This article has been written by Abhishek Aditya, pursuing a Diploma in Labour, Employment and Industrial Laws (including POSH) for HR Managers from LawSikho.
On March 17, 2017, the Walt Disney Company agreed to pay $3.8 million in back wages to more than 16,000 of its employees. It was found that Disney had violated provisions related to minimum wage by deducting costume expenses from workers’ wages. Also, they had violated the provision related to overtime under the FLSA. Coming from one of the world’s most admired companies such news might appear unlikely, however, violations of FLSA are not uncommon.
Fair Labour Standards Act (FLSA)
The Fair Labour Standards Act, 1938 (FLSA), originated out of the ‘New Deal’ policy of Roosevelt’s government at a time when the United States was trying to get out of the Great Depression of the 1930s. One of the fundamental tenets of the New Deal was ‘relief for the unemployed and poor’. In this backdrop, the FLSA created the right to a “minimum-wage”, a forty-hour workweek and an overtime rate which is currently one and a half times the regular wage rate. Some of its salient features are:
- A minimum wage is currently $7.25 per hour.
- Deductions from wages are allowed, however, the wages, consequent to such deductions, should not fall below the minimum wage rate.
- A forty-hour work-week after which overtime pay is required to be paid. However, the FLSA does not set either a daily or a weekly limit on hours of work, provided that the employee is at least 16.
- The FLSA, thus, also regulates child labour. In accordance with ILO’s Minimum Age Convention C138, the minimum age is 16 for regular work, 18 for hazardous work and 14 for ‘light’ work. There are different rules for agricultural employment, for Workers with disabilities and child labour among others.
FLSA – Who’s covered and who’s exempt
One of the biggest challenges in ensuring FLSA compliance is deciding whether an employee is covered by or exempt from the Act. An employee who is not exempt must necessarily be paid overtime wages as mentioned earlier. Exempt employees are not entitled to overtime pay under FLSA.
Classifying employees as exempt or non-exempt can be tricky. There are 2 “tests”, and an employee needs to ‘pass’ both, to be classified as exempt:
- The Salary Test – For an employee to be exempt, they must receive at least $684 a week on a fixed salary basis.
- The Duties Test – Considering the duties done by the employer, common categories that are exempted are as follows:
- Administrative exemption – An employee is exempt if her primary duty is in office or non-manual work, which is directly related to management or running of the business. Such duties require her to exercise judgment and discretion about significant business matters.
- Executive exemption – If her primary duty is in managing the firm itself or one of its departments or divisions. In that capacity, she must have at least two full-time employees reporting to her. She must also have the authority or at least a significant say in hiring and firing employees, and in decisions about their pay, promotion, salary-hikes etc.
- Learned Professional Exemption – If her primary duty is such that it requires advanced knowledge. Such advanced knowledge is typically in fields of science, and are acquired ‘usually’, though not always, through specialized training. Work done by such professionals requires the use of discretion and judgment which are based on such knowledge.
“Blue-collar” employments such as electricians, mechanics, carpenters etc are typically non-exempt under the FLSA. Those working as “Computer Employees” in roles such as programmers, analysts, software engineers are exempt. However, those involved in the manufacture of computer hardware or those who use computers extensively in their work (such as computer operators or draftsmen) do not qualify under this exemption, unless their work involves programming or system analysis.
For each of the above-mentioned exemptions, an employee needs to pass the “salary test” in addition to the “duties test”.
The Fact Sheets provided by the Department of Labour provides details of these and other categories of employees that are exempted under the FLSA.
Common Mistakes under FLSA
Two of the most common mistakes employers make while implementing FLSA involve classifying their employees and with respect to the calculation of overtime. For the classification of employees, the job title is irrelevant. The nature of the primary duties under the job determines whether the employee is exempt from the provisions of FLSA. Thus merely using the term – ‘supervisor’ or ‘manager’ for the designation of an employee, without assigning him managerial responsibility with powers to exercise discretion and judgment, will not make him exempt under the act.
