Unfortunately for many contractors and subcontractors, in the fall of 2011 the U.S. Department of Labor’s Wage & Hour Division decided to investigate major homebuilders, and the companies with which they contract, to root out suspected minimum wage and overtime violations. This summer, Wage & Hour officials announced locally that electrical contractors are among the industry groups that the Labor Department is targeting for investigation of "rampant" violations. The trickle-down effect of the government’s investigation has exposed poor record-keeping and payment practices of many members of the construction industry, resulting in substantial assessments and penalties related to payment for piece work.
Where many construction companies and other payers of piece-based compensation get in trouble is that they neglect to record and observe actual hours worked, which can put them squarely at odds with the Fair Labor Standards Act (FLSA). Piece rates require legitimately keeping “two sets of books”: one set that records hours worked, the other set that records work completed. Reconciling those sets of records with actual compensation paid allows you to demonstrate to workers and government agencies that, while you paid by the task, the amount paid complied with minimum wage and overtime requirements.
CONSEQUENCES
Failure to keep track of worker hours and to pay them according to the rules leaves you open (and largely defenseless) to worker claims that you did not pay them (a) the minimum wage, (b) overtime or (c) both. Those claims will likely spark an audit by an investigator from the Wage & Hour Division, an experience that leaves many employers yearning for the peace and tranquility of an IRS examination.
While your first reaction to learning that one of your workers has reported you to the Department of Labor is to seek vengeance on them, please note the folly of that course of action: If you fire or otherwise willfully discriminate against an employee for filing an FLSA complaint or for participating in a legal proceeding against you, you are subject to criminal prosecution, a first-offense fine of up to $10,000, and imprisonment for repeat offenses.
That would be in addition to civil penalties of up to $1,100 – per violation – for willfully or repeatedly violating the minimum wage or overtime pay requirements, and in addition to liability for back wages.
If that doesn’t seem sufficiently harsh, any undeposited payroll taxes that are associated with the back wages are subject to further penalties and interest, and any employee of your company who could have deposited those payroll taxes can be held personally liable for them.
More on that: When you pay an employee – whether salary, hourly wage or piece rate – and withhold taxes from their paycheck, you become a trustee for the federal government. Withheld payroll taxes are called “trust fund taxes” and, in the eyes of the IRS, belong to the government. When you fail to pay withheld payroll taxes to the government, IRC Section 6672(a) imposes a penalty equal to the entire amount of the trust fund taxes on every “responsible person” who “willfully” fails to see that the taxes are paid. The IRS can assess the penalty against any or all responsible persons, without first trying to collect from the company.
PAYING FOR PIECE WORK THE RIGHT WAY
If, at this point in your reading, you have decided to recommit to doing things right, you are probably more receptive than you were a few minutes ago to a few practical pointers.
On its website, the Wage & Hour Division offers some insight into paying workers on a piece rate, which is defined as the “regular rate of pay for an employee paid on a piece work basis ... obtained by dividing the total weekly earnings by the total number of hours worked in that week.”
Our Wage & Hour friends use this example: One of your workers, who is paid on a piece work basis, earns $675 in a particular week. In that week, he worked 45 hours. The regular rate of pay for that week equals $15 ($675 divided by 45 hours). In addition to the straight-time pay, the worker is entitled to $7.50 (half the regular rate) for each hour worked over 40 – an additional $37.50 for the five overtime hours – for a total of $712.50. While the temptation may be great to “adjust” the number of hours worked to get your worker back down to a gross pay of $675, don’t do it. For employees subject to minimum wage and overtime, hours worked are hours worked.
The Wage & Hour Division offers this alternative method of complying with overtime rules while paying by the “piece”: If you and your worker agree to this arrangement before the work is performed, you may pay 1.5 times the piece rate for each piece produced during the overtime hours. The piece rate must be the one actually paid during non-overtime hours and must be enough to yield at least the minimum wage per hour.
The recurring theme here is that you must keep track of the worker’s hours. The FLSA requires that you retain for two years "records on which wage computations are based.” This includes time cards, piece work tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages." However, for purposes of satisfying the Department of Labor, payroll registers should be kept for a minimum of three years.
Remaining vigilant about keeping accurate time records and using approved methods to calculate wages will allow you and your workers to realize the benefits of piece work, while staying out of the cross-hairs of Wage & Hour Division investigators.
