Wage and Hour Pitfalls for Law Firms and Their Clients
Absent the proper application of a specific exemption, state and federal wage and hour laws require employers to compensate their employees at no less than a specified minimum rate per hour (currently $7.25) and at one and one-half times an employee’s regular rate of pay for all time over 40 hours that employee works in any given workweek.1 Most businesses employing administrative, managerial, or professional employees take advantage of “white-collar” exemptions to wage and hour laws, which allow these businesses to avoid paying overtime compensation to certain employees, even when they work more than 40 hours in a workweek.
Unfortunately, many business owners misunderstand their obligations to pay their “white collar” employees in a certain manner in order to take advantage of the overtime exemptions available. For example, many business owners mistakenly believe that paying a management-level employee a salary is sufficient to exempt that employee from overtime laws. As a result, such businesses operate in violation of state and federal wage and hour laws, which could subject them to significant financial liability. A review of clients’ pay practices to ensure compliance with wage and hour laws is important, especially prior to terminating or bringing an action against an employee.
Perhaps surprisingly, law firms—especially small firms—are common wage and hour offenders. This appears to be especially true with the rise of alternative compensation structures for new law school graduates who are desperate for legal work at any pay level. Members and partners of small to medium-sized firms may be alarmed to discover that they are exposed to costly and potentially embarrassing wage claims.
The federal Department of Labor (“DOL”) is currently targeting the issue of exempt employee misclassification by increasing its investigation and enforcement efforts in this area. Also, as of the writing of this article, the DOL is poised to issue its proposed revised version of the regulation entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Computer and Outside Sales Employees.”2 The revised regulations are expected to drastically raise the minimum salary threshold for exempt “white collar” workers and further limit the types of duties that are considered exempt work.
As all employers should be reviewing the new regulations to ensure compliance of their pay practices, now is the perfect time to review compliance for our clients and our own firms.
II. State and Federal Wage and Hour Laws
A. Applicability of Wisconsin Law and Federal Fair Labor Standards Act
Most employers are subject to both Wisconsin wage and hour laws and the federal Fair Labor Standards Act (“FLSA”). Wisconsin wage and hour laws have a very expansive definition of who is an “employer” subject to the laws. In this state, “every person, firm or corporation, agent, manager, representative, contractor, subcontractor or principal, or other person having control or direction of any person employed at any labor or responsible directly or indirectly for the wages of another” is an “employer” subject to Wisconsin wage and hour laws.3
The FLSA’s definition of “employer” is equally expansive,4 but determining whether an entity’s employees are covered by the FLSA is more complex than under Wisconsin law. The first question is whether the employer is an “enterprise engaged in commerce or the production of goods for commerce.” An employer meets this “enterprise test” if both of the following are true:
- The employer has two or more “employees engaged in commerce or in the production of goods for commerce or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person”; and
- The employer has a gross annual volume of sales of at least $500,000.5
If both factors are met, all of the employer’s employees are subject to the FLSA. However, the FLSA covers not just employees of employers who meet the “enterprise test,” but also employees who are individually engaged in producing or handling goods in production for interstate commerce.6 Therefore, such employees are subject to the FLSA, even if other employees of the same employer are not.
As “interstate commerce” is interpreted broadly,7 this article will assume that both the FLSA and Wisconsin wage and hour laws apply to a given employer. Employers subject to both Wisconsin and federal laws are required to comply with the applicable provision that is more favorable to the employee.8 Therefore, the more stringent applicable provision, whether from the FLSA or Wisconsin law, will be discussed.
B. Minimum Wage Requirements
Although there are a number of exemptions applicable to overtime compensation requirements, there are very few exemptions from minimum wage applicability.9 As a result, all employers, and especially those employing individuals who work many hours per week, must be cognizant of their obligations under minimum wage law.
For example, suppose an administrative or professional employee (such as an attorney) makes $577/week (the equivalent of $30,000/year) and works many hours each week. Even if the employer takes steps to properly qualify the employee as exempt from overtime compensation requirements, the employer must still ensure that the employee is paid at least the minimum wage rate of $7.25 per hour every week. Therefore, if the employee works 80 hours in a given workweek at his/her regular salary of $577, he/she will be making less than minimum wage that week and will be entitled to additional compensation. Eighty hours of compensable time in a workweek may not be far-fetched, considering that “work time” includes not only the time that an employee is physically present at the office, but also time responding to work emails and performing work tasks at home, and potentially even all time traveling for work.10
C. Overtime Compensation Requirements
The general requirement for non-exempt employees under overtime laws is simple: Such employees must be paid at time-and-a-half their regular hourly wage for any time worked over 40 hours in a workweek.11Depending on the manner in which the employee is compensated, his/her regular rate of pay may vary from week to week. Unlike minimum wage laws, there exist a number of exemptions from the overtime pay requirements of which employers may take advantage, provided that certain prerequisites are met. Included are the “white collar” exemptions for executive, administrative, professional, and highly-compensated employees.
