Fourth, the employee and employer must mutually understand that the employee will be paid a fixed salary regardless of the number of hours actually worked. Finally, the employee must be paid, in addition to the fixed salary, half his or her hourly wage for every hour or portion thereof in excess of 40 in any given week.
This prompts two important questions. First, the class of employees for whom the FWW is applicable is non-exempt salaried employees. How then does an employer calculate the hourly wage of an employee who is not paid hourly but rather on a salary basis? Second, the FLSA mandates that an employer must pay overtime at time-and-a-half (150 percent) of the employee’s hourly wage, yet the FWW requires only half-time (50 percent) of the hourly wage. Fortunately, the federal courts have clarified both issues.
With respect to the hourly rate of a salaried employee, the U.S. Supreme Court explained that the “regular rate” is determined by dividing the number of hours actually worked by the weekly wage.22 Consequently, if a salaried employee is paid $1,000 per week and works 45 hours in a given week, the employee’s “regular rate” would be $22.22 per hour ($1,000 divided by 45 hours). In that scenario, the employee would be entitled to be paid the regular $1,000 salary, plus an additional $111.10 for that week ($22.22 multiplied by the five hours in excess of 40 worked that week).
As for the second question, why is the salaried non-exempt employee only entitled to half-time instead of time-and-a-half? That question was answered in Torres v. Bacardi Global Brands Promotions, Inc., 482 F. Supp. 2d 1379, 1381 (S.D. Fla. 2007). In Torres, the court explained that since the salaried employee is being paid a flat salary for all hours worked in a workweek, irrespective how many hours that is, that salary includes payment for all hours worked including any hours in excess of 40 hours in a week. As a result of the fixed salary arrangement, “a non-exempt employee who receives a weekly salary for all hours worked has, by definition, already been paid his “regular rate” for all hours worked in the workweek. Thus, a salaried employee is only owed half-time for any hours worked in excess of  per workweek.”23 The non-exempt salaried employee is still entitled to be paid time-and-a-half of their regular rate, but the salary constitutes the “time” portion, thus, entitling the employee only to the additional “half” portion. Thus, the FWW method only entitles the salaried non-exempt employee to half-time for any hours worked in excess of 40 in any workweek.
• Employee vs. Independent Contractor —The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee….”24 Subject to certain exceptions, with which the FLSA is replete, the FLSA defines employee as “any individual employed by an employer.”25 Finally, “employ” includes to “suffer or permit to work.”26 Therefore, the FLSA protections only covers employees, it does not cover independent contractors: “Under the FLSA, only employees are entitled to overtime and minimum-wage compensation. Independent contractors do not enjoy FLSA’s protections.”27
Not surprisingly, businesses commonly run afoul of the FLSA by erroneously classifying their employees as independent contractors in an attempt to avoid the FLSA overtime and minimum wage obligations. However, “Where the work done, in its essence, follows the usual path of an employee, putting on an ‘independent contractor’ label does not take the worker from the protection of the Act.”28 Even if an employer pays the individual by a 1099 as opposed to a W-2 does not render that individual an independent contractor. “There is neither a logical nor legal nexus between the operators (sic) subjective desires regarding their preferred method of payment and a finding of their employment status. Subjective beliefs cannot transmogrify objective economic realities.”29 (In fact, issuing a misclassified employee a 1099 rather than a W-2 could compound the employer’s liability as the employer now not only has run afoul of the FLSA, but in addition has an issue with the Internal Revenue Service for unpaid employment taxes.) Given the pernicious penalties involved for misclassifying employees as independent contractors, it is imperative for those businesses — and the lawyers representing them — to know the difference and treat the individuals correctly.
To discern whether an individual is an independent contractor or an employee, the Supreme Court developed what has become known as the “economic realities” test. “In short, if the ‘economic reality’ rather than ‘technical concepts’ is to be the test of employment, these homeworkers are employees.”30 “[E]conomic dependence may be the ultimate controlling factor in a given situation for finding an employment relationship.”31 To determine whether an individual is economically dependent on the employer and, thus, is an employee, or is economically independent of the employer and, thus, an independent contractor, the federal courts have identified six factors to consider.32
Those factors are:
1) The nature and degree of the alleged employer’s control as to the manner in which the work is to be performed;
2) the alleged employee’s opportunity for profit or loss depending on his managerial skill;
3) the alleged employee’s investment in equipment or materials required for his task, or his employment of workers;
4) whether the service rendered requires a special skill;
5) the degree of permanency and duration of the working relationship;
6) the extent to which the service rendered is an integral part of the alleged employer’s business.
