21 st Annual IL Statewide APA Conference

1. 21st Annual IL Statewide APA Conference August 22, 2014

2. Cooking Up Trouble:Independent Contractor vs. Employee Misclassification and Other Common Wage & Hour Mistakes William R. Pokorny Partner Franczek Radelet, P.C. 21st Annual IL Statewide APA Conference – August 21-22, 2014

3. Key Wage & Hour Laws

4. Fair Labor Standards Act • Minimum wage • 1.5 x “Regular Rate” for all hours over 40 • Recordkeeping • Child labor

5. Illinois Minimum Wage Law • Similar to FLSA • Some differences • Higher minimum wage • Exemptions • Follow whichever is best for the employee

6. Wage Payment and Collection Act • Requires payment of wages / final compensation • Easy claims procedure for employees • Strict limits on payroll deductions

7. Mistakes Can Be Costly • 10 employees • $800/week • For 35 hrs • 45 hrs/week • 13 weeks/yr $800 / 35hrs = $22.86/hr O.T. prem. = $22.85 / 2 = $11.43/hr 45 hrs x $22.85/hr = $1,028.57 5 hrs x $11.43/hr = $57.14 Total due = $1085.71 Total paid = $800 Difference = $285.71 x 13 weeks = $3,714.29 x 10 employees = $37,142.86 x 3 years = $111,428.57 x 2 (liquidated damages) = $222,857 + Attorney fees, state penalties

8. Common Problems

9. Deductions

10. Oscar Overpaid • Payroll error: $100 / paycheck, approx. $2,600 • Asked Oscar – he does not want to repay • Oscar’s supervisor wants to deduct the money from his next paycheck – would barely cover

11. Oscar Overpaid • Document overpayment – get acknowledgement from employee • Agree on repayment schedule if possible • Use disputed deduction process if needed • Consider employee relations issues – worth the headache / ill will?

12. Fired Fred • Custodian • Terminated: Damaged equipment, suspected theft • Final pay: • 2 weeks unused vacation • 1 week pay through termination date • Next pay day – this Friday • Supervisor: • Can we deduct value of damaged property from final pay? • Can we withhold final pay pending theft investigation?

13. Deductions from Final Pay • With consent of employee • At time of deduction • “Cash Advance” agreements – signed at time of advance • Can’t deduct for: • Lost/damaged property • Business losses • Other debts owed by employee, absent cash advance agreement • Disputed deduction process

14. Misclassification

15. Not Necessarily Exempt • Salaried employee • “Manager” • Supervisor / foreperson • Confidential employee • Non-union employee • Office staff • IT personnel

16. Key Exemptions • “White Collar” • Industry-specific • Outside sales • Commissioned retail sales • Auto / parts sales • Agricultural

17. “White Collar” Exemptions • Salary Amount - $455 / week minimum • Salary Basis • Duties

18. Salary Basis • Fixed amount • For any week in which work is performed • No variance for • Hours • Quantity of work • Quality of work • Deductions strictly limited

19. Effects of improper deductions • Exemption lost for the period deduction made • Affects not only employee to whom deduction made but also . . . • All employees in the same job class working for the same manager

20. Executive • Primary duty: managing enterprise or customarily recognized department or subdivision • Customarily and regularly directs at least 2 FTEs or equivalent • Authority to hire / fire, or recommendations as to hiring, firing, advancement, promotion, or change of status carry “particular weight” • IL: Max. 20% of time on activities not “directly and closely related” to the above. (40% for retail / service; not applicable to sole-charge of separate branch or owner of at least 20% share.)

21. Assistant Managers • Reports to Store Manager • Spends significant time on on-exempt activities • Makes schedules, some supervisory responsibility • No independent hiring / firing authority

22. Administrative • Primary duty of office work • Directly related to the management or general business operations of the employer or the employer’s customers • Regularly exercises discretion and independent judgment • e.g. HR Director, Sales Manager

23. Office Manager • Primary duties: • Generally in charge of office operations • Prepares and analyzes payroll, monthly and quarterly reports and financial statements • Scheduling • Other Duties: • Typing • Filing • Bookkeeping

24. “Learned” Professional • Advanced knowledge in a field of science or learning • Customarily acquired through prolonged course of specialized intellectual instruction

25. “Creative” Professional • Primary duty is original or creative work in recognized field of artistic endeavor • Result depends primarily on the invention, imagination, or talent of employee

26. Professionals - IL • Consistent exercise of discretion and judgment • Predominantly intellectual and varied in character, and such that the output cannot be standardized in relation to a given period of time • No more than 20% of time on work not “essential and necessary” to the above.

27. Independent Contractors • Control • Profit/Loss • Investment • Special skills • Permanence • Integral to the business of the principle

28. Independent Contractor Self-directed; controls details of how the work is performed Works for multiple employers Paid on a project basis Does not receive training from Company Does not receive benefits Uses own equipment Employee Works for one employer Employer provides work direction and tools Paid a guaranteed regular wage Employment related out-of-pocket expenses are paid by employer Training from employer Receives benefits Practical Considerations

29. Illinois Employee Classification Act • Applies to “contractors” – basically any employer in the construction industry • Extremely stringent definitions of independent contractor • Severe penalties for misclassification • up to $2,000 per worker per day.

30. Prevention: • Analyze job duties • Update job descriptions • Review payroll practices • Track hours for exempt workers? • Change policies / classifications?

