Three Payroll Myths That Can Get You In Trouble

3 minutes

Myth 1: If you hire your workers through a temp agency, you’re off the hook for wage and hour issues.

Some organizations think if they hire their workers through a temp agency, all the wage and hour issues become the responsibility of the agency. They think they won’t need to track employee time or worry about overtime pay. Because of a concept called “joint employment,” though, these companies could still find themselves liable, even if the agency is originally the one who dropped the ball.

For example, Intershell International Corp., a Gloucester, MA seafood processor, was ordered to pay $90,000 in back wages and an equal amount in liquidated damages to 60 employees, plus $28,050 in civil money damages to the U.S. Department of Labor. Their offenses? They failed to maintain proper payroll and hours records, provided inaccurate records to investigators, made improper deductions from employee wages, and failed to pay overtime for hours worked over 40.

Apparently they thought because they paid their workers through temporary staffing agencies, this cleared them of their responsibility to track work hours or ensure the laborers received proper overtime pay. They learned to their chagrin this wasn’t true… and it was an expensive lesson, to the tune of over $200,000.

Myth 2: If you pay your employees a salary, they’re automatically exempt from overtime rules.

A common misconception: if somebody is paid a salary, they don’t have to be paid overtime. In fact, paying a salary is only step one in determining if an employee is exempt from overtime. The Department of Labor (DOL) specifies a job duties test that must also be satisfied.

In other words, you can call somebody the “Director of Culinary Sanitation Services” and pay them a salary, but if their actual job is washing dishes, you sill better pay them overtime when they work more than 40 hours in a week.

Los Arcos Mexican Restaurant in South Carolina learned this the hard way. Their offense? Among other things, they paid cooks and dishwashers a fixed salary without regard to the number of hours they worked. As a result, not only did they fail to pay proper overtime, in some cases they wound up paying their workers less than the required federal minimum wage per hour. (They also made wait staff work for tips only, which is another huge no-no.)

All told, they reached a settlement with the DOL and paid a total of $459,130 to 28 employees ($229,565 in back wages and an equal amount of liquidated damages). For those of you playing along at home, that works out to an average of over $16,000 per employee. Another expensive lesson learned!

Myth 3: If you pay your employees piecework rates, you can call them independent contractors and you don’t have to worry about overtime or minimum wage.

Hiring someone as an independent contractor (IC) isn’t as simple as just saying, “This person is an independent contractor.” Not even if you write it in as a clause in their employment contract. The DOL has a set of standards that must be met in order to classify someone as an IC — and just to make things more complicated, the Internal Revenue Service has a different set of criteria.

Companies like to hire ICs because they feel it gives them more flexibility with their workforce, plus they don’t have to withhold taxes, pay unemployment insurance, or worry about stuff like minimum wage and overtime. Unfortunately, some mistakenly think as long as they pay the workers by some method other than hourly, they can call them ICs — without taking into account the other criteria of the DOL or the IRS.

A national food distribution company, El Club Mexicano, based in Asheboro, NC, has agreed to pay back wages and damages totaling $136,266 to 47 employees. Their offense? They paid their workers a piece rate, which they thought meant they could classify them as ICs. The result is that some of the workers ended up making less than $7.25 per hour, and some were not paid at the overtime rate when they worked more than 40 hours in a week.

In fact, the method the company uses to calculate pay has nothing to do with whether workers are classified as employees or as ICs. IC status is determined by the degree of control the company exerts over how the worker does the job, and the amount of economic independence the worker has. You can pay employees by the hour, by the piece, a day rate, a flat salary, however you want. If you exert sufficient control over their working conditions, they’re going to be classified as employees, not ICs.

As an added problem: if you misclassify workers as ICs, you may not just be on the hook for overtime and/or minimum wage. Many states and the IRS have signed a Memorandum of Agreement with the U.S. DOL, agreeing to share information on these types of cases. If you’re found to have misclassified workers by the DOL, you may also soon find your state tax authority and the IRS knocking at your door, as well.

Myths… busted!

Don’t let these payroll myths get you in hot water! A good start is to track your workers’ time accurately. This will help ensure you’re paying more than the minimum hourly wage and any required overtime, no matter what payroll calculation method you choose.

Contact Acroprint or visit our web store to learn more about all the workforce management solutions we offer. With one of the most extensive product lines in the industry, we’re sure to have a time tracking product that will work for you.

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