West Marine Products, which operates a chain of retail stores across the United States specializing in boating supply and fishing equipment, recently settled a class action lawsuit involving 707 former non-exempt employees. Over a five-year period, the company underpaid employees by a total of $18, 828. The settlement amount: $435,000!
The underlying culprit for the wage and hour violations was spiff bonuses (spiffs). Spiffs are a form of remuneration used to incentivize sales associates to sell a specific item or group of items. West Marine failed to properly incorporate spiffs into the regular rate of pay, so that employees who were owed spiffs and who also worked overtime hours in the same workweek were underpaid by a few cents for that pay period. Eighty-eight percent of the class action members were underpaid by a mere $50 or less.
There are a number of takeaways that companies can learn from this case.
Calculating the regular rate of pay is not as simple as it may otherwise appear.
Complex pay rules often pose a liability for employers because they create a wide array of variables that must be factored into regular rate of pay calculations. The Fair Labor Standards Act (FLSA) defines the regular rate of pay as including “all remuneration for employment paid to, or on behalf of, the employee.” Commissions, non-discretionary bonuses, wages (salary, hourly, piece rate), and tips received by eligible tipped employees (individuals who are paid a cash wage lower than the minimum wage in which the employer takes a tip credit) are all variables to be taken into account when calculating the regular rate of pay. Regardless of an employer’s pay period, these calculations are always based on a standard workweek.
There are marked differences in discretionary versus non-discretionary bonuses.
What differentiates discretionary bonuses from non-discretionary is key to labor compliance – and this is often where employers make mistakes that violate existing wage and hour laws. Discretionary bonuses are a form of variable pay that can be excluded from the regular rate. The employee has no contractual right, express or implied, to any amount whatsoever. In contrast, employers are obligated to pay non-discretionary bonuses. These are often announced to employees in advance to encourage them to work more steadily, rapidly or efficiently – such as anniversary, attendance, production-oriented, and retention bonuses. As required under the FLSA, non-discretionary should always be included in the regular rate.
Employers choosing to provide discretionary bonuses should exercise caution. When improperly handled, an employer can inadvertently cause a bonus to lose its discretionary status – there are specific guidelines governing the amount, timing, and announcement. For example, let’s say an employer wants to pay a discretionary bonus to employees in June. The employer is allowed to do that. But if the employer announces in January to his employees that he intends to pay them a bonus in June, this becomes a non-discretionary bonus, because the employer has now made a promise to employees to pay this bonus. This would not be excluded from the regular rate of pay.
Know that wage and hour compliance is multifaceted.
Properly calculating the regular rate of pay helps ensure that workers are fairly and accurately compensated for all hours worked. However, this alone will not isolate employers from wage and hour violations. Compliance is a continuous process that often requires employers to take a multipronged approach.
A comprehensive set of proactive policies and procedures will help safeguard employers from liability. In today’s digital age, businesses have more analytical tools than ever before. Employers should utilize these technologies to help mitigate costly wage and hour violations so that any miscalculations or mistakes are identified and properly addressed before they escalate into costly violations.
Auditing and reporting mechanisms can better identify errors in employee compensation.
West Marine’s employee handbook stated, “If you discover an improper deduction, communicate it to your supervisor or the payroll department immediately to ensure you are reimbursed.” Absent of other internal mechanisms, this policy is reactive, relies solely on workers to identify wage and hour discrepancies, and does not clearly outline how underpayments will be properly investigated.
The ambiguity in directing inquires to “supervisor or payroll” makes the process less clear for employees who have queries regarding pay. If supervisors are responsible for wage disputes, there should also be a dedicated payroll official to further investigate and review such claims, and this process should be clearly communicated to employees. This is especially true for companies that have multiple lines of business, but are utilizing a single source for processing payroll. Even if payroll processing is outsourced, internal wage claim investigations should still continue to be performed, and brought to the attention of senior executives.
Miscalculations often appear to be “one off” errors, but typically point to a larger systemic issue, such as an underlying glitch within an employer’s timekeeping or payroll systems. When employers learn about these miscalculations, they should always be asking, “Why did this occur?” There should be a designated resource charged with investigating issues arising from employee compensation. Not addressing the root cause to miscalculations leads for wage and hour violations to permeate for many months – or in West Marine’s case – even years.
Maintaining labor compliance can be an expensive endeavor but wage and hour violations will ultimately prove to be more costly. In the 2014 fiscal year, the Department of Labor reported a 23 percent increase in “agency-initiated investigations” – and from this number, 78 percent of employers were in violation of labor regulations. Rather than waiting for miscalculations to occur, prioritizing the rate of pay and proactively setting clear frameworks and policies will save a lot of headaches (and money) in the long term.