Association of Progressive Rental Organizations

Legal Article

Wage and Hour Basics Every Employer Should Know

The fundamental Wage and Hour law in the United States is the Fair Labor Standards Act of 1938 (“FLSA” or “the Act”). It’s one of the facts of business life that companies are governed by standards established in the depths of the Great Depression. Nevertheless, these are the rules of the road when it comes to wage and hour issues.

The FLSA regulates four areas: minimum wage, overtime, child labor, and recordkeeping. In this article, we will address how these basic standards apply to businesses across the country. We should note, however, that many states have their own wage and hour laws, and some of these impose much stricter standards than the federal law. It’s beyond the scope of this article to address the rules in all 50 states, but employers should be aware of state laws in every state in which they operate. For example, wage and hour standards in California are far more demanding than the federal law.

There are also exemptions from certain requirements of the FLSA. We will briefly mention these, but they will be addressed at greater length in subsequent articles.

Workweek Basis of Enforcement

The standard, the “measuring stick,” if you will, for FLSA compliance is the workweek. The workweek must be distinguished from the employer’s normal or basic schedule. While a basic schedule may be 9-to-5 Monday through Friday, that’s not the workweek. The workweek is defined as a period of seven consecutive 24-hour days. It begins whenever the employer chooses, and ends 168 hours later. Employers are free to select any workweek they want, but once they choose a workweek, they have to live with it. The workweek may not be changed unless the change is intended to be permanent. Furthermore, each workweek stands alone.

Minimum Wage

The federal minimum wage is currently $7.25 per hour. It has not increased since 2009. This is one area where state law frequently imposes higher standards than the Act. More than half the states have minimums greater than the federal minimum (30, plus the District of Columbia, Guam, Puerto Rico, and the Virgin Islands). Most minimum wage violations result from failure to pay minimum wage each workweek, or from improper deductions.

Earnings

The workweek basis of enforcement means that employees must be paid for all their hours of work at minimum wage or more, in each workweek. Very few employers pay less than $7.25, but problems can arise when employees are paid on a contingent basis, such as commission or piece rate. A commissioned employee may earn substantially more than the minimum wage on a monthly or annual basis. If they have a bad week, however, and earn little or no commissions that particular week, that may result in a minimum wage violation for that week, regardless of what shows on their W-2 for the year.

Deductions

Employers typically make a number of different deductions from their employees’ wages. These may include legal deductions, such as taxes and Social Security, and may also include deductions for fringe benefits such as health insurance. Such deductions are typically not regulated by the FLSA. An employee may gross minimum wage, but net less after legal deductions, and that’s not a violation. Where employers can violate the FLSA is when they make deductions for the employer’s benefit.

Deductions for things like cash shortages, breakage, personal protective equipment, etc., are considered to be for the employer’s benefit. The net effect of such deductions may not result in the employee’s wage being reduced below the minimum wage. Take, for example, an employee who makes $8.25 per hour and works 40 hours in a given workweek. The employee’s cash drawer comes up $100 short. The employer wants to deduct that $100 from the employee’s pay. However, the employee makes only $40 per week more than minimum [($8.25 – $7.25) x 40]. A deduction of $100 in that workweek would reduce the employee’s pay below minimum wage by $60, and to that extent, it is a violation of the law. However, because each workweek stands alone, this employer could recover the $100 by deducting $40 in one workweek, $40 in the next workweek, and $20 in the following workweek. This way, the employee has never been paid less than minimum wage. (Keep in mind that many states require an employee’s written permission to make a deduction from their pay. In such states, the employer must familiarize themselves with the state law before making a deduction for the employer’s benefit.)

Overtime

For most employers, the principal impact of the FLSA is overtime. Overtime is the requirement that nonexempt employees be paid one and a half times their regular rate of pay for hours worked over 40 in a workweek. Each element of this definition requires discussion.

