Top 5 FLSA Mistakes Small Businesses Should Avoid

The Fair Labor Standards Act (FLSA) governs the vast majority of workplaces in the United States. Chances are, your small business is among them.

As an FLSA-covered employer, you must follow applicable federal minimum wage, overtime, child labor, and recordkeeping laws — all of which are regulated by the FLSA.

Consequences of violating FLSA laws potentially run deep, such as the employer facing wage-and-hour investigations and being liable for unpaid wages, liquidated damages, and legal fees. It’s therefore imperative that you shield your small business from FLSA violations.

Here are 5 key FLSA mistakes to avoid.

Consequences of violating FLSA laws potentially run deep, such as the employer facing wage-and-hour investigations and being liable for unpaid wages, liquidated damages, and legal fees.

1. Not knowing which FLSA laws apply to your business

Although the FLSA covers most workplaces, this does not mean each covered employer must abide by the same FLSA rules.

Broadly speaking, the FLSA requires covered employers to:

• Pay employees appropriately, for all hours worked
• Notify employees to their FLSA rights
• Maintain specific FLSA-related records
• Comply with certain laws if they employ minors

Within those general FLSA requirements there are many provisions, which may or may not apply to your small business, such as:

• Standard minimum wage, tipped minimum wage, and subminimum wage
• Classification of nonexempt and exempt employees
• Standard overtime rate, fluctuating workweek overtime, and overtime exemptions
• Child labor hours, occupations, and wages
• Meal and break periods, including for nursing mothers
• Workplace poster requirements, including minimum wage poster
• Recordkeeping for nonexempt and employees

Consider using the DOL’s FLSA Advisors to determine whether your small business is subject to the FLSA, and if so, which laws are applicable.

2. Making all employees salaried, without consulting the FLSA

Small businesses are particularly susceptible to this mistake. Because they usually don’t have a lot of administrative resources, it’s often easier for them to pay all employees a fixed salary rather than tracking and paying hours worked. However, indiscriminately making everyone salaried can spark a number of issues, including:

• The employer not taking into account whether the employee is nonexempt-salaried or exempt-salaried under the FLSA.
• Assuming that because the employee is salaried, they are not eligible for overtime. In reality, the employee qualifies for overtime if they are nonexempt-salaried. They do not qualify for overtime if they are exempt-salaried.
• The employee not receiving the required minimum pay. If the employee is nonexempt-salaried, they must receive no less than the federal minimum wage (currently $7.25 per hour). But if they are exempt-salaried, they must receive no less than $684 per week.

The bottom line is that although it’s administratively simpler to pay all of your small business employees a fixed salary, the FLSA isn’t so simple.

The bottom line is that although it’s administratively simpler to pay all of your small business employees a fixed salary, the FLSA isn’t so simple.

Consider using the DOL’s FLSA Overtime Security Advisor before paying all of your employees on a salary basis.

3. Ignoring FLSA rules when employees wear multiple hats

Small business employees sometimes wear multiple hats, based on whatever duties happen to demand their attention throughout the workday. However, a lack of clear delineation between the employee’s primary/essential duties and any additional responsibilities invites an ad hoc work environment — where roles are ill-defined, possibly triggering FLSA noncompliance.

This is particularly true for small businesses that require employees to perform a mixture of nonexempt and exempt duties. Although employees can perform multiple jobs for an employer, they must have only one designation: either nonexempt or exempt. As noted in 29.C.F.R. §541.700, to qualify as exempt under the FLSA, the employee’s primary duty “must be the performance of exempt work,” as defined by the FLSA.

So, if an employee handles multiple roles in your small business, you’ll need to examine their combined duties to see if they qualify as exempt or nonexempt. If their “primary duty” does not meet the FLSA’s exempt standards, then they are nonexempt.

Also, if you pay a nonexempt employee different rates for working multiple jobs — such as $12/hour for one job and $15/hour for another job — then you must consider the FLSA’s weighted average overtime criteria when calculating the employee’s overtime compensation.

4. Overlooking FLSA paycheck deduction rules

You might think that because your business is small, only the most basic payroll deductions apply — such as payroll taxes. However, the FLSA has specific requirements for making deductions from an exempt employee’s pay.

Moreover, the FLSA has deduction requirements for:

• Cash register shortages
• Uniforms and tools used in the employee’s job
• Loss or theft of the employer’s property
• Damage to the employer’s property
• Financial losses caused by customers not paying their bills

In short, employers cannot make paycheck deductions for items that:

• Are for the benefit or convenience of the employer, and
• Will cause the employee’s wages to fall below the minimum wage or reduce their overtime compensation

The DOL says, “This is true even if an economic loss suffered by the employer is due to the employee’s negligence.”

5. Not comparing the FLSA with state wage and hour laws

Many states have their own wage and hour standards, which are higher than the FLSA’s or differ from the FLSA in some way. So, small employers must examine applicable state wage and hour laws, in addition to the FLSA.

For instance, many states have their own minimum wage laws, and some have overtime requirements, both of which may be more generous than the FLSA. And, some states require rest periods, which are not mandated by the FLSA, while others have unique recordkeeping and child labor laws.

When the FLSA conflicts with state wage and hour laws, the employer must use the law most favorable to the employee. For example, if the state minimum wage is higher than the FLSA, then the employee must receive no less than the state minimum wage.

Also, some local governments (e.g., the city or county) have wage and hour regulations. You may contact the state labor department to determine applicable state/local wage and hour laws.