Keeping time - avoiding making errors in overtime pay calculations

HR Magazine, Oct, 1998 by Carla Joinson

One of the most basic HR management duties continues to be one of the most vexing. Here are ways to get it right.

A few minutes a day may seem trivial - but not to the U.S. Department of Labor (DOL). An investigation into the compensation practices of Iowa Beef Processors Inc. revealed that the company had failed to pay 23,500 employees in six states for setup and cleanup work done before and after their shifts. The time amounted to only 14 minutes per employee each day, but that oversight cost the meatpacker $7.1 million in back wages and interest in a lawsuit decided last year.

DOL's Wage and Hour Division takes about 40,000 compliance actions each year under the Fair Labor Standards Act (FLSA). Nearly 70 percent of its investigations are prompted by complaints from employees, and these complaints can be expensive for employers. In 1997 alone, businesses paid more than $63 million in back wages and penalties for overtime violations involving more than 125,000 employees. Obviously, a thorough understanding of when and how to pay employees is an employer's best protection against a DOL investigation into overtime violations.

OPPORTUNITIES FOR MISTAKES

"Unless a new law has just been passed, wage/hour has always been our No. 1 category for questions," says Deborah Keary, PHR, director of the Information Center at the Society for Human Resource Management's (SHRM) Alexandria, Va., headquarters. "We get a lot of calls from small HR staffs or the more junior people on larger staffs; but the FLSA can be difficult for anyone to grasp."

Managers and supervisors at decentralized sites may be especially prone to violate wage and hour regulations. Without guidance, they're likely to do whatever seems logical. An employee who usually eats lunch at her desk can answer phones for those who go out; if valuable equipment can't be secured during breaks, just tell workers to stay in the area to watch it; an employee waiting for equipment to be repaired shouldn't have to be paid for just sitting there; and surely an employee does not have to be paid for working overtime that wasn't authorized ... right?

Line managers who do not understand that all of those situations are compensable put the employer at risk.

Kenneth Kovach, a professor of management at George Mason University in Fairfax, Va., has observed a trend that may cause other problems: offering comp time instead of overtime for private-sector nonexempt employees. "For females who have many demands on their time, this can be desirable," says Kovach. "They'd rather have the comp time than overtime. But unless comp time occurs within the same [work]week as the overtime, the practice is illegal."

Keary adds that even if you administer comp time correctly, you'd be better off calling it a "time-off" plan. "The real problem is your ability to document what you're doing," she emphasizes. "Most payroll systems can't handle this kind of plan, but you must be able to prove that what you're doing is legal."

Failure to include all hours worked can often lead to overtime miscalculations. Some easily overlooked compensable situations include:

* Rest breaks shorter than 20 minutes.

* Down time or on-call time during which an employee is not free to pursue personal business.

* Preparation and clean-up before or after a shift.

* Mandatory classes, meetings and conventions.

* Unscheduled or unauthorized work.

* Travel time away from the home community or from job site to job site.

Even when companies figure total hours correctly, they may not calculate the correct overtime pay rate. Additional earnings such as shift differential pay and "call-pay" must be included in calculating overtime pay. Any bonuses that are substantial and regular must also be included in the hourly rate for purposes of calculating overtime earnings. (That requirement - and the prohibition on comp time for private-sector nonexempt employees-are among FLSA provisions that SHRM has lobbied Congress to amend.) Other payments such as spot bonuses, gifts and profit-sharing payments do not have to be included.

EXEMPT VERSUS NONEXEMPT

Many experts believe that the single biggest overtime mistake occurs when employers misclassify nonexempt employees as exempt. "The law is nebulous," says Kovach, and administrative and professional categories are particularly open to interpretation. He advises employers to call the Labor Department's local office, read the job description and ask for a decision. This action can help protect the employer if a complaint is made later.

Employers sometimes overreach when deciding who is exempt, says Paul Heylman, partner at Schmeltzer, Aptaker & Shepard P.C., an employment law firm in Washington, D.C. "You want to be certain you have a good sense of what the job duties are," he warns. "The work the employee does has to be exempt, and he or she must be paid on salary."

Businesses may categorize employees as exempt because job titles seem to indicate they are, or employers believe that a "professional" job title is a perk the employee would like to have. Employees often buy into the misclassification because they enjoy the status of being a professional exempt employee or think they have to put in extensive overtime before they can advance.