Employers in Limbo: The FLSA Time-Tracking Dilemma

By Peter Limone, President & CFO

You probably know that the Obama administration's FLSA overtime rule has been temporarily blocked. So should you, the employer, still require your exempt employees to track their time? In this post, the first of a two-part series, we'll explore the reasons why you might still want to have them do it. In the next post? Why you might say, "No way."
In late February, a federal appeals court signaled that the Fair Labor Standard Act overtime rule battle was far from over.

The original rule, intended to take effect Dec. 1, 2016, raised the annual salary threshold for overtime exemption to $47,476. In anticipation of the rule, employers across the country worked last fall to shift pay structures and train salaried workers to track time.
But just days before its effective date, a federal judge said, "Not so fast." Judge Amos Mazzant, an Obama appointee to the Eastern District Court of Texas, blocked it via a temporary injunction until he could review it further. Mazzant, in his ruling, indicated he'd likely side with the business coalition and 21 state attorneys general that objected to the regulation.

Adding to the uncertainty, the U.S. Fifth Circuit Court's Feb. 27 order extended the deadline to May 1, 2017, giving the Department of Justice time to submit arguments concerning the rule. What position will the Trump administration take? To date, it hasn't signaled whether it will defend the rule, leaving employers and HR leaders with a difficult decision to make.
With the law in limbo, why track time?
Regardless of the rule's ultimate fate, there are some compelling reasons why you might still want your exempt employees to track time:

• Avoid costly wage and hour lawsuits.It's your HR team's job to stay compliant with federal, state, and local employment laws. These complex regulations are constantly changing, and, worse, they vary broadly by jurisdiction. Employers found in violation can pay big penalties. The average wage and hour settlement in the first three months of 2015 was $1.9 million, but class-action settlements can be far larger. Brinker Restaurant Corp. recently paid an astronomical $56.5 million to settle a case that included 108,000 workers claiming wage and hour violations. It's easy to see why documenting employee hours can protect against costly employment law liabilities.The first step to mitigating this risk? Include a time-tracking provision in your employee handbook. We suggest something along the lines of:

  "Tracking Hours Worked
  Our company is committed to complying fully with all applicable laws and regulations dealing with wage and hour issues, including but not limited to: minimum wage requirements, meal and rest breaks, overtime pay, termination pay, and off-the-clock work. If you are paid on an hourly basis, you are required to record and submit all hours actually worked each pay period. If you see an error in your time record, you should immediately report it to your supervisor or the payroll department."

  Finally, be sure managers are well-versed in the company's time-tracking policy, and perform regular audits to ensure procedures are properly followed. While wage-and-hour infractions can be expensive, they're easily mitigated with effective time-tracking policies.

• Qualify for tax incentives.Done right, time-tracking policies can prevent costly lawsuits, but they can also reduce your tax obligations to Uncle Sam.For example, states and the federal government provide research and development tax credits to companies that invest in product innovation. Think your company doesn't perform enough R&D to qualify? You might be surprised. Just be sure to contact a tax professional before claiming any such credits.What does this have to do with time tracking? Well, to receive the credit, your employees need to accurately and contemporaneously track time spent on R&D projects. The payoff? For each dollar you pay your team for this work, you get a dollar back on your taxes.Here's how it works. Imagine you're implementing a new benefits administration system. You need to determine the right functionality, hire the right engineers, build the system, and test it before rolling it out to the team.

  Upon completion, your team might have spent 400 hours working on it. If you paid an average of $25 per hour for the work and everyone tracked his or her time, congratulations! You just cut your tax bill by $10,000.

Until May, we won't know whether the Trump administration supports the overtime rule. In the meantime, employers are playing a waiting game. Regardless of the outcome, it shouldn't be the sole deciding factor in your time-tracking decision.

So why wouldn't you want exempt employees to track time? Be on the lookout for our next post about the drawbacks a blanket time-tracking policy could have on your company. Only by fully understanding both the costs and the benefits can you make the best decision for your business.
Peter Limone is the president and CFO of Innovative Employee Solutions, a leading nationwide employer of record that specializes in human relations and payroll services. