Wage theft is the failure of an employer to pay its workers the full wages to which they are legally entitled. This can take various forms, including but not limited to failing to pay overtime wages, misclassifying employees as independent contractors, failing to pay the minimum wage, and withholding tips. The Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq. (“FLSA”), is the federal law which sets the baseline rules for how employers must compensate their employees. This page addresses several general principles broadly applicable under the FLSA. It is important to note that many states have their own wage and worker classification laws that expand upon the protections of the FLSA, and these state laws vary substantially.
What does it mean to have been “misclassified” under the FLSA?
Misclassification occurs when an employer gives an employee the wrong designation, whether by mistake or on purpose, resulting in that employee being denied benefits to which they are entitled. Misclassification can take several forms. In some instances, an employer misclassifies an employee by incorrectly designating the employee as exempt from the FLSA’s minimum wage (i.e., $7.25 per hour, or $2.13 per hour for tipped employees) and overtime requirements (i.e., paying 1.5 times an employee’s hourly rate for hours worked over 40 in a given week). Misclassification also occurs when an employer incorrectly pays a worker as an independent contractor rather than as an employee.
How do I tell if I am exempt or non-exempt?
Certain employees are “exempt” from the FLSA’s minimum wage and overtime requirements, and the FLSA enumerates these exemptions. Employers may inflate job titles or mistakenly – or deliberately – misclassify an employee as “exempt,” resulting in the employer paying its employees fewer wages than to which those employees are entitled. In order to properly determine whether to classify an employee as “exempt,” the employee in question must pass two tests under the FLSA.
The first test is the salary basis test. Regardless of the duties performed by the employee, that employee must earn at least $684 per week in order to be exempt from the FLSA. If an employee does not earn $684 per week, even if they fit into one of the categories described below, an employer must pay that worker the minimum wage and overtime.
The second test is the duties test. This test focuses on the types of duties performed by an employee, and there are several categories of exemptions into which an employee can fall:
- Executive Exemption: The employee’s primary duties must be managing the business or a recognized unit of a business, the employee must supervise at least two employees, and the employee must have the authority to hire or fire employees or have their recommendations regarding employment actions be given weight.
- Administrative Exemption: The employee must perform office or non-manual work related to management or business operations, and these duties must involve the exercise of discretion and independent judgment.
- Learned Professional Exemption: The employee must perform work requiring advanced knowledge, i.e., work that is predominately intellectual and which requires the consistent exercise of discretion and judgment. This advanced knowledge must be in a field of science or learning (e.g., medicine or law), and this knowledge must be acquired by a prolonged course of study, such as medical school or law school.
- Creative Professional Exemption: The employee’s primary duties must require originality, talent, invention, or imagination in advancement of an artistic or creative pursuit.
- Computer Employee Exemption: This exemption applies to those employed as a computer systems analyst, a programmer, a software engineer, or a similar position. Such an employee’s duties must include analyzing computer systems to determine their specifications; designing, developing, documenting, analyzing, creating, testing, or modifying computer systems and programs; or some combination of these duties.
- Outside Sales Exemption: This exemption applies to employees who solicit contracts or orders for goods or services and who primarily work away from the employer’s place of business.
Additionally, “highly compensated employees” earning at least $107,432 annually are also exempt as long as they perform at least one of the duties of an exempt executive, administrative, or professional employee. Blue-collar workers – e.g., electricians, mechanics, construction workers, and others working in production, maintenance, or construction – or police, firefighters, correctional officers, paramedics, and other first responders do not qualify for these exemptions regardless of compensation.
How do I tell if I am an independent contractor or an employee?
Independent contractors are self-employed individuals who offer services to the public and who are contracted to perform those services, typically on a one-time basis or for a certain period of time. Generally, while clients may direct the result of an independent contractor’s work (e.g., hiring a plumber to fix a leak), the client does not direct how or when the work is completed. Independent contractors are not entitled to the minimum wage or overtime, and employers do not have to withhold taxes for them (as independent contractors must pay their own taxes). These “savings” provide a strong financial incentive for employers to misclassify employees as independent contractors. However, the consequences to employees of such a misclassification can be severe: In addition to not receiving overtime pay and being required to bear the financial burden of contributions to Social Security and Medicare normally paid by employers, independent contractors are not protected under the National Labor Relations Act or Title VII.
Determining whether a worker has been correctly classified as either an employee or an independent contractor requires analyzing the relationship between the worker and the business. Courts will apply the “economic realities test” to evaluate whether a worker is economically dependent upon a business or self-employed. Tony & Susan Alamo Found. v. Sec’y of Lab., 471 U.S. 290, 291 (1985). The multi-factor economic realities test asks “whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983); see, e.g., Barfield v. New York City Health & Hosps. Corp., 537 F.3d 132, 142 (2nd Cir. 2008) (applying the four-factor economic realities test). In some jurisdictions, the court will also consider two additional factors, “the degree of permanence of the working relationship; and  whether the service rendered is an integral part of the alleged employer’s business.” Flores v. Velocity Express, LLC, 250 F.Supp.3d 468, 478 (N.D. Cal. 2017) (internal citation omitted); see also McFeeley v. Jackson St. Ent., LLC, 825 F.3d 235, 241 (4th Cir. 2016) (applying a six-factor economic realities test). No single factor is dispositive, and courts will look at the entire circumstances to determine the economic reality of the relationship.
