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Sample HR Policy
Pay Procedures
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Model Policy
305
Policy:
It is the policy of the Company to pay1 employees7
by check or direct deposit8 on a regular basis and in a manner so that the
amount, method, and timing of wage payments comply with any applicable laws9 or
regulations.
Comment:
(1) Employees normally will be paid2 on the fifteenth day and the last day
of the month.10 If the regular payday occurs on a Saturday, Sunday, or a
holiday, employees will be paid on the last working day before the regular payday.
(2) Employees on each payday will receive, in addition to their check or deposit
advice, a statement showing gross pay, deductions,3 and net pay. Local, state,
federal,11 and Social Security taxes will be deducted automatically. No other
deductions12 will be made unless required or allowed by law, contract, or
employee obligation. Employees may elect to have additional voluntary deductions taken
from their pay only if they authorize the deductions in writing.
(3) Employees who discover a mistake4 in their pay check, lose their pay
check, or have it stolen should notify the Personnel Department immediately. In the case
of a mistake,13 the error will be remedied promptly. In the case of loss or
theft, the Personnel Department will attempt to stop payment on the check and reissue a
new one to the employee. However, the employee is solely responsible for the monetary
loss, and the Company will not be responsible for the loss or theft of a check if it
cannot stop payment on the check.
(4) Employees who are eligible for vacation may receive an advance on their vacation
pay as long as an approved request for it is submitted to the Personnel Department at
least one pay period before the beginning of the vacation. Under normal circumstances, no
other advances5 or loans14 for employees will be made without the
prior approval of the Personnel Director. (See Personal Finances of Employees, Chapter
803.)
(5) Nonexempt employees (those not exempt from the provisions of the Fair Labor
Standards Act) will be paid overtime compensation15 at the rate of one and
one-half times their regular hourly rate for work in excess of forty hours during their
normal workweek. (For a more detailed discussion of exempt and nonexempt status, see Hours
of Work, Chapter 207.)
(6) Nonexempt employees will receive premium pay6 at one and one-half their
regular rate for work on Saturday and Sunday, regardless of the number of hours worked in
the workweek, unless the normal workweek includes regular Saturday and Sunday work.
(7) Nonexempt employees will receive a shift differential6 calculated as
follows:
(a) If the shift begins after noon and ends at 11:00 p.m. or earlier, 10 percent of
regular pay; or
(b) If the shift begins after 3:00 p.m. and ends after 11:00 p.m., 15 percent of
regular pay.
(8) For policies and procedures regarding on-call and reporting pay, see Hours of Work,
Chapter 207. For policies and procedures governing pay upon termination, see Termination
of Employment, Chapter 211.
(9) Employees should discuss any questions or concerns regarding their rate of pay and
other compensation issues with their department head or with the Personnel Department.16
Management Rationale
1 Regulation of Pay Practices: Pay practices are regulated extensively at
both the federal and state level. At the federal level, the wage and hour provisions of
the Fair Labor Standards Act ("FLSA") regulate areas such as minimum wages,
overtime, and child labor. (See notes 9 and 15, below.) Many states also have their own
minimum wage and overtime requirements as well as special rules on the timing and method
of wage payments, payments on termination, deductions from pay, and pay for work outside
of normally scheduled hours. (See notes 10 and 12, below.) Employers, therefore, should
familiarize themselves with both state and federal laws relating to pay practices. In
addition, employers should explain pay practices to their employees, including frequency
of pay periods, deductions, and applicable state and federal laws that affect an
employee’s paycheck.
2 Timing of Wage Payments: The payment of wages or a salary is fundamental to
the employer-employee relationship and also is regulated by state law (see note 10,
below). Employers should inform new employees about when and how wage and salary payments
will be made so that employees can manage their finances in an orderly fashion. For
employees who are retiring or otherwise terminating employment, employers should explain
how any remaining wage payments will be made. (For information on payment of accrued leave
at the time of termination, see Vacations, page 502:7, note 20.)
