Direct Pay Regulations

The Fair Labor Standards Act is an original cornerstone of human resource management. Until its enactment in 1938, the employer and employee negotiated the wage and hourly pay one-on-one.1 After the Fair Labor Standards Act, Congress passed several other statutes to improve wages: Walsh-Healey Public Contracts Act,2 Davis-Bacon Act,3 Service Contract Act,4 and Equal Pay Act,5 to name a few.6

This section is concerned with the situations that frequently arise under the FLSA and the problems involved in compliance. Minimum wage requirements under the act involve a relatively small percentage of the gainfully employed, and have fewer compliance problems than other sections of the act. Therefore, they are not discussed in this chapter.7

Legal compliance and cost control under FLSA focus on determining compensable hours, determining eligibility for overtime pay, a worker’s status as an independent contractor, and pay for meal periods 8 Managers accept these long-standing provisions as a necessary cost of doing business. The FLSA does restrict the freedom of the employer in the payment of wages, but it does not prevent the establishment of policies and procedures to control costs.9

Historically, violations under the FLSA can exist for a long time before anything happens. Often an employee does not protest an incidental violation because the violation is not known to be one. Or it may be more convenient for the employee to ignore the requirements of the act.10 When “the honeymoon is over,” the employer usually regrets the casual practice.

An investigation for compliance by the Wage and Hour Division of the Department of Labor can be caused by complaints from the employee, unions, or competitors. Most investigations are initiated through employee or union complaints. Seldom does the agency make spot-checks, unless it finds a flagrant violation in one company and wants to determine if it is a common practice throughout the industry. Compliance with most provisions of the act is not difficult if the employer knows the regulations, but sometimes it can be an employee relations problem. Often when a condition is questionable, such as an exempt or nonexempt classification (overtime premium pay or not), the employer takes the risk.


The FLSA covers most employers, including:

  • U.S. federal government
  • State and local governments
  • Private employers who have annual gross sales of at least $500,000
  • Private employers engaged in interstate commerce11

Because this definition excludes small enterprises, most states have enacted “small” fair labor standards acts that cover employees not included in the federal act. For this reason, whenever an employer–employee relationship exists, it is rare that employees are not covered. Section 203 exempts enterprises such as religious organizations and mom-and-pop businesses where only the family is employed. Nonprofit organizations do not have a primary business purpose, and seasonal recreational establishments are also exempted under the act. State and local governments are not exempt because of the Supreme Court decision in Garcia v. San Antonio Metropolitan Transit Authority, 105 S.Ct. 1005 (1985).

Exemptions are numerous under FLSA. The determination of when an employee comes under these exemptions is discussed in subsequent sections. There are special overtime rules for firefighters, law-enforcement personnel, and hospital and facility care people in residence. If a state law is stricter than the federal law, it will supersede the federal law; otherwise, the federal law controls. Any agreement between an employer and employee to waive coverage is illegal, void, and unenforceable, except under conditions that will be treated later in this chapter.

Penalties for Violation

The Fair Labor Standards Act is enforced by the Wage and Hour Division of the Department of Labor (DOL) and includes criminal and civil penalties for willful violations. In Williams v. Tri County Growers, Inc., 747 F.2d 121 (3rd Cir. 1984), the court said that the lack of filed complaints does not mean that the employer did not intend to violate the law. Other courts were more liberal, and stated that if the employer merely knew that the FLSA was a consideration during the time the act was being violated, it was willful.

The Supreme Court in Trans World Airlines v. Thurston, 105 S.Ct. 613 (1985), rejected this concept and defined willful as where the “employer either knew or showed reckless disregard for the matter of whether its conduct was prohibited by the ADEA.” If the employer didn’t have knowledge, there was no reckless disregard. The Thurston thinking was adopted in McLaughlin v. Richland Shoe Co., 108 S.Ct. 1677 (1988). The court stated that the employer acted willfully if it “knew or showed reckless disregard for the matter or whether its conduct was prohibited by the Fair Labor Standards Act.”12

The employer would not be charged with a willful violation unless it knew or should have known that the action was violating a statute and made no attempt to comply.13 This would make it very difficult to sustain a willful violation unless the employer intentionally violated the statute or totally disregarded it. Certainly, advice of counsel or serious consideration as to whether a statute was being violated would be sufficient to make any violation “nonwillful.”

