Oct 1, 2003 12:00 PM, Mark E. Battersby
It is no secret that employment practices have long posed problems for small business owners. In fact, even the federal government has difficulty determining which employees should be paid overtime and under what circumstances. Similarly, the mislabeling of workers as independent contractors can reduce an integrator's tax bill, but the definition of who is and who isn't an independent contractor is an area that remains controversial.
EXEMPT OR NONEXEMPT?
The question of whether your employees are exempt from minimum wage and overtime rules or are considered to be nonexempt is usually governed by both federal and state laws. Fortunately, the federal rules in this area may, at some future date, see changes that better reflect the reality of the workplace.
In general, employees working more than a 40-hour week must be compensated at a rate not less than one-and-a-half times their regular rate of pay — unless they are exempt. Washington state, for example, recognizes as exempt from overtime any individuals employed in a bona fide executive, administrative, or professional capacity or employed as outside salespeople.
In addition to being responsible for administering rules covering federal minimum wage laws, restrictions on child labor, and equal pay for men and women, the U.S. Department of Labor (DOL) dictates whether you must offer additional overtime compensation to nonexempt employees working more than 40 hours a week.
What makes an employee exempt? More than many integrators might think. There is, for instance, a widespread misconception that if a person is on salary, he or she is not entitled to overtime. In fact, keeping an employee on salary is only half the battle. In order for any employee to be exempt from overtime pay, that person must meet two requirements: 1. he or she must hold a professional, executive, or administrative position; and 2. he or she must be paid on a salary or fee basis as opposed to an hourly one.
The DOL offers clear definitions of the types of employees that should be considered professional, executive, or administrative in its Code of Federal Regulations. An executive, for example, manages two or more employees, sets policy, and wields the power to hire and fire. Administrative personnel perform office or nonmanual work to assist executives in their managerial duties.
In general, the Fair Labor Standards Act (FLSA) covers all employees of any enterprise engaged in interstate commerce or in the production of goods for interstate commerce, and it exempts many small enterprises. The FLSA overtime guidelines, for instance, apply only if your business earns at least $500,000 annually — a figure that hasn't changed in more than 60 years.
Keep in mind, however, that federal laws merely set one limit. Just as some states impose higher minimum wages than have been approved by Congress, state labor laws might require overtime pay by businesses making less than $500,000 each year.
Those who work for a combination of salary and commissions may be exempt from overtime pay in retail or services firms under federal law if their regular hourly rate is more than one-and-a-half times the minimum wage and more than half of their compensation and consists of commissions for a representative period of not less than one month.
CLEANING UP YOUR ACT
Remember that not only can your business be held liable for overtime pay violations but that you, the business owner, may also be held accountable. If you are the owner or principal of the business — the one responsible for setting pay — you might be on the hook if your business folds.
When it comes to employment taxes, to clean up your act, you will find that there is a distinct provision in U.S. tax laws: Section 530. Added in 1978, this provision offers a chance for a contractor or business not already being audited to make a case for its practices being reasonable based on widespread industry practices.
Coming clean does not always require the expertise and expense of professional assistance. Compensating for the overtime of nonexempt workers should, of course, be done on a retroactive basis. However, most bookkeepers can do it if they handle payroll and tax returns.
When it comes to properly labeling workers as employees rather than independent contractors, at first, it may seem burdensome to file W-4 and W-2 forms for every employee or to withhold 7.5 percent of every employment dollar and match it. With time and experience, however, the possibility of penalties will ease. For the relatively modest cost of cleaning up, you can avoid the risks of your business being caught by those federal and state agencies that are becoming increasingly more involved in enforcing those confusing and complex employment tax rules.
Mark E. Battersbyis a freelance writer, a columnist, an author, and a lecturer with offices in suburban Philadelphia.