The Florida Supreme Court adopted a similar economic test when it adopted the Restatement (Second) of Agency §220, which sets forth similar criteria to determine whether an individual is an independent contractor or an employee.33 The Florida analysis involves 10 factors to consider.
Those factors are:
1) The extent of control which, by the agreement, the master may exercise over the details of the work;
2) whether the one employed is engaged in a distinct occupation or business;
3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
4) the skill required in the particular occupation;
5) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
6) the length of time for which the person is employed;
7) the method of payment, whether by time or by the job;
8) whether the work is a part of the regular business of the employer;
9) whether the parties believe they are creating the relation of master and servant;
10) whether the principal is in business.
Just as with the federal analysis, the most critical factor in the Florida analysis is the degree of control exerted over the individual by the employer. “To determine if an individual is an independent contractor or an employee, the [c]ourt first considers the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed.”34 Also, similar to the federal analysis, the label the employer puts on the employee is not relevant. “The parties’ subjective beliefs and expectations, as well as the labels they place on their relationship, are immaterial.”35
For small businesses who wish to hire individuals on an independent contractor basis, it would be prudent to have a lawyer who is familiar with these criteria draft an independent contractor agreement for each such individual. These agreements should identify each of the criteria used to determine the individual’s status as an independent contractor and obligate the individual to acknowledge the applicability of those criteria to their own working conditions. Of course, it is equally incumbent on the employer to adhere to those criteria in practice.
FLSA Regulations: From Obama To Trump
As expected, the presidential election of 2016 is having a significant impact in the area of labor and employment law. It would be an understatement to say that U.S. Presidents Obama and Trump have different priorities and philosophies regarding labor laws and regulations, and the laws and regulations are changing at a rapid pace. One of the most important changes between the administrations has been with respect to how the DOL has approached the minimum wage provisions of the FLSA. On May 18, 2016, the Obama administration released “the Final Rule” which was set to take effect on December 1, 2016. That rule roughly doubled the threshold salary required to qualify for the FLSA’s executive, administrative, and professional exceptions from the current $455 per week to $913 per week. In addition, it also set in place a procedure whereby the salary threshold would automatically increase every three years so as to maintain consistency with the formula set forth in 29 C.F.R. 541.100, et seq.36
Prior to the effective date, a coalition of business groups filed suit in federal district court in Texas seeking an injunction to prevent the law from going into effect. Judge Mazzant granted a temporary injunction on November 22, 2016.37 The Obama administration subsequently appealed the ruling to the Fifth Circuit.
The appeal was pending during the presidential election, and upon assuming the presidency, President Trump’s Department of Labor advised the Fifth Circuit it was dropping its defense of the heightened salary thresholds. On August 31, 2017, Judge Mazzant granted summary judgment against the Department of Labor and invalidated the Final Rule.
Another significant change concerns the National Labor Relations Board (NLRB). The NLRB is a five-member board that oversees disputes between labor unions and the employers who employ union members. Under President Obama, the majority of the members were Democrats who were more sympathetic to the union membership. After being elected, President Trump had two vacancies to fill, and naturally he filled those seats with Republicans whose proclivities were more sympathetic to the employers than their Democrat counterparts. In fact, with President Trump’s two appointments, Republicans took control of the NLRB for the first time in 10 years, portending more significant changes to come.38
The newly constituted NLRB rapidly issued three major decisions that significantly altered the labor and employment landscape. First, the board reversed a 2015 Obama-era regulation regarding the meaning of “joint employment.” This regulation hindered the ability of individuals employed by a franchise business to form unions and collectively bargain with their franchisor company. It next overturned a 2011 case that allowed smaller groups of workers to form collective bargaining units. In so doing, the board expressed its belief that bargaining units should not consist of a subset of individuals at a workplace, but rather all employees at such a location. Finally, the board addressed an employer’s ability to restrict its employees’ use of such things as cell phones and other technologies. Whereas under the Obama administration the NLRB was more permissive on such issues, the NLRB under Trump ruled that an employer could limit such privileges without infringing on the employees’ rights to communicate and organize with other employees.39
Another change to the labor and employment landscape pertains to the priorities with respect to regulation enforcement. Under Obama, the Department of Labor issued guidance as to when an employee could be considered jointly employed or misclassified as an independent contractor. Upon assuming office, Trump’s labor secretary, Alex Acosta, rescinded that guidance.