Where no willful violation is found, the penalty is restitution in the form of back pay. The amount of back pay and liquidated damages awarded is discretionary with the court. In 2008, a “willful” determination cost Wal-Mart a settlement of $54 million. The company was charged with willfully compelling employees to work “off-the-clock” and depriving personnel of meal and rest periods.14

Often, it is difficult to determine damages incurred by an employee because of an employer’s failure to pay overtime. The courts have stated that, in the absence of employer records, the employee’s reasonable recollections of the hours worked is sufficient.15 In all situations under the act, the plaintiff has a right of jury trial; the successful plaintiff may obtain attorney fees and costs from the defendant.


Often the employee’s desire for overtime pay is stronger than the desire of the employer to limit overtime. This makes the cost of overtime difficult, but not impossible, to control. A waste control clerk or sales service expeditor can always find a reason to work overtime when money is needed.55 Overtime can be largely controlled by requiring authorization before overtime can be worked. However, the promulgation of a rule is not enough. The rule must be consistently enforced and if the employee works the overtime, then the overtime earnings must be paid.56 Wage and Hour takes the position that unauthorized overtime still must be paid if known or tolerated, and the courts have sustained this position.57

Compensatory Time Off

The federal law requires that overtime be paid only after 40 hours are worked in one work week, but compensatory time off can be exchanged any time during the scheduled work week in order to avoid overtime. In the private sector, overtime hours worked in one week cannot be offset by granting compensatory time off in another week. However, in the public sector, the Wage and Hour Division grants exceptions. For public employees, compensatory time off may be approved in lieu of overtime pay for irregular or occasional overtime work by both exempt and nonexempt employees. Federal, state, and local governments can pay overtime hours in 1½ times pay, or hours of “comp” time.

Stabilizing Overtime Pay

A “Belo” contract is a guaranteed wage contract made with the nonexempt employee, where hours vary widely from week to week. It provides a fixed weekly pay. This is an effective method to control overtime, while the employee controls hours of work. It is widely used for field repair service, customer service jobs, and other situations where the job requires work off the premises by nonexempt employees.

The conditions necessary to qualify for a Belo contract were stated by the Supreme Court in Walling v. Belo Corp., 317 U.S. 706 (1941). The court listed five requirements:

  1. The duties of the job covered by the Belo contract must require working hours that fluctuate above and below 40 hours per week.58 This is the key requirement. The fluctuation must not be caused by economic conditions or employer control, but by job duties of the employee.
  2. The contract must pay the employee a regular hourly rate above the statutory minimum wage requirements.
  3. The weekly guarantees must pay at least one and one-half times the regular rate for all hours over 40.
  4. The contract cannot cover more than 60 hours a week.
  5. The total hours to be worked and paid for weekly must be agreed on in writing with an individual or union.
  6. Records of actual hours must be maintained.

Exhibit 5.1 shows a Belo contract that complies with these requirements.

Applied Administration


EXHIBIT 5.1 A Belo Contract

The total hours inserted in the last line of the Belo contract must bear a “reasonable relationship to the hours an employee actually works.” This is usually determined in the first contract by past overtime records. However, the actual hours worked before a Belo contract are usually greater than those worked after the Belo contract. When the incentive to work overtime is removed by the Belo contract, the overtime hours usually decrease with no effect on job performance. To anticipate a decrease in hours by entering less than the previous average would not be in violation of the Belo requirements, but may result in the employee not signing it. A better plan would be to review the contract in six months or a year, basing the average hours on the experience under the Belo contract.

