How Employers Can Avoid Overtime Problems and Other Wage and Hour Concerns

October 2009
By: Nancy E. Joerg, Esq.

In this very tough economy, which is affecting businesses across the United States, many businesses are worried with good cause about wage and hour audits by government agencies and/or civil action lawsuits brought by disgruntled employees, sometimes on behalf of just themselves (or, with increasing frequency, by very costly and complex class action lawsuits).

Shareholder and Senior Attorney, Nancy E. Joerg, questioned an outstanding consultant in the wage and hour field. The consultant, who works frequently with Wessels Sherman, was one of the lead people in the Illinois Department of Labor in administering the Illinois minimum wage law from its inception. The consultant spent over ten years of her career with the IDOL as the manager in charge of all field audits.

The below question-and-answer session addresses some of the key wage and hour danger spots for employers:

1. Nancy Joerg: Does Illinois have the same minimum wage requirements as the federal government?

Consultant: No. Illinois has a much higher minimum wage. As of July 1, 2009, Illinois' minimum wage is $8.00, and effective July 1, 2010, Illinois' minimum wage will be $8.25. The Federal minimum wage, as of July 24, 2009, is $7.25.

2. Nancy Joerg: What explanation do you have for the Illinois minimum wage being higher than the federal?

Consultant: The Illinois minimum wage was changed with a long range effort in mind. Instead of passing a law that was only for one or two years, Illinois extended the increases in the minimum wage for up to six years.

3. Nancy Joerg: What should an employer do if it realizes that it is violating the minimum wage? If the employer makes a sudden increase, would that be tipping off their employees that the employer has been doing things incorrectly all along?

Consultant: Dependent upon the time frames that are involved, if an employer realizes they have not been paying the minimum wage, my advice would be to increase to the minimum wage immediately. Then go back and take a look at what the liability would be and evaluate whether to reimburse these employees (if it's a short time period involved) or whether to wait out the statutory time frame of three years and hope that the mistake goes undetected during that period of time.

4. Nancy Joerg: Are you saying that if three years have passed since the employer made the mistake, the employer is home free so to speak?

Consultant: Yes.

5. Nancy Joerg: If the employer is incorrectly paying the minimum wage and the employer is audited by the Illinois Department of Labor, what happens?

Consultant: If the employer is incorrectly paying the minimum wage, the employer will be required to repay the employee all the back wages that are due, and, should there be a penalty attached, and it becomes a second violation or a willful violation, there could be some interest attached as well.

6. Nancy Joerg: What interest rate is that usually?

Consultant: Two percent per month for the underpayment. In the case of a willful violation, a 20% penalty could go to the Illinois Department of Labor.

7. Nancy Joerg: Twenty percent of the total amount owed?

Consultant: Yes.

8. Nancy Joerg: If an employer is not aware that it is violating the minimum wage laws, and then the employer is audited, is that a good defense that they did not know they were in violation?

Consultant: No, it is not an excuse, but if there has been no case of previous violations - simply an error in not paying the minimum wage - it would not be construed as willful.

9. Nancy Joerg: So the employer would have to pay the back money owed?

Consultant: Yes, for the period going back three years.

10. Nancy Joerg: Is it only the Illinois Department of Labor who is interested in minimum wage, or does the U.S. Department of Labor also look at the minimum wage?

Consultant: Absolutely. The U.S. Department of Labor first looks at the federal minimum wage because it is less than many states. Like Illinois, many states have a higher minimum wage than the Fair Labor Standards Act. The U.S. Department of Labor seeks to get at least the federal minimum wage for workers who are not being paid correctly. The U.S. Department of Labor also looks at overtime, record keeping, proper exemption classification, calculations, etc.

11. Nancy Joerg: Does the employer have to pay for lunch breaks?

Consultant: No. Lunch breaks of 30 minutes or longer (and in some instances of 20 minutes or longer) are not required to be compensated.

12. Nancy Joerg: What if the employee is very conscientious and wants to work straight through their lunch break. Should the employer allow that?

Consultant: Absolutely not. Compliance with the statute is the employer's responsibility and not the employee's. The employer must insist that the employee take their lunch and get away from the desk.

13. Nancy Joerg: What does the Illinois Department of Labor generally look for when they audit?

Consultant: The same thing: minimum wage, overtime, overtime exemptions, record keeping, calculations, working off the clock, time cards, and they would be doing some interviews to make sure that the records the employer is presenting are correct.

