Wage and hour best practices for SMBs

One of the worst things that can happen to a small business is a lawsuit. They are expensive and time-consuming and, if a company doesn’t have the money in the bank, they can be totally devastating. One of the most common lawsuits businesses face is wage and hour claims. This is mainly because there is just so much to know. Pleading ignorance doesn’t fly with the DOL, though, who generally rules in the employee’s favor, so being aware of best practices is crucial to the success of a small business.

The four main things to understand are overtime, employee/contractor classifications, minimum wage, and unpaid time.

1. Overtime

Unauthorized overtime

Many employers mistakenly believe that if overtime is not authorized it does not have to be paid. This is not true. Under the FLSA, any time worked for an employer’s benefit must be paid and if that time exceeds 40 hours, then time and a half must be paid. If employees work overtime without getting prior approval, rather than withholding pay, employers should give written warnings, reduce hours, demote the employee, and finally dismiss the employee.

Comp time in lieu of overtime

The FLSA mandates that if employees work overtime, they get paid for that time in time and a half their regular rate of pay. Offering employees comp time even at a rate of one and a half hours off for every hour over 40 worked, is not permissible for private employers under the FLSA. Offering comp time in lieu of overtime is permissible for government employees, however.

Altering timecards

Adjusting timecards so that the total time worked in a week is below 40 hours is unlawful, but some employers do it anyway because they don’t want to pay overtime. If an employee turns them in, the court costs will far outweigh the pocket change they saved to begin with.

Misclassifying hourly employees as salaried

With the new salary threshold for exempt employees, exempt/non-exempt misclassification will be less common. It has been a big problem in the past and potentially could still be an issue even in the higher salary ranges.

2. Contractor/employee misclassifications

Employees sometimes get classified as independent contractors in order to avoid both overtime and taxes. Messing with anything involving the IRS is risky business but put that together with the DOL and you’re in for big trouble. Be very careful about misclassifying workers. Most workers are employees and not contractors so if you think you have a contractor, check, double check, and triple check to be absolutely sure they fit that category.

3. Minimum wage

Paying below the minimum wage is pretty obviously a violation of the FLSA but there are actually ways to pay below the minimum wage without even knowing it.


Deductions like employee generated expenses, for example, can bring the hourly rate down below the minimum wage. The FLSA does not require that business expenses be paid back but if an employer doesn’t pay them back and the employee’s hourly rate, minus those expenses, falls below minimum wage, the company is in violation of the FLSA and possibly state law too.

State laws

Many states have their own minimum wage laws that are higher than the federal minimum wage. These rates change occasionally so it’s important to stay on top of this in your state.

4. Unpaid time

Many overtime violations are deliberate attempts at withholding pay but there are many honest ways in which employees can lose wages. All of the following are common mistakes employers make.

Non-standard working time

A lot of employers don’t realize this but preparation time, waiting time, and travel time are all compensatory time and must be paid at a rate of at least minimum wage. Any time that is spent for the employer’s benefit must be paid. This time includes: waiting for a manager to arrive and unlock the door, prepping the workstation, driving from work to another location for work purposes.

Improper rounding

Time rounding is an antiquated practice that can be easily messed up. One common mistake is rounding down and not also up. In order for rounding to be compliant, employees cannot lose any time on the clock. Rounding may have made calculations easier before there were systems in place to do the work automatically. But now, with online time clocks, nothing needs to be added up by hand so using the actual minutes worked is no longer an inconvenience.

Not paying for remote work time

Again, before the days of online time tracking systems, remote work was just a disaster waiting to happen. Employees had to write the time they worked from home on scratch paper, run it by their boss, and transfer it to their timesheet before the close of payroll. It was so complicated that remote work often went unpaid, which left employers at risk for lawsuits. The best way to avoid these issues is to have a system that employees can log into at home and track the time they spend doing any kind of work at all.

5. Compliance policies

Making it known to employees that you intend to adhere to the FLSA’s rules is a good idea. It might be helpful in a lawsuit if there is proof that every effort was made to stay compliant. However, a mere statement in the employee handbook isn’t exactly a get out of jail free card. When employers break the rules and don’t act fast to fix them, they usually pay a high price.

Editing time cards

If timecards get altered, management better make sure that the employee signs off on its accuracy before the close of payroll. Mistakes happen and adjustments might need to be made but they can’t be made in the dark.

Retention of records

Even after employees are released from employment, employers must keep their timekeeping records in case of an audit. From the DOL: “Each employer shall preserve for at least three years payroll records, collective bargaining agreements, sales and purchase records. Records on which wage computations are based should be retained for two years, i.e., time cards and piece work tickets, wage rate tables, work and time  schedules, and records of additions to or deductions from wages.” 

Accurate timekeeping

The best practice for time and attendance compliance is to use an online service. The concept is new within the last 15 years or so but has proven to be effective in protecting businesses in the case of wage and hour lawsuits. Being able to produce accurate records is invaluable and online time tracking makes that pretty much painless. Here are some of the reasons why online time tracking is a great compliance option:

  • Visibility into hours totals
  • Ability to pay to the punch
  • Time entry signatures
  • Audit trail on time adjustments

Peggy Emch is the marketing director at Timesheets.com. Timesheets.com helps small businesses reduce payroll and maximize billing by tracking accurate work time.

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