3 Deductions: Employers should state clearly that they will make only those
deductions that are required or allowed by law. Mandatory deductions include payroll taxes
and certain court ordered payments involving wage deduction orders, support payments, and
taxes owed. (For restrictions on garnishments, see Personal Finances of Employees, page
803:5, note 11.) Other deductions may be elective, such as amounts to repay loans from the
employer to the employee or benefit contributions, but they also may be restricted by
federal or state law. In any case, employees should be required to authorize in writing
all elective or voluntary pay deductions. This authorization helps prevent
misunderstandings, and many states require it. (See note 12, below.)
4 Pay Check Mistakes, Losses, or Theft: Employers should be prepared to
respond promptly to mistakes in pay checks or their loss or theft. A mistake is the
employer’s responsibility. (See note 13, below.) Accordingly, the employer should
correct the mistake quickly so that the employee is not inconvenienced. The loss or theft
of a pay check, however, often is a result of employee negligence. In these situations, an
employer should not obligate itself to remedy the situation beyond attempting to stop
payment on the check and issuing a new check when appropriate.
Employers should encourage employees to take basic precautions against the loss or
theft of their checks, such as direct deposit, and the employer’s policies should
state that it is not responsible for missing or stolen checks. Many employers prefer
direct deposit, because of the savings in the cost of printing and distributing checks,
and encourage employee participation. However, for various reasons, some employees may
object to electronic transfer of funds or be unwilling to sign the required electronic
deposit authorization. (For information on direct deposit regulation, see note 8, below.)
5 Pay Advances and Loans: Many employers are willing to help their employees
by granting advance pay for vacations. However, most prefer not to make other advances and
loans because they do not want to get into the financial services business. In addition,
it may be difficult to collect on advances and loans through wage deductions since most
states limit these deductions. (See note 12, below.) Employers that choose to make loans
to employees also should be aware of the tax consequences of below market loans to
employees. (See note 14, below.)
6 Premium Pay and Shift Differentials: Many employers provide extra pay to
employees who work unpopular shifts or on Saturdays, Sundays, or holidays, even though
they do not have a legal obligation to do so. For example, employers typically provide an
incentive, often a set amount per hour, for the "swing shift" (3 p.m. to 11
p.m.) and the "graveyard shift" (from 11 p.m. to 7 a.m.). The Model Policy
recognizes that shifts beginning after noon, but before 3 p.m., can also be disruptive to
family and social life, and thus provides for some extra compensation for shifts starting
after noon.
As an additional incentive, some employers voluntarily compensate hours worked in
excess of eight per day at overtime rates. Others consider time away from the job during
the workweek, such as vacations, holidays, or approved absences, as hours worked for
purposes of computing overtime. Neither of these practices is required by federal wage and
hour laws, although some states require daily overtime. (See Hours of Work, page 207:8,
note 17). (For information about regulations on overtime pay, see note 15, below.)
References for Legal Counsel
References for Legal
Counsel
FEDERAL
7 Employee Versus Contractor Status: Workers generally can be classified as
either the organization’s "employee" or as a self-employed
"independent contractor." This distinction is important because employees are
entitled to many protections under federal and state law that independent contractors are
not, such as coverage under minimum wage and overtime laws, workers’ compensation,
unemployment compensation, and employment discrimination laws. In addition, the
organization must contribute payroll taxes for employees. Whether a person who performs
work for the organization is an "employee" or an "independent
contractor" primarily depends on how much control the employer has over the work
relationship.
There generally are three different analyses that must be considered in determining
independent contractor status: (1) the Internal Revenue Service ("IRS")
20-factor analysis, for coverage under federal withholding requirements; (2) the
"economic reality" test, used to determine compliance with requirements of the
Fair Labor Standards Act ("FLSA"); and (3) the common law "right to
control" test, used by many courts to administer certain other statutes. Each of
these tests is discussed below. Generally, misclassification of employees for purposes of
federal tax withholding can cause the employer the most harm because the IRS is very
aggressive at questioning independent contractor status and has severe penalties for
noncompliance.