Instructions regarding how and when to perform work (e.g., working a 9 to 5 shift), what tools to use, and where to secure supplies, and training regarding how the business conducts this work all suggest that a worker is an employee and not an independent contractor. Self-investment in one’s work – e.g., purchasing a truck and all of one’s tools – may indicate that someone is an independent contractor, but, if the risk of profit and loss primarily falls on the business or if the business reimburses the worker for expenses, that worker may be an employee. The receipt of benefits such as insurance, vacation, etc. indicates that a worker may be an employee, and written contracts may be very important in determining the intent of the parties. Additionally, an ongoing relationship between the business and the worker may indicate that the worker is an employee, though independent contractors often perform work for repeat clients.
How is overtime calculated under the FLSA?
The FLSA requires that an employee who works more than 40 hours in a given week be paid 1.5 times their normal rate for any hours worked in excess of 40 hours. By way of example, if an employee is paid $14.00 per hour and works 50 hours in a week, that employee’s compensation for that week can be illustrated as ($14.00 * 40 hours) + ($21.00 * 10 hours), totaling $770. Had that employee not been paid overtime, her paycheck would be only $700.
The FLSA does not permit employers to average the hours worked by an employee across weeks. For instance, if an employee earning $14 per hour worked 50 hours in one week and 30 hours the next week, her employer cannot pay all 80 hours at straight time (which would total $1,120). Rather, the employer must pay overtime on the 10 extra hours worked during the first week. In this example, this employee would be owed $1,190.
However, there is an alternative and permissible way of calculating overtime when an employee’s hours vary from week to week, called the fluctuating workweek method. Under the fluctuating workweek method, employers are permitted to pay employees a fixed amount per week that does not change regardless of how many hours an employee works, i.e., if the employee one week works only 30 hours, the weekly rate cannot be reduced. If the employee works more than 40 hours in a given week, the employer must calculate an average hourly rate for that week and base overtime compensation – a half rate – on that fluctuating rate.
For example, if an employer pays an employee $600 per week and the employee works 50 hours that week, she will an average hourly rate of $12 per hour. The employee’s half rate is $6, and she will be owed an additional $60 in overtime compensation ($6 * 10 hours), for a total paycheck of $660. If she then worked 60 hours the next week, her average hourly rate would be $10 per hour, and her half rate would be $5. She would be owed $100 in overtime compensation ($5 * 20 hours), for a total paycheck of $700. There are specific requirements for when an employer can use the fluctuating workweek method, e.g., the number of hours worked by the employee must actually change from week to week.
When an employee earns commissions, those commissions are included in the calculation of the employee’s regular rate. For instance, take an employee who worked 60 hours, earning $11 per hour and $200 in commissions, and whose employer paid her $860 (i.e., $11 * 60 hours + $200). This employee’s regular rate is actually $21.50 per hour for the purposes of calculating overtime ($860 / 40 hours = $21.50 per hour). This employee should have received an additional $215 in overtime pay.
These examples are merely illustrative and do not capture all of the ways in which employers can miscalculate overtime pay.
Are employees protected from retaliation under the FLSA?
Yes. The FLSA makes it illegal for any person to “discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to [the FLSA], or has testified or is about to testify in any such proceeding, or has served or is about to serve on an industry committee.” 29 U.S.C. § 215(a)(3). Employees are protected regardless of whether their complaint is oral or in writing, and most federal Courts of Appeals have held that internal complaints to an employee’s supervisor are protected. Kasten v. Saint-Gobain Performance Plastics Co., 563 U.S. 1 (2011) (holding that “any complaint” includes oral complaints); see, e.g., Greathouse v. JHS Security Inc., 784 F.3d 105 (2nd Cir. 2015) (internal complaints are protected); Minor v. Bostwick Labs, Inc., 669 F.3d 428 (4th Cir. 2012) (holding same).
The FLSA also protects employees against gender inequity in compensation through the Equal Pay Act, 29 U.S.C. § 206(d) (“EPA”). The EPA prohibits employers from paying employees of one sex than employees of another “for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions,” except where such unequal payment is made due to a seniority system, a merit system, systems in which pay varies due to quality or quality of production, or “a differential based on any other factor other than sex.” Id. If an employer is paying unequal wages based on sex, such an employer cannot correct this violation by reducing wages. You can find more information about the EPA on the Katz Banks Kumin website.
How much do state laws vary from each other and from federal law?
State laws regulating wages and worker classification vary substantially from one another and from federal law. For instance, while the federal minimum wage for non-tipped employees is $7.25, the minimum wage in other jurisdictions is higher, sometimes significantly. For example, the minimum wage is $17.00 in the District of Columbia and $15.50 in California.
Additionally, the FLSA only provides liquidated damages (i.e., payment of two times the wages owed) if an employer’s violation of the law is determined to be “willful.” 29 U.S.C. § 260. However, many states automatically apply liquidated or “treble” damages. See, e.g., D.C. Code § 32-1012(b)(1) (wages owed plus three times, or “treble,” the wages owed); Cal. Lab. Code § 1194.2 (liquidated damages equal to the wages owed); N.Y. Lab. L. § 198 (same). In California, the Private Attorneys General Act enables employees to pursue substantial civil penalties for violations of wage and hour laws that could otherwise be assessed by the Labor Commissioner. Cal. Lab. Code §§ 2698 et seq. The list of differences between state wage and hour laws is expansive. Because of these substantial variations, it is important to consult with an attorney familiar with the wage and hour laws in your state to best evaluate your claims.