The process of paying an employee requires that you determine the compensable work an employee has done. Some activities are not considered compensable, but rather incidental. Deductions may be made from employees' pay under certain circumstances, but the rules differ for exempt and nonexempt employees. The treatment of meals and breaks for the purpose of calculating hours worked is subject to both federal and state laws. Finally, it's important to have an accurate method of tracking your employees' hours worked.
Properly paying your employees involves a complex series of steps to determine how many hours an employee has worked in a workweek. The concept of a workweek and hours worked is crucial to administering your payroll because the federal Fair Labor Standards Act (FLSA) provisions for minimum wage and overtime pay are based upon it. While calculating how many hours an employee has worked may sound simple, determining what counts as compensable time is anything but straightforward.
What counts as compensable work?
Employees must be paid for all time making up the regular working hours for which the employee is hired and for time devoted to the principal activities for which the employee is hired.
Generally, the law says that an employee must be paid for:
- all time during which an employee is required to be:
- on duty
- on the employer's premises
- at a prescribed workplace
- all time during which an employee performs work for the employer
Therefore, two conditions have to be met: one of the three conditions relating to the employee's location plus the second, performance of work, condition.
In addition to the principal duties that you hire an employee to perform — and for which that employee must be paid — are incidental activities.
Some incidental activities are compensable, that is, you must pay the employee for performing them. Others, however, are not compensable, and you do not have to pay an employee for the time it takes to do them.
The following is a list of considerations when you are calculating an employee's compensable time:
- Employee absences: Employee absences due to illness, holidays, vacation, time off to vote, or similar causes can be ignored in figuring hours worked under the FLSA, even if the employee is paid for the absences. Whether you have to pay an employee for that time depends upon the policies and rules you've set up (and, in some cases, the state where you live).
- Meals and breaks: Generally, you have to include as working time, and to pay employees for, breaks or rest periods that last no longer than 20 minutes. States may also have separate break requirements.
- Multiple jobs: If the employers are independent of each other, separate treatment is allowed. If, however, the employers are interrelated, the total of the time worked for all the employers is the "hours worked" figure that must be used in computing the employee's pay for minimum wage and overtime purposes. Therefore, if you own more than one business and an employee works for more than one of your businesses, you have to total all of his or her time to figure out hours worked. Of course, the employee must be paid for the time worked for both employers.
- Working at home: If the employee does work at home, but you know nothing about it, you don't have to pay the employee for that work. If, however, you have reason to believe the employee is working at home, you have to pay the employee for that work.
- Orientation or training: Once the decision is made to hire an employee, any time spent on activities that you require, such as filling out additional forms, is considered part of working time, and the employee must be paid for that time. This is true even if you send them to a class before or after the work day or on a nonwork day. If you require it, you have to pay them. Compensation is not required for voluntary training. If, however, you tell an employee that a training class is optional but you cause the employee to feel that nonattendance will have an adverse effect on him or her, the training is not really voluntary, and you have to include that time as working time.
- On-call time: Depending upon the circumstances, you may have to pay an employee for time on call. It comes down to how much control you have over the employee. If a nonexempt employee has to be available for a phone call and come in to work immediately, you have to pay that employee. But, generally, if the employee is free to do whatever the employee wants to do, you don't have to pay that employee. This is true even though you require the employee to carry a beeper.
- Travel time: Time spent traveling during normal working hours must be compensated. Time spent commuting and time spent traveling from home to a train station or airport do not have to be compensated. If overnight travel is required, only a portion of that time requires compensation.
- Unauthorized overtime: If an employee works overtime that you didn't authorize, you will still have to pay the employee for that time and you still have to include it as working time, if you knew or had reason to know that the employee was performing the work. In other words, if you know an employee is working overtime that you didn't authorize, you have an affirmative duty to stop the employee from performing the work. You might want to consider having a policy to discipline employees who work unauthorized overtime to keep the practice from happening.
Tip: The federal FLSA does not limit the hours that may be worked by an employee. It merely requires that all nonexempt employee be compensated for whatever hours the employee works, including compensation at one and a half times the regular rate for any hours worked in excess of 40 in a week.
Classifying incidental activities. Use the chart below to help you determine if an employee's incidental activities are compensable or noncompensable:
Compensable incidental activities
Noncompensable incidental activities
Time spent doing things that are generally a part of principal duties, regardless of when they are performed.