As previously mentioned, employees must receive overtime pay for hours of work in excess of forty per work-week. FLSA does not mandate overtime pay for work done on holidays or rest days. While calculating the wage rate for the purpose of overtime pay, all components of remuneration must be included except the following:
- Expenses incurred by the employee on employer’s behalf;
- Extra payments made for work on holidays or rest-days;
- Discretionary bonuses;
- Gifts; and
- Payments made by the company during periods of no work (during illness, holiday or vacations).
Non-cash payments made to the employees must also be counted by valuing them at a fair and reasonable value.
How did Disney go wrong?
As reported in news, one of the violations by Disney was the deduction of the cost of costumes from their employees’ wages, to the extent that their wages fell below the minimum limit of $7.25 per hour. As per FLSA, if the wearing of uniform by the employee is required either by some law, or by the employer, the cost of the uniform and its maintenance is to be borne by the employer. Deductions by the employer may be allowed, so long as the wage after deduction does not fall below the minimum wage level. If any such wrongful deduction is made, the employer will obviously also default on the overtime provisions.
Some other examples, involving expense by the employee, but which is for the benefit of the employer include tools used by the employee or damages/financial losses suffered by the employer, whether due to the employee or someone else. Such expenses may be deducted only to the extent that minimum wages are still paid to the employee.
However, it appears highly unlikely that an organization like Disney with upwards of $65 billion in revenue (FY2020), did not have systems and processes in place that could not prevent a basic error such as this. Did their IT systems not have a simple check that the wages which they are paying are below $7.25 an hour, because of the deductions for the cost of uniforms? Did they simply not account for that cost considering it as an expense incurred by employees? Did they wrongly classify their employees as exempt because of the provision available for recreation and amusement establishment? Under this provision, such employees are exempt if the establishment does not operate for more than seven months in a year. This too appears unlikely in a warm place like Florida.
Apart from minimum wage violations, overtime rates were wrongly calculated by Disney. Such calculation, apart from wrongly calculating overtime rates, can also result from not maintaining proper records of hours worked. The FLSA also sets the minimum standards of record-keeping requirements on employers. While no forms are mandated, accurate information is required to be maintained related to the worker’s personal identification details, details of his work such as the start of his work-week, hours worked each day and each week, pay rate, total regular and overtime earnings, deductions made, payment date etc.
Per FLSA ‘workweek’ includes all the time during which an employee is required to be on the employer’s premises. Thus ‘hours of work’ may also include time during which the employee was actually at work. Thus extra-time voluntarily offered by employees will also be counted. Rest periods less than 20 minutes should be included as work-time; however ‘meal-period’ specifically indicated as such need not be included, provided that the employee is not required to perform any duty during that time. Fact Sheet 22 discusses many such situations in detail.
A common misconception among employers is that overtime is not required to be paid to employees earning a ‘fixed-salary’. This is because typical categories of ‘exempt’ employees, as described above, do not get paid by the hour for their work. They earn a fixed salary and their hours of work are not relevant to that ‘fixed-salary’ amount. However, as detailed above, their exemption is for reasons other than their fixed-salary (though the salary test requires their weekly salary to be above $684). If a non-exempt employee, who earns a fixed-salary works beyond 40 hours, overtime must necessarily be paid to him, irrespective of the fact that his wages are not paid to him by the hour if he works less than 40 hours.
Why the Disney story matters
The Disney experience is important for a number of reasons. In California, a study commissioned by workers’ unions found a vast majority of workers surviving on lower than living wages, with lack of access to food security or affordable healthcare. Subsequent to the aforesaid disclosure of wage violation by Disney, the company faced worker protests both at Florida and in California. In August of 2018, the company agreed to raise its minimum wage to $15 an hour by 2021. FLSA violation or mistakes can lead to expensive litigation or settlements, in addition to bad press. They reflect poorly on the image of a globally-respected firm.
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