In the second contract term, the hours could be reduced if the average justifies it. If the hours are reduced to the average, the employee is not being rewarded for efforts in doing the work in fewer hours.

Compliance and Overtime Control

Supervisors should be made aware that if the employee is required or permitted to work overtime for the employer’s benefit, the employee must be paid. Management must authorize it, and the rule must be enforced. For the employer to control overtime, two strong positions must be taken. First, remove the control of hours from the employee. Second, if control of the overtime hours cannot be removed from the employee, and exempt status cannot be justified, the Belo contract or some other pay plan should be considered. If a Belo plan is not possible and there is an uncontrollable fluctuation in the hours worked, another plan should be submitted to the Wage and Hour Division for approval.


Independent contractors are workers who are not employees. Typically, they are temporary consultants. Employers are sometimes tempted to avoid the costs and responsibilities associated with hiring an additional employee by claiming that those who perform certain services are independent contractors. Where the independent contractor relationship has been established, both parties enjoy certain advantages:

Employer Advantages

  1. The requirements of the Fair Labor Standards Act do not apply. Overtime premiums need not be paid.
  2. Unemployment compensation payroll taxes do not have to be paid.
  3. Social Security taxes do not have to be paid.
  4. City, state, and federal income taxes do not have to be withheld.
  5. Compulsory workers’ compensation coverage does not apply.

Worker Advantages

  1. The worker has much greater flexibility with respect to the time, place, and manner of performance of services.
  2. The independent contractor has enhanced flexibility with respect to the deduction of business-related expenses. For example, employees may deduct only those business and miscellaneous expenses that exceed 2 percent of their adjusted gross income, but independent contractors may deduct 100 percent of their expenses related to self-employment.
  3. Independent contractors may establish individual pension and profit-sharing plans that may be more desirable than those offered by employers. Obviously, there is considerable economic advantage in avoiding the statutory requirements.

There is strong incentive for establishing an independent contractor relationship wherever possible, but there are also certain risks in doing so.59

Risks in the Relationship

Although there are advantages, so are there risks if the Wage and Hour court finds that an independent contractor is, in fact, an employee.60 No statute defines the exact meaning of an independent contractor. The interpretation is left entirely to the courts, using agency principles. The principal liabilities, if it is determined that an independent contractor is an employee, are:

  1. The amount of the employee’s state and federal income tax, plus interest, due to the failure to withhold under IRS regulations
  2. Unpaid overtime or minimum wages under the FLSA
  3. Liability to the state for unemployment compensation insurance tax
  4. Expenses incurred under the common law for a work-related injury, due to the failure to carry workers’ compensation insurance
  5. The employer’s amount owed on the employee’s Social Security taxes, plus what is owed by the employee, in addition to the interest on the entire amount, due to the failure to withhold

To determine whether an independent contractor relationship exists, one must look to the common law,61 the IRS code, National Labor Relations Board (NLRB) cases, decisions under the FLSA, state agencies’ positions on workers’ compensation coverage, and liability for unemployment insurance. Most of these agencies use either all or part of the common law definition, but some put more stress on certain factors than others. For example, the NLRB looks only at the control factor, whereas the IRS looks to see whether or not it was a businesslike operation.


The courts have said on numerous occasions that no one element establishes an independent contractor relationship.62 The historic base for determining if such a relationship exists comes from the law of agency. An attempt to define the distinction between an employee and an independent contractor was made by the Restatement of the Law of Agency (2nd, Sect. 220), which stated:

  • While an employee acts under the direction and control of the employer, an independent contractor contracts to produce a certain result and has full control over the means and methods that shall be used in producing the result. He is usually said to carry on an independent business.

