Avoiding FLSA Landmines

Updated on January 21st, 2019 Author: Sergei Lemberg

As your start-up expands into a thriving enterprise, a host of new legal issues arise, including laws and regulations covering compensation as it relates to interns, employees, and independent contractors.

Entrepreneurs’ three common wage and overtime law mistakes:

•  Paying exempt employees an hourly rate rather than a salary.
• Misclassifying employees who don’t meet the criteria as exempt.
• Paying an employee as an independent contractor.

The Fair Labor Standards Act

The primary law governing wages and overtime pay is the federal Fair Labor Standards Act. Originally enacted in 1938, the FLSA has been amended close to a dozen times and is enforced by the U.S. Department of Labor (and federal courts when disgruntled employees sue). While the FLSA covers wages and overtime pay, it does not:

• address vacation pay, sick pay, holiday pay, or severance pay;
• mandate meal breaks, rest breaks, holidays, or vacations;
• require extra pay for weekends or holidays; or
• specify circumstances or timing of pay for fired employees

Whether your start-up is required to pay employees minimum wage and overtime depends upon whether or not it’s subject to the FLSA. If your business generates $500,000 or more in annual revenue, it falls within the enterprise coverage requirements of the FLSA and you must adhere to the federal wage and overtime rules. Even if your start-up falls below the $500,000 threshold, an individual employee still might be subject to the protections afforded by the FLSA if that employee’s work regularly involves interstate commerce. Legally, that’s just as murky as it sounds.

Generally, it’s best to avoid the field of FLSA landmines and conform to wage and overtime requirements if the employee:

• is required to travel across state lines;
• undertakes transactions with individuals or entities in other states;
• uses materials, supplies, or equipment received from out of state; and/or
• communicates with those in other states by mail, telephone, or email

Equity and Deferred Compensation

It’s common for start-ups to offer employees equity or deferred compensation. The FLSA makes an exception for founders who have 20 percent or greater equity in the start-up. Otherwise, the FLSA requires that employees are paid at least minimum wage on a regular payday for the period in which the workweek ends. In other words, paying in equity or deferring compensation violates the law.

Minimum Wage and Overtime Exemptions

Even if your business or employee is covered by the FLSA, your employee may be exempt from the law’s minimum wage and overtime requirements based on their job duties. There are a number of exemptions to the FLSA, but for start-up employees the most common classification exemptions are executive, administrative, professional, computer, and outside sales. Each of these exemptions has technical requirements that can lead a start-up to improperly rely on an exemption that your employee does not actually meet. Three common mistakes are:

1. Paying employees who may otherwise be exempt on an hourly basis. In order to meet any of the common exemptions, the employee must be paid on a salary basis that amounts to at least $455 per week.
2. Docking pay for partial days. While a start-up does not have to pay a salaried worker for a day in which no work is performed, that employee’s wages may not be docked if they work any part of a day.
3. Misclassifying employees as exempt. Simply giving an employee the title of a manager or administrator does not confer exemption from the overtime provisions of the FLSA. The exemption is based on the actual work performed – such as managing an aspect of the business and being authorized to use discretion and independent judgment in their work.

Using Independent Contractors

A start-up may not have the resources to hire employees, and instead opt to use independent contractors. This is another area where start-ups tend to run afoul of the law. There are numerous factors that the Internal Revenue Service, Department of Labor, and courts evaluate in determining whether a worker is properly classified as an independent contractor, and no single factor is dispositive. As a rule of thumb, if your worker is classified as an independent contractor, they should at a minimum:

• set their own schedule;
• use their own tools, supplies, and equipment to perform their job;
• possess the special skills needed to perform the job without training; and
• maintain control over what they do and how they perform their work.

Unpaid Interns and Volunteers

Generally speaking, a start-up that uses unpaid interns and volunteers puts itself at risk. An intern may be unpaid if, based on the totality of the circumstances, the internship is primarily for the benefit of the intern, not the business.

If challenged, the factors considered include:

• whether the intern had an expectation that no monetary compensation would be provided;
• whether the internship provided training similar to that which would be provided in an educational setting;
• whether the internship was closely tied to a formal educational program; and
• whether you accommodated other educational obligations and activities.

In addition, for-profit businesses (and non-profits engaged in commercial activities) cannot legally use unpaid volunteers.

State Wage and Hour Laws

Even though the FLSA doesn’t regulate areas like meal breaks, holiday pay, and the timing of a fired employee’s last paycheck, state wage and hour laws typically do. That’s why it’s critical to evaluate the wage and hour laws of the state(s) in which your start-up employs workers. This cannot be overstated. Even if your business and employees are not covered under the FLSA, you still risk running afoul of state wage and hour laws that provide additional protections beyond those provided by the FLSA.

A start-up’s legal requirements can quickly get complicated. The Fair Labor Standards Act and state wage and hour laws are a minefield that must be successfully navigated in order to mitigate risk and bolster the chances for the long-term success of your business.

Lemberg Law helps employees who are victims of wage theft sue employers who have violated federal and state wage and overtime law. If you believe you have been just compensation, please contact a member of Lemberg Law’s legal team at 475-277-2200 for a free consultation.