IRS Analysis. Employers normally are responsible for withholding certain employment
taxes from their employees’ pay. This obligation does not apply when the work is
performed by an independent contractor. The IRS considers the existence of an
employer-employee relationship to depend on whether the worker is subject to the will and
control of the employer. For the employment relationship to exist, the employer’s
control must apply to both the manner in which the work is performed as well as to the
result. The employer does not actually have to exercise this control. It only has to have
the right to exercise control. Conversely, the IRS considers a worker to be an independent
contractor if the employer controls only the result of the work and not the way in which
the result is achieved.
For example, a worker pursuing an independent trade, business, or profession typically
is regarded as an independent contractor. The IRS evaluates 20 factors in determining
whether the employer has control over both the manner in which the work is performed as
well as the work product. These factors are often applied in Private Letter Rulings
("PLRs") issued by the IRS in response to taxpayers’ requests. Although
PLRs may not be used as legal precedents, they indicate how the IRS can be expected to
interpret situations involving similar facts. The presence or absence of any one of the 20
factors is not determinative; rather the IRS will consider all of the factors affecting
the relationship. See, e.g., Eastern Inv. Corp. v. United States, 49 F.3d 651 (10th Cir.
1995) (the court determined that the presence or absence of one factor in the 20-factor
test was not determinative; however, the court viewed the method of payment as having a
strong impact on the other factors in examining the totality of the evidence relating to
the existence of an employer-employee relationship). The 20 factors include:
(1) Instructions: Workers are employees if they must follow another person’s
instructions as to when, where, and how to perform the job.
(2) Training: A requirement that the worker must undergo training supports employee
status.
(3) Integration: Integration of the worker’s services into the business operations
suggests that the worker is subject to the direction and control of the owner of the
business.
(4) Services Rendered Personally: A requirement that services must be rendered
personally by a specific worker implies that the hirer controls the methods used to
complete the work.
(5) Hiring, Supervising, and Paying Assistants: Control by the hirer over the hiring,
supervision, and pay of assistants, rather than by the worker in question, implies
employee status.
(6) Continuing Relationship: A continuing relationship between a worker and the entity
ordering the services suggests that an employer-employee relationship exists, even if the
work is performed on an irregular basis.
(7) Set Hours of Work: The establishment of set hours by the entity ordering the work
implies control over the worker.
(8) Requiring Full Time: A worker who must devote full time to the business of the
hiring entity is being controlled and implicitly is restricted from doing other gainful
work. In contrast, an independent contractor is unrestricted as to when and where to work.
(9) Doing Work on Hirer’s Premises: Work that is performed on the hirer’s
premises indicates employer control, especially when the work could be done elsewhere.
However, the importance of this factor depends upon the nature of the work involved.
(10) Order or Sequence: Work that must be performed in an order or sequence established
by the hirer suggests control and indicates that the worker is not free to set the pattern
of work.
(11) Oral or Written Reports: A requirement that the worker submit regular or written
reports to the hirer implies control over the worker.
(12) Payment by Hour, Week, or Month: Payment at these intervals generally indicates an
employer-employee relationship. Payment by the job or on a straight commission indicates
the worker is an independent contractor.
(13) Payment of Business or Traveling Expenses: Payment of these expenses incurred by
the worker suggests an employer-employee relationship because the employer has the right
to regulate and direct the worker’s activities.
(14) Furnishing Tools and Materials: Provision of tools, materials, and other equipment
by the hirer tends to show an employer-employee relationship.
(15) Significant Investment: Independent contractor status is implied if the worker
invests in the facilities used for the work. On the other hand, an absence of investment
indicates an employer-employee relationship. Special scrutiny is given to the legitimacy
of certain work facilities, such as home offices.
(16) Realization of Profit or Loss: A worker who can realize a profit or suffer a loss
as a result of providing services is usually an independent contractor.
(17) Serving More Than One Firm: A worker is generally an independent contractor if the
worker provides services to several unrelated firms at the same time.
(18) Serving the General Public: A worker is an independent contractor if the
worker’s services are regularly available to the general public.
(19) Right to Discharge: The right of the hirer to discharge the worker at any time is
a factor indicating an employer-employee relationship. In contrast, an independent
contractor may not be fired if the independent contractor produces a result that meets
contract specifications.
