You know the Fair Labor Standards Act (FLSA). It’s that 1938 law that says employers have to pay minimum wage and overtime. Oh, if only it were that simple.
Despite being nearly a century old, the FLSA continues to trip up employers in often costly ways. Many of the most common issues arise not from intentional misconduct, but reflect more of the old adage that no good deed goes unpunished — or result from an employer simply not knowing any better.
Although there are many examples, below are six recurring mistakes we continue to see, along with practical reminders for avoiding them.
1. Failing to Include Non-Discretionary Bonuses in the Regular Rate
One of the most frequent errors involves the calculation of the “regular rate of pay” for overtime purposes for, of course, non-exempt employees. For example, another potential collective action lawsuit under the FLSA was filed this week against a Pennsylvania employer because it allegedly did not include non-discretionary bonuses in the regular rate of pay for non-exempt employees. Discretionary bonuses — like a Christmas bonus, for example — do not have to be included within the regular rate of pay.
Non-discretionary bonuses typically include:
- Productivity bonuses
- Attendance bonuses
- Incentive or performance-based bonuses
If a bonus is promised in advance or tied to measurable criteria (i.e., if you do X, then you’ll get Y), it is almost certainly non-discretionary. These payments must be allocated back over the workweeks in which they were earned and included in the regular rate calculation, which can increase overtime owed. For example, an annual attendance bonus would be allocated back over the year in which performance was measured.
If a non-exempt employee has not actually worked overtime, then this would not cause additional monies to be paid. But if a non-exempt employee has worked overtime during the measured time period and was paid the non-discretionary bonus, then the regular rate of pay must increase, and there would be additional overtime pay owed.
Risk: Back pay exposure can compound quickly, particularly in collective actions where the same bonus structure applies to large groups of employees.
2. Using Biweekly Pay Periods to Avoid Overtime
Another persistent misconception is that overtime is determined based on a pay period (e.g., two weeks) rather than a regular workweek. Sometimes employers think that if a non-exempt employee has not worked more than 80 hours in a biweekly pay period, that overtime is not owed to the employee.
That, of course, is not the case. The FLSA requires that overtime be calculated on a workweek basis — not a biweekly or semi-monthly pay period. This means:
- An employee who works 45 hours in Week 1 and 35 hours in Week 2 is still owed five hours of overtime for Week 1.
- Averaging hours across weeks is not permitted.
Risk: Employers who rely on payroll system defaults or informal “averaging” practices may unknowingly create systemic underpayment issues.
3. Assuming Salary Equals Exempt Status
“They’re salaried. They don’t get overtime.” This is a very common misconception that shows a misunderstanding of the FLSA. Paying an employee on a salary basis, standing alone, does not make the employee exempt from overtime.
To qualify for exemption under the FLSA for the most common exemptions (i.e., the white-collar exemptions of executive, administrative, or professional), employees must generally meet:
- A minimum salary threshold (currently at $684 per week, or $35,568 per year); and
- The applicable duties test (e.g., executive, administrative, or professional duties).
We routinely see misclassification where employees are paid a salary but:
- Lack meaningful discretion or independent judgment needed for the administrative exemption
- Primarily perform routine or production work
- Do not supervise two or more full-time employees (for executive exemption)
Risk: Misclassification claims often result in significant exposure because they typically involve multiple years of unpaid overtime, plus liquidated damages and attorneys’ fees.
4. Commission-Only Pay for Non-Exempt Sales Roles
“Oh, they are commission only. They don’t get a salary.” That may work if the employee is outside sales, but if not, then this belief likely violates the FLSA. This is because some employers assume that paying employees on a commission-only basis eliminates the need to comply with minimum wage and overtime requirements. That is typically not correct, particularly if the employee does not engage in outside sales.
Unless an employee qualifies for a specific exemption — most commonly the outside sales exemption — they must still receive:
- At least minimum wage for all hours worked; and
- Overtime for hours over 40 in a workweek.
The outside sales exemption is discussed more below, but any time an employee is being paid on a commission-only basis, then an employer needs to check on whether the outside sales exemption or another exemption would apply, and if not, make sure the employee gets minimum wage and overtime if working more than 40 hours in a regular workweek.
Risk: Commission-only pay models can run the risk of violating minimum wage and overtime requirements. And if the time worked is not tracked accurately, then the bill for unpaid overtime could be steep.
5. Misapplying the Outside Sales Exemption to Remote Workers
With the rise of remote work, some employers mistakenly assume that employees who work from home and engage in sales activity qualify for the outside sales exemption. That is not necessarily the case.
To meet the outside sales exemption, an employee must be:
- Primarily engaged in making sales or obtaining orders; and
- Customarily and regularly engaged away from the employer’s place of business.
Importantly, an employee’s home office is typically considered one of the employer’s “places of business” for purposes of this analysis. As a result:
- Employees who make sales primarily by phone, email, or video from home generally do not qualify for the exemption
- Inside sales employees working remotely remain subject to minimum wage and overtime requirements unless another exemption applies
Risk: Misclassifying remote sales employees as exempt under the outside sales exemption when they are not customarily and regularly outside of their home making sales can create significant overtime exposure, particularly where employees are working long hours but not tracking time.
6. Treating Workers as Independent Contractors by Agreement
Finally, one of the most common and highest-risk mistakes is assuming that a worker can be classified as an independent contractor simply because:
- The worker prefers it or even requests it; or
- The parties sign an agreement labeling the relationship as such.
Under the FLSA, classification depends on the economic realities of the relationship, not the label used by the parties. Key factors include:
- The degree of control exercised by the employer
- The worker’s opportunity for profit or loss
- The permanency of the relationship
- Whether the work is integral to the business
While the worker’s preference to be classified as an independent contractor may keep the worker from hiring an attorney and claiming misclassification, a governmental entity auditing the employer — like the United States Department of Labor — will likely not care that the worker requested to be classified as an independent contractor.
Risk: Misclassification can trigger liability for unpaid minimum wage, overtime, tax issues, and potential exposure under multiple statutes.
Takeaway
These issues are rarely isolated. In many cases, employers discover multiple overlapping compliance problems during an audit or litigation — particularly where pay practices, classification decisions, and evolving workplace models intersect.
The good news is that most of these risks can be mitigated with periodic review of:
- Pay practices
- Job classifications
- Bonus and commission structures
- Remote work arrangements and how work is actually performed
A proactive review — particularly before implementing new compensation models or expanding remote work — can significantly reduce exposure. If Bradley’s Labor & Employment Practice Group can assist you in auditing or reviewing any of your pay or classification practices, please let us know. Thank you.
