Determining whether you and/or your employees are subject to the federal Fair Labor Standards Act is the first step in determining what laws you are required to comply with when paying your employees.
When paying your workers, the first step in proper compliance with federal wage and hour law is understanding if your employees or your business, or in some cases both, are subject to the Fair Labor Standards Act (FLSA). This federal law is so important because it governs the following main areas involved in paying your employees:
- minimum wage
- overtime pay
- child labor
- equal pay for equal work
- posting requirements
- recordkeeping requirements
In addition to determining whether you are covered by the FLSA as an employer and if you're not, whether any individual employees are covered, you will have to classify workers covered by the FLSA as exempt or nonexempt employees.
Employer coverage under the FLSA
Generally, you, as an employer, are subject to the FLSA if you meet two tests. If you meet the commerce and dollar tests, then all of your employees are covered under the FLSA, and you must classify employees as exempt or nonexempt under the FLSA.
Commerce test. The first test is what's known as the commerce test, and it says that you are subject to the law if you are engaged in an element of commerce over which the federal government has control. This means that you meet the test if you satisfy any of the following:
- you have employees engaged in interstate or foreign commerce
- you have employees engaged in the production of goods for interstate or foreign commerce
- you have employees engaged in handling, selling, or otherwise working on goods or materials that have been moved in, or produced for, interstate or foreign commerce by any person
For the commerce coverage test to be satisfied, there must be some actual participation by you or your employees in interstate commerce. Some examples of workers engaged in commerce are those:
- in telephone, telegraph, radio, television, and railroad jobs
- who purchase or order goods from other states
- who unload, unpack, check, or otherwise handle goods on receipt directly from outside the state
- who maintain records of such interstate activities
- who regularly travel across state lines in the performance of their duties
- who regularly use instrumentalities of commerce, such as the telephone, the telegraph, and the mails, for interstate communication
Since virtually all businesses use the phone and the mail, virtually all will be considered to be "in commerce."
Hospitals, nursing homes, and schools need only meet the commerce test in order to be subject to the federal wage and hours law. Public agencies are presumed to meet the commerce test.
Dollar test. All enterprises other than hospitals, nursing homes, schools, and public agencies must also meet a second test, the dollar test, which says that only enterprises with gross yearly sales of at least $500,000 are subject to the law. Therefore, if you do not meet the dollar test, you are not covered by federal law, even if you're engaged in interstate or foreign commerce.
Warning: Some of your employees may be individually protected under the federal wage and hours law even if you don't meet this dollar test.
Enterprise definition. An important point to note here is that federal law uses the term enterprise (generally, the related activities performed by any person or persons for a common business purpose) rather than "company" or "business."
The reason for the distinction is that Congress wanted the federal wage and hour law to apply to a broader array of organizations than just single companies or businesses. Thus, several establishments operated by the same person might be covered by the law if they meet the dollar test when considered together, even though each of them independently would not be.
How closely related two separate businesses have to be to qualify under enterprise coverage depends on the following factors:
- the degree of common day-to-day management
- the trading of skills
- the sharing of credit, and interconnected advertising, marketing, or distribution setups
- whether one business "materially supports" another
If you are unsure about whether your separate lines of business would make you subject to enterprise coverage under the FLSA, check with an attorney who can analyze your specific fact situation.
Under enterprise coverage, a business is subject to FLSA requirements with respect to all of its employees if two or more of them are engaged in interstate commerce, in the production of goods for interstate commerce, or in handling goods or materials that have been moved in or produced for commerce.
Family business exception. There is a mom-and-pop exception to the enterprise definition. If the business you own has as its only regular employees the owner or persons standing in the relationship of parent, spouse, child, or other members of the owner's immediate family, you are expressly excluded from enterprise coverage.
If you determine that your business is subject to the FLSA, you will have to ensure that that you are complying with overtime pay, equal pay for equal work, and child labor wage and hour laws.
What if you don't meet the tests for employer coverage? You must determine if any of your employees might be individually protected by the FLSA.
Individual employee FLSA coverage
Your employees will be individually protected by the FLSA if they are engaged in either of the following:
- interstate or foreign commerce; that is, commerce that moves from one state to another or from one state to another country
- producing goods for transportation in interstate or foreign commerce
For an employee to be involved in interstate commerce, direct contact with interstate channels is not required, but the employee's activities must be so closely related that they are considered a part of such commerce.
Using the mail or telephone to communicate with people in other states are enough to establish that you are conducting interstate commerce.