Examples: Setting up a machine for a particular job, passing out work-related materials to employees.
Time spent by employees on changing clothes and washing up can be excluded from hours worked, even though the nature of the employee's principal duties makes these an integral part of those duties.
Time spent is for the employer's benefit.
Example: Rest periods of up to 20 minutes (rest period requirements differ according to state law.
Time spent during the workday on activities other than the principal duties if the employee is freed from duties for a specific amount of time that is sufficiently long enough for the employee to use at his or her discretion.
Example: Meal periods, long periods (hours) of down time between jobs.
Time spent that is controlled by the employer that the employee cannot use it for his or her own purposes.
Example: Remaining on-call or near the employer's premises or waiting for work to be assigned.
Time that the employer allows employees to spend working beyond the end of a shift or workday.
Example: Allowing employees to remain after their shift is over to correct errors or prepare records.
Time spent resulting from a request by the employer.
Example: Doing charitable work at the employer's request or participating in certain activities at the employer's request.
Time spent on activities performed before or after the workday (other than principal duties) if compensable under a contract or by the employer's custom or practice.
Example: Either under custom or contract, paying employees for the time it takes an employee to travel from home to the workplace (more likely to occur if the workplace is not where the business's offices or headquarters are and an employee has to be dispatched to a remote work site).
Time spent on activities performed before or after the workday (other than principal duties) if deemed not compensable by a contract, absence of a contract, or custom or practice.
Example: Walking, riding, or otherwise traveling to and from work, waiting in line to punch in or out, waiting in line for a paycheck.
Supreme Court weighs in. Employees must be compensated for the time they spend walking to production areas after changing into protective safety equipment. However, the court ruled that the time workers spend waiting to don the first piece of gear is not compensable.
Calculating and keeping track of hours worked
Meal times and breaks are treated differently for purposes of computing hours worked and states often have their own rules regarding meals and breaks. In addition, federal law and a number of states have addressed the issue of breaks for nursing mothers.
Employee meal and break times
To add up work time for minimum wage and overtime purposes under federal wage and hour law, meals and breaks are treated differently. Generally, you have to include as working time, and to pay employees for, breaks or rest periods that last no longer than 20 minutes.
If the break lasts more than 20 minutes and the employees are free to pursue independent activities, you don't have to pay them for it and you don't have to include it as working time.
Bona fide meals (meals that last at least 30 minutes) do not have to be included in computing work time under the federal Fair Labor Standards Act (FLSA). If, however, any of the following conditions are present, an employee must be paid for the meal period under the federal wage and hours law and the time must be included as working time:
- The period is less than 30 minutes long.
- The employee is not completely relieved of duties.
- The employee cannot leave the work post.
Meals and breaks under state law. While federal law does not require that breaks be given, some state laws do. Some states specify certain requirements for both meal periods and rest periods and specify when breaks should occur and how long such breaks should be. A number of states have meal and rest period requirements for certain industries only.
Nursing in the workplace. The Patient Protection and Affordable Care Act amended the FLSA to require employers to provide unpaid reasonable break time for nonexempt employees to express breast milk.
An employer must also provide a private place, other than a bathroom, where the employee can express breast milk each time she has the need. Break time for nursing mothers must be provided for a period of one year following the birth of the child.
Employers with fewer than 50 employees may be exempt from these requirements if they would impose an undue hardship by causing significant difficulty or expense when considered in relation to the size, financial resources, nature or structure of the business.
Many states have laws that allow mothers to breastfeed their infants where mothers and children are authorized to be. This general rule includes the workplace. In addition, several states have specific rules regarding the right of women to take a break during working hours to breastfeed. These state rules may include provisions that have to be made for employees breastfeeding and whether these breaks are to be paid or unpaid. If you are an employer in one of these states, you will want to make sure you are in compliance with the laws in your state.
If state law provides greater protection for nursing mothers in the workplace than federal law, an employer is obligated to provide any greater protections prescribed by state law.
Keeping track of employees' hours
Federal wage and hour laws do not require you to have a time clock. However, whether you decide to have a time clock or not, you should have a reliable system in place for keeping track of your employees' hours.
Many companies use sign-in sheets, paper or electronic, that employees must complete when they come in, when they leave for lunch, when they return from lunch, and when they leave work for the day. They also request that the employee total the number of hours worked per day.
