/>iWhy Wage & Hour Compliance Deserves Your Attention
Wage and hour compliance isn’t just about cutting checks on time. Missteps in proper compliance can cost employers thousands in backpay, double damages, and attorneys’ fees.
As employment law attorney Charles Krugel notes, a metaphorical ‘perfect storm’ characterizes the current wage and hour environment: increased regulatory scrutiny, shifting wage movements like ‘Fight for $15,’ and a persistent misunderstanding of how these laws work.
This article will outline the major considerations every employer must keep in mind as part of their compliance work to avoid litigation and reputational harm.
The Harsh Reality for Employers
The Fair Labor Standards Act (FLSA) (29 U.S.C. § 201 et seq.) governs most wage-related issues in the US. It sets the federal minimum wage, mandates overtime pay for non-exempt employees, and includes recordkeeping and youth labor provisions. It preempts only those state laws that offer less protection; where state or local laws are more favorable to employees, those prevail.
‘Strict liability’ is a legal standard that applies under the FLSA and many state laws. In its simplest form, this standard means that intent doesn’t matter. As Helen Bloch explains, if a business fails to pay minimum wage or overtime — even by accident — it is still legally liable. Courts won’t consider excuses, even if they’re reasonable.
Employee Classification
Exempt vs. Non-Exempt
One of the most misunderstood wage compliance issues involves worker classification. Employees are either ‘exempt’ or ‘non-exempt’ from FLSA protections, particularly overtime.
As Amit Bindra of Prinz Law Firm explains, non-exempt employees must receive overtime pay at 1.5 times their regular hourly rate for hours worked beyond 40 per week. Exempt employees do not receive overtime but must meet two critical criteria:
- Duties Test: The employee must perform specific types of work (e.g., executive, administrative, or professional tasks).
- Salary Basis Test: The employee must be paid a fixed salary not subject to reduction based on hours worked. As of 2025, the minimum salary threshold is $684 per week under federal guidelines, though this may vary by state.
Helen Bloch emphasizes the importance of the highly compensated employee exemption. Under FLSA rules, employees earning more than $107,432 annually may be exempt if they perform at least one exempt duty. But, as Bloch warns, state laws may be stricter — and being paid hourly, no matter how much, could still void an exemption.
The Independent Contractor Trap
Many businesses try to sidestep overtime obligations by labeling workers as ‘independent contractors.’ However, as Max Barack of Garfinkel Group, LLC points out, “what you say on paper doesn’t matter as much as what happens in practice.”
The FLSA and IRS use variations of the ‘economic realities’ test to determine true employment status. Factors include:
- Whether the worker is integral to the business
- Level of control exercised by the employer
- Worker’s opportunity for profit or loss
- Permanency of the relationship
Misclassification can result in severe penalties, including backpay for unpaid wages, taxes, and benefits. Even well-intentioned mistakes can backfire, particularly when one contractor’s complaint leads to a class action or Department of Labor audit.
Tipped Employees
Tipped employees, especially in restaurants and hospitality, are governed by separate wage rules. Helen Bloch notes that under the FLSA, an employer can claim a ‘tip credit,’ paying tipped workers as little as $2.13 per hour if tips bring them to the minimum wage.
However, this rule is rapidly evolving. Cities like Chicago and states like California have eliminated or limited the use of tip credits. Additionally, ‘tip pooling’ is permitted only among non-management employees who customarily receive tips.
Employers must keep meticulous records and stay updated on local regulations. Failing to do so can invalidate the tip credit entirely.
On-Call and After-Hours Work
Whether on-call time is compensable depends on the level of restriction imposed on the employee. Max Barack offers the example of engineers or paramedics who must be immediately available and remain within a certain distance. These employees may be entitled to pay even if they aren’t actively working, because their freedom is limited. Conversely, if a worker is free to spend their time as they choose and rarely called in, on-call time may not be compensable.
Timekeeping: Accuracy Isn’t Optional
Amit Bindra explains that while employees are responsible for recording their hours, the employer bears the legal burden for ensuring accurate records. In the absence of proper documentation, courts often accept the employee’s word — especially in the 7th Circuit, which has robust case law favoring employees.
Federal law generally requires employers to retain wage and hour records for at least three years. However, some state laws, such as Illinois’ Wage Payment and Collection Act, mandate longer periods up to 10 years. A solid recordkeeping system can be your best legal defense.
Max Barack suggests keeping detailed records of:
- Total hours worked
- Rate of pay
- Overtime calculations
- Bonuses and commissions
- Deductions and garnishments
- Pay dates and pay periods
Calculating Overtime
Overtime isn’t just time-and-a-half of base pay — it often includes non-discretionary bonuses, commissions, and other incentives. Failing to include bonus payments in overtime calculations is a frequent mistake. Employers who make this error expose themselves to backpay liability and double damages under the FLSA.
For example, Bindra notes that if an employee earns a performance bonus, that extra income must be spread over the pay period in which it was earned. This affects the ‘regular rate’ used to calculate overtime.
Discipline and Deductions: Handle With Care
Employers sometimes attempt to dock pay from salaried employees for absences or performance issues. As Max Barack warns, improper deductions can destroy the employee’s exempt status, making them retroactively eligible for overtime. Improper deductions for things like being late or leaving early are forbidden and may violate both FLSA and state laws.
Legally acceptable deductions include:
- Full-day absences for personal reasons
- Penalties for serious safety violations
- Unpaid disciplinary suspensions of a full day or more
In jurisdictions where meal or rest breaks are mandatory for example, employers are obligated to ensure compliance. Helen Bloch points out that failing to take breaks, or working unauthorized overtime, may expose the employer to penalties. Policies that require discipline for violations can help enforce compliance and mitigate risk.
Garnishments and Overpayments
Employers who receive garnishment notices for child support, tax levies, or creditor judgments must verify their authenticity. As Helen Bloch recommends, always check for a valid court order and consult directly with the employee. Unauthorized deductions, even with the employee’s verbal consent, may be illegal under wage laws. Written agreements are essential.
A Word of Caution
Helen Bloch explains that while employers can require arbitration agreements, not everything is waivable. Employees still retain the right to file complaints with government agencies. Amit Bindra and Max Barack further caution that arbitration clauses and class waivers like those often seen in low-wage sectors can ultimately backfire. In cases like Chipotle, companies faced mass arbitration filings after defeating class certification. Arbitration costs, which are typically borne by employers, multiplied exponentially.
Final Thoughts
Wage and hour laws are complex, often unforgiving, and ever-changing. Therefore, employers must take a proactive, well-documented approach to remain compliant. Misclassifying workers, failing to calculate overtime properly, or skimping on recordkeeping can all lead to devastating legal and financial fallout. Staying on the right side of the law means fewer angry employees — and fewer costly lawsuits.
To learn more about this topic view Protecting Your Employee Assets: Human Resources Management & The Life Cycle Of The Employment Relationship / Show Them the Money: Wage & Hour Compliance. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about HR topics.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
