Fair Labor Standards Act

One of my dental practice clients called this week to inquire about an idea he heard of recently called a “working interview.”  The idea is to have an hygienist come in for a couple of days to find out whether they are good at their job without officially hiring them.   What is better, my client said, “you don’t have to pay the person for their time.”

I don’t know how the idea of working interviews became so pervasive in the dental world.  It was probably a topic of discussion at one of those dental practice building seminars.  From there I imagine it spread like wild fire.  And, like the game we used to play in my kindergarten class passing some phrase down the line, the details of what was said at the seminar got lost in the translation.  Dentists everywhere got the idea that a working interview is a way to find out if a prospective employee will work for you without having to follow any of the employment law rules in the process.

It is time to put out the straight dope on the subject and shatter a few myths in the process:

1.  Pay – The theories on pay for a working interview are all over the map.  Some, like my client are led to believe that you don’t have to pay the person for their time.  Others are told that you can just issue a check without proper withholding and 1099 the payment.  Wrong. Wrong.  If you bring someone in for a working interview you must pay them for their time in compliance with state and federal law and make appropriate withholding.

2. Paperwork – Some believe that since they are only going to be there for a few days, you don’t have to do new-hire paperwork.  Just skip the I-9, background check, application, and W-2.  Wrong again.  If you hire anyone – for 1 day or 1,000, you have to do new hire paperwork.

3. Unemployment – Still others believe that you are not responsible for unemployment if you choose not to hire the person. Wrong, yet again.  Unemployment tax is tied to the prospect’s wages during the preceding year, not the employer.  That said, the shorter period the person is employed by you the less they will draw from your unemployment account.

Yes, I’m a kill-joy.  My client was looking forward to the free time from a prospect employee and the ability to learn whether someone will be a good fit without having to go through all the motions.  Unfortunately, most of what he was hoping for is not legal.

But is there anything that can be done?  Yes there is.  Depending on how long you would like to conduct your interview, we can create a day contract or a week contract for the prospective employee.  This will limit your exposure under unemployment compensation laws, and you can even reduce the amount you pay.  Where you might pay a good hygienist $20 per hour or more as a full time wage, you can pay them minimum wage during a working interview.  You might also forego the background check, etc, during this brief period having the person only complete a W-4 and an I-9.

Who, What, Why . . .

Who does it apply to: Every employer who has or intends to hire unpaid interns.

When must an intern be paid: All “employees” of a business must be paid at least minimum wage unless they are a “trainee” under the law, regardless of whether they are called an “intern.”  So, what makes a trainee? The United States Department of Labor (DOL) has established a six-factor test couched in terms of – you guessed it – training – to determine whether an unpaid intern should be considered an employee or trainee under the Fair Labor Standards Act (FLSA):

  • the training is similar to that which would be given in a vocational school (even though it includes actual operation of the facilities of the employer);
  • the training is for the benefit of the trainees;
  • the trainees do not displace regular employees, but work under their close observation;
  • the employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion operations may actually be impeded;
  • the trainees are not necessarily entitled to a job at the conclusion of the training period; and
  • the employer and the trainees understand that the trainees are not entitled to wages for the time spent training.

When can I hire an unpaid intern or volunteer: The six-factor test is primarily used in the, “for profit,” private sector. State and local government agencies and non-profit organizations can generally utilize interns or volunteers without an obligation to pay them under the FLSA. It is important, though, that the volunteers understand they are not to be paid for their time. Volunteer work at non-profit, religious, charitable, and civic organizations have specifically been cleared by the Texas Workforce Commission.

What about true student interns: Student interns are not evaluated differently by the DOL. They should easily meet the trainee test. That said, there are special rules for individuals who have completed a professional degree like physicians, attorneys, and therapists, generally allowing them to volunteer their time as they choose.

What do these factors really mean: The more an internship program can be structured around a classroom or academic type experience the better. It is better if the employer can provide the individuals with skills applicable to various employment settings, not just skills particular to the employer’s business. Essentially, the employer needs to provide the intern or volunteer with valuable training. Ideally, the training would make them more marketable in the open job market. The employer must pay any intern or volunteer that is used as a replacement for a regular employee or to reduce their workload. The intern or volunteer should receive more supervision than a regular employee.  If the employer would have to hire additional employees if the intern or volunteer were not performing certain work, the intern or volunteer would be considered an employee. Don’t rely on unpaid interns to do work of any real significance to your business. The work done by an unpaid intern should be secondary to their training. An intern that is hired by an employer on a trial basis with the expectation that they will eventually be hired full time will likely be considered an employee under the FLSA. Employers should indicate prior to the start of the internship that there is no guarantee or expectation of hiring the interns upon completing the internship. A written agreement indicating this is advisable. Employers should indicate prior to the start of the internship that there is no intention to pay the intern. A written agreement indicating that the intern will not be paid and does not expect to be paid is advisable.