Employers are responsible for accuracy. While you may rely on your employees to keep their time, it's up to you to make sure that what they put on that sheet is correct. If an employee totals his hours wrong and you don't catch the error, with the result that the employee appears to be underpaid, an auditor is not going to go to the employee for the problem — you'll be held responsible.
Accounting for fractional parts of an hour. Generally, you are required to determine precisely the compensable time of your employees, including fractional parts of an hour. There is, however, an exception to the rule: if you round off your time (for example, to the nearest tenth of an hour), the practice is acceptable if it is shown that over a period of time, the rounding results in the employees' getting paid for all the time they actually work.
Compensatory time and docking pay
Employers often consider giving an employee comp time in lieu of overtime pay. However, under the federal FLSA you must consider an employee's exempt or nonexempt status under the law when determining whether you can give comp time to the employee instead of pay. Whether an employee is exempt or nonexempt also determines whether you can dock the employee's pay.
Rules for comp time in lieu of overtime pay
"Giving comp time" refers to the practice of giving "compensatory" time off to an employee instead of overtime pay. Giving comp time to nonexempt employees who work extra hours instead of paying them time and a half as required by federal wage and hour laws is illegal.
On the other hand, under federal wage and hour law there is nothing wrong with giving comp time to an exempt employee.
You may also give comp time to an employee who doesn't work 40 hours in a week, even with the extra time.
Example: Traci stays late four days in a row to help you finish an important project. You want to show your appreciation for her efforts, so you give her the next week off. Traci normally works 20 hours a week but the extra time meant that she worked 32 hours for the week. You have not violated federal law because Traci is not entitled to overtime until she works 40 hours in a workweek.
Rules for deducting pay
You can deduct pay from a nonexempt employee's pay for lateness (subject to rules), but docking an exempt employee's pay for absences of less than one day is not permitted.
Federal wage and hour laws don't prevent you from making deductions from a nonexempt employee's pay for tardiness or for failure to punch a time clock (if you have one).
However, if you do adopt this practice, you must:
- compute the regular rate before the deduction is made
- count all the time actually worked by the employee when figuring overtime hours
- ensure that the employee's regular rate meets the minimum wage requirement free and clear of the deduction
- not make deductions from overtime pay
It's a common practice for employers to "dock" late employees for 15 minutes or 30 minutes when they come in a few minutes late. However, if an employee starts working before that period of 15 or 30 minutes has elapsed, you have to pay the employee for the actual time that he or she worked and cannot "dock" him or her for the full amount of the period.
Example: Jennifer calls in to tell you that she will be 20 minutes late getting to work. According to your policy on tardiness/absenteeism, she will be docked for 30 minutes' time. If Jennifer arrives 20 minutes late and begins working immediately, you have to pay her for the extra ten minutes that she worked.
To avoid this kind of confusing scenario, you should make it a policy not to allow the employee to begin working before the docked time period has elapsed. That way, you know how much time the employee has worked, and you won't have to start dealing with paying employees by the minute.
Docking exempt employees' time. By definition, exempt workers are paid by salary, which means that they get the same amount of pay per week regardless of how many hours they work in a week. Deducting pay from an exempt employee for absences of less than one day is illegal. You can, however, "dock" an exempt employee's pay for an absence of a whole day.
If an exempt employee calls in sick and plans on being out for the entire day, you can "dock" his or her pay for the whole day and make up for the loss from a sick or vacation leave plan, if you offer those kinds of benefits.
Loss of exempt status. If you do dock an exempt employee for any reason, other than for a major safety violation, or serious conduct violations, such as sexual harassment or violence in the workplace, that employee loses their exempt status for that pay period, not just that week. If that occurs, then you will have to pay any overtime to that employee that may be due for that pay period. If you make a habit of "docking" exempt employees for absences of less than one day, you risk losing the exemption completely, which could make you liable for back overtime pay over a longer period of time.
If an employer makes an improper deduction from an exempt employee's pay, the employee's exempt status will remain intact if the employer has a clearly communicated policy, including a complaint mechanism, prohibiting improper pay deductions, reimburses the employee for the improper deduction, and makes a good faith commitment to comply with the rules in the future.
How do you prove that you do not make a practice of docking exempt employees for absences of less than one day? The best way is to keep payroll records that show that the employee received the same amount of pay for each pay period. The record should also include notations about the amount of sick time, personal leave, or vacation taken during each payroll period, too.