Workweek Basis of Enforcement

Like the minimum wage, overtime is enforced on a workweek basis. That is, overtime is based on working more than 40 hours in a given workweek, regardless of the number of hours worked in previous or subsequent weeks. The workweek-based enforcement has several consequences.

Daily OT Not Required

Overtime is required after the employee works more than 40 hours in a workweek. There is no requirement for daily overtime. Employers can require employees to work any number of hours on a given day, but as long as they do not exceed 40 hours in the workweek, no overtime is due. Some states, notably California, do require daily overtime.

No Averaging of Workweeks

Many employees are paid less frequently than weekly, such as biweekly or semimonthly. Overtime, however, is due after 40 hours worked in a single workweek, regardless of pay frequency. For example, an employee is paid biweekly. In week one of the pay period, she works 48 hours. In the second week of the pay period, she works 32 hours, for a biweekly total of 80. Even though she has not exceeded 80 hours in the biweekly pay period, she is still due 8 hours of overtime from the first workweek.

No Comp Time for Overtime

Some employers, as well as some employees, would prefer that overtime be paid in the form of compensatory time off, or comp time. Regardless of the parties’ wishes, however, when employees work over 40 hours in a workweek, they must be paid in money for the overtime hours worked in the paycheck for that pay period. They may not be given time off in subsequent weeks as compensation for overtime, even at an hour and a half of comp time for each hour of overtime worked.

We should distinguish between true comp time and the practice of avoiding overtime by giving time off in the same workweek. Take, for example, an employee who works the following schedule:

MTWTHFSS
128884XX

The employee worked an extra four hours on Monday. On Friday, the employer told the employee to punch out and go home at noon, thus limiting the employee’s hours to 40 in the workweek and avoiding overtime. This is perfectly legal. It isn’t really comp time; it’s just a limitation on total hours for the workweek. True comp time would be a plan under which the employee would work, for example, 48 hours in one week. The employee would be paid for 40 hours, and in some subsequent week would be allowed to take off eight or 12 hours with pay. Although such a plan would be attractive to many, it is not legal under the FLSA.

Overtime Must Be Paid for Hours Worked Only, Not Hours Paid

Overtime is due only when the employee actually works more than 40 hours. Paid time off, such as holidays, vacation, sick leave, PTO, etc., need not be counted towards overtime. Take, for example, an employee who works the following schedule:

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8-H88888X

The employee does not work on Monday, which is a holiday, but is paid for eight hours of holiday pay. The employee then works eight hours a day, Tuesday through Saturday. The employee will be paid for 48 hours that week, but has only worked 40 hours, and no overtime is due. Many employees object to this, thinking they should be paid overtime when their total paid hours exceed 40. Employers are free to count paid time off toward overtime, but are not required to do so.

Regular Rate of Pay

Overtime is computed at 1 ½ times the employee’s regular rate of pay. The term regular rate is not a casual phrase, but a technical legal term. An employee’s regular rate of pay is not necessarily their base rate or the rate upon which they and the employer agreed. Moreover, the regular rate of pay can and often does change workweek to workweek. This is because the regular rate of pay is defined as the employee’s total remuneration for a workweek divided by the total hours worked in the workweek:

  • RR = Total Remuneration For the Workweek ÷ Total Hours Worked in the Workweek   

Total remuneration includes not only the base rate of pay, but all additional compensation, including but not limited to commissions, most bonuses, shift differentials, etc. If employees receive compensation on a less frequent basis than weekly, that compensation is allocated back over the workweeks the additional compensation was intended to reward.

Take, for example, an employee who is paid a base hourly rate of $10/hour and is paid weekly. He is also eligible for bonuses. In a given workweek, he works 50 hours and receives no bonus. His overtime is often computed as follows:

  • 40 x $10 = $400
  • 10 x $15 = $150
  • Total Pay: $550

There is nothing wrong with this computation. But it is better to think of overtime as follows, especially when employees receive additional compensation:

  • 50 x $10 = $500
  • 10 x $5 = $ 50
  • Total: $550

In this formulation, we see that the employee has been paid $10 per hour, representing straight-time compensation, for all 50 hours worked. Then, for the overtime hours, we go back and pay an additional half-time, or $5 per hour, for the 10 overtime hours. The true overtime premium is the additional half-time.