In Nationwide Mutual Ins. Co. v. Darden, 12 S.Ct. 1344 (1992), the Court held that an individual is an employee under the Employment Retirement Income Security Act (ERISA) unless Congress says otherwise. The Court used the common law person agency principle in determining whether there was an independent contractor. Under ERISA, the Court in Darden listed the factors to be considered when determining whether there is an independent contractor or employee relationship. The Court pointed out (at 1349) that no one factor is decisive.

The Fifth Circuit, in Reich v. Circle C. Investments, Inc., 498 F.2d 824 (5th Circ. 1993), found one factor that would indicate topless dancers were independent contractors. But on balance, four other factors made them employees. In this situation, the dancers received no compensation from the club; they received only tips from customers. And, at the end of each night, the club received $20 from each dancer, regardless of how much the dancer made in tips from dancing on the tables. The club claimed this was rental. However, the club controlled the number of customers and tables.

The court focused on control, investments of the worker (costumes and a padlock), opportunity for profit (the club controlled the customer flow, where money could be made if the dancer was popular), skill and initiative required to perform the job (no training was needed), and permanency of the relationship (this was very short). This would indicate a nonemployee status, but the court decided other factors outweighed the short employment relationship, and found the dancers to be employees. The main factor was control.

The Supreme Court has identified two main conditions for finding that an independent contractor condition exists. First, there must be independent performance of the assigned job. Second, the initiative and decision-making authority must involve the performance of the work by the independent contractor.63 The major factor in the determination of independent contractor status is the degree of employer control. With a greater degree of employer control, it is more likely the worker will be found to be an employee. A person who is required to comply with instructions about when, where, and how to work is ordinarily an employee. Some employees who are experienced or proficient in their work need little instruction; however, this does not put them in an independent contractor status. The control element is present if the employer retains the right to instruct.

For the purpose of determining an employer–employee relationship under the National Labor Relations Act, the board applies only the right of control test. If the person for whom services are performed retains the right of control of the end result, in addition to the manner and reasoning to be used in reaching that result, the board will find that an employer–employee relationship exists.

The right to instruct a person who works for the employer eight hours a day in one job and cleans the office at night, or mows the lawn on Saturday, often makes a worker an employee. If an employer–employee relationship exists, overtime compensation is due for all hours worked over 40 per week, unless a flat fee is greater than time-and-a-half for hours worked. There is an implied right to instruct a person who works for the employer eight hours a day on one job and does additional work in off hours. If there is an employee–employer relationship, overtime compensation is due. If the flat fee exceeds the overtime rate for the hours worked, then there is compliance. If an employer assumes that an independent contractor relationship exists and in fact it does not, the exposure in other areas is far greater than the payment of overtime. Because of this exposure, the employer should be cautious when treating the relationship as an independent contractor status. Serious consideration should be given to requesting a determination from the appropriate regulatory agency. Most agencies will furnish a list of guidelines on request. Such a request may not trigger an investigation.

Examples of Relationships

To prevent exposure to liability, when an employer assumes an independent contractor relationship exists but an employer–employee relationship legally exists, some examples may be helpful.

When a gasoline distributor leased stations to operators, the court found that not only was the lessee an employee but those persons whom the lessee hired were also employees of the distributor. The evidence showed that the distributor controlled the hours of operation, the prices of major items, and the daily management of money, and took the risk of profits and loss. The court reasoned that the employees of the lessee were an integral part of the operation; therefore, they were also employees of the distributors and the lessee.64 Other cases where the court found an employee–employer relationship were where an agent who operated a retail cleaning outlet under a contract was held to be an employee of the owner65 and where crew leaders for a builder were registered under a state law as labor contractors but were, in practice, employees.66 In the Fifth Circuit, a contract laborer who was a mechanic and supervisor was held to be an employee; however, the contract laborer who was a subcontractor of this employee was held to be an independent contractor.67 The test in these cases is whether the party for whom the service is being performed retains control over the outcome.68

