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It’s Easy to Become a Wage-and-Hour Criminal. Here’s How Not To

Many common wage-and-hour problems face small businesses today.  For example, many companies fail to properly retain records or can find themselves making improper deductions from employees’ pay.  Keith Reinfeld, a lawyer in the Labor and Employment Group at Fox Rothschild LLP, offers tips to help employers avoid such problems.

Pitfalls of Docking an Employee's pay: Docking an employee’s pay for loss or destruction of company property is a fairly common practice among small businesses.   However, these practices violate wage-and-hour laws of several states, including, but not necessarily limited to, California, Connecticut, Iowa, Massachusetts, Minnesota, New Jersey and New York.  Violation of these laws can result in monetary and criminal penalties.

“These states have laws specifically prohibiting deductions from employees’ wages in the event of cash shortages, loss of equipment, misconduct, the destruction of company property and various other occurrences,” Reinfeld says.  “For instance, a grocery store cannot deduct $10 from the paycheck of a cashier who could not account for a $10 cash shortage at the end of his or her shift.”

These restrictions apply to all employees, regardless of whether they are classified as exempt or nonexempt. Additionally, docking an individual’s pay can result in the loss of an employee’s exempt status.  An exempt employee is one who, because of his or her position, duties or level of authority, isn’t entitled to overtime pay under federal and state law.

Exempt employees are often expected to work whatever hours are necessary to achieve the responsibilities of their jobs, and are not issued additional compensation for working more than 40 hours in a week.  Accordingly, the loss of an employee’s exempt status could lead to the assessment of thousands of dollars in unpaid overtime for an individual employee.

Many businesses have attempted to sidestep the dangers inherent in docking employees’ pay by insisting that employees consent in writing to deductions from their paychecks. The law is clear that employee consent to deductions for lost or damaged company property has no bearing on whether it is proper.

Similarly, employers have required workers to issue the company money for lost or damaged property rather than deduct the amount from their paychecks. While legal, this policy is troublesome, as it has no teeth.  The company has no recourse if the employee refuses to reimburse it for the damaged or lost property. 

In light of these concerns, employers are best served by maintaining a policy of disciplining, rather than docking, employees who are responsible for loss, damage or destruction of company property.  

Recordkeeping requirements: Over the past several years, both large and small businesses have been hit with a seemingly unending wave of wage-and-hour lawsuits. These lawsuits have commonly consisted of claims by current and former employees for alleged unpaid overtime, travel time, working time and meal breaks.  “Small businesses often have a difficult time defending these wage-and-hour lawsuits because they have failed to maintain the time and payroll records necessary to challenge such claims,” Reinfeld says.

The record-keeping requirements issued by the U.S. Department of Labor (DOL) provide employers with guidelines for properly maintaining and preserving documents. In particular, the DOL requires that businesses, regardless of their size, maintain the following records:

  • Employee’s full name and Social Security number.
  • Address.
  • Birth date, if younger than 19.
  • Sex and occupation.
  • Time and day of week when employee’s workweek begins.
  • Hours worked each day.
  • Total hours worked each workweek.
  • Whether the employee is paid on an hourly, salary or fee basis.
  • Regular hourly pay rate.
  • Total daily or weekly straight-time earnings.
  • Total overtime earnings for the workweek.
  • All additions to or deductions from the employee’s wages.
  • Total wages paid each pay period.
  • Date of payment and pay period covered by the payment.

The DOL further provides that for a period of three years, an employer must preserve payroll records and collective-bargaining agreements.  Similarly, records on which wage computations are based, time cards, wage-rate tables, records of additions to or deductions from wages, and work and time schedules need to be retained for two years. 

The DOL, however, has provided only the minimum requirements for complying with the law, but not necessarily the best practices for an employer to protect itself.  Reinfeld cautions that the DOL’s record-keeping requirements are directed only at nonexempt employees.  Nonexempt employees are typically rank-and-file workers who must be paid time-and-a-half for all hours worked over 40 in a week. 

“As we have seen over the past several years, misclassification of exempt employees, who are paid a set amount regardless of their hours worked, is a hotly litigated issue,” Reinfeld says. “The failure by an employer to maintain complete records for exempt employees puts it at a distinct disadvantage in defending such lawsuits.”

For instance, a company does not want to be in a position in which an employee claims to have worked 100 hours a week, and while untrue, it does not have the time records to dispute the allegation. 

Even more concerning is that an employer's failure to maintain documents can result in a presumption that the employee’s allegations are true. To the extent possible, businesses should also maintain the records discussed above for exempt employees, and even though the DOL requires employers to keep time records for only two years, employers can be liable for damages under federal and state law for up to three years before the filing of a lawsuit. 

Thus, small-business owners can best protect themselves with respect to future wage-and-hour lawsuits by implementing a policy of preserving payroll and time records for all employees for at least three years.

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