Now consider this same employee when he receives a $100 bonus. Because the bonus is part of his regular rate, he can’t be paid his overtime premium only based on the $10 per hour base rate. Rather, we must first compute his regular rate of pay and only then the half-time overtime rate. Then we compute the total overtime premium by multiplying the half-time overtime rate by the number of overtime hours:

  • 50 x $10 = $500
  • Bonus: $100
  • Total Straight Time Pay: $600

His regular rate is then:

  • $600 ÷ 50 = $12

Now we compute the half-time overtime rate, and use that to compute the overtime premium due:

  • $12 ÷ 2 = $6
  • $6 x 10 overtime hours = $60 Overtime Premium

Notice that when the employee worked 50 hours at $10 per hour with no bonus, the overtime premium was $50. When he received $100 bonus, the overtime premium was $60. The additional $10 payment represents the overtime due on the bonus. Overtime must be paid on all compensation, with a few statutory exclusions.

In some cases, bonuses or commissions are paid less frequently than weekly. Take, for example, this same employee, but instead of weekly bonuses, he receives monthly bonuses. The monthly bonus should be divided by the number of complete workweeks in the month and allocated back over each of those workweeks. For example, let’s say the employee received a $500 monthly bonus, and there were four workweek ending dates in the month. The employer would allocate the $500 back over the four workweeks at $125 a week and adjust the overtime due accordingly.

Regular Rate Exclusions

There are some forms of remuneration for employment that are excluded from the regular rate – that is, employers need not compute overtime on these payments. They include:

  1. sums paid as gifts, such as Christmas bonuses,
  2. paid time off, such as holidays, sick days, vacation, etc.,
  3. employer payments for fringe benefits, such as health insurance, pension plans, etc.,
  4. discretionary bonuses, where both the fact that the bonus is to be paid at all, as well as the amount, of the bonus, are only determined at or near the end of the bonus period,
  5. any premium for working more than eight hours per day or 40 hours in a workweek,
  6. “special day premiums”– time and a half paid for working on Saturdays, Sundays, holidays, etc., and
  7. premiums paid at time and a half for hours worked outside of normal hours.

Compensable Hours Worked

It is important for employers to know what hours have to be paid for – what the Department of Labor calls “hours worked.” Hours worked includes all time the employee is required to be on the employer’s premises, all time the employee is required to be at a pre-scribed worksite, and all time the employee spends in activities which are of benefit to the employer. Common hours worked problems include:

Meals and Breaks

Federal law does not require that employees be given time off for meals or breaks. However, if they are given, the law dictates how they are to be counted as hours worked. Time off for meals is not hours worked if the employee is relieved from duty during their meal period, uninterrupted, and the period of time is long enough for the employee to use for their own purposes, typically 30 minutes or more. Many states require lunch and breaks.

Travel Time

Home-to-work travel, whether to and from the employer’s location or a job site, is not compensable hours worked. Travel between job sites is counted as hours worked.

Waiting or On Call Time

Employees who are required to wait for work at their employer’s locations or so close thereto as to prevent them from using the waiting time for their own purposes, are working while on call. Employees who are on call but whose on-call conditions enable them to use the on-call time for their own purposes are not working while on call. For example, employees who are free to go where they want and do what they want, as long as they can report to work within a reasonable time after they are called, are not working while on call.

Recordkeeping

Employers are required to maintain basic records on their employees. These include name, address, Social Security number, job classification, rate of pay, etc. In particular, employers are required to maintain accurate records of the hours employees work each day and each week. Basic time records, such as timecards, must be maintained for two years. Payroll records showing gross, deductions, net pay, etc., must be maintained for three years. There is no prescribed form of records. Any form of records that contain the basic information required are permitted.