Essential Elements

Because of the risks involved and the possibility of litigation, employers should have very strong reasons for attempting to establish an independent contractor relationship. If such a reason does exist, then it is advisable to state specifically in the agreement that:

  1. The only supervision will be related to result and not to method.69
  2. As much as possible, the individual will make the investment in equipment.
  3. The independent contractor will be responsible for the profit or loss of the operation.
  4. In all other respects, the independent contractor will be performing as a separate business.
  5. The employer does not provide benefits, such as holiday or vacation pay.
  6. The person is to be employed for a specified length of time.
  7. The method of pay is different than for employees.
  8. The materials and equipment will be supplied by the contractor.70
  9. The parties enter into the relationship with a specific intent: to create an independent contractor relationship.
  10. The work is either a distinct occupation or a business.

Use of Contracts

The economic reality of the relationship is the strongest element in establishing an independent contractor relationship that will stand the scrutiny of the courts and the regulatory bodies. If such a relationship is intended, it must be objectively established by a written agreement. The contract should be written with a careful eye toward common law and agency interpretation. The contract must emphasize the preceding 10 elements. Creating an independent contractor status is one way to control overtime. Extreme care should be taken to make certain that, although an independent contractor status was intended, an actual employee–employer relationship does not exist. Liability for uninsured workers’ compensation and payment of unemployment, Social Security, and withholding taxes often offsets the advantages of establishing a questionable independent contractor status. Administrative agencies and the courts will give great weight to the agreement. However, they will also look to other factors that reflect the tasks of the individual, the terms and conditions of employment, and whether the parties are following the agreement. In questionable situations, professional advice should be considered. This demonstrates a good faith effort to comply with the law.

The Fair Labor Standards Act, as well worn as it is, still provides the media with frequent opportunities to publicly expose employers caught in noncompliance. To prevent any such negative situations:

  1. Avoid hiring young people for the wrong hours and types of work.
  2. Don’t permit overtime-eligible employees to “come early,” “stay late,” or “take work home.”
  3. Demand accurate work time records, including work occurring during lunch time.
  4. Be sure any designated independent contractor positions qualify as such.
  5. In the private sector, don’t apply compensatory time off that carries beyond the designated work week.
  6. Pay overtime-eligible personnel for all work beyond the 40-hour work week.

Rubric is below

Evaluates Which Compensation, and Benefit Laws Best Apply to Each Scenario

Distinguished – Clearly and thoroughly evaluates the compensation and benefits law as applied to each scenario.

Proficient – Evaluates the compensation and benefits law as applied to the scenario. Minor details are missing or slightly unclear.

Basic – Partially evaluates the compensation and benefits law as applied to the scenario. Relevant details are missing and/or unclear.

Below Expectations – Attempts to evaluate the compensation and benefits law as applied to the scenario; however, significant details are missing and unclear.

Non-Performance – The evaluation of the compensation and benefits law as applied to the scenario is either nonexistent or lacks the components described in the assignment instructions.

Explains How the Situation Meets Each Element that Needs to be Proven or Satisfied Under the Specific Law

Distinguished – Thoroughly explains how the situation meets each element that needs to be proven or satisfied under the specific law.

Proficient – Explains how the situation meets each element that needs to be proven or satisfied under the specific law. The explanation is slightly underdeveloped.

Basic – Minimally explains how the situation meets each element that needs to be proven or satisfied under the specific law. The explanation is underdeveloped.

Below Expectations – Attempts to explain how the situation meets each element that needs to be proven or satisfied under the specific law; however, the explanation is significantly underdeveloped.

Non-Performance – The explanation of how the situation meets each element that needs to be proven or satisfied under the specific law is either nonexistent or lacks the components described in the assignment instructions.

Assesses Possible Arguments Against Your Position and Counter Those Arguments

Distinguished – Thoroughly assesses possible arguments against your position, and comprehensively counters those arguments expertly utilizing strong, relevant examples to support the assessment.

