You pay your employees on time. You run payroll every week or every other week. You have job descriptions, offer letters and people who have been classified as salaried employees for years.
So your wage-and-hour practices must be fine, right? Not necessarily.
Some of the most expensive HR mistakes don’t happen because a business owner deliberately ignores the rules. They happen because someone makes an assumption, follows an old practice or simply doesn’t realize the rules have changed.
When it comes to employee classification, overtime and timekeeping, those assumptions can get expensive.
Calling someone salaried or an independent contractor doesn’t automatically make it so.
Let’s talk about where small businesses get into trouble, and what you can do about it.
The Salary Misconception: Salaried Doesn’t Always Mean Exempt
One of the most common wage-and-hour mistakes is assuming that an employee who receives a salary doesn’t qualify for overtime.
That’s not how it works.
Whether an employee is exempt from overtime requirements depends on the applicable salary minimum threshold (currently $684.00/week) and the employee’s actual job duties. A fancy title, a signed offer letter or a salary arrangement doesn’t automatically establish an exemption.
Think about an employee who is promoted to manager. Their title changes, and the company moves them to a salary.
But what changes about their job?
If they’re still primarily performing the same duties as before, the employer needs to evaluate whether the position meets the applicable exemption requirements. The title alone isn’t enough.
The lesson? Classify the job based on the work being performed, not what looks good on an organizational chart.
A classification that was appropriate several years ago may also need to be revisited when an employee’s responsibilities change.
Independent Contractor or Employee? Don’t Guess.
Here’s another assumption that can create problems: If someone signs an independent contractor agreement and receives a Form 1099, they’re an independent contractor.
Not necessarily. (And, there is no such thing as a 1099-employee!)
The actual working relationship matters more than the paperwork.
Government agencies may examine factors such as how much control the business has over the work, the worker’s financial independence and the overall nature of the relationship.
For example, a business might engage someone as a contractor but dictate their schedule, closely direct how they perform their work and treat them much like an employee.
That arrangement deserves a closer look.
Misclassification can create exposure beyond unpaid overtime. Depending on the circumstances, a business may face back wages, tax liabilities, penalties and legal expenses.
The problem may extend beyond current employees. Former workers can also be affected when a classification practice is found to have been incorrect. A signed agreement doesn’t eliminate the need to get the classification right.
The Small Timekeeping Mistakes That Add Up
Classification isn’t the only wage-and-hour issue worth reviewing. Sometimes the problem is much less obvious.
An employee checks email before clocking in. A supervisor asks someone to finish a task after their shift. Employees travel between job sites. A timekeeping system automatically deducts meal breaks that employees don’t always get to take.
Individually, these situations may seem insignificant.
Multiply a few unpaid minutes across several employees and multiple pay periods, however, and the numbers can add up quickly.
Small businesses should pay particular attention to these practices:
- Off-the-clock work: Employees perform work before clocking in, after clocking out or outside their scheduled hours.
- Automatic meal deductions: Time is deducted for meal periods even when employees work through some or all of the break.
- Travel time: Employees travel between job sites or perform other work-related travel that may need to be counted as hours worked.
- Pre-shift and post-shift tasks: Employees complete required preparations, paperwork or closing duties outside their recorded hours.
- Overtime calculations: Certain bonuses or other forms of compensation may need to be included when calculating an employee’s regular rate of pay.
The exact requirements depend on the circumstances, but the important point is that your payroll process needs to reflect the work employees perform.
A timekeeping system can only be as reliable as the practices surrounding it.
Your Written Policy Won’t Protect You If Managers Ignore It
Let’s say your employee handbook clearly states that employees must record all hours worked. Great, that’s a start.
But what happens when a supervisor tells an employee not to record overtime because the department is over budget? Or when employees know they’re expected to finish their work after clocking out? Or when a manager routinely approves timesheets without checking whether the recorded hours are accurate?
Now you have a problem that a written policy alone won’t solve.
HR compliance is about what happens in practice, not just what’s written in your handbook.
Your supervisors need to understand how timekeeping works, what employees must report and what to do when someone works unapproved overtime.
It’s also important to distinguish between requiring employees to obtain approval for overtime and paying employees for work they actually perform. Disciplinary or coaching issues should be handled separately from the obligation to pay for compensable hours worked – meaning you still have to pay the time whether it was approved or not.
If managers don’t understand that distinction, a seemingly simple scheduling decision can turn into a wage-and-hour issue.
Five Ways to Reduce Wage-and-Hour Risk
You don’t have to wait for a complaint or payroll problem to start reviewing your practices. Here are five practical steps small businesses can take.
1. Audit your exempt positions
Review actual job duties, salary arrangements and the applicable exemption requirements. Don’t rely solely on job titles, old job descriptions or the fact that someone has always been classified as exempt.
2. Review your independent contractor relationships
Look beyond contracts and tax forms. Evaluate how the relationship operates in practice and whether the classification is appropriate.
3. Check your timekeeping procedures
Look for off-the-clock work, automatic meal deductions, unrecorded travel time and other situations where employees may be working without having all their hours captured.
4. Train supervisors and payroll personnel
Make sure the people approving timesheets and managing schedules understand their responsibilities. Employees need a straightforward way to report all time worked, and managers need to know how to respond when problems arise.
5. Revisit classifications when jobs change
Promotions, reorganizations and evolving responsibilities can affect whether an employee’s classification remains appropriate. Make classification reviews part of your regular HR process rather than a one-time exercise.
These steps won’t eliminate every risk, but they can help you identify potential issues before they become harder to address.
When Was the Last Time You Reviewed Your HR Compliance Practices?
If you’re thinking, “We haven’t looked at our classifications in years,” you’re not alone.
Many small businesses don’t have an internal HR department dedicated to monitoring wage-and-hour requirements, reviewing job descriptions and evaluating timekeeping practices.
The owner is busy running the business. Payroll is getting processed. Managers are focused on their teams.
Because nobody has raised a concern, it’s easy to assume everything is working as it should, but no news doesn’t necessarily mean no risk.
A proactive HR compliance review can help identify gaps in your current practices, clarify where additional documentation may be needed and establish a plan for addressing potential problems.
It’s much easier to investigate a questionable classification or correct a timekeeping procedure before it becomes a formal complaint than to reconstruct years of records after the fact.
At HR Resolutions, we understand that small-business owners have a lot on their plates. You shouldn’t have to become an HR compliance expert just to make sure your people practices are working as intended.
We help businesses evaluate HR practices, identify potential compliance concerns and determine practical next steps.
Whether you need help reviewing employee classifications, evaluating timekeeping procedures, addressing contractor relationships or strengthening your broader HR compliance practices, we can help you understand where to focus your attention.
Our HR consulting and HR compliance support services help small businesses throughout Central PA take a more proactive approach to managing their people and reducing avoidable risk.
If you’re unsure whether your current classifications, payroll procedures or workplace policies are up to date, let’s chat!
This article provides general educational information and is not legal advice. Wage-and-hour and worker-classification requirements depend on applicable federal and state law and the specific circumstances of the working relationship.