Quick Consultant: Avoid the Wage & Hour Trap

Most readers, at least those that like me, know that I have a good sense of humor. I try not to take myself too seriously. But before I delve into the subject of salaried employees and how many owners are violating the law, I feel compelled to pass on some comments on a story that recently received prominent attention in the news—the story of Bernard Madoff, the investment guru accused of running a $50 billion dollar Ponzi scheme.

Mr. Madoff, under a bail agreement, was placed under 24 hour house arrest at his apartment on the East Side of Manhattan. Poor soul! Federal authorities actually hired a team of security guards to watch his apartment building around the clock.

According to news accounts, the new restrictions on Mr. Madoff's movements appear aimed at protecting as well as confining him. In a letter delivered by hand to federal magistrate judge Gabriel W. Gorenstein, prosecutors said the guards were necessary "to prevent harm or flight."

What happened to sending men like Madoff to jail pending trial? Isn't that what jail is for? We don't generally confine murderers and rapists to their homes, do we? No; we send them to jail pending trial. I guess the laws are different for white collar criminals. Of course, if I had Madoff's $50 billion, I could hire an entire army equipped to take over all of New York state and free me from my imprisonment.

According to Federal officials, confining Madoff to his apartment was done to protect him from all the threats he has received because of the $50 billion financial fraud he is accused of perpetrating. Yeah, good idea. The New York Post labeled Madoff as "The Most Hated Man in New York." I say anyone who has defrauded individuals and large investment banks of $50 billion probably deserves a few threats.

Squandering $50 Billion?

What galls me the most, however, are news accounts that constantly referred to Madoff as having "squandered" $50 billion. My question is: How do you possibly squander $50 billion? Seriously, it would be an almost impossible task to do so.

If you gave me that amount of money and said, "John, go ahead and spend the money. We will even give you the next 10 years to squander $50 billion," I don't think I would be up to the task.

Do you realize most calculators won't even display numbers that large? Okay, let's divide $50 billion by 10 years. That's $5 billion a year and that will display on my calculator. Divide that amount by 365 days to indicate how much I need to spend each day and that turns out to be $13,698,630 per day! My God, how could anyone spend that amount each day?

Sure, the first couple of days or even the first few weeks might be fun. A Citation Jet here, a huge yacht here, then you buy an island and maybe even staff it with your own army. If you saved it up over a couple of days you could probably buy a whole country. Iceland comes to mind since they are bankrupt. But then again who would want to buy Iceland?

Violating Wage & Hour Regulations

In the past 25 years of writing columns for this magazine, I've noticed certain issues or subjects that tend to rear their head on a regular basis—interpreting profit and loss statements, explaining the definition and use of sales per employee, and promoting or explaining the latest finds from the studies I conduct for NAQP. The fact that some of these subjects seem to reappear on a regular basis is simply a reflection of one generation taking over for another as well as individuals with no previous business experience entering this industry.

One of the topics that never seems to go away completely is what constitutes the difference between a "salaried" employee and someone who is paid an hourly wage. Based upon some recent consulting visits as well as a dozen or more emails I have read recently, I realize that many small business owners (and some not so small) still don't understand that they may be running afoul of the law and putting themselves at risk somewhere down the line.

Maybe not this month, or even a year from now, but sooner or later there are business owners who will arrive at work and find a letter addressed to them from their state's Wage and Hour division advising them there has been a complaint and that a full audit of their books will soon commence. The subject of the audit: Violating one or more provisions of the Federal Labor Standards Act (FLSA).

I know many readers claim they already know this stuff inside and out and label discussions of same as simply "old stuff" not worth rehashing. Sometimes I think the same thing, but nothing could be further from the truth. I can assure you that this subject is alive and well, and that serious misunderstandings of wage and hour regulations continue to flourish in our industry.

My Employees are All Salaried

Recently, I was on a consulting visit for a brother and sister team running a quite successful digital printing operation. Their operation consisted solely of digital printing services, both small- and large-format. Much of their work consisted of reprographic (blueprinting) services, and despite the dismal national economic news, their firm was doing quite well. The company was doing $1.6 million in sales, and even though I got after them for not having any decent financial statements upon which I could offer advice, I could tell from the raw numbers that they would indeed qualify as a profit leader in this industry.

As we approached the end of my consulting visit we started going over how much various employees were being paid. I asked a couple of questions about their prevailing wages. One of the owners, just in passing, mentioned that all eight of their employees were on salary rather than an hourly wage.

My eyes lit up when the brother said that and I questioned him again. My first question was, "Do any of your employees work more than 40 hours?"

He responded, "Sure, on occasion a number of them work more than 40 hours. If they have a big project they are working on they may come in early, or stay late to complete the job, but they are all on salary so it is easy for us to manage."

Well, that statement quickly led to a small lecture. I advised him he was taking serious chances, and that he was surely violating the laws (both federal and state) by doing so. He assured me that all his employees were long term, all were happy to have a job, and that his place was a great place to work at. Having visited with the employees during my two day visit, I couldn't agree more.

The employees seemed happy and it appeared like a great place to work, but that didn't negate my statement to him that all it would take would be for some employee down the line, especially one who had occasionally worked overtime, to file a complaint and be compensated for hundreds of hours of overtime worked over a period of years. If you think it can't happen, you are dead wrong. By the way, it doesn't even take a complaint by a former or current employee to launch such an investigation. An inquiry or complaint by a competitor could lead to the same result.

Why Designate Salaried Positions?

Why do owners place employees on salary as opposed to paying them an hourly wage? Some simply don't know any better. They came from the corporate environment and that's how they were always paid. Some think it is just easier that way. No time clocks or records to worry about. Others think that simply by hiring an employee and giving them some fancy title and maybe a decent salary, they don't have to pay overtime.

