About the FLSA

The Fair Labor Standards Act of 1938 requires that full time employees whose jobs do not primarily involve executive, administrative or professional duties are paid at least one and a half times their regular pay rate if they work more than 40 hours in a week. Subject to certain exemptions, the standard also applies to every employee regardless of role who earns a salary below a certain threshold.

The Department of Labor’s new overtime rule will increase the current salary threshold of $23,660 a year by 50% as of Jan. 1, 2020. All nonexempt employees who earn less than $35,568 a year will be entitled to time-and-a-half overtime pay, regardless of their duties. The new threshold increase is lower than the amount proposed by the DOL under the Obama administration. Then secretary of Labor Perez proposed to double the threshold to $47,476.

What it means for employers

If your company has any salaried exempt employees making less than $684/week, you will be required, starting with checks dated 1/1/2020, to make one of the following changes:

• Increase the worker’s salary to the new $684 weekly minimum or
• Change their status to non-exempt and pay overtime

Employers are allowed to use non-discretionary bonuses (routine and part of an employee’s total wages), incentives, and commissions (paid annually or more frequently) to satisfy up to 10 percent of the standard salary level ($684/week).

• Example: An employee makes an annual salary of $33,000 and has been promised a non-discretionary bonus of $800 each quarter.
• Since their annual salary of $36,200 will exceed the $35,568 minimum and their bonus accounts for less than 10% of that salary, no change is needed.

Partnering with a Professional Employer Organization (PEO)

Employers who have partnered with a PEO can expect to be notified if they have any workers who will be affected by the new rule. The PEO will assist the PEO client with the HR and payroll changes necessary to ensure compliance with the new rules.   Keeping their client companies compliant in any every changing regulatory world is what PEOs do. Review the DOL Wage and Hour Division rule fact sheet for more information.

For general contractors, hiring subs may be riskier than it appears

To demonstrate the employment related challenges for general contractors, let’s create a scenario for our customer Donald, a property developer. Donald develops property all over the USA. For a recent project in Texas, he has hired Ted, a general contractor, to build the building. Ted is a shrewd businessman and recognizes that in order to maximize his profit he will need to bring in several subcontractors that will work as cheaply as possible. Ted sends out bid requests to several plumbing contractors in the area. He gets a bid on the plumbing portion of the project from Marco, a plumbing contractor in the area. Marco’s bid is much cheaper than the others so Ted awards the contract to  Marcos’ plumbing company. Ted is getting a good deal on the plumbing and knows it leaves more money in his pocket.

Problems with workers

As the project moves forward, the building is ready for Marco’s plumbing workers to start on the job. Marco sends in three people who start on the plumbing; Jeb, Carly and John. As the days go by Ted notices that Marco is almost never on the job site and provides little direction to his workers. Ted begins to get frustrated that the plumbing workmanship is shoddy and the project schedule is falling behind. Ted confronts Marco on these problems and Marco apologizes, stating that he is not at the jobsite enough because he is running in an election and that takes up all his time. Marco tells Ted “just tell my workers what you want done and let me know if there are any problems”. Ted is not happy. Ted has been watching the workers and notes that Jeb works very slowly, very low energy. Carly would rather talk all day then get any real work done. John spends most of his time telling everyone about how they did plumbing up in Ohio.

Mistakes are made

In frustration, Ted calls Jeb, Carly, and John into a meeting at the worksite and tells them he expects them there seven days a week from 8:00am to 7:00pm until the job gets done. In addition, he informs them that he will be the one providing them with direction on how to he wants the plumbing installed. Marco is not involved.

Feces strike the rotating air movement device

Two weeks later, the job is complete and Ted has made his final payment to Marco’s plumbing company. All is good until Ted gets a call from investigator Hillary with the US Department of Labor. Hillary explains that several of Marcos workers were not paid overtime and have filed a complaint against Ted’s General Contracting Company. Ted is confused… how can he be liable for wages when they weren’t his employees? That was Marco’s company! Investigator Hillary explains that her investigation has determined that because Ted set work hours and working conditions for Jeb, Carly and John, Ted was actually a considered a “joint employer” with Marco’s Plumbing and was liable for the overtime wages. Of course Ted is flabbergasted that he will be liable for the unpaid overtime and fines from the DOL. After the Department of Labor calculated the unpaid wage liability and assessed the fines, Marco has suddenly disappeared, so the DOL assesses the entire judgement against Ted General Contracting company. His profit on the job just evaporated.

Lessons Learned

While our story is fiction, it is based on real exposures faced by general contractors and virtually any business that hires subcontractors. The Fair Labor Standards Act (FLSA) has recently been used by several federal district courts to put pressure on general contractors to ensure that wage and hour rules are not being violated by their subcontractors. A recent case in Louisiana illustrates the issue. In that case four employees of a subcontractor sued both the subcontractor and the general contractor for violations of minimum wage and overtime claims. A motion to dismiss the claims was denied and the suit proceeded against the GC because the supervisor at the GC exercised direct control over the workers and exercised direct control over their work.

Avoiding the Subcontractor Liability Trap

While complete insulation from FLSA violations is impossible, there are steps GCs can take to minimize the exposure to the employment practices of subcontractors.