Proficient – Assesses possible arguments against your position, and counters those arguments utilizing examples to support the assessment. Minor details are missing.

Basic – Partially assesses possible arguments against your position, and minimally counter those arguments utilizing somewhat relevant examples to support the assessment. Relevant details are missing.

Below Expectations – Attempts to assess possible arguments against your position and counter those arguments; however, examples are not utilized to support the assessment, and significant details are missing.

Non-Performance – The assessment of possible arguments against your position and counters those arguments are either nonexistent or lack the components described in the assignment instructions.

Critical Thinking: Evidence

Distinguished – Employs persuasive and applicable information from credible sources to develop an ample analysis or synthesis of the topic. Viewpoints of experts are scrutinized thoroughly.

Proficient – Employs applicable information from credible sources to develop an analysis of the topic.

Basic – Identifies applicable information from credible sources, but may neglect the application of such information toward the analysis of the topic. 

Below Expectations – Presents information from external sources, but such information may lack credibility and/or relevance. Neglects to apply such information toward the analysis of the topic.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

Critical Thinking: Conclusions and Related Outcomes

Distinguished – Conclusions and related outcomes are logical and clearly reflect an informed evaluation and the ability to place evidence and perspectives discussed in priority order.

Proficient – Conclusions and related outcomes are logical and reflect an informed evaluation and the ability to place evidence and perspectives discussed in priority order.

Basic – Conclusions and related outcomes are identified and minimally reflect an informed evaluation and the ability to place evidence and perspectives discussed in priority order.

Below Expectations – Conclusions and related outcomes are not logical or reflective of an informed evaluation and the ability to place evidence and perspectives discussed in priority order.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

Written Communication: Control of Syntax and Mechanics

Distinguished – Displays meticulous comprehension and organization of syntax and mechanics, such as spelling and grammar. Written work contains no errors and is very easy to understand.

Proficient – Displays comprehension and organization of syntax and mechanics, such as spelling and grammar. Written work contains only a few minor errors and is mostly easy to understand.

Basic – Displays basic comprehension of syntax and mechanics, such as spelling and grammar. Written work contains a few errors which may slightly distract the reader.

Below Expectations – Fails to display basic comprehension of syntax or mechanics, such as spelling and grammar. Written work contains major errors which distract the reader.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

Written Communication: APA Formatting

Distinguished – Accurately uses APA formatting consistently throughout the paper, title page, and reference page.

Proficient – Exhibits APA formatting throughout the paper. However, layout contains a few minor errors. 

Basic – Exhibits limited knowledge of APA formatting throughout the paper. However, layout does not meet all APA requirements. 

Below Expectations – Fails to exhibit basic knowledge of APA formatting. There are frequent errors, making the layout difficult to distinguish as APA.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

Written Communication: Page Requirement

Distinguished – The length of the paper is equivalent to the required number of correctly formatted pages. 

Proficient – The length of the paper is nearly equivalent to the required number of correctly formatted pages. 

Basic – The length of the paper is equivalent to at least three quarters of the required number of correctly formatted pages.

Below Expectations – The length of the paper is equivalent to at least one half of the required number of correctly formatted pages.   

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

Written Communication: Resource Requirement

Distinguished – Uses more than the required number of scholarly sources, providing compelling evidence to support ideas. All sources on the reference page are used and cited correctly within the body of the assignment.

Proficient – Uses the required number of scholarly sources to support ideas. All sources on the reference page are used and cited correctly within the body of the assignment.

Basic – Uses less than the required number of sources to support ideas. Some sources may not be scholarly. Most sources on the reference page are used within the body of the assignment. Citations may not be formatted correctly.

Below Expectations – Uses an inadequate number of sources that provide little or no support for ideas. Sources used may not be scholarly. Most sources on the reference page are not used within the body of the assignment. Citations are not formatted correctly.

Non-Performance – The assignment is either nonexistent or lacks the components described in the instructions.

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