Child Labor

The FLSA contains the Federal child labor rules. There are four groups of minors for FLSA purposes:

  1. Minors under 14 may not work. There are limited exceptions where the sole employer is the minor’s parent.
  2. Minors 14 to 15 may work in a limited number of jobs. They may not work in any area in which manufacturing or processing takes place, nor may they use machinery or power-driven equipment other than simple office machines such as copiers. Additionally, minors aged 14 and 15 are restricted in the number of hours they can work per day and per week, as well as the times of day when they may work.
  3. Minors 16 and 17 have no hour or time restrictions. There are, however, 17 occupations deemed hazardous, and no one under 18 may work in a hazardous occupation. The most common hazardous occupation for minors under 18 is driving.

There are substantial fines, called “civil money penalties,” for child labor violations.

Enforcement

The Wage and Hour Division

The FLSA is enforced by the Wage and Hour Division of the U.S. Department of Labor (DOL). Enforcement involves investigations of employers conducted by Wage and Hour investigators. A typical investigation involves an opening conference with the employer and/or the employer’s representative; a review of time and payroll records going back two years from the date the investigation begins; employee interviews, which are confidential; and, when the investigation is completed, a final conference at which the investigator presents his or her conclusions. If the investigator concludes that there are violations and that back wages are due, the investigator will first request that the employer agree to comply fully in the future. Once an agreement to comply is secured, back wages are demanded. If the employer agrees with the findings, the investigation can be closed with payment of back wages. If the employer does not agree, the DOL has the option to file a lawsuit in federal district court.

Litigation by DOL

If the DOL chooses to file a lawsuit, it sues on behalf of all current and former employees affected by the alleged violations. In addition, it will typically ask the court for a finding that the violations were willful. This extends the statute of limitations from two years back, which is the normal statute, to three years. The government will also ask for liquidated damages in an amount equal to the back wages due. In addition, it will also ask the court to issue an injunction making future violations contempt of court, punishable by fines and, in extreme cases, imprisonment.

Private Litigation

Employees need not go through the DOL to assert their claims. They have the right to file their own private litigation in the US District Court. In such litigation, the employees may ask for the 3-year willful statute of limitations, liquidated damages, and all court costs and attorneys’ fees. In many cases, the attorney’s fees are equal to or exceed back wages due.

Under the FLSA, there are no true class actions. There are, however, collective actions. This means that the plaintiffs sue on behalf of themselves and other similarly situated employees. They then apply to the court to issue notices to all current and former employees who worked during the relevant period. These notices advise them of the ongoing litigation and allow them to join (“opt in”) the litigation. Such cases can be extremely expensive for the employer if multiple employees join in.

Exemptions

As noted above, the Fair Labor Standards Act includes several exemptions. We don’t have time to go into them in this article, but we hope to address them in subsequent articles. Briefly, there is a complete minimum wage and overtime exemption for bona fide executive, administrative, and professional employees, and outside salespeople. Executive, administrative, and professional employees must be paid on a salary basis in order to be exempt. In addition, they must meet certain duties tests imposed by federal regulation. The current minimum salary required for exemption is $684 per week.

There is also an overtime exemption for certain commissioned employees. To qualify for this exemption, the employees must work in a retail establishment (i.e. 75% or more of the establishments income must be derived from retail sales); the employee’s regular rate of pay must be more than one and one half times the federal minimum wage; and the employee must be paid primarily on commission when measured over a representative period of at least a month. We hope to present articles in greater detail on these exemptions in the near future. If you have any questions in the meantime, please submit them through APRO’s Legal Hotline.


About the Author: Brian T. Farrington is an attorney in Dallas, Texas, where he is the head of the Labor and Employment Law section at Cowles & Thompson, PC. For 12 years Mr. Farrington worked for the Wage and Hour Division of the US Department of Labor, as an investigator and Assistant District Director. He is now in private practice, where he represents employers in FLSA, EEO, and similar labor and employment matters. Mr. Farrington also serves from time to time as an expert witness in FLSA cases.