14. Nancy Joerg: What is the most common mistake that you saw employers make?

Consultant: The misclassification of non-exempt workers (that is, workers who may be very valuable to their company but don't meet the exemptions that are allowed under the law). I think the best way for an employer to evaluate the classification of workers is to assume that everyone in their establishment is entitled to overtime after 40 hours of work per week. Then you start to look at the exemptions and see if you can prove that these employees are in fact exempt from the provisions of the overtime requirement (instead of just saying, "All salaried employees are exempt," or, "Well, you know, she runs my entire business. She must be exempt.

15. Nancy Joerg: What are the most common mistakes that you saw with classifying exempt and non-exempt?

Consultant: Well, there are three "white collar" classifications for exemptions: executive, administrative, and professional.

The executive exemption from overtime is pretty clear-cut. The employee has the power to hire and fire, supervise, make recommendations, and is paid on a guaranteed salary.

The professional exemption from overtime is pretty clear inasmuch as that it requires a four-year degree in a field of science or learning, with a guaranteed salary.

The administrative exemption from overtime is one where employers tend to put employees who don't meet one of the other classifications. Example: Sally worked for Company "A" for 30 years. She is classified as an executive secretary, but in essence Sally, by law, is actually the payroll clerk. She has been in that position for so long that everyone assumed that she was classified as an administrative employee and exempt from overtime. It's a very small office. She doesn't have people that she supervises. She gets a salary, but the duties in fact are not the kind that would allow her to be exempt from overtime.

Also with the administrative exemption, employers need to look at employees who are not on the employer's premises (who the employer thinks is running a secondary operation, for example). Employers need to evaluate the duties of their off-premises employees to make sure that they would meet the exemption.

16. Nancy Joerg: In a small office where there are a few other employees in the office, is it successful to say that Sally is supervising two employees?

Consultant: If Sally is in fact supervising those two employees. If she hires, fires, directs their work, is part of the evaluation process when an employee is given a raise and Sally's input has some value, then she would probably meet the exemption as an executive as long as there were two full-time employees.

Many employers fail to realize that for the executive exemption, there must be two full-time employees supervised or the equivalent of 80 hours of direct supervision. So you can have four 20-hour people or three 30-hour people or two 40-hour people, but it has to be a direct supervision of a minimum of 80 hours of labor (to meet the executive exemption from overtime).

17. Nancy Joerg: If an employee is an Assistant Manager, is that a good enough explanation to an auditor as to why that person doesn't get overtime?

Consultant: First, the word "Assistant" is a bad word. It indicates under the federal law and under the Illinois law that the employee has not reached the level of exemption that may or may not be needed to actually be exempt. An assistant is still learning. They are still working at it. They are not the Administrator. They are not the Supervisor. If you are going to claim an Assistant Manager as an exemption, you need to be able to prove that Assistant Manager has separate duties that they perform that are not part of the Manager's duties.

18. Nancy Joerg: Have you ever seen an Assistant Manager successfully claim an exemption from overtime?

Consultant: Yes, I have. That would be in the fast food industry where the Assistant Managers have the same duties as the Managers but work a different shift. It is the Assistant Manager who works a night shift and has those clear responsibilities-the same ones as the General Manager has during the day.

19. Nancy Joerg: Do employers tend to make mistakes with the guaranteed salary requirement?

Consultant: Yes, employers fail to pay the full guaranteed salary in weeks in which the employee doesn't work the 40 hours. There isn't a problem if the employee shows up every day and works 40 or 50 hours a week. But, if an employee happens to be gone two days or happens to have taken a half-day off, oftentimes the employer wants to deduct from that guarantee, and that destroys the guaranteed salary concept.

20. Nancy Joerg: If the guaranteed salary concept is destroyed, what impact does that have?

Consultant: If there was no intent to pay this employee a guaranteed salary, regardless of the number of hours of work, the Illinois Department of Labor will try to establish that the employee is non-exempt, and the employer could be subject to paying the additional overtime.

21. Nancy Joerg: Is that also governed by a three-year statute of limitation?

Consultant: Yes, it is.

22. Nancy Joerg: And does that also involve interest?

Consultant: Not unless it's a willful violation.