Let's get something straight right off the bat. So long as the employee in question doesn't work more than 40 hours, the issue of whether you call it a salary or an hourly wage is really moot. If they don't work more than 40 hours per week, you are safe, whether you pay them hourly or a straight salary.

The issue of possible violation of federal and state wage and hour regulations arises when you hire a person and tell them you are going to pay them a salary of, say, $20,000 per year and that you expect them to work "whatever hours are necessary to get the job done." Oftentimes, that statement is appended with something like, "If you get the job done in less than 40 hours, you are free to go. But if it takes you 45 or 50 hours, I expect you to stay and complete the work. That's part of the job."

What Are Exempt Employees?

"Hey John, I pay most of my employees a lot more than $20,000. I have three or four who receive salaries in the $35,000 to $45,000 range, and they appreciate that. I expect them, even without me asking, to work whatever hours are necessary, and I sure don't pay them overtime to do so."

Guess what? If that's what you are currently doing, you are violating the law. There are thousands of articles on the Web that explain the law in detail. Suffice it to say that in order to legitimately pay someone a salary and avoid having to pay them overtime, these employees must meet certain qualifications and fall under the precise definitions of one of six specific job categories.

These are called "exempt" employees meaning that they are exempt from the overtime requirements of the FLSA. If the employees to whom you are paying a salary qualify under one or more of these exempt classifications, then you are safe in paying them an annual salary. If they do not qualify under one of these six exempt categories, then you MUST pay them overtime if they work more than 40 hours per week. Period!

The six exempt categories are as follows:

  • Executive Employee Exemption
  • Administrative Employee Exemption
  • Learned Professional Exemption
  • Creative Professional Exemption
  • Computer Employee Exemption
  • Outside Sales Exemption

Virtually all of the above exempt categories include very precise language as to how one would qualify. At the very least, all of them require that the employee receive a salary of $455 per week. However, this salary test or minimum is generally the least of your worries or concerns. Even if you pay most of your employees $455 or more, that alone will not qualify them under one of the six exempt categories.

You may say to yourself, "Hey, what John is saying may be true, but the employees I have on salary fit into one or more of these categories." My quick response is, "I'll bet they don't."

For example, Cathy, your graphic arts designer, would most likely not qualify under either the "creative" exemption or the "computer employee" exemption. These are clearly defined in the regulations, and she would not be exempt.

"Well, Cathy works in the graphics department and manages Susan and Bob, so she would probably qualify under the ‘administrative' exemption, right?" Nope! Take my word for it, she wouldn't. What about Bob, who supervises two press operators, but also runs a press himself and helps out in bindery. Nope; he wouldn't qualify either!

The same conclusions would most likely apply to a majority of the salaried positions I encounter in this industry, including bindery supervisors, production managers, bookkeepers, and press room supervisors. Generally speaking, managers must manage others, meaning two or more people. The exempt employees must also exercise independent judgment with respect to matters of significance.

Very few of the individuals I see who are "salaried" in this industry would qualify as an "exempt" employee to whom you would not have to pay overtime. By the way, job titles mean nothing. What you call them has nothing to do with whether a person really is exempt from overtime. Even employees who are highly paid and receive $100,000 or more may not be exempt. God forbid that you are working under the assumption that since you are paying someone $100,000 they better not expect overtime on top of that.

In most cases, the employees mentioned above would indeed be entitled to overtime. Worse, a $100,000 employee who does not qualify as an exempt employee could cost you a fortune in fines and back pay. Look at it this way: A salary of $100,000 equates to approximately $48 per hour, and if they don't qualify as exempt you would be looking at paying them $72 for every hour over 40 they worked. And that assessment could go back five years or more. Ouch!

Blue Collar versus White Collar

Almost all of the exempt categories are meant to apply to white collar positions that meet very specific tests as set forth in the regulations. The exemptions are not meant to be applied to more traditional blue collar employees, who traditionally perform manual labor or repetitive operations with their hands, physical skill, and energy. You can call their functions what you want, but if employees work in production, maintenance, or rely on general skills and tend to perform many of the same functions as the employees they supervise, then they typically are not exempt.

"John, you're crazy. My son works a desk job in Philadelphia, he doesn't supervise anyone, and he consistently works 50-60 hours a week. His employer is a Fortune 500 company, and he sure doesn't get paid overtime for all those extra hours."

Well, I'm not crazy, but the chances are good that one of two things is happening. First, despite being in the Fortune 500, the company could be breaking the law, but no one has filed a complaint with a state wage and hour board. Second, they could qualify under what is called "Other Exemptions" that are spelled out in the FLSA regulations. Almost all of these "other" exempt positions are the direct result of earmarks and pork barrel legislation added to FSLA regulations over the years. There are almost two dozen different industries exempt from the FSLA overtime regulations.

As an example, if you work in the motion picture industry, run a fish hatchery, drive a taxi, work in agriculture, work at a radio station or small TV station, work for the railroads or the airlines, or you are a seaman you are most likely exempt from these overtime requirements. Unfortunately, the printing industry is not among these special "other exempt" categories, so some of you are going to have to accept the bad news that I've outlined above.

While there are thousands of pages describing FLSA regulations, one of the best and briefest I've read can be found at: www.flsalaw.info/flsa_coverage_exemptions.htm. It's only four pages long and one of the best I've found. Happy reading!

Senior contributing columnist John Stewart is president of Q.P. Consulting, Inc. He is the co-author of the industry best seller titled, "Print Shop For Sale." You can visit his website at www.quickconsultant.com or a special website dedicated to his new book titled: www.printshopsforsale.net. You can also email him at qkconsult@aol.com, write to him at 2110 S. Dairy Road, West Melbourne, FL 32904, or call him at: 321/727-2444.