The U.S. Department of Labor’s Wage and Hour Division may or may not be investigating automotive service shops for pay plan violations at a greater rate than other retail businesses. There is certainly evidence supporting such a bias, although all it takes is a complaint from a disgruntled employee to trigger an investigation. Either way, all findings are based on the federal Fair Labor Standards Act (FLSA), which regulates overtime pay requirements.
If you are non-compliant with FLSA provisions, the penalty can be harsh.
“A $50,000 judgement to a store with 10% return on sales would take a half million in sales to recoup,” says Dennis McCarron, a partner in a brokerage firm that focuses on the tire and automotive service industry. “If you have a 5% net profit, it would take a million dollars in sales to recoup.”
McCarron should know. Before joining Cardinal Brokers he was executive director of Dealer Strategic Planning Inc., a company that manages multiple tire dealer 20 Groups in the U.S. He also gained managerial experience at Bridgestone Retail Operations LLC, where he worked for 17 years.
Your dealership can be investigated or audited by the Department of Labor no matter how big or small you are. Best-One Tire Group, which jointly owns and manages more than 250 locations in 26 states, thought it was properly paying its employees. After a series of Wage and Hour Division investigations, the dealership was forced to pay more than $500,000 in back wages. As part of its settlement, Best-One agreed to write an article for Modern Tire Dealer to help other independent tire dealers learn from its misfortune. The article not only explains how the group became non-compliant, but also what was required to right the wrong.
What follows is an in-depth primer on how to properly pay your employees in order to meet FLSA requirements from the Best-One Tire Group. — Bob Ulrich
Best-One: Learn from our mistakes
Any audit can blindside a business, but the complex wage and hour laws make a U.S. Department of Labor (DOL) investigation particularly daunting. Every tire dealer should evaluate their pay practices, because your pay may be competitive — but not compliant.
The Best-One Tire Group recently cooperated with a DOL investigation on proper computation of overtime. The tire industry historically incentivizes employees at all levels of the business: Technicians are paid on flat rate, counter salespeople earn spiffs, and outside salespeople may be 100% commission. Through the DOL investigation, Best-One Tire learned that these incentives must be factored into overtime.
For 70 years, Best-One Tire has focused on its mission of Creating Raving Fans. We value our employees and compensate them well, because they are our most important fans. They depend on Best-One Tire for their livelihoods, and we take that responsibility very seriously. But good intentions and high compensation are not the same as compliance.
A Best-One core value is “Accept the Urgency of Accountability and the Necessity of Change.” The DOL investigation is causing us to change practices and get in compliance. It’s the right thing to do, for Best-One and our employees, and for you.
The wage and hour laws are not new, but our industry’s lengthy history of incentive pay has clouded compliance. After all, if we are paying the same as everyone else has always paid, and often their fathers and grandfathers, how can we be non-compliant?
The DOL has investigated many tire dealers in the last few years, and we need to know wage and hour law. In an investigation, besides back wages, the DOL can assess liquidated damages and civil penalties. Don’t assume that you are compliant because you outsource payroll; payroll companies may not be contractually responsible for compliance or fully aware of your pay structures.
Tire dealers need to particularly understand three topics under the Fair Labor Standards Act (FLSA):
- how to compute the regular rate for overtime;
- how to apply the Section 7(i) overtime exemption to commissioned retail employees; and
- how to properly classify executive, administrative and professional employees under the Section 13(a)(1) minimum wage and overtime exemption.
Computing the regular rate for overtime
Overtime must be paid on the “regular rate,” defined in Section 7(e) of the FLSA. The regular rate includes all compensation paid for employment unless the FLSA specifically excludes that compensation.
The regular rate is not always the hourly rate. The regular rate is a weighted rate — it factors in both incentives and hourly pay. So if you pay overtime on just the hourly rate, but also pay spiffs, you are not paying enough overtime.
Here’s another way to look at the regular rate: You convert incentive pay to an hourly rate, add that rate to the employee’s typical hourly rate, and pay overtime accordingly. If an employee worked 45 hours that week and earned $90 in spiffs, the spiffs equal $2/hour. If the hourly rate is $15/hour, add the $2/hour for spiffs to arrive at a regular rate of $17/hour. You must pay overtime based on the regular rate of $17/hour.
As a sidebar, we typically think of overtime as “time-and-a-half” for hours over 40. When computing the regular rate, it helps to think of “straight time pay” as pay at the hourly rate for all hours worked plus incentives, and “overtime pay” as a premium that equals half the regular rate for hours over 40. So for a 50 hour work week, the employee receives straight time pay at 50 hours multiplied by their hourly rate, plus incentives, plus an overtime premium at half the regular rate for hours over 40. The “time” is in the straight time pay and the “half” is in the overtime premium.
In general, the regular rate includes incentives paid through a program known to the employee. Examples may include a sales bonus, commissions, or a production bonus. The regular rate excludes discretionary bonus payments, as long as both the decision to pay and the amount of the payment are at the employer’s discretion. Examples may include a payment as a “thank you” or recognition of outstanding work. Because they are not part of the regular rate, you do not have to factor discretionary bonuses into overtime.
1. Computing the regular rate: non-discretionary sales bonus. Here is an example of a non-discretionary sales bonus that changes the rate.
The employee earns an extra $50 if the employee hits a weekly sales target. The employee makes $20/hour and works 50 hours this week. In the incorrect example (see Chart No. 1), you can see that overtime was calculated without factoring in the bonus. In the correct example, you can see that the regular rate, inclusive of the bonus, for calculating overtime is $21.
Computing overtime on the regular rate rather than the hourly rate adds $5 that week. Over a year’s time, that equates to $260 for that employee.
2. Computing the regular rate: commission. Commissions are treated similarly to non-discretionary bonuses, unless the employee meets certain exemptions under the FLSA. Here is an example of a commission that changes the rate (see Chart No. 2).
A technician (not flat-rate) gets paid $20/hour and 1.5% of labor turned. He or she worked 50 hours that week and turned $4,000 of labor. In the incorrect example, you can see that overtime was calculated without factoring in the commission. In the correct example, you can see that the regular rate for payment of overtime is $21.20. Computing overtime on the commission adds $6 that week.
3. Computing the regular rate: payment at different hourly rates. Payment at two different hourly rates also changes the regular rate — the rate must be weighted to account for the pay differential. Examples include a night shift differential or pay at a premium rate for road service. Also, hours spent on road service must accumulate toward overtime.
You might say, “I pay road calls at time-and-a-half anyway, so I’m covered.” That is not necessarily true. As Best-One Tire found, pay at time-and-a-half, double time, or greater does not remove those hours or pay from overtime. There are certain exceptions to this requirement in the FLSA, such as clock pattern premium pay, that are outside the scope of this article. For reference, see Sections 7(e)(5), (6), and (7) as interpreted by regulations.
In Chart No. 3, the company did not count road call hours toward overtime and did not calculate the regular rate. Even though the road call rate is more than time-and-a-half, it should be weighted with the hourly rate to determine the regular rate for overtime. The correct example shows the regular rate as $22.50 when road call pay is included with hourly pay, a difference of $2.50 an hour.
The difference in pay — adding in the five road call hours for overtime and weighting the rate — is $62.50 for the week or $3,250 for a year.
For a typical two-year payroll audit, you could be looking at $6,500 in back wages for one employee, and that’s before the possibility of damages.
1. The Section 7(i) Exemption: retail commissioned employees. In the tire industry, certain retail or commercial salespeople and technicians, including flat-rate, may fit under this exemption (see Section 7(i) of the act). If so, the employee is exempt from overtime, so you do not need to calculate the regular rate and pay overtime. However, before relying on this exemption, make sure your state law permits it, as some do not. You must be compliant with both federal and state wage and hour laws.
An employee may meet the 7(i) Exemption if all these requirements are satisfied:
- He or she is employed by a retail or service establishment;
- Regular rate of pay is more than 1.5 times minimum wage; and
- More than half the employee’s compensation in a representative period comes from commissions.
For the first requirement, “retail” may include what our industry calls “commercial.” You may qualify as a “retail or service establishment” if at least 75% of your annual dollar volume of sales of goods and/or services is not for resale, and your business is recognized as retail sales or services in that industry. Sales to the end user are not for resale, so both “commercial” and “retail” in our industry may qualify under this exemption.