23. Nancy Joerg: Employers frequently ask me, "What do I do when I find out I am going to be audited by the Illinois Department of Labor?" Is it normally a letter or a phone call that the company would get?

Consultant: The Illinois Department of Labor's responsibility is to diligently enforce. Most often you can expect to get either a phone call or a letter telling you that an auditor will be coming to make an initial investigation, but that isn't necessarily required. If there is a suspicion of child labor being involved, chances are you will get no notification and the Illinois Department of Labor auditor will simply walk in.

24. Nancy Joerg: Is that on purpose - that they are trying to surprise the employer?

Consultant: Exactly.

25. Nancy Joerg: What happens in those cases?

Consultant: In those cases actually the investigation itself proceeds about the same (whether you have received notice or not). If you haven't received notice and the IDOL auditor walks in and asks to see records, the auditor is actually probably only going to want to see what you have right on the premises. Then the auditor will give you time to prepare and make the other records available.

26. Nancy Joerg: If the employer receives a letter from the IDOL, does the letter indicate exactly which years they want to audit?

Consultant: It should.

27. Nancy Joerg: Does the letter tell you who made the complaint?

Consultant: No. Under the provisions of the Illinois minimum wage law, it will never reveal who the Complainant is. Under the provisions of the Illinois minimum wage law, the IDOL has no obligation to reveal the source of their investigation.

28. Nancy Joerg: Who in the Company who do you suggest should interact with the auditor?

Consultant: The employer should be protecting his/her business, so someone at the highest level (the CEO, the President, the Owner) should interact with the auditor. Human Resources may have that authority; your Payroll Supervisor may have that authority, but you really want to have your thumb on it and make sure that you know what that IDOL investigation is going to constitute. That doesn't mean that you can't pass this off to your Human Resource or Payroll people, but I think it behooves the employer to know what is going on with the IDOL audit. Oftentimes you will find that there are untruths or there are statements that are floating around (that you didn't even know were going on within the confines of your own business).

29. Nancy Joerg: What would be an example of an untruth floating around in a business under audit?

Consultant: "Nobody gets lunch hours, no one takes any lunch." "We don't have lunch hours." "I am required to work off the clock all the time." "The records are all doctored."

Some of these untruths can be squelched right away. "We have records here." "We make them require in-and-out punches." "Everyone gets a lunch hour." "Here are our records backing up these untruths that are going around."

30. Nancy Joerg: What mistakes do you see employers make when they are being audited?

Consultant: Not taking hold of the IDOL audit and being uncooperative. You need to be cooperative, and you need to be aware of what the auditor is looking for.

31. Nancy Joerg: If an employer receives a letter from the Illinois Department of Labor saying they want to see the records for three years, should the employer give the auditor records for all three years immediately, or do you think you should just start with one year?

Consultant: You have to make the records available by statute. If the records are going to be mailed to a third location (for example, to the IDOL Chicago or Springfield offices), then the employer has to send all three years. But, if the records are being looked at or reviewed at your location, then at your discretion, you can say, "Here are last year's records." Start there, if possible.

32. Nancy Joerg: As we conclude this article, do you have any special tips you would like to share?

Consultant: Absolutely. Record keeping, record keeping, record keeping! In this day and age with sophisticated record keeping, it's far better to have good records than no records at all. Both the U.S. Department of Labor and the Illinois Department of Labor rely heavily upon interviews, and the Courts have looked at those interviews and those statements from those employees and have usually sided with the employee because it is the employer's responsibility to maintain the records. In the absence of those records, pretty much whatever that employee says, the Courts have agreed upon. Employers really need to have very, very good records. It used to be the opposite of that. Thirty years ago, if you didn't have any records, nobody did much about it. It was his word against yours. No one went to Court. No one ever got anywhere, and the employer perhaps was not obligated, but not anymore. We have educated a lot of our workers. They have access to websites and information that was not available 20 years ago.

33. Nancy Joerg: When you look at records, what are the most common mistakes you see?

Consultant: Probably the punching in and punching out, or failure to punch. If the employer doesn't look at that payroll record or that time card and catch it right away, that employee is going to be the one that says, "I was required to work off the clock all the time." The employer can't prove that statement false unless the employer has good hourly records that are complete.

Questions about this topic or other management-side labor and employment law issues? Please contact WS Shareholder and Senior Attorney Nancy E Joerg at 630-377-1554, najoerg@wesselssherman.com, or visit our website.