Examples of workers engaged in commerce for FLSA coverage purposes are those:
- in telephone, telegraph, radio, television, and railroad jobs
- who purchase or order goods from other states
- who unload, unpack, check, or otherwise handle goods on receipt directly from outside the state
- who maintain records of such interstate activities
- who regularly travel across state lines in the performance of their duties
- who regularly use instrumentalities of commerce, such as the telephone, the telegraph, and the mails for interstate communication
Whether all of your employees, or certain individual employees, are subject to federal wage and hour law, be sure that you are complying with wage and hour laws for minimum wage, overtime pay, equal pay for equal work, and child labor restrictions.
Employees meeting either of the bullet-point tests described above, are entitled to the benefits of the federal wage and hour law, unless they are specifically exempt under another provision of the law. Exempt employees are generally executive, administrative, and professional employees, while nonexempt employees are more or less everyone else.
Exempt and non-exempt employees for FLSA purposes
All employees in your business must be classified by you as either exempt or nonexempt for purposes of complying with the FLSA. Based on the criteria set out by the FLSA, you can determine which classification--exempt or nonexempt--is appropriate for each of your employees.
When an employee is exempt from the FLSA, it means that that employee is not entitled to the benefits and protections of the FLSA, and you, as an employer, are not subject to its rules for that employee. That means that an exempt employee may not have to be paid minimum wage or paid in accordance with the overtime requirements specified by the FLSA, for example.
Conversely, when an employee is classified as nonexempt, it means that the employee is entitled to a minimum wage, overtime pay at the rate of time and one-half the regular rate for all hours worked in excess of 40 hours per week, as well as other protections under child labor and equal pay, as prescribed by the FLSA.
Warning: In order to treat an employee as exempt, you must pay him or her a salary. Employees who are paid by hourly wage are automatically considered to be nonexempt. On the other hand, employees can be paid by salary and be nonexempt.
Employees exempt from FLSA provisions
Specific categories of employees are exempt from different wage and hour laws.
Minimum wage, equal pay, overtime pay and child labor requirements. An exemption from the minimum wage, equal pay, overtime pay and child labor provisions of the FLSA applies to:
- Employees engaged in the delivery of newspapers to consumers
- Homeworkers making evergreen wreaths
Minimum wage, equal pay and overtime pay requirements. An exemption from the minimum wage, equal pay, and overtime requirements of the FLSA (but not the child labor laws) applies to:
- Employees of amusement or recreational establishments having seasonal peaks
- Seamen on non-American vessels
- Employees engaged in the fishing industry, including offshore seafood processing
- Certain agricultural employees
- Employees of weekly, semiweekly or daily newspapers of less than 4,000 circulation, the major part of which is in the county of publication or contiguous counties
- Switchboard operators employed by independently owned public telephone companies having not more than 750 stations
- Employees who are casual babysitters or companions to ill or aged persons unable to care for themselves
Overtime pay laws. An exemption from the minimum wage and overtime laws (but not the equal pay or child labor laws) applies to:
- Executives. An employee is an executive if the employee's primary duty is:
- management-related; and
- the employee customarily and regularly directs the work of two or more employees including the authority to hire or fire other employees or is in a position to make suggestions and recommendations as to the hiring, firing, advancement, promotion or another change of status of other employees that will be given particular weight.
- Retail supervisors are included under the executive exemption, even if they perform the same duties as subordinates, if they also perform managerial functions including assigning work, scheduling employees, and/or managing inventory.
- Administrative. An employee is in an administrative position if the employee's primary duty is:
- the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
- the exercise of discretion and independent judgment with respect to matters of significance.
- Professionals. An employee is a professional if the employee's primary work:
- requires advanced knowledge in the field of science or learning, is predominantly intellectual, and includes work requiring the consistent exercise of discretion and judgment; and
- the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction; or a creative professional whose primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
- Computer. An employee who is a computer systems analyst, a
computer programmer, a software engineer, or is a similarly skilled
worker in the computer field is exempt from the overtime pay rules if
the primary duties performed consist of:
- the application of systems analysis techniques and procedures;
- the design, development, documentation, analysis, creation; testing or modification of computer systems and/or programs based on and related to user or system design specifications;
- the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- a combination of these duties, requiring the same level of skills.
- Outside salespersons.
Salary requirements. The minimum salary level to qualify for exemption from the overtime requirements as an executive, administrative, professional or computer employee is $455 per week or $23,660 annually.
An employee paid below this minimum salary level is not exempt from the FLSA overtime pay rules even if the employee meets the executive, administrative, professional or computer job duty requirements.
Executives, administrative employees and professionals who earn $100,000 or more annually are required to satisfy only one of the requirements in order to be classified as exempt.
Employees who own a 20 percent or more interest in a business and are employed by that business and actively engaged in its management do not have to meet the overtime pay salary requirements for exempt employees.
Tip: Be aware that each wage and hour law, such as minimum wage and overtime pay exempts certain other employees from its scope .
Once you've determined the status of each employee, you can then begin addressing the specific issues involved in complying with the requirements of the applicable wage and hour laws.