(20) Right to Terminate: A worker with the right to terminate the relationship with the
hirer at any time without incurring liability is generally an employee.
Generally, the most important factors are those affecting the right to control when,
where, and how the work is performed. See, e.g., Feivor v. Comm’r of Internal
Revenue, T.C. Memo. 1995-107 (U.S. Tx. Ct. 1995) (the district manager was an independent
contractor since the insurance company measured the manager’s performance by results,
not method of achieving goals, and did not control the details of how the manager
conducted business). Another important factor is who has the right to discharge or
terminate the relationship. 26 C.F.R. §31.3401(c)-1(b). However, each factor’s
degree of importance varies depending on the specific occupation and facts involved. Rev.
Rul. 87-41. Employers also should note that the status of the relationship is not
determined by designations or descriptions. 26 C.F.R. §31.3121(d)-(a)(3). Thus, labelling
someone as a contractor does not, by itself, make the worker an independent contractor.
See Eastern Inv. Corp. v. United States, 49 F.3d 651 (10th Cir. 1995) (the hiring
party’s classification of a salesperson as an employee or independent contractor is
of no consequence to the analysis).
FLSA Analysis. The Department of Labor ("DOL") uses the "economic
realities test" for purposes of determining coverage under and compliance with the
minimum wage and overtime requirements of the Fair Labor Standards Act ("FLSA").
The following are among the factors considered by the DOL: (1) the degree of control
exercised by the hiring party over the manner in which the work is performed; (2) the
relative investments by the hiring party and the worker in materials and equipment; (3)
the degree to which the worker’s opportunity for profit and loss is determined by the
hiring party or the worker’s own managerial skill; (4) the skill and initiative
required in performing the job; (5) the permanency of the relationship; and (6) whether
the service is an integral part of the hiring party’s business. See, e.g., Reich v.
Circle C Inv., Inc., 998 F.2d 324 (5th Cir. 1994) (nightclub dancers were employees since
the nightclub scheduled dancers to work weekly, fined and disciplined the dancers, made a
significant investment compared to that of the dancers, and controlled factors affecting
the dancers’ profits; in addition, little skill and initiative were required by the
dancers). (For additional information about the Fair Labor Standards Act, see Hours of
Work, Chapter 207.)
Common Law Test. The common law "right to control" test is used by courts to
determine employee status in various types of cases, including employment-related cases,
tax cases, and tort liability cases. The common law test, as applied by the courts,
includes the following ten factors: (1) the extent of control which, by agreement, the
hiring party may exercise over the hired party; (2) whether the hired party is engaged in
a distinct occupation or business that is usually done by a specialist without
supervision; (3) how the worker’s helpers are hired, whether paid by the hiring party
or the worker; (4) the skill required in the particular occupation; (5) who supplies the
means, tools, and place of work; (6) the length of time for which the person is hired; (7)
the method of payment, whether by time or the job; (8) whether the work is part of the
regular business of the hiring party; (9) whether the parties believe they are creating an
employment relationship; and (10) whether the hired party is an actual business entity.
See General Inv. Corp. v. United States, 823 F.2d 337 (9th Cir. 1987) (employer control
over the manner in which work is performed is the basic test for determining common law
employer-employee relationship). See also Nationwide Mutual Ins. Co. v. Darden, 503 U.S.
318 (1992) (the Supreme Court applied the common law right to control test to determine
whether a worker was an employee covered under the Employment Retirement Income Security
Act).
8 Form of Payment: The Electronic Fund Transfer Act, 15 U.S.C. §§1693 et
seq., and Regulation E of the Federal Reserve Board, 12 C.F.R. §§205.1 et seq., make it
unlawful, as a condition of employment, to require an employee to establish an account
with a particular financial institution for receipt of electronic fund transfers, such as
the employee’s wages. 15 U.S.C. §1693k(2); 15 U.S.C. §1693a(5). In addition,
employees have the right under federal and state law to be paid their wages in cash or
negotiable check. 29 C.F.R. §531.27. Although the Act does not expressly authorize or
prohibit employers from requiring payment by electronic transfer, employers are advised
not to require direct deposit and to obtain the written consent of their employees before
instituting electronic transfers in order to comply with state laws. Most state laws
specifically require employers to obtain each employee’s voluntary, written consent
in order to use direct deposits or electronic transfers for pay purposes. See, e.g., Cal.
