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Start-ups Need to Understand Wage and Overtime Laws

by Jason Shinn of Michigan Business Law Center

All employers are generally required to comply with federal and state laws applicable to paying employee wages. There are various nuances and exceptions that need to be discussed with an experienced employment attorney, but here is an overview of state and federal wage law, a look at why start-ups are especially at risk for violating such laws, and a glimpse into the critical area of employee classification. 

Overview of Federal and State Wage Laws

As to federal wage regulations, employers need to generally understand the Fair Labor Standards Act (FLSA), as well as the U.S. Department of Labor regulations applicable to the FLSA when it comes to employee wages.

Under federal law, similar to Michigan’s minimum wage statute, employees must be paid a minimum standard for wage compensation. Additionally, covered “nonexempt employees” must receive overtime pay for hours worked over 40 per workweek at a rate not less than one and one-half times the regular rate of pay.

States, however, are entitled to set higher standards. For instance, all states also have their own wage and hour regulations. In Michigan, employers may be subject to the Minimum Wage Law of 1964, which is the corollary to the FLSA’s minimum wage and overtime pay requirements.

Michigan’s Minimum Wage Law applies to employers who employ two or more employees at any one time within a calendar year. But this statute does not apply to any employer who is subject to the FLSA, unless the minimum wage provisions of the FLSA would result in a lower minimum wage than provided under the Michigan act.

Under both state and federal law there are numerous exemptions from minimum wage and overtime requirements that apply to certain employees and these exemptions should be discussed with an experienced employment attorney.

Why Start-ups Need to Understand Wage Laws and Avoid Misclassifying Employees in Violation of those Laws

The risk of misclassification of employees as exempt should be a significant concern for any start-up. This is because in the early days of a start-up company, funding is limited and everyone is working long hours and frequently doing whatever work needs to be done regardless of official job title or core responsibilities.

This means that employees may actually be doing work that is a combination of exempt and nonexempt work. If the nonexempt work dominates the employee’s time and attention, then the employee may be able to argue that he or she is no longer exempt from overtime wages. This situation exposes the company to significant risks and may delay or outright prevent the start-up from going to market.

Proper Classification of Employees under Federal Wage Laws

It is critical to determine the proper classification of an employee because wage payment obligations that are not fulfilled expose the employer to liability and fines.
 
The most common exemption from the federal FLSA’s minimum wage and overtime requirements is commonly known as the “white collar exemption.” This exemption applies to certain executive, administrative, and professional employees who are also salaried employees. But this exemption does not automatically apply just because an employee receives a salary or is given a particular job title. Instead, various other factors must be considered, including these general guidelines:
  • The “executive exemption” normally applies to “high-salaried” managerial employees with primary duties involving managing the business or a department and supervising two or more employees.
  • The “administrative exemption” usually applies to “high-salaried” employees whose work requires the exercise of discretion and independent judgment and whose primary duty consists of work directly related to management policies or general business operations.
  • The “professional exemption” applies to “high-salaried” employees whose primary duty consists either of work of an advance type in a field of science or learning that is customarily acquired by a prolonged course of specialized study, or of work requiring invention, imagination, or talent in a recognized field or artistic endeavor, and which requires the exercise of discretion and independent judgment.

It is important to note that these exemptions arise under the federal FLSA and may be different than state regulations, including in Michigan.

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Since 2001, Jason Shinn has provided employment and business law counseling to companies and individuals. He also routinely represents their interests in state and federal courts. For more information about Mr. Shinn or his law firm, see www.shinnlegal.com. For additional information on legal issues facing businesses visit the Michigan Business Law Center


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