The Danger of Day Rates
When you employ W-2 employees in the US, the day rate scheme is not as straightforward as it may seem. It can put your business at high risk of non-compliance with federal and state laws around wages and hours worked.
What are the dangers of day rates?
Paying $682,000.00 settlement for not understanding daily rates and overtime law is a steep cost for any employer. This huge sum highlights the danger of day rates which one company had to fork out for not remaining compliant. The Texas-based foundation repair company (Allied Foundation Specialists, Inc.) in 2016 agreed to pay this eye-watering amount in back wages as a settlement following an audit carried out by the Department of Labor. The basis of the settlement was that daily rates were paid instead of hourly rates and overtime (OT) pay was neglected.
What lesson does this wage and hour settlement teach employers?
Be aware of the risk and compliance factors of day rates
This case emphasizes the importance of employers in the contingent workforce industry being aware of the risk and compliance factors surrounding day rates. Employers should use this information when analyzing which pay scheme is best for their business.
Without the proper understanding of daily rates and overtime laws in the US, employers could stumble into a similar situation. When employing W-2 employees, the day rate scheme is not as straightforward as it may seem. It can create a high risk of non-compliance with federal and state laws around wages and hours worked.
Some argue day rates are an “industry norm” in industries such as oil and gas, medical staffing, and creative services. However, providing these workers with a daily rate without paying OT at a premium rate is a direct violation of the Fair Labor Standards Act (FLSA) and can leave your company exposed to undergoing a similar case as this Texan company. When you employ W-2 employees all hours worked must be paid.
Overtime must be paid regardless of prior approval
The employer can instruct a worker to not work OT without prior approval, but if the hours are in fact worked they must be paid regardless of whether the employee has received approval to work OT or waived their rights to OT. The FLSA states that non-exempt employees are entitled to overtime at a premium of 1.5x the regular rate for all hours worked over 40. The Texan company’s settlement demonstrates that paying a day rate alone does not negate this rule.
To use a day rate compliantly a premium T rate needs to be paid unless the employee is exempt*. With varying OT rates dependent on the number of hours worked, the calculations can vary daily and lead to a much higher rate.
Here are some of the key areas to be aware of when calculating OT on a daily rate:
Difficulty to withhold from pay if less than a full day's hours are worked, there must be clear guidelines on how this will be managed and when it will apply.
Inability to take workers daily hours and average over the week. For instance, if the employee works 12 hours one day and 5 the next, you can’t average out the day where OT was worked.
Increased risk of non-compliance and more room for error in providing incorrect payments.
Essentially the solution to maintaining compliance and knowing your rates is to pay hourly rates and not day rates. Otherwise, the varying calculation creates an uncertainty in knowing actual costs when employing a contingent worker.
At PGC, we work with companies every day that face issues on how to manage their pay rates compliantly. As each issue arises we evaluate the unique conditions applicable to ensure compliance is maintained.
If you need help or advice to support your company in mitigating day rate risks, feel free to get in touch!
*Exempt employees: If your worker is paid hourly and falls within the ‘Computer Employee Exemption’ they may not be required to receive premium OT rates. The worker must make over a certain threshold ($27.63 in most states, with a higher hourly rate in some states). If these IT workers are paid a set daily rate regardless of hours worked as opposed to an hourly rate, the exemption is lost and the employee must be treated as Non-Exempt and entitled to overtime at a premium rate.
Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.