Lab. Code §213(d); N.Y. Lab. Law §192(1) and (2).
9 Minimum Wage: The Fair Labor Standards Act ("FLSA"), 29 U.S.C.
§§201 et seq., requires that employees who are covered by the Act ("nonexempt
employees") be paid at least the minimum wage of $5.15 an hour and must be paid
overtime for all hours worked in excess of 40 in a single workweek. Overtime compensation
must be at a rate of at least one and one-half times the normal hourly rate. The
FLSA’s requirements generally apply to public and private employees engaged in
commerce or in the production of goods for commerce, or who are employed in an enterprise
engaged in commerce or in the production of goods for commerce. 29 U.S.C. §§206 and 207.
The term "commerce" is defined to mean trade, commerce, transportation,
transmission, or communication among the several states or between any state and any place
outside the state. 29 U.S.C. §203(b). Thus, the FLSA applies to most employees. However,
the minimum wage and overtime provisions of the Act do not apply to certain employees
specifically exempted from its coverage, including employees in bona fide executive,
administrative, or professional capacities. 29 U.S.C. §213(a) and (b). (For a more
detailed discussion of which employees are covered by the FLSA, see Hours of Work, page
207:4, note 4. For additional information about the FLSA’s overtime provisions, see
note 15, below; and Hours of Work, page 207:8, note 17.)
States may also have minimum wage regulations. Many states provide for the same minimum
wage as the federal requirement, but a few impose a higher rate. For example,
Alaska’s minimum wage is set at 50 cents an hour higher than the prevailing federal
minimum wage. Alaska Stat. §23.10.065. Similarly, Connecticut law provides that whenever
the federal minimum wage is increased, the state will raise its minimum wage to one-half
of one percent higher than the federal rate, rounded to the nearest whole cent, effective
the same date as the federal increase. Conn. Gen. Stat. §31-58(j). Therefore, employers
should check state law to determine whether the minimum wage is higher than the federal
rate.
10 Payday Requirements: Almost every state has passed legislation specifying
how frequently certain wage payments must be made to employees. In addition, many also
impose restrictions on how quickly the money must be paid after it is earned. For example,
California, Illinois, Michigan, and New Jersey all specify a minimum of biweekly or
semimonthly wages for most categories of employees and require payment within a period
ranging from 10 to 15 days after the close of each pay period. See Cal. Lab. Code §204;
820 ILCS 115/3; Mich. Comp. Laws §408.472; N.J. Rev. Stat. §34:11-4.2. New York and
Texas also have biweekly or semimonthly pay requirements for most employees but do not
specify when the wages must be paid after the end of the period. N.Y. Lab. Law §§190(7)
and 191(1)(d); Tex. Lab. Code §61.011.
In addition, some states have special requirements for weekly pay, while others allow
for monthly payment. For example, New York specifies weekly payments for manual laborers.
N.Y. Lab. Law §191(a). Colorado, Wisconsin, and Washington require only monthly payments
to employees. Col. Rev. Stat. §8-4-105(1), (3); Wis. Stat. §109.03(1); Wash. Admin. Code
R. 296-126-023. Many states also allow monthly payment to employees who are exempt from
their minimum wage and overtime requirements. See, e.g., Cal. Lab. Code §§204 and 204c;
820 ILCS 115/3; N.J. Rev. Stat. §34:11-4.2; N.Y. Lab. Law §§190(7) and 191(d); Tex.
Lab. Code §61.011.
State wage payment requirements may not apply to employers with collective bargaining
agreements that specify payment periods. For example, California, Illinois, and Wisconsin
allow collective bargaining agreements that set out wage payment arrangements that differ
from state law. See Cal. Lab. Code §204; 820 ILCS 115/4; Wis. Stat. §109.03(1). Because
of the variations in state laws, employers should consult the wage and hour laws that
apply to their jurisdiction.
11 Federal Withholding for Fringe Benefits: The Internal Revenue Code, as
amended, provides rules for taxing certain fringe benefits. Benefits that are not
specifically excluded under the Code or other tax statutes, such as group term life
insurance on the life of an employee or qualified transportation fringe benefits, are
included in taxable income and employers, therefore, must withhold income, Social
Security, and unemployment taxes on those fringe benefits. 26 U.S.C. §§3401(a), 3501(b);
26 C.F.R. §§1.61-21, 1.132-0.
According to IRS Announcement 85-113, 1985-31 I.R.B. 31, withholding on taxable fringe
benefits must be done at least annually. In addition, under a special accounting rule, the
employer may treat the value of certain benefits provided during the last two months of
the calendar year as paid during the subsequent taxable year. Income tax withholding may
be accomplished by: (1) adding the value of the benefits to the regular wages for a
payroll period and computing withholding taxes on the total compensation; or (2) by
withholding at a flat rate of 20 percent on the value of the benefit. Employers should
consult with tax counsel for more information on these tax issues.
12 Restrictions on Deductions: The federal Fair Labor Standards Act
("FLSA"), 29 U.S.C. §§201 et seq., which requires minimum wage payments and
premium overtime pay for covered employees (see note 9, above, and note 15, below),
prohibits deductions from pay if they would reduce the employee’s pay below the
required minimum wage. 29 C.F.R. §531.36. In addition, deductions may not affect the
employee’s overtime pay. Accordingly, in weeks that overtime is worked, deductions
are limited to the same amount an employer may deduct if the employee had worked only 40
hours or less. 29 C.F.R. §531.37. However, deductions for board, lodging and "other
facilities" (i.e., items similar to board or lodging) may be made even if they bring
an employee’s compensation below the minimum wage, as long as the deduction does not
exceed the reasonable cost of these items. 29 C.F.R. §531.32. For example, "other
facilities" include meals furnished at company restaurants, dormitory rooms furnished
to student employees, merchandise furnished at company stores, fuel, and electricity. 29
C.F.R. §531.32.
Thus, deductions to cover cash shortages and credit card processing errors violated the
FLSA since the deductions brought the wage rate below the overtime and minimum wage
requirements. Martin v. Petroleum Sales, Inc., 1 WH2d 363 (W.D. Tenn. 1992), rev’d
and remanded on other grounds, Reich v. Petroleum Sales, Inc., 30 F.3d 654 (6th Cir.
1994). Similarly, in Calderon v. Witvoet, 999 F.2d 1101 (7th Cir. 1993), farm owners
violated the FLSA minimum wage requirement when they reduced weekly pay below the minimum
wage by withholding portions of farm workers’ weekly pay and paid it to them at the
end of the summer as a bonus. (For more information about garnishment and other deductions
from wages, see Personal Finances of Employees, Chapter 803.)
Virtually all states limit the deductions that can be taken from an employee’s
paycheck to those which are required by federal or state law or court order, or to those
which are authorized in writing by the employee. With respect to employee-authorized
deductions, many state statutes are broadly worded and do not limit or describe
specifically the types of deductions that can be made. See, e.g., Mich. Comp. Laws
§408.477. Other states specify which deductions are allowed (generally, those which
benefit the employee, such as insurance premiums, retirement plan contributions, and
savings plans) and stipulate that any other form of deduction violates the law. See, e.g.,
N.Y. Lab. Law §193(1). Illinois specifies deductions for inventory shortages, financial
loss, cash advances, equipment, improper credit card transactions, and property damage as
appropriate only if there is a written authorization "freely given" at the time
of the deduction. 56 Ill. Admin. Code §§300.700 et seq. Wisconsin allows similar
deductions only with the employee’s written authority or if the employer and the
employee’s designated representative determine that the loss or damage was the result
of the employee’s negligence or willful conduct. Wis. Stat. §103.455. Due to
variations in state laws, employers should consult the applicable state statutes before
making any wage deductions.
13 Underpayments and Overpayments: An employer has an obligation to correct
any underpayments of employee wages. A wage underpayment that is not promptly corrected
generally will violate state statutes regarding the timely payment of wages. (See note 10,
above.)