For the second requirement, divide the employee’s total earnings for the period by the total hours worked. If the result is greater than 1.5 times minimum wage, the employee may meet this exemption.
The last requirement of that exemption is the most difficult to determine. Courts have examined what pay qualifies as commissions. Generally, if the employee’s pay is proportionate to the customer’s bill, the pay may be a commission. For example, if a technician’s pay is simply a percentage of what he turns, his pay is likely a commission. A technician on flat-rate also may qualify under this exemption.
Also, each year you need to review the employee’s compensation to verify the exemption still applies. You choose a representative period and audit whether the employee’s compensation is more than half from commissions; if not, you need to pay overtime. The employee should track hours worked so that you have the records needed to verify this exemption.
Chart No. 4 is an example of auditing the compensation. The employee is paid solely on commission at 25% of labor. If minimum wage is $7.25, then the minimum wage row shows what 1.5 times minimum wage would be for the hours worked. Compare this to the actual commission earned, and you can see the employee meets both requirements of pay at 1.5 times minimum and more than 50% compensation from commissions.
2. The Section 13(a)(1) Exemption: Executive, Administrative, Professional, Computer and Outside Sales Employees. In the tire industry, certain managers, office professionals, outside sales, and computer personnel may fit into this exemption (see Section 13 of the act). If so, they are exempt from minimum wage and overtime.
However, verify your compliance, because misclassification of employees under this exemption is expensive. These employees are typically highly compensated and work substantial overtime, resulting in big figures for compliance.
Chart No. 5 is an example of the costs of misclassification.
Executive, Administrative, Professional and Computer employees under this exemption have both a weekly salary requirement of $455 (or $27.63 an hour for computer employees) and a duties requirement. See the DOL website for more information.
Generally, management employees may qualify if they meet all of the following:
- receive a salary of not less than $455/week; primary duty is management of the enterprise or a recognized department of the enterprise;
- “customarily” and “regularly” direct the work of at least two or more full-time employees or their equivalent; and
- have authority to hire or fire, or suggestions and recommendations are given particular weight.
Cautions for tire stores are: treating a counter salesperson as exempt, although they are only in charge when the manager is out (fail to meet “primary duty” test); and treating a department manager as exempt although all hiring and firing decisions are made by the company manager (fail to meet “hiring and firing” test).
Note that a job title does not grant exempt status; the employee must meet all the requirements for each exemption. So calling a person a manager does not automatically qualify them for the executive exemption.
The Administrative Exemption is notably difficult to apply because the qualifications are not as clear-cut as the Executive Exemption. Tire dealers may try to qualify office managers, HR personnel, or safety directors under this exemption. See the DOL website for more information about the Administrative, Professional and Computer Employee exeptions.
Outside Sales employees under this exemption do not have a weekly salary requirement, but do have a duties requirement — the employee’s primary duties must be making sales. Also, the employee must be customarily and regularly engaged away from the employer’s place of business, and working out of a home office does not qualify. Be conscious of the time outside salespeople spend in and out of the office. If the salesperson spends more time in the office than just entering and picking up orders, you may want to evaluate your compliance with this exemption.
Once again, the salary requirement of $455/week does not apply to the outside sales exemption.
Are you concerned about compliance? Worried about the amount of back wages and the possibility of double damages? Consider applying for the Department of Labor’s PAID (Payroll Audit Independent Determination) program.
The DOL operates the PAID program to encourage self-reporting and compliance. If an employer qualifies for the PAID program, the employer may be able to settle back wages without paying damages or penalties. The employer does need to provide contact information for affected employees, back wages calculations, payroll and other records. The DOL provides employees with settlement forms that release claims against the employer for the covered violations.
The PAID program operates as follows:
- Employer identifies potential violations, affected employees, and time frames;
- Employer calculates back wages due;
- Employer contacts the DOL and submits calculations, and the DOL determines employer’s eligibility for the program;
- The DOL issues a summary of unpaid wages and settlement forms for employees;
- Employer pays back wages and gathers settlement forms; and
- Employer submits proof of payment to the DOL.
Best-One Tire was blindsided by its recent DOL investigation. It learned that good pay and compliance are not always the same.
We encourage you to evaluate your pay practices, even if you believe you are paying well and fairly. Or you may be the next headline for the DOL.