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Are your employees headed for overtime? Maybe not

by on
in Compensation and Benefits,Human Resources

A Federal Court of Appeals recently ruled that auto mechanics paid on a flat-rate system are exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). The court found that the flat-rate system used in the auto repair industry is akin to a commission system for FLSA purposes. The case opens the door for some employers to restructure their pay system to avoid costly overtime.

What is the FLSA?

The FLSA establishes the federal minimum wage and overtime laws. Specifically, the law requires that employees covered by the FLSA receive one-and-a-half times their hourly wage for any hours worked in excess of 40 hours per week. However, there are a number of exemptions to the overtime requirement.
    One such exemption is for retail and service employees. The FLSA provides that an employer does not have to pay overtime to a retail or service employee if:

  1. The regular rate of pay is in excess of one-and-a-half times the minimum hourly rate, and
  2. More than half the employee’s compensation for a representative period (not less than one month) represents commissions on goods or services.

How flat-rate pay works

Generally, a flat-rate pay system in the auto repair industry works as follows: The employer determines (usually based on industry standards) how long a certain repair will take to complete. This is known as the booked time. The booked time is then multiplied by the employee’s hourly wage rate. (The customer pays a higher hourly “cost of labor.”)
    The employer pays the mechanic assigned to the repair for the entire booked time, regardless of how long the repair actually takes the mechanic to complete. Thus, the mechanic pockets the difference between the booked time and the amount of time he actually worked on the project.
    Say, for example, a windshield needs to be replaced. The booked time for the repair is two hours and the mechanic’s hourly rate is $15, for a total of $30. Under a flat-rate system, if the mechanic assigned to the job completes the repair in one hour, the mechanic is paid the entire $30, pocketing the extra $15.

The courts have spoken

In Yi v. Sterling Collision Centers Inc., the Federal Circuit Court of Appeals for the 7th Circuit found that a flat-rate pay system is a commission system under the FLSA. In this case, mechanics worked in teams to complete the repairs. Accordingly, the employer paid each team member based on his or her proportion of hours worked on each repair. Once the employer calculated the proportion of actual time worked on the repair, that proportion of the booked time was multiplied by the individual’s hourly rate.
    For example, two employees, Smith and Jones, worked on a windshield repair booked for two hours, but they completed the work in one hour. Smith worked for 45 minutes and Jones worked for 15 minutes. Smith would be credited for three-quarters of the booked time, or 1.5 hours; Jones would be credited for a quarter of the booked time, or .5 hours. If the employer paid Smith $15 an hour and Jones $10 an hour, then Smith would receive $22.50 for the job, while Jones would get $5.
    The court reasoned that because mechanics work in teams and contribute various levels of skill and ability, the employer had to use a commission-based system.

What this means for employers

Significantly for employers, the court recognized a commission system in a context that is not ordinarily thought of as commission-based. Therefore, retail employers (see box below) now have an additional avenue to avoid overtime liability because their employees may be exempt under the FLSA.
    Retail employers that do not already use commission systems may want to consider restructuring their payment plans to qualify for the retail commission exemption. However, employers must keep in mind that, to qualify under the retail commission exemption, the employee must:

  • Be in a recognized retail or service occupation
  • Be paid at least one-and-a-half times the current minimum wage and
  • Have more than half the compensation from commissions on goods and services.

    Employers also must continue to maintain hourly records for such employees to prove that they receive one-and-a-half times the minimum wage.

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