What happens if I don’t follow the test: An employer violating the rule is subject to the same damages available to an employee who is not paid all of the wages they are owed. This may include minimum wage and overtime for all hours worked, plus an equal amount in liquidated damages for all interns over the past two or three years.

What about discrimination laws: It depends on whether the person in question receives “significant remuneration” for their efforts. The EEOC has stated that things like a pension, group life insurance, workers’ compensation, or access to professional certifications constitute significant remuneration. However, Courts have determined that things like academic credit, practical experience, and scholarly research do not constitute significant remuneration. Because this point is subject to interpretation, however it is best to treat all interns and volunteers as though they are employees with respect to discrimination laws.

Common Situations:

Required training: Safety First is ready to hire a new class of security guards.  The company requires that security guard trainees receive 40 hours of training prior to performing any regular work under their service contract.  According to their contract, the training is focused on “company practices, policies, and rules.” Does Safety First have to pay the trainee security guards even though they are not yet performing regular work?  Yes. These trainees would be considered employees because: (1) the employer is directly benefiting from their training, (2) the training is given to security guards who will work on contract, and (3) Safety First can only employ specifically trained guards.

Homegrown hiring: Maverick Finance hires interns each summer.  Maverick’s intern program is structured much like an academic program.  The interns do not do the work of regular employees and are heavily supervised.  The interns are not paid and are aware there is no guaranty of employment.  However, Maverick hires its first year analysts almost exclusively from the unpaid interns it has each summer. Does the FLSA require Maverick to pay these interns at least minimum wage? Probably.  Although Maverick substantially satisfies the six factor test, its practice of hiring analysts from the intern pool is likely enough to tip the balance against the company in the face of a DOL audit.

What should I do:

Good: Paying minimum wage to all interns probably is the safest bet. You avoid the risk of an audit of all your employment practices because of one dissatisfied intern that calls the DOL.  If you go the trainee route, be sure to meet all the factors.

Better: If you have true “trainees” taking into consideration all the factors, it makes sense to put that understanding in writing in a short half-page agreement outlining the factors. If you use volunteers, it makes sense to have them sign a one-paragraph agreement acknowledging their status as a volunteer without expectation of pay or other “significant remuneration” to avoid the possibility of an EEOC complaint.

Best: In addition to the items above, require that the trainees keep track of their hours so you have a record of how much they might be entitled to if the DOL audits and rules them employees. Be sure they do not work more than 40 hours to avoid increasing the risk to include overtime. Have the trainees and their supervisors keep a log of their activities so that there is no confusion regarding the type of work they did.

With unemployment for people 20 – 24 hovering around 13.2%, college students are flocking to unpaid internships to gain some experience, stay busy, and better position themselves for jobs afterward.  As recently reported by Josh Sanburn at Time MoneyLand and Steven Greenhouse in the NYT, however, these unpaid internships have serious legal problems.

Businesses are taking advantage, offering “internships” that are supposed to put the grads on the path to a super career.  Instead, interns are working 12 hour days in some cases cleaning out closets, getting coffee, and running errands.  They are no more learning the business than the man in the moon, unless they are studying for a runner job they could have gotten – with pay – before college.

A few of these interns have gotten smart though, and are filing lawsuits for minimum wage and overtime and employers should be concerned.  In addition to collecting these back wages, the interns can collect liquidated damages of an equal amount, and attorney fees.

So, how do the employers that are using internship programs for the right reasons know they won’t get in trouble?  Well, to properly be an unpaid internship, the intern must not be an employee within the meaning of the Fair Labor Standards Act (FLSA).  Of course, as you might imagine, the congress painted with a pretty broad brush when they defined “employ” under the FLSA because the wanted to prevent just this type of conduct.

Though not having the force of law, the Department of Labor came up with a six factor test that it will use to decide if an internship must be paid.  And, since the Department of Labor is the organization who enforces the FLSA, employers should sit up and listen.  To properly be an unpaid internship:

1.  The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

2.  The internship experience is for the benefit of the intern;

3.  The intern does not displace regular employees, but works under close supervision of existing staff;

4.  The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

5.  The intern is not necessarily entitled to a job at the conclusion of the internship; and

6.  The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Of course, after reading the criteria, employers with anything less than the purest motives will want to drop the idea of an internship program all together.  C’est la vie!


Who, What, Why . . .

Who does it apply to: Overtime is governed by the Fair Labor Standards Act. Without a long discussion about the .1% of employers who might not be covered, the simple answer is – virtually everybody.

