January 17, 2017

70% of Companies Are FLSA Noncompliant and Don’t Know It—Are You?

70% of Companies Are FLSA Noncompliant and Don’t Know It—Are You?

By Kit Dickinson on January 17, 2017

ignorant businessman with a smiley face bag over his head

Chances are high that you’re not in compliance with FLSA, even if you think you are. And the DOL could show up at your door to take legal action.

According to the U.S. Department of Labor, at least 70% of companies are not compliant with the Fair Labor Standards Act (FLSA). As a result, the Department of Labor has ramped up their wage and hour litigation in recent years. FLSA lawsuits have increased more than 500 percent since 1991.

Noncompliance can result in heavy fines, lawsuits and even criminal charges. Companies that contract with the government can be debarred from government contracts for three years. Whether you’re a large or small business, private or public, organizations that think they’re safe from litigation should think again.

FLSA Noncompliance Is Costly

Often, companies become noncompliant because confusing laws have changed. Other times, they’re relying on complex manual calculations to determine pay. In either case, noncompliance can be costly.

For example, Central Florida Investments, an Orlando time-share operator, was ordered to pay $868,000 in back wages due to miscalculations of overtime pay. Though there was no intentional wrongdoing—commission-based sales involve complex calculations—the miscalculations proved to be a costly mistake.

In another case, Raceway Petroleum was ordered to pay $3.9 million in back wages and $100,000 in fines for violating FLSA overtime regulations. The company was unable to provide accurate employee time records and had no audit trail to substantiate their actions.

RadioShack was also recently found in violation of Pennsylvania law for calculating overtime wages and will pay at least $5.8 million in back wages. Although the company followed federal regulations, it failed to comply with the state’s more expansive Minimum Wage Act. Confusing laws and regulations led a well-meaning company into noncompliance.

Like these companies, if you use manual calculations and adjustments when running payroll, you’re placing yourself at greater risk of noncompliance and heavy penalties.

Overtime Laws Are a Major Pitfall

FLSA guidelines on overtime pay can be especially confusing—and the current state of the 2016 overtime changes doesn’t help. There are two situations in particular when overtime compliance can lead you into FLSA noncompliance. If you’re relying on manual adjustments and calculations to run payroll, use extreme caution in these scenarios.

Overtime and Semi-Monthly Pay Period

Federal law states that overtime must be paid based on a weekly average rate if an employee works more than 40 hours in a seven-day workweek. When the pay period covers all seven days in the week, calculating overtime is straightforward.

But it’s another matter if the pay period ends midweek and the overtime week crosses the pay period boundaries. Many companies on a semi-monthly pay cycle have trouble calculating the proper overtime rate, even with automated time-and-attendance systems. Because payroll systems can’t look back into the past and account for the overtime, payroll personnel must remember to manually calculate the adjustment.

Non-Discretionary Payments and Overtime

A non-discretionary bonus or commission is any earnings amount that is owed to an employee for meeting predetermined requirements, such as a quota. Employers often forget that non-discretionary bonuses must be treated as regular wages when calculating overtime pay. If a bonus is awarded in the same pay period it is earned, the calculation is easily handled by most time-and-attendance or payroll systems.

However, it can get complicated. In certain cases, the bonus or commission is awarded in a later pay period—for example, if a mortgage broker sells a loan in one month but the commission is booked in the next month. In these cases, you must apply the overtime from the prior month to the bonus this month. This gets tricky. Not only must you correctly calculate the proper compensation, you must also keep track of times when you owe additional overtime pay for non-discretionary payments.

Automation Helps Keep You Safe

IDI's Time Bank integration application can help mitigate the risk of potential fines and violations. Time Bank automatically integrates your time-and-attendance and payroll systems to apply complex payroll calculations, including average overtime rate logic for different pay periods (including semi-monthly). Time Bank can also be configured to apply bonus or commissions earnings against a prior period when the overtime earnings occurred.

Time Bank works with time-and-attendance and payroll systems to automate critical business rules and pay policies that help you stay in compliance. Companies that continue using spreadsheets and manual processes potentially expose themselves to significant lawsuits, fines and other violations.

Protect Your Pocketbook

Don’t let your company take on the risk of noncompliance. Automation is a much more affordable alternative to FLSA violations. Contact us to see how we can get you off a spreadsheet system and help you avoid heavy penalties.

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