• Require subcontractors to sign and acknowledge their responsibilities under FLSA and mandate the same for any of their subcontractors.
• Insist on terms in your agreement with the subcontractor that address potential labor issues and insist on indemnity provisions in the event of an FLSA violation.
• Keep your distance from the subcontractors workers. Do not provide direct supervision of the subcontractor’s workers and do not get involved with hiring/firing or pay issues with the subcontractors workers.
• Of course always insist that workers’ compensation insurance is place for the subcontractor and that all workers on the jobsite are covered under the policy. Ask the sub for their work comp certification or “cert”.

How joining a PEO can help

General Contractors that join a Professional Employer Organization (PEO) gain access to expertise and best practices for avoiding DOL and labor entanglements. Unfortunately some PEOs (being potential co-employers with the General Contractor) recognize the regulatory risk ($$) associated with GCs and do not allow GCs to join their PEO. Many PEOs have stopped working with GCs due to the increasing joint-employer risk associate with subcontractors. However, other PEOs have developed programs for GCs that when implemented reduce the overall regulatory risk and those PEOs may allow a GC to join their PEO if they meet other workers compensation insurance and company size criteria. StaffMarket maintains a master database of PEOs who will and will not consider working with general contractors. Contact StaffMarket for more information.

Note: All characters in this story are fictional and under no circumstances should this be considered related to any candidates running for the presidency of the USA.

image courtesy of the U.S. Army Corp of Engineers

Payroll Card Benefits for Employers

Many employers like these “Paycards” or “payroll debit cards” since they are often a more efficient way to make payroll disbursements than by a physical check and can reduce the overall payroll processing costs. For companies with workers who are not regularly at a known physical location, paycards prevent workers from having to travel to a home office to get their check or having a “runner” take the checks out to the workers.

Payroll Card Benefits for Workers

Forget the Paycheck (Johnny), put in on my Payroll Card! Employees do not need a bank account to participate in the program, and they can participate regardless of their creditworthiness. For many employees this is easier than direct deposit, where employees have to provide personal bank account information to their employer simply to get paid. In addition, they do not need to spend time and money at check cashing outlets to access their payroll funds. Payroll cards are often branded by MasterCard™ or Visa™ and can be used where debit card transactions are accepted. Employees can make cash back transactions and withdraw cash – without the need for a credit card. Employees also have access to an FDIC-insured account that provides them with protection for fraudulent charges. In addition, many workers are “unbanked” meaning they navigate life without the benefit of any bank account. For those workers, direct deposit does not work where payroll cards do.

Employers Can’t Force It

The Fair Labor Standards Act (FLSA) generally requires employers to pay nonexempt employees at least the applicable minimum wage and overtime compensation and exempt employees a minimum weekly salary. Wages are not considered paid unless they are received by the employee “free and clear.” This requirement is not satisfied if the employee must “kick back” a portion of his or her wages to the employer, either directly or indirectly. Some payroll card vendors have been offering to pay employers a piece of the transaction fees collected when employees use their payroll cards. This “kick back” provision could create problems for employers if the payroll card vendor offers a commission or other payment to the employer as an incentive to enroll employees. Employers should use caution with these proposed arrangements. The Electronic Fund Transaction Act (“EFTA”) is the only federal regulatory act that specifically deals with payroll cards. (See 15 U.S.C. §§1693 to 1693r) Regulation E is the EFTA’s implementing regulation, and it explicitly provides that no employer can require employees to receive direct deposit into an account at a particular financial institution. Therefore, employers cannot require employees to participate in a payroll card program unless the employees can choose the bank and have the option of receiving wages by another method, such as cash or check.

Lawsuits have been filed against employers, alleging that wage payment by payroll cards violates state and federal law since many payroll card programs charge fees for various card-related activities such as ATM withdrawals, account opening and closing, account maintenance, account balance inquiries and account overdrafts. When those fees impact the take home pay of low-wage workers, there is a potential violation of wage and hour laws if sub-minimum wages are the result of these fees. In addition, some of the fee disclosures issued to the employees have been scrutinized because employees with limited English proficiency or limited access to the internet.

States Get Involved

Several states have created their own rules regarding the use of payroll cards to pay wages. A key feature in most state’s rules are that the employee have access to the full amount of his or her wages on regular paydays, at no cost. These laws also typically include a provision that the payroll card agreement outline the terms and conditions of the program at the outset of its use. As of May 21, 2015, twenty one states and Puerto Rico have enacted legislation regarding the use of payroll cards. Legislation in 19 of those states: Arizona, Florida, Georgia, Hawaii, Illinois, Kansas, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Dakota, Oklahoma, Oregon, Puerto Rico, Tennessee, Vermont, Virginia and West Virginia and Puerto Rico apply to any employers, while Texas and Washington enacted legislation specific to specific employers. In Georgia for example, every employee must be provided with a written explanation of any fees associated with the payroll card AND provide them with a form that allows them to opt out of the payroll card payment and request either a paper check or direct deposit.

A full breakdown of state specific laws regarding payroll cards can be found here.

How joining a Professional Employer Organization can help.

As of December 2015, 64% of the 400+ PEOs participating at StaffMarket offer payroll card services to their client companies and associated worksite employees. PEOs are well aware of the advantages and pitfalls of payroll cards. Since governmental regulations are a moving target (in each state) companies that join a PEO can be confident that offering something as effective and convenient as payroll cards will minimize regulatory risk and ensure they are abiding by the rules .