While this article certainly is not an exhaustive treatise on the FLSA and its attendant regulations, exceptions, and exemptions, or the policy differences between the two administrations, I hope it provides some guidance to small business owners and the lawyers who represent them to help prevent some common mistakes and avoid finding themselves defending a civil action.
1 See Fla. Stat. §448.110.
2 These provisions, like other sections of the FLSA and every other federal law, has numerous exceptions where the law is inapplicable. For the sake of brevity, this article will concentrate on the FLSA’s main provisions and will not delve into every exception.
3 29 U.S.C. §213(a)(3).
4 29 U.S.C. §213(a)(5).
5 29 U.S.C. §213(a)(8).
6 29 U.S.C. §213(a)(10).
7 29 U.S.C. §213(a)(1).
8 Byers v. Petro Servs., Inc., 110 F. Supp. 3d 1277, 1281 (S.D. Fla. 2015) (internal citations omitted).
10 Adams, Case no. 13-10748 at 4-5.
13 Williams v. Genex Servs., LLC, 809 F.3d at 107.
17 Id. at 111.
18 29 C.F.R. §541(3)(a).
21 29 U.S.C. §541(3)(b)(4).
22 See Overnight Motor Transportation Company v. Missel, 316 U.S. 572 (1942); See also Kohlheim v. Glynn County, Ga., 915 F.2d 1473, 1480 (11th Cir. 1990).
23 Torres, 482 F. Supp. 2d at 1381.
24 29 U.S.C. §203(d).
25 29 U.S.C. §203(e)(1).
26 29 U.S.C. §203(g).
27 Keller v. Miri Microsystems LLC, 781 F.3d 799 (6th Cir. 2015) (internal citation omitted).
28 Rutherford Food Corporation v. Comb, 331 U.S. 722, 729 (1947).
29 Brock v. Mr. W Fireworks, Inc., 545 F.3d 338, 345 (5th Cir. 1987).
30 Goldberg v. Whitaker House Cooperative, Inc, 366 U.S. 28 (1961) (internal citations omitted).
31 Donovan v. Brandel, 736 F.2d 1114 (6th Cir. 1984).
32 See Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1312 (11th Cir. 2013).
33 Cantor v. Cochran, 184 So. 2d 173, 174 (Fla. 1966).
34 Yilmaz v. Mann, 2014 WL 1018006, * 7 (S.D. Fla. 2014).
36 Gary S. Batke, Obama’s Overtime Rule Struck Down; Trump’s Department of Labor Starts Over, Columbus Business First(Oct. 1, 2017), available at https://www.bizjournals.com/columbus/news/2017/10/01/obama-s-overtime-rule-struck-down-trump-s.html.
37 State of Nevada, et al. v. United States Department of Labor, et al., No. 4:16-CV-00731 (E.D. TX 2016).
38 Eric Morath, What’s Next for President Donald Trump’s Labor Policy, The Wall Street Journal, Dec. 28, 2017, available at Z:ZZ-HHC StuffHHC StuffWhat’s Next for President Donald Trump’s Labor Policy – WSJ.mht.
HUNTER H. CHAMBERLIN earned a B.A. from Hamilton College in Clinton, New York, and a J.D. from the University of Miami School of Law, cum laude, where he served on the Business Law Review. He was admitted to The Florida Bar in 2001 and began his career as an associate at Steel Hector & Davis (now part of Squire Sanders). There, he worked as a legislative consultant for business and industry. In 2011, Chamberlin formed Chamberlin Law Firm, P.A. In addition to his criminal defense practice, he also represents small- to medium-sized businesses in labor and employment litigation disputes.
This column is submitted on behalf of the Labor and Employment Law Section, Zascha Blanco Abbott, chair, and Robert Eschenfelder, editor.