State laws vary with respect to what an employer may do to recover any wage
overpayments. For example, under Illinois law, the employer may deduct the entire sum on
the first payday after the overpayment occurred if the employee agrees that an overpayment
was made. However, if the employer does not discover the error until after that date, the
employer may make deductions only after entering into a written repayment schedule
agreement. 56 Ill. Admin. Code §§300.900 and 300.930. Other states are less restrictive.
See Ind. Stat. Ann. 22-2-6-4(a) and (b) (an employer that overpays an employee may deduct
overpayment from wages after two weeks notice); 26 Maine Rev. Stat. §635 (an employer
that has overpaid an employee may withhold up to 10 percent of any subsequent pay without
the employee’s written permission). Consequently, employers should consult state law
before deducting any wage overpayments.
14 Below Market Loans: Employers that give employee loans must be careful
about the interest rate charged on the loans. The Internal Revenue Code, as amended,
allows the Internal Revenue Service to classify as taxable wages the difference between
the current "applicable federal rate" ("AFR") and the below market
interest rate charged by an employer. 26 U.S.C. §7872. The AFR generally is based on the
average interest rate paid for short, medium, and long-term Treasury securities, with
those rates determined every month. There are certain exclusions and rules that may apply
to below market loans, including:
(1) Employer loans to an employee are excluded if they total below $10,000;
(2) Although the below market discount will be included in the employee’s wages,
the employee may be able to deduct all or a portion of the interest paid on that loan,
depending on how the loan proceeds are used, if the employee itemizes deductions; and
(3) The employer will have to pay Social Security taxes ("FICA") and federal
unemployment taxes ("FUTA") on the below market discount but is not required to
withhold income tax on it.
Any employer offering below market loans to employees should seek the advice of tax
counsel.
15 Overtime Compensation: The Fair Labor Standards Act ("FLSA")
requires that every employee covered by the Act who works more than 40 hours in a single
workweek must be paid not less than one and one-half times that employee’s
"regular rate" for each hour over 40. 29 U.S.C. §207(a)(1). (For a discussion
of the FLSA’s coverage, see note 9, above.) Thus, the employee’s regular rate of
pay per hour for the week must be calculated before the overtime rate can be determined.
Some items of compensation do not have to be included in the regular rate calculation. The
following is a brief discussion of different methods of payment and their effect on the
regular rate calculation:
Piece-rate, salaried nonexempt, and commission employees. Under the FLSA, the
"regular rate" is a rate per hour that is determined before any deductions from
wages are made. 29 C.F.R. §778.109. For employees who are not paid a regular rate per
hour (such as those whose compensation is determined on a piece-rate, salary, or
commission basis), overtime compensation must be computed on the basis of the hourly rate
derived from their total compensation. 29 C.F.R. §778.109. For example, a semimonthly
salary is translated into its equivalent weekly wage by multiplying by 24 and dividing by
52. The regular hourly rate of pay is computed by dividing the weekly salary by the number
of hours that the salary is intended to compensate. 29 C.F.R. §778.113.
Shift differentials and "dirty work." Extra pay for shift differentials and
"dirty work" generally must be considered in calculating the employee’s
regular rate. 29 C.F.R. §778.207(b). (Shift differentials and "dirty work" pay
are extra compensation provided for employees who regularly work unpopular shifts or less
desirable jobs.) However, when the differential is at least one and one-half the
employee’s regular rate and is paid under a collective bargaining agreement that
establishes certain hours as the regular work day, it may be excluded from the regular
rate and also credited against the employer’s overtime pay obligation. 29 C.F.R.
§778.204(a).
So, for example, if the established regular workday is 8 a.m. to 5 p.m., a rate of one
and one-half times the usual pay for work performed from 5 p.m. to 8 a.m. is treated as
overtime pay. If, however, the employer pays the premium rate only for some hours outside
of the regular work day (such as only for the shift from midnight to 6 a.m.), the amount
of the premium cannot be excluded from the calculation for the regular rate and may not be
credited against the employer’s overtime obligation. 29 C.F.R. §778.204(b).