What do I have to do: Employers must pay overtime, unless the employee is exempt. There are a myriad of complete and partial exemptions. The five discussed here are the most common.

How does the “Administrative” exemption work: Administrators may qualify for this exemption if they:

• Receive a salary greater than $455 per week;

• Have a primary duty performing office or non-manual work related to general business operations or management of customers or the business; and

• Exercise discretion and independent judgment with respect to matters of significance.

What are the two “Professional” exemptions: Professionals can be exempt under two different paths. Both have the requirement that the employee receive a salary greater than $455 per week.

The “Creative Professional” exemption then requires:

• The employee’s primary duty is the performance of work requiring a talent recognized in a field of creative or artistic endeavor which involves invention, imagination, and/or originality.

The “Learned Professional” alternatively requires:

• The employee have a primary duty requiring advanced knowledge that is primarily intellectual and that the employee’s work involve consistent exercise of discretion and judgment.

What is the “Executive” exemption: To be eligible for this exemption, an employee must:

• Receive a salary greater than $455 per week;

• Have a primary duty to manage the business or a customarily recognized department;

• Direct the work of two or more full time employees (or their equivalent); and

• Have authority to hire and fire or at least recommend hiring, firing, advancement, or promotion with the employee’s opinion given particular weight.

Are “Highly-Compensated” employees exempt:

Employees who make over $100,000 per year from salary (employees over the limit because of discretionary bonuses do not qualify) are exempt but they have requirements too:

• Receive a salary greater than $455 per week (the rest could be bonus);

• Have a primary duty involving office work or non-manual labor;

• Customarily and regularly perform the duties of someone qualified under the Executive, Professional, or Administrative exemption.

What about sales people: Retail commission and “outside” sales people can be exempt. Outside sales employees must customarily work outside of the office and their primary duty must be making sales or taking orders for services or goods for which a customer will pay. Retail commission employees must work for a retail or service business, earn at least ½ of their wages from commission sales and their total pay each week must be more than 1½ times minimum wage.

What does “primary duty” mean: In case you missed it, the term comes up in almost every exemption, so it is important. Generally, an employee spending more than 50 percent of their time engaged in the primary duty will meet the exception, but other factors count too: (1) the importance of the exempt responsibility compared with others; and (2) the employee’s freedom to direct or supervise.

What other areas offer exemptions: Amusement and recreation; fish processing and canning; agriculture; motor, rail, and air carriage; household services; forestry and logging; and the newspaper industry have exemptions not covered here.

Common Situations:

Radiology Tech: Acme Imaging hires a radiology technician with specialized training from an accredited trade school. Acme characterizes the tech as exempt under the professional exemption. Unfortunately, this is one of the biggest pitfalls with overtime exemptions. The Department of Labor is very strict about this exemption. Many types of technicians, including nurses, bookkeepers, cooks, paralegals, and engineering techs, are not exempt.

Salary Deduction from Exempt Employee: The Dewy, Cheatum, & Howe law firm, closes its office due to ice on the roads and deducts a day of pay from its employees. It’s office manager complains to the Department of Labor. An investigator takes away the office manager’s professional exemption and charges the company for back overtime. Be careful, Exemptions are fragile. Exempt employees must usually be paid their full salary each week – rain or shine. Employers must be very careful to clear deductions from exempt employees’ wages with their lawyers.

The Case of the Traveling Salesman: Mark is treated as an exempt “outside” salesman by Joe’s Basket Co. He works in the office about one week a month making calls and delivering product to customers. He travels the remainder of the time to call on customers and present at trade shows where he manages the company’s booth. A Department of Labor investigator pulls the exemption and charges for back overtime. What was the cause of the charge back? Was it delivering product, working from the office, or working a company booth at trade shows? The office time did it, though each of those issues have been considered to challenge the exemption. Office time is a killer for outside salesmen.

What Should I Do:

Good: Evaluate every position in your company and implement appropriate exemptions. Be careful not to make improper deductions from an exempt employee’s wages because you could lose the exemption and have to pay back overtime.

Better: Make job descriptions for all exempt positions tailored to the exception. They will be helpful if audited. Also, verify with the employees affected that they believe their job meets the requirements.

Best: Sometimes the Department of Labor disallows a claimed exemption when conducting an audit. If that happens, the employees you thought were exempt suddenly are not, and you may have to pay back overtime. To protect against wild overtime back-charges, have even exempt employees keep a time sheet.

Who, What, Why . . .

Who does it apply to: Overtime is governed by the Fair Labor Standards Act. Without a long discussion about the .1% of employers who might not be covered, the simple answer is – virtually everybody. That said, it does not apply to independent contractors or volunteers.

What do I have to do: Everyone knows they are supposed to pay overtime at 1½ times the employee’s “regular rate” for “work” over 40 hours in a “workweek” (unless the employee is exempt). Where it gets tricky is trying to make the calculation without a clear understanding of what the law means by “work”, “regular rate”, and “workweek”.

What is a “workweek”: Let’s start simple. A workweek is any consecutive 168 hour period (7 days for those of you pulling out your calculator). Most businesses use the traditional Monday to Sunday model, but you can define it anyway you want as long as you are consistent.

What is the “regular rate”: The regular rate is usually equal to the hours worked divided by the total pay received for that week. For many this calculation is relatively simple. The employee works 40 hours and is paid $400. Dividing $400 by 40, you get a “regular rate” of $10.00, which happens to be the hourly wage of the employee. In other instances, it is more complicated but still is dependent on the number of hours worked:

Salary: The regular rate is salary earned in a week divided by 40.

Commission Paid Weekly: Add any non-commission earnings to the total commissions earned and divide by the hours worked (including hours over 40).

Commissions Paid Over Another period: The regular rate is calculated by the non-commission earnings in that week divided by the hours worked until the commissions are paid, at which time they must be calculated and added back in to the workweek earned so that overtime can be retabulated and any difference compensated.

Piece Work (workers paid by the completed piece): Tabulate the hours worked during the week (including hours over 40) and divide by the total earned from piece work.

Multiple Hourly Rates (some people get paid different rates for travel time): Tabulate the total earned at the combined rates during that week (including hours over 40) and divide by the hours worked.

What is “work”: What counts as work seems deceptively simple. It includes the minutes employees spend on the clock, but employers often miss time that counts:

Fringe Time: Time employees spend working that is not part of their regular work time, including, for example, the time it takes to log into a computer to clock in electronically.

Waiting: Time spent waiting counts as work unless the employee is completely free to use the time for their own purposes (including leaving the workplace) and the interval is long enough. A 30 minute break while a machine is repaired probably would be considered work, while a two hour break where the employee may leave probably would not be considered work time.

On-Call: Wearing a pager or have a cell phone away from work is not usually considered work as long as the employee can use the time for their own purposes. Being stuck at your place of business or prevented from using the time for yourself, however, does count.

Training: Involuntary training counts as work.

Sleep: On a shift lasting less than 24 hours, sleep time usually counts as work (think fireman or ER doctor).

Travel: Everyday travel to the workplace is generally not work, but travel during the work day counts. Also, travel for a unique purpose counts.

Aren’t some employees exempt from overtime: Some employees are exempt, but less often than many employers think. Look for next month’s issue.

Common Situations:

Vacation and Overtime: An employee takes two vacation days during the week, but upon return has so much to do that the employee manages to log 40 hours of true work in the remaining 3 days. You do not have to treat the vacation as 16 hours worked and pay overtime, the law only considers hours truly worked.

Breaks: Employees at Acme Brick are required to take a 10 minute break twice a day and that time is deducted from their pay. Interestingly enough, any break less than 20 minutes is considered beneficial to both the employer and employee and is counted as “work” time. Note, however, that employers are not required to give any breaks for smoking, lunch, or any other purpose (except nursing mothers and possibly by local ordinance, e.g. Austin, Texas requires a 10 minute break per 4 hours for construction workers).

Holiday Pay: Employees at Bah Humbug, Inc. are required to work on holidays and paid straight time. No problem. Employers are not required to give days off or pay even standard overtime for holidays.

Salary and Fluctuating Hours: Joe works 43 hours one week and 37 for the next two week before going over 40 again. Joe receives his standard salary even though he does not work 40 hours in some weeks, plus, his employer must pay overtime for the weeks over 40. If Joes schedule has enough regular fluctuation, he and his employer can make an agreement (preferably in writing) for “Chinese Overtime”, by which Joe earns just the ½ overtime premium for overtime hours.

Semi-Secret Overtime: Beth’s shift ends each day at 5:00, but she routinely leaves the office at 5:25. You don’t pay close attention to what she does during that time but you have reason to believe she works. If you know or have reason to believe an employee is working overtime – even if they don’t report it – you must investigate and pay any overtime due.

What Should I do:

Good: Be careful to calculate overtime correctly. Keep employee time records three years. Make employees clock in and out for lunch. And, don’t forget the most common mistake: salary employees aren’t necessarily exempt from overtime!

Better: If you have salaried employees that earn overtime, but have regular fluctuation between weeks over and under 40, make an agreement to pay “Chinese Overtime”.

Best: In addition to the above, have employees acknowledge to any travel policies you may have. Require all employees to report any other employee they observe working but not reporting overtime. Finally, have employees sign off each week that their hours are correct.