Steer Clear: 5 Wage & Hour Mistakes Employers Must Dodge

As a small business owner, you should know that failing to comply with the Fair Labor Standards Act (FLSA) when paying your employees can lead to problems with the Internal Revenue Service (IRS).

It's easy to make compliance mistakes, especially when it comes to hourly employees. To help you, we've compiled five common wage and hour compliance mistakes and the best ways to avoid them.

What is the Fair Labor Standards Act (FLSA)?

The FLSA first went into effect in 1938. Employers often complain that it is complex, cumbersome and changes too frequently for them to fully understand. One of the most important purposes of the FLSA is to require employers to pay most employees a minimum hourly wage.

As of 2023, that federal wage will be $7.25 per hour. States also set a minimum hourly wage, and employers must pay employees the higher of the two wages.

Another component of the FLSA is the distinction between exempt and non-exempt employees. Exempt workers must be classified in the administrative, computer repair or information technology, managerial, field, or professional categories. They must also receive a minimum weekly and annual salary as they are not entitled to overtime pay.

Most small business employees are classified as non-exempt employees. They are paid an hourly wage and must receive overtime or an hour and a half of extra pay for every hour they work more than 40 hours in a week.

The most common problems related to wages and working hours

1.Misclassification of employees

When it comes to paying employees, the most common mistake employers make is misclassifying non-exempt employees as exempt employees or misclassifying regular employees as independent contractors.

This error is usually not intentional. Typically, it's because the employer doesn't understand that non-exempt employees' job title must fall into one of the recognized categories. Let's look at the differences between exempt and non-exempt employees.

Exempt employees

An exempt employee is someone who is not entitled to overtime pay if they work more than 40 hours per week. You will usually receive a fixed salary instead of an hourly wage.

Non-Exempt Employees

A non-exempt employee is someone who is entitled to overtime pay if they work more than 40 hours per week. They are usually paid on an hourly basis.

To understand the difference

Because the FLSA created categories for exempt jobs decades ago, current job titles don't always fit neatly into any of the law's descriptions. If you need help understanding the law, IceHrm HR Pro can help you understand and correctly apply the FLSA to avoid fines and other penalties for misclassification.

This includes deciding whether a person working for your company on a part-time or casual basis should be classified as a regular employee or an independent contractor. When making this decision, you must follow an IRS checklist that addresses who controls the employee's time, who pays for the materials, and other factors.

2.Deducting money from an employee's paycheck for poor job performance

You may feel like you shouldn't pay employees who don't perform their duties as expected. But federal law is on the side of workers on this issue. You may not withhold funds for attendance or performance issues if the employee has worked even part of the week.

The following exceptions apply:

• You can withhold pay if employees miss two consecutive days of work for reasons unrelated to incapacity, illness, or pre-planned time off.
• Payroll deductions can be made when employees commit a serious safety violation and the employer imposes it in good faith.
• You do not have to pay employees if they have been suspended from work without pay for serious misconduct. Common examples include coming to work under the influence of drugs or alcohol, sexual harassment, workplace violence, or violations of federal or state law. You must have a written unpaid suspension policy in place before you can withhold salary from employees.
• Employees do not receive pay when they use the voluntary Family and Medical Leave Act (FMLA), unless they use their personal or sick leave to cover part of the time.

3.Deduction from wages for short rest breaks

Under the FLSA, employers are not required to pay employees for meal breaks of 30 minutes or more. Shorter breaks of 15 or 20 minutes must be paid as long as employees work a certain number of hours per day.

Employers should avoid using time tracking software that automatically deducts meal breaks. This is because employees may not be able to take the allotted time for lunch or dinner because the company is short-staffed or has an urgent matter.

Instead of requiring employees to prove how much time they took off work for a meal, have them clock in instead.

4.Failure to pay employees for training time, travel time, or meetings

Federal law requires employers to pay their employees to attend meetings and training unless they meet all four of the following criteria:

• The event takes place outside of regular working hours
• Participation is not mandatory
• The training or meeting is unrelated to the employee's work
• Employees do not perform productive work during training

5.Failure to properly maintain records of working hours

You must retain a printout of all timekeeping records for two years - and demographic and other compensation-related data for three years. Here are some examples of data authorities expect employers to provide about all employees:

• Full name, mailing address and social security number
• Job title and salary
• Date of birth for employees under 19 years of age
• Hours worked daily and weekly
• Overtime pay
• All mandatory and voluntary deductions from an employee's payroll

Using a single timekeeping system and conducting regular payroll audits can help small businesses stay on top of their hours and payroll. With IceHrm you can not only automate your payroll but also keep the necessary records easily.

Stay compliant and avoid FLSA pitfalls with proper classification and record-keeping. Simplify your payroll process with IceHrm.