Different hourly rates for one employee. Another situation that can complicate the
calculation of the weekly regular rate is an employee working two or more jobs for which
the employee is paid different hourly rates. In that situation, the employee’s
regular rate of pay is the weighted average of the different rates. 29 C.F.R. §778.115.
For example, the regular rate of an employee who works 35 hours per week at $15 per hour
as a machine operator ($525), and works 10 hours that same week at $7 per hour cutting the
grass outside the plant ($70), is $595 divided by 45 hours or $13.22 per hour. Thus, the
overtime rate for this employee is one and one-half times $13.22, or $19.83 per hour,
regardless of which job the employee performs during the extra hours. The employee’s
regular and overtime rates will vary from week to week with the number of hours spent
performing each job.
Alternatively, an employer and employee may agree (before the work is performed) that
the overtime rate will be based on the regular rate that applies to the type of work
performed during the hours in excess of forty. 29 C.F.R. §778.419. Therefore, if an
employee spends 35 hours in a week working as a machine operator at $15 per hour, and five
hours a week cutting the grass at $7 per hour, the overtime rate for any additional hours
spent cutting the grass is $10.50 per hour. Conversely, the overtime rate for any
additional hours spent working as a machine operator is $22.50. This method of computation
is available for hourly employees only and does not apply to nonexempt salaried employees.
29 C.F.R. §778.419.
Excluded items of compensation. Certain types of compensation are excluded from an
employee’s regular rate of pay. The following are among the items that may be
excluded from the calculation:
(1) Discretionary bonuses. (However, awards, prizes, or bonuses for quality, quantity,
or efficiency in performing usual work during regular work hours, and bonuses based on
hours worked, are included in the calculation.) 29 U.S.C. §207(e)(3)(a); 29 C.F.R.
§778.211.
(2) Sums paid as gifts at Christmas time or on other special occasions. 29 U.S.C.
§207(e)(1); 29 C.F.R. §778.212.
(3) Premium pay for work on Saturdays, Sundays, or holidays, if the pay is at least one
and one-half times the employee’s regular rate. 29 U.S.C. §207(e)(6); 29 C.F.R.
§778.203. (See also the discussion of shift differentials and "dirty work,"
above.)
(4) Irrevocable contributions to many employee benefit plans. 29 U.S.C. §207(e)(4); 29
C.F.R. §778.214.
(5) Payments made for occasional periods when no work is performed because of vacation,
holiday, or illness. 29 U.S.C. §207(e)(2); 29 C.F.R. §778.218. (See also note 6, above.)
16 Prohibiting Employee Discussions of Compensation: Although some employers
may prefer that employees did not share information about compensation, forbidding this
activity is impractical and may be a violation of federal and state law. For example, some
states specifically prohibit employers from forbidding employees to discuss compensation
among themselves and even prohibit employers from requiring employees to sign agreements
not to disclose their wages and from retaliating against employees who disclose their
wages. See, e.g., Cal. Lab. Code §232; Mich. Comp. Laws §408.483a.
Additionally, a total ban on wage discussions among employees (i.e., a prohibition that
goes beyond limiting the time and place of discussions) is prohibited under the National
Labor Relations Act ("NLRA"), 29 U.S.C. §158(a)(1). Since higher wages are a
frequent objective of employee organizations, a rule prohibiting wage discussions has been
interpreted to be unlawful interference with the right of employees to engage in
organizational and concerted activity. See, e.g., Jeannette Corp. v. NLRB, 532 F.2d 916
(3d Cir. 1976) (the employer violated the NLRA by establishing a rule prohibiting
employees from discussing wage rates among themselves and by terminating employees who
violated the rule).
See also Franklin Iron & Metal Corp. and Hill, 148 LRRM 1246 (NLRB 1994), enforced
at 83 F.3d 156 (6th Cir. 1996) (a rule prohibiting employees from discussing wages among
themselves violates §8(a)(1) of the NLRA). Thus, rather than prohibiting employees from
discussing wages, the Model Policy encourages them to direct questions or concerns about
compensation to the human resources or personnel department or their department head
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