31. Limiting Misclassification Damages • 10 employees • $800/week • For all hours • 45 hrs/week • 13 weeks/yr $800 / 45hrs = $17.78/hr O.T. prem. = $17.78 / 2 = $8.89/hr 45 hrs x $17.78/hr = $800 5 hrs x $8.89/hr = $44.44 Total due = $844.44 Total paid = $800 Difference = $44.44 x 13 weeks = $577.78 x 10 employees = $5777.78 x 3 years = $17,333.33 x 2 (liquidated damages) = $34,666.67 + Attorney fees, state penalties

32. Calculating Overtime

33. General Overtime Calculation • Total all non-excluded compensation • Divide by total hours worked to determine the “regular rate” • Divide the “regular rate” by 2 to determine the overtime premium rate • Calculate overtime hours by subtracting 40 from the total hours worked • Multiply the total overtime hours by the overtime premium rate

34. General Overtime Calculation • 46 total hours • $20/hour 1. Total non-excluded compensation: $20 x 46 hours = $920 2. Regular Rate = $20 / hour 3. OT premium = $10 / hour 4. Total OT hours = 46 – 40 = 6 hours 5. 6 hours x $10 / hour = $60 Total pay = $920 + $60 = $980

35. OT for Salaried Employees • 46 total hours • Salary = $1,000 / week • Salary covers 37.5 hour week Regular rate - $1,000 / 37.5 hours = $26.66 2.5 hours additional straight-time pay: $26.66 x 2.5 = $66.67 6 hours OT pay: $26.66/hr x 1.5 x 6 hours = $239.94 Total pay = $1,306.61 ($1,000 + $66.67 + $239.94)

36. Multiple Jobs, Different Rates • Must pay OT for all hours over 40 • Means All Hours – even if in different jobs

37. Multiple Jobs, Different Rates Unless the employee is exempt or the work is occasional or sporadic: • Track and total all hours worked in all jobs • Pay OT if total hours are over 40 • Calculate OT using either: • Weighted average • Negotiated rate for work being performed during OT hours

38. Multiple Jobs, Different Rates • Bob makes a current hourly rate of $20 per hour and works as a secretary for 37.5 hours per week • He also works as assistant coach for the volleyball team • One Saturday, he works at a volleyball tournament for 8 hours, for which he is paid a stipend of $100 • The total straight time compensation for the week is ($20 x 37.5 + $100), or $850 • Bob is entitled to 5.5 hours of OT pay

39. Weighted Average Method • $850 / 45.5 total hours worked = $18.68/hour • $18.68/hour is Bob’s weighted average pay • For each OT hour, Bob is owed ½ of the weighted average rate • Thus, Bob’s additional OT is calculated as follows: • $18.68 x ½ x 5.5 OT hours = $51.37

40. Negotiated Rate Method • Depends on what the employee is doing when the OT work is performed • If the workweek starts Saturday and ends Friday: • $20 x ½ x 5.5 OT hours = $55

41. Negotiated Rate Method • Depends on what the employee is doing when the OT work is performed • If the workweek starts Sunday and ends Saturday: • $100 stipend / 8 hours = $12.50/hour • $12.50/hour x ½ x 5.5 hours = $34.38

42. Brian Bartender • Works total of 40 hours as a bartender at $7/hr., plus tips • 10 hours as banquet staff at $10/hr, plus share of service charge ($50) • How do you calculate overtime for this week?

43. Brian Bartender • Straight Time: • $7 hours x 40 = $280 • 10 hours x $10 = $100 • Total: $380 • Overtime: • ($7.00 ÷ 2) x 10 hours = $35 • Total Pay: • Straight Time: $380 • Service charge: $50 • OT: $35 • Total: $465 • $8.25/hr x 40 ($7/hr rate plus $1.25 tip credit) = $330 • $10/hr x 10 = $100 • $50 service charge • Total of $480 • Regular hour rate ($480/50 = $(9.60) • OT ($9.60 x 1/2 = $XX) • $430 + $43 = $473 • Tip credit ($1.25 x 40 hours = $50) • Total payment to Brian is $423 ($473 - $50) WRONG

44. Brian Bartender • Determine total non-overtime compensation • $8.25/hr x 40 ($7/hr rate plus $1.25 tip credit) = $330 • $10/hr x 10 = $100 • $50 service charge • Total: $480 • Regular rate - $480 ÷ 50 = $9.60 • OT ($9.60 ÷ 2 = $4.80) • Total pay: • $7/hr x 40 hrs = $280 • $10/hr x 10 hrs = $100 • $4.80/hr x 10 OT hrs = $48 • $50 service charge • Total: $478

45. Calculating Overtime • Use weighted average rate (absent agreement) • Include all compensation in regular rate • Bonuses • Service charges • Tips (only amount used to satisfy minimum wage) • Incentive pay

46. Tracking Work Hours

47. Dedicated Dwight • Bookkeeper • Hourly • Responsible for monthly TPS Reports • Solid performer, highly dedicated • Has been taking TPS reports home, completing them after-hours • Has not recorded this time • Not looking for pay

48. Helga Housekeeper • Helga works as a hotel room attendant • Lately, she has been working through her breaks • Does not tell anyone she is not taking breaks • Automatic deduction of 30 minutes each shift for meal break

49. Addressing Off the Clock Work • Investigate immediately • Determine scope of the problem • Ensure practice stops • Counseling / discipline for employee • Counseling / discipline for management • Determine hours • Verify through available sources (security logs, email, etc.) • Obtain employee’s written estimate • Written acknowledgement of payment • Ounce of prevention …

50. Travel / Commuting Time • Hourly employee • 6:00 a.m. – logs in, checks & responds to email • 7:00 a.m. – ½-hour commute home to work