It should be easy to pay employees. A company writes a check or does a direct deposit and then the company does it again a couple of weeks later. Unfortunately, paying employees is one of the most difficult tasks that employers do. Lawsuits alleging violations of the Fair Labor Standards Act (wage and hour lawsuits) are up by 415% since 1997. “The top 10 employment-related settlements in 2017 totaled $2.72 billion—up from $1.75 billion in 2016.” These lawsuits are expensive! Let’s also remember that companies not only need to follow the law at the federal level under the Fair Labor Standards Act, but they also need to follow laws at the state, city, and county level. So what should employers do? Answer: They should pay their employees correctly.
Here are the Various Ways that You Can Pay Employees
1. Hourly
This is (seemingly) one of the easiest ways to pay employees. An employer pays employees the same rate for every hour that they work. Companies use this method when employees do not qualify for an exemption from overtime, their hours vary from week to week, or they are primarily part time employees.
With hourly employees there are number of things that employers need to remember to minimize potential lawsuits:
- Make sure that the timeclock captures all the time that the employee spends working. Starbucks recently lost a case (in California which is not friendly to employers) for time spent off the clock “activating the store alarm, locking the front door and walking co-workers to their cars,” which took one employee 4-10 additional minutes per shift. Employers need to be careful about time that is spent off the clock. Regularly occurring off-the-clock work may be considered compensable time (paid time) in some situations.
- Have a policy for reporting off-the-clock work and explain that policy to employees. In one case, Chicago police officers lost a lawsuit claiming that they were not properly paid for answering emails off-the-clock because Chicago did not forbid these employers from reporting off-the-clock work and it did not have actual constructive knowledge that employees were working off the clock.
One final note. While employers have to pay employees for working off-the-clock even if their policy forbids employees from working overtime without approval, the company may still discipline employees for violating their policy against working overtime without getting proper authorization.
2. Salary Exempt
Some employees are exempt from being paid overtime. There are a variety of exemptions, but the most common exemptions are:
- The Executive Exemption
- Administrative Exemption
- Professional Exemption
- Computer Professional Exemption
- Outside Sales
If an employee meets the required salary for the exemption (usually $455 per week) and the employee meets the duties for the exemption, then employers do not need to pay them overtime.
The issue for most employers becomes whether or not the employee actually meets the required duties to be exempt. For example, Taco Bell has been sued because they allegedly classified employees as managers that did not have the authority to hire, fire, or discipline employees or recommend that employees be hired, fired, or disciplined. The managers were essentially doing the same work as other staff: cleaning, cooking, bussing tables, etc.
3. Salary Nonexempt
Employees can be paid a salary even if they are not exempt from overtime. Employers must pay these employees overtime for any hours that they work over 40 hours a week (or more than 8 hours in a day if required by state law). The reason that some companies use this method is that many employees feel that getting paid a salary is a status symbol and it makes them feel more like a professional. Many workers are paid a salary even though they are not exempt from overtime. The employers just limit their hours to 40 hours a week to avoid paying them overtime.
4. Commission
Employees may be paid a commission. Employees will typically be paid a straight commission (they only earn money when they make a sale) or a draw against commission. A draw is essentially an advance that the company pays an employee before they make any sales. For example, the company may give an employee a draw of $500 a week. At the end of the month or the relevant time period, the company would pay the employee any excess commissions that they earned. If the employee earned $5000 in commissions by the end of the month, then the employee would be paid the remaining $3000. If an employee earns less than they were paid in advance (less than the draw: i.e. they earned $1000, but were paid $2000), then the employee will owe their employer money.
The advantage of the draw against commissions is that it balances out the employee’s earnings. They get consistency in their pay every week (assuming that they always meet their sales goals).
5. Tipped Wages
An employer may take advantage of the tipped credit and only pay on employee $2.13 an hour (if not prohibited in their state or city) provided that the employee makes at least $7.25 an hour or the state or local minimum wage with tips. Essentially, the employer pays $2.13 and the employee earns at least $5.12 in tips. If an employee does not make at least the minimum wage with their tips, then the employer has to pay the employee the difference.
An opinion letter from the Department of Labor released earlier this month also eliminated the 80/20 rule, which barred employers from using the tip credit for employees that spent more than 20% of their time doing non-tipped activities.
Employers can now use the tip credit as long as the duties are related to the tipped activities. For example, employers can utilize the tipped credit for servers that clean up and set tables and other tasks related to working as a waiter or waitress.
You can read more about this issue in this post on paying tipped employees.
6. Piece Rate
This is not a recommended approach. It is basically the equivalent of when you were a kid and were paid for every can that you brought to the recycling center. You are paid a set rate for how much you produce. For example, a farmhand may be paid a set amount for the strawberries that they bring in from the fields.
The most important point to remember with a piece rate is to be sure that employees still make a minimum wage and to properly determine the employee’s regular rate so that companies pay employees the right amount for any overtime.
Here is a helpful explanation from the Department of Labor:
The regular rate of pay for an employee paid on a piecework basis is obtained by dividing the total weekly earnings by the total number of hours worked in that week. The employee is entitled to an additional one-half times this regular rate for each hour over 40, plus the full piecework earnings.
Example: An employee paid on a piecework basis works 45 hours in a week and earns $405. The regular rate of pay for that week is $405 divided by 45, or $9.00 an hour. In addition to the straight-time pay, the employee is also entitled to $4.50 (half the regular rate) for each hour over 40 – an additional $22.50 for the 5 overtime hours – for a total of $427.50.
Another way to compensate pieceworkers for overtime, if agreed to before the work is performed, is to pay one and one-half times the piece rate for each piece produced during the overtime hours. The piece rate must be the one actually paid during nonovertime hours and must be enough to yield at least the minimum wage per hour.
7. Stock Options
This cannot be your only form of payment, but it is a way to encourage employees to work for a company. For employees, they have the option of taking less in salary for the chance to make more in stock when the company goes public or at some later point. Of course, employees may end up making less money by taking stock options in lieu of a larger salary. It is a bit of a gamble.
8. Bitcoin or Cryptocurrency
Bitcoin has fallen dramatically in price since it rose to record highs last year. Jon Hyman breaks down why it is probably not permissible to pay employees directly in Bitcoin under the Fair Labor Standards Act:
The IRS treats bitcoin and other virtual or cryptocurrencies as property, not as currency.
And, the Fair Labor Standards Act requires that employers pay employees in “cash or negotiable instruments payable at par.”
Because the IRS treats bitcoin as property, it’s very likely that the DOL will not consider it “cash” or a “negotiable instrument” (i.e., a paycheck) for purposes of wage payments.
Thus, if you are not properly paying your employees under the FLSA, you have failed to pay them a minimum wage (a big FLSA no-no), no matter how valuable the Bitcoins you’re providing may be.
Conclusion
There are a lot of ways to pay employees, but the key is to do it properly. No matter how companies pay employees they need to ensure that the company has good records so that it can adequately respond to any wage and hour claim that may be filed against the company.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.