Mr. Farrington is on retainer with APRO. Members may contact him through APRO’s Legal Hotline for brief consultations by telephone or email. Members requiring more extensive legal assistance may engage his services directly.


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Mike Lewis

Mike Lewis is a Premier Rental Purchase franchisee with multiple stores and currently serves as Vice President of Operations. With 33 years of experience in the rent-to-own industry, he has spent the past 20 years working closely with franchisee owners and previously spent 12 years in Corporate RTO, gaining a strong foundation in the business.

For the past five years, Mike has been sharing his knowledge by teaching managers and franchisees at the company’s Training Center.

Outside of work, he enjoys time with his family, kids, and grandkids, and appreciates the simple things in life – especially riding his Harley Davidson with the sun on his face. If you know, you know!

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Arona Corporation dba Arona Home Essentials

Lauren Talicska is an experienced multi-channel marketing specialist and the Vice President of Marketing & Communications at Arona Home Essentials. She has found her home in the RTO community, supporting stores in branding, growth, and increasing traffic.

You may recognize Lauren as a former RTO vendor, including her time as a partner for Nationwide RentDirect, or her previous participation in the APRO Vendor Advisory Committee. Lauren calls Columbus, Ohio, home and spends her workday crafting and executing marketing promotions from inception to realization, all while supporting the branding and social media needs of all the Arona stores in 12 states (plus Puerto Rico!).

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APRO

Charles Smitherman, JD, PhD, CAE, became CEO of APRO in 2023, bringing years of legal and executive experience in the rent-to-own industry. 

Prior to joining the association, Charles served as COO, General Counsel, and Vice President of PTS Financial Services, where he played an active role in the rent-to-own industry by representing his company through PTS’s club program offering with APRO member dealers. Charles is an attorney with two decades of experience across a wide variety of areas, including RTO, consumer financial services, antitrust, corporate law, mergers and acquisitions, litigation, franchise law, and privacy law. Following law school at the University of Georgia, Charles earned a Master of Legal Studies and PhD in Law from the University of Oxford in England.

Charles is credentialed as a Certified Association Executive (CAE) with the American Society of Association Executives, a Certified Franchise Executive (CFE) with the International Franchise Association, and a Certified Information Privacy Professional (CIPP/US) and Certified Information Privacy Manager (CIPM) through the International Association of Privacy Professionals. As APRO’s sixth CEO in its 45-year history, he brings a collaborative, member-focused approach to association leadership, emphasizing transparency, advocacy, and value creation. Outside of work, Charles is an active ultra runner and open water swimmer.

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Mike works to leverage a wide breadth of relationships and influence, intimate knowledge of market trends, and unique knowledge of what RTO dealers need from a supplier to be successful.

The saying goes that a high tide raises all boats, and our goal is to leverage the world’s largest furniture manufacturer to drive the continued growth of the RTO industry and all the suppliers.

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Countryside Rentals Inc., dba Rent-2-Own

Mike grew up in the rent-to-own industry under the guidance of his father, former APRO President and RTO legend Darrell Tissot. For nearly 25 years, Mike’s innovative leadership has helped expand the family business to more than 40 stores across Ohio and Kentucky while also shaping the industry as a whole.

He has served as President of the Ohio Rental Dealers Association, an APRO board member and Treasurer, and President and Treasurer of the TRIB Group. His contributions have earned him the APRO President’s Award of Excellence and the title of APRO Rental Dealer of the Year.

Outside of RTO, Mike enjoys time at the lake house or in Orange Beach, Alabama, with his girlfriend, Angela Strong McCool. A passionate Cincinnati Reds fan, he rarely misses a game, whether watching or listening alongside his parents. He also takes every opportunity to visit Arizona, where his daughter is currently attending Arizona State University.