Wednesday, 12 September 2018 14:51

ASA’s Attorney Discusses Overtime Laws

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On Wednesday, August 22, the Automotive Service Association (ASA) hosted a webinar on “Making the Overtime Law Work for You” as part of its Webinar Wednesdays initiative.


The presentation featured Brian Farrington, ASA’s wage and hour attorney and expert, who addressed federal overtime laws and the costly impact they have on non-compliant shops.


ASA Vice President Tony Molla opened the webinar by welcoming attendees and introducing Farrington. Farrington began by discussing the Fair Labor Standards Act of 1938 (FLSA), which is the basic wage and hour law in the United States and establishes standards in four areas: minimum wage, overtime, child labor and recordkeeping. As of July 24, 2009, the federal minimum wage is $7.25 per hour.


Farrington emphasized that when state law varies from federal law, an employer must follow whichever standard most benefits the employee. For example, if the state’s minimum wage is higher than the federal minimum wage, but there is no state overtime law, an employee in that state will receive the state’s minimum wage while being paid overtime under federal provisions.


Farrington stressed, “Employers must be familiar with the state laws in every jurisdiction where they operate.”


Although overtime is often viewed as a reward for an employee who works a long week, Farrington explained, “It is actually a penalty on the employer for working an employee over 40 hours. Overtime is paid out at one and a half times the employee’s regular rate of pay for hours worked over 40 hours in a workweek. The primary purpose of overtime is to spread employment because the government wants you to work more people for fewer hours. It is meant to be punitive, cost you money and be difficult to comply with.”


Clarifying that a fundamental principle of overtime is that “each workweek stands alone,” Farrington defined a workweek as a “fixed and recurring period” of seven consecutive 24-hour days that may not be altered unless it is being changed permanently. However, daily overtime is not required under FLSA, which means an employer can schedule employees within the workweek as they see fit, moving hours around to minimize overtime. Averaging workweeks is forbidden, even if the employer pays bi-weekly. For example, an employee who works 48 hours one week and 32 hours the next is still entitled to eight hours of overtime for that first week.



Paid time off does not count toward overtime. If an employee utilizes eight hours of vacation, sick or holiday pay, they will be paid for 48 hours, but since only 40 hours were actually worked, there is no overtime due.


“Overtime is based on time worked. Only hours that are actually worked beyond 40 hours count toward overtime,” Farrington said.


Overtime must also be paid at an employee’s regular rate, which is the employee’s total remuneration for employment within the workweek divided by the total number of hours worked. This means that overtime must be paid on the employee’s base rate and all compensation, including bonuses and commissions. Farrington explained how to calculate overtime on bonuses and commissions on a monthly or quarterly basis.


Hours worked is defined as all time the employee is required to be on the employer’s premises, all time the employee is required to be at a prescribed work site and all time the employee spends in activities that benefit the employer. Because management has the total power to control, schedule and require the hours worked, it is therefore completely management’s responsibility to record and pay for hours worked, meaning an employer must pay for overtime even if it is unauthorized or unknown.


“Make sure it’s a proactive management responsibility to see that employees record and are paid for hours worked,” Farrington stressed.


Meals are not required by FLSA, but if they are given, they do not need to be paid as long as these three conditions are met: the break is long enough for the employee to consume a meal or use the time for their own purposes (typically 30 minutes), the break is uninterrupted and the employee is relieved from their duties during the break. It is important to note that many states have requirements pertaining to lunch breaks. While short 15-minute breaks are not required by FLSA, they must be treated as paid work time when given.


Noting that there is an overtime exemption for most employees paid on flat rate hours, Farrington explained that overtime is not required for “salesmen, parts men and mechanics” employed by a “dealership,” which is defined as an establishment that derives over 50 percent of its gross revenue from the sales of automobiles, trucks or farm implements.



Farrington continued to describe another applicable exemption for establishments that do not derive 50 percent of its revenue from selling vehicles. Employees are exempt from overtime if the following three conditions are met: They work for a retail establishment, their regular rate is more than 1.5 times the federal minimum wage, and they are paid primarily (more than 50 percent of their earnings) by commission.


A retail establishment is considered such under FLSA if 75 percent of its income is derived from retail sales and sales made to the general public. In a collision shop, this means individual customers, even when the insurance company is paying.


The three common types of non-retail income are income from work on heavy trucks (16,001 pounds or more) or specialized equipment; income from fleet work, where work is done for a fleet customer pursuant to a contract or agreement and where the customer gets a fleet discount; and income from sales for resale, in which a dealer engages a shop to refurbish a used car that the dealership then sells, or a dealership farms out its body work to a body shop. In each case, income to the shop is non-retail. If these types of income constitute more than 25 percent of the business’s income, it is not eligible for the exemption.


Farrington provided several examples of how these requirements can be analyzed. He also explained the benefits of drawing against commission.


He warned, “The danger is if the draw is so high that the employee never gets commission. Then, the courts will determine that is a salary, not a commission. For example, techs paid on commission of 40 percent of labor draw $700 per week. Commissions are settled at the end of the quarter. At the end of the first quarter, employees generated $25,000 in labor charges and have therefore earned $10,000 in commissions at 40 percent. The employee has drawn $9,100 ($700 x 13 weeks), so at the end of Quarter 1, the employees get another $900 in excess commissions above the draw.



“Employers should ensure that regular payments to employees are not considered salary payments. The best way to do this is to carry forward any deficits (amounts by which draws exceed commission), and charge them against future commissions,” Farrington suggested. “For instance, say the commissions had been $9,000 for the quarter. There is a $100 deficit, so it gets carried forward to the next quarter and subtracted from Quarter 2’s commission.


“Under this system, a fixed number of hours are attributed to a particular job, regardless of how long it actually takes to do the job. The customer pays for the number of hours to the shop at the labor rate, and the technician receives money so what they receive is a function of what the customer pays, and that’s a commission. A painter or mechanic may work for seven, eight or nine hours in a day and still receive credit for 10, 11 or 12 flat rate hours, depending on how much work is done and regardless of the actual time it takes to complete a certain job.”


As his presentation came to a close, Farrington emphasized the importance of engaging legal counsel that is familiar with your specific state’s legal requirements.


Molla stated, “Ignorance of the law is no excuse. Seek competent legal advice when in doubt.”


For more information on ASA, visit asashop.org.