III. “White Collar” Exemption Basics
Determining applicability of each of the white collar exemptions requires a three-step analysis. First, the employer must assure that the employee’s actual duties meet the requirements for the specific exemption. Second, the employee must be paid on a “salary basis,” which is more than simply paying an employee a salary, versus an hourly wage. Third, the employee must be paid at least the minimum amount established for the particular exemption at issue.
A. Determination of Coverage Based on Employee’s Actual Duties
Each specific overtime exemption sets forth unique requirements that the employee must meet to be eligible for the exemption. Reviewing agencies look at the employee’s actual duties to determine whether the requirements are met, rather than the employee’s title or job description.12
The specific requirements discussed in this section refer to the state and federal regulations currently in effect. As previously noted, the anticipated revisions to the FLSA regulations are expected to change these specific requirements. However, employers will still be obligated to analyze employees’ actual duties to determine whether they are performing work that may exempt them from overtime regulations.
For example, the administrative exemption provides the following duties requirements:
- The employee’s primary duty consists of both:
- performing office or non-manual work directly related to management policies or general business operations of their employer or employer’s customers, and
- exercising discretion and independent judgment with respect to matters of significance; and
- The employee does one of the following:
- regularly and directly assists a proprietor or another employee in an executive/ administrative capacity, or
- performs under only general supervision work along specialized or technical lines requiring special training experience or knowledge, or
- executes special assignments and tasks under only general supervision; and
- The employee does not devote more than 20% of his/her work time in any given workweek to activities which are not directly and closely related to the performance of work described above. (This threshold is 40% for retail and service establishments.)13
Attorneys fall under the professional exemption, which requires that:
- The employee’s primary duty consists of one of the following:
- work requiring knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual or physical processes, or
- work that is original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination, or talent of the employee; or
- The employee’s work requires consistent exercise of discretion and judgment; and
- The employee’s work is predominantly intellectual and varied (as opposed to routine mental, manual, mechanical or physical work) and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time; and
- The employee does not devote more than 20% of his/her work hours in a workweek to activities which are not an essential part and necessarily incidental to the work described above.14
If an employee’s actual duties do not comport with the requirements of one or more exemption, then he/she must be paid overtime compensation.
B. Compensation on a Salary (or Fee) Basis
After an employer determines that an employee’s actual duties allow him/her to be classified as exempt from overtime requirements under one of the white collar exemptions, the employer must compensate that employee at least at the minimum applicable level and upon a “salary basis” or a “fee basis.”15
The requirement of payment on a salary basis is not satisfied by simply paying the employee a salary. An employee is paid on a “salary basis” if he/she receives a predetermined amount of compensation on a weekly or less frequent basis and if that amount is not subject to reduction because of variations in the quality or quantity of the employee’s work.16 Therefore, subject to certain exceptions, “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.”17
In other words, if an employee works any portion of a workweek, he/she is entitled to the full, predetermined salary for that week. There are a few exceptions to this general rule, with the most frequently-occurring being:
1. Deductions for one or more full days of absence due to purely personal reasons, other than disability or sickness.18
For example, if an employee wishes to take three days off for vacation or other purely personal reasons and performs no work during these three days, the employer may make a proportional deduction from the employee’s salary for such time off. Employers often provide a certain amount of vacation or other paid time off that can be substituted for regular salary pay on such days. If, however, an employee wishes to take two and one-half days off for purely personal reasons, the employer may only deduct the two full days from the employee’s regular salary. If the employee performs any work during a given day, the employee earns his/her salary for that day.
2. Deductions for one or more full days of absence due to sickness or disability, if the deduction is made in accordance with a bona fide plan, policy or practice of the employer for providing compensation for employee sickness or disability.19
If an employer has a policy or practice of providing a certain number of paid sick days which an employee may use for illness or injury, then the employer may substitute a full day of that paid time off for a proportionate day of the employee’s salary. Again, this only applies to full days of absence in which the employee performs no work. If an employee leaves work early due to illness, but has performed some work that day, the employee is entitled to compensation for the entire day. As noted, this exception does not apply to employers who do not have policies or practices in place to provide compensation for employee employee 25 sickness or disability. It should be noted that an employer is not required to compensate an exempt employee for full days of absence due to illness or disability if the employee has not yet qualified for paid leave under the policy, or if he/she has already exhausted all of his/her paid sick time for the year.20
3. Deductions from pay as discipline or penalty for certain employee infractions.
Employers may make deductions from exempt employee pay “for penalties imposed in good faith for infractions of safety rules of major significance.”21 The FLSA regulations use the example of violating a rule prohibiting smoking in explosive plants, oil refineries, and coal mines.22 Employers may also make deductions for unpaid disciplinary suspensions of one or more full days imposed in good faith for violating a written workplace conduct rule.23
4. Proportional payments during the initial or terminal week of employment.24
Employers may make proportional deductions from exempt employees’ weekly salary during their first and final weeks of work.
None of these exceptions apply to any absence occasioned by the employer. To comply with the requirement that exempt employees be paid on a salary basis, an employer must compensate its exempt employees for absences occasioned by the employer, such as company closures due to weather, or if there is not enough work for the employee to do.
Employees who qualify for the administrative or professional exemptions may be paid on a “fee basis” instead of a salary basis.25 This means that the employee may be “paid an agreed sum for a single job regardless of the time required for its completion.”26 “Payments based on the number of hours or days worked and not on the accomplishment of a given single task are not considered payments on a fee basis.”27
C. Minimum Amount of Compensation
Each white collar exemption also has a corresponding minimum level of compensation that an employee must be paid on such a salary, or in some cases, fee, “basis,” in addition to meeting the duties requirements above, to qualify as exempt from overtime regulations.
Currently, the minimum compensation levels are quite low, but, as noted, are expected to drastically increase with the new FLSA regulations. Currently, the minimum compensation requirement for attorneys under the professional exemption is $750 per month on a salary or fee basis, which amounts to only $9,000 annually.28 This minimal compensation amount is prescribed solely by state law, as the practice of law is specifically excepted from the $455 per week ($23,600 annually) compensation prescribed for professional employees under federal law.29 It is unknown whether the new, higher compensation minimums under the new FLSA regulations will apply to attorneys.
IV. Wage and Hour Pitfalls in the Legal Profession
It is not difficult to imagine a number of ways that the above rules could be misapplied by law firm employers. The relatively unique compensation arrangements for associate attorneys in some firms are particularly susceptible to this type of wage and hour violation. Commission-only compensation arrangements for associates are common, especially in smaller firms. Under such arrangements, the associate is paid a certain percentage of fees collected from work they perform or files under their direction. While (one would hope) this results in annual compensation exceeding the required minimum, it violates wage and hour laws in other respects.
As the associate’s amount and frequency of compensation is based on when, how much, and even if, the client pays the firm, this arrangement violates the requirement that compensation be on a salary or fee basis. Therefore, the associate 27 is entitled to overtime compensation for all hours over 40 worked in any workweek. Moreover, the arrangement may violate minimum wage law for weeks in which the associate does not receive compensation of at least $7.25 per hour.
Additionally, like many other types of employers, law firms of all sizes, and regardless of how they compensate their employees, often misapply the rules for compensation on a salary basis by deducting pay for partial-day absences or unauthorized reasons. If so, the firm is required to pay these employees time-and-a-half compensation for overtime hours worked.
V. Liability Arising from Wage and Hour Violations
Financial liability for wage and hour violations can be severe, if not debilitating, for an employer. In the case of a law firm, the impact on reputation and the embarrassment factor of ignorance or misapplication of the law is of special concern. Moreover, as the definition of “employer” is expansive and includes “any person … having control or custody of any employment, place of employment or of any employee,”30 individuals with direct authority or control over employees may face personal liability. The potentially severe financial penalties discussed below could be particularly devastating for a member of management or a supervisor found to be personally liable. Employers may also face criminal penalties.31
Employees who have been misclassified as exempt from overtime laws may recover up to twice the amount of wages owed, plus reasonable attorney fees.32 Misclassified employees may recover unpaid wages owed extending back two years, and three years in cases of willful violations.33 In calculating wages owed, each workweek is analyzed separately to determine the number of hours worked and average hourly compensation.34
For example, assume that an associate attorney employed by a law firm earns $60,000 per year (or approximately $1,150 per week, on average). Also assume that the attorney is either paid on a straight commission basis with no set guaranteed compensation, or that the firm erroneously deducts from his/her set salary. As the firm does not pay the attorney on a “salary or fee basis” as required by wage and hour law, the attorney is not exempt from overtime laws and is entitled to time-and-a-half his/ her average compensation each week for all hours worked in excess of 40. Finally, assume that the attorney has worked 60 hours per week, including time answering emails and working from home, each week.
In the above example, the law firm owes the associate $191.66 in overtime wages for each week ($1,150 weekly compensation ÷ 60 hours ÷ 2 (to calculate half-time rate) x 20 hours of overtime hours).35Applied practically, the calculation will be much more cumbersome because the total amount of overtime hours will likely vary each week, and therefore the average hourly wage for each week will also vary. In this example, however, if we assume that the associate has worked 50 weeks in each of the past two years, he/she is owed $19,166 for the past two years (or $28,749 for the past three years if the violation is found to be willful.) Doubling that amount, the law firm is liable for up to $38,332 (plus attorney fees) for its arguably minor misapplication of overtime law. Of course, if the law firm has done this with more than one employee, that liability quickly escalates.
Common misunderstanding or misapplication of wage and hour laws may result in overtime compensation liability for employees whom an employer—including law firms—assumes are exempt from overtime laws. This can lead to cost and embarrassment for the employer involved. With the anticipated introduction of the new Fair Labor Standards Act regulations, now is the perfect time to review wage and hour compliance—both for our clients and within our own firms.
Nicole Marklein Bacher is a partner with the Cross, Jenks, Mercer & Maffei law firm in Baraboo, Wisconsin. She focuses her practice on employment law and civil litigation, with an emphasis in insurance defense litigation. She has successfully represented companies and their insureds in various types of merits and coverage litigation. She also enjoys providing her business clients with cost-effective employment advice and representation to help them avoid employment claims and limit potential exposure if a claim arises. Ms. Bacher has been named a Rising Star by SuperLawyers magazine in the area of employment law for three consecutive years. She is a frequent presenter on a variety of employment topics. She earned her J.D. from the University of Wisconsin Law School and her undergraduate degree from the University of Wisconsin-Madison.
1 Wis. Admin. Code §§ DWD 272.03, 274.03; 29 U.S.C. §§ 206(a), 207(a)(1).
2 29 C.F.R. part 541.
3 Wis. Admin. Code § DWD 272.01(5)(a).
4 29 U.S.C. § 203(d).
5 Id., § 203(s)(1).
6 Id., §§ 206(a), 207(a).
7 See, e.g., Harper v. Coates-Clark Orthopedic Surgery & Sports Medicine Center, LLC,2006WL1319447 (M.D. Fla. May 15, 2006) (unpublished decision) (finding a material issue of fact regarding whether the employee was covered by the FLSA where the employee used a telephone and fax daily for out-of-state communications); DeArment v. Curtins, Inc., 790 F. Supp. 868 (D. Minn. 1992) (holding that employee’s receipt of daily phone calls from out-of-state callers was sufficient to establish interstate commerce for purposes of the FLSA).
8 29 U.S.C. § 218.
9 Wis. Stat. § 104.01(2)(b).
10 See Wis. Admin. Code § DWD 272.12 for regulatory interpretation of “hours worked” by employees.
11 Wis. Admin. Code § DWD 274.03; 29 U.S.C. § 207(a)(1).
12 29 C.F.R. § 541.2.
13 Wis. Admin. Code § DWD 274.04(1)(b); 29 C.F.R. § 541.200.
14 Wis. Admin. Code § DWD 274.04(1)(c); 29 C.F.R. §§ 541.300-541.304.
15 Wis. Admin. Code §§ DWD 274.04(1)(a)6., (b)5., (c)5.; 29 C.F.R. §§ 541.100(a)(1), 541.200(a)(1), 541.300(a)(1).
16 29 C.F.R. § 541.602(a).
18 29 C.F.R. § 541.602(b)(1).
19 Id., § 541.602(b)(2).
21 Id., § 541.602(b)(4).
23 Id., § 541.602(b)(5).
24 Id., § 541.602(b)(6).
25 Id., § 541.605(a).
28 Wis. Admin. Code § DWD 274.04(1)(c)5.
29 29 C.F.R. §§ 541.300(a)(1), 541.304.
30 Wis. Stat. § 103.01(1). The FLSA definition of “employer” is equally broad. 29 U.S.C. § 203(d) (“‘Employer’ includes any person acting directly or indirectly in the interest of an employer in relation to an employee....”); see also Riordan v. Kempiners, 831 F.2d 690, 694 (7th Cir. 1987).
31 Wis. Stat. § 109.11(3); 29 U.S.C. § 216(a).
32 Wis. Stat. § 109.11(2); Jacobson v. American Tool Companies, Inc., 222 Wis. 2d 384, 588 N.W.2d 67 (Ct. App. 1998); 29 U.S.C. § 216(b).
33 Wis. Stat. § 893.44; 29 U.S.C. § 255(a).
34 See, e.g., 29 C.F.R. §§ 778.109-778.603.
35 This is assuming that the employer and employee have agreed that the employee will be paid a fixed salary for fluctuating hours each week. The reviewing agency will first determine how many hours per week the fixed salary was meant to compensate the employee. Id., §§ 778.113- 778.114.