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“Gail Gardenia’s” new floral studio was an overnight success with customers who sought out her innovative edible flower designs. As her business grew, Gail hired a front desk receptionist, and three part-time floral design “consultants’ whom she trained on the signature Gail Gardenia look in edible arrangements. Times were good. Then, seemingly out of the blue Gail was assessed almost $20,000 in back employee taxes and non-compliance fines…for only four employees! What happened?
Unbeknownst to Gail, a former floral designer who resigned months earlier applied for unemployment insurance after being laid-off from his subsequent job. The claim drew the interest of the California Employment Development Department (EDD) who reviews each applicant’s employment history. The ensuing state audit of Gail Gardenia’s pay practices determined she had improperly paid her design consultants and receptionist. She had also failed to withhold and report the appropriate employment taxes. Further, she did not have the proper new-hire paperwork in place – but that’s another scary business story.
While no-one advised Gail Gardenia how to properly manage employee paperwork and payroll when she opened her business, a basic consideration for any owner is determining whether their employee is a consultant or actually an employee, and if an employee whether they are exempt, or non-exempt from State and Federal wage and hour laws. Most industries are required to classify each job as exempt or non-exempt based on strict guidelines defined in the Federal Fair Labor Standards Act (FLSA), and in California by the state Wage and Hour Orders issued through the Industrial Welfare Commission (IWC).
In brief, employers in California are required to pay non-exempt employees at least the state minimum wage for each hour worked, plus overtime pay calculated at time and a half for all hours worked in excess of eight hours a day and 40 hours each week. Exempt employees, who typically hold executive, supervisory, professional or outside sales positions, are "exempt" from overtime pay regulations. Employers beware: simply placing an employee on a salary, or calling them “consultant” or “commissioned salesperson” does not automatically exempt that employee from the state wage and hour laws. Even though Gail considered her consultants to be independent contractors, in the eyes of the state they were legally defined as “non-exempt” employees, and therefore covered by the Wage and Hour laws.
How can employers find out how about these laws? The Wage and Hour regulations are available for download on the Department of Industrial Relations’ Division Labor Standards Enforcement website: http://www.dir.ca.gov. Currently, 17 different Wage Orders exist, each for a different industry or occupation. In additional to identifying the characteristics of an exempt employee, the IWC Wage Orders regulate wages, work hours, overtime pay, meal and rest breaks and other matters related to non-exempt employees. Employers are strongly advised to become familiar with the Wage Order for their type of business as the courts may assess civil penalties against an employer, or person acting on behalf of an employer, for violating any wage and hour provision of the state Labor Code. Luckily for Gail, by taking out a business credit line she was able to pay the back taxes and fines and keep the doors to her floral studio open.
Starting and growing a business endeavor can be an exciting yet daunting experience fraught with potential financial disasters. Most new owners understand the importance of having a solid business plan and preparing for unexpected expenses during the start-up phase. They also recognize the importance of shielding their personal assets and purchasing insurance to protect them against consumer claims. Unfortunately, many business owners are ill-prepared to deal with one of the biggest obstacles they might face on the road to achieving their goals: their employees. To be successful in today’s environment, employers need to know how to protect themselves and guard against employee legal liabilities. They also have to be able to address a myriad of compliance regulations, and know how to classify each employee in order to be in adherence with State and Federal pay laws.
In the coming months, we’ll be writing about other HR practices and programs start-up and growing businesses can put in place to help mitigate the risk inherent in hiring employees. For more information or questions concerning employee issues, employers may contact us at www.HRGSolutions.com or 877. 430. HRGS.
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5042 Wilshire Boulevard, Suite 400, Los Angeles, California 90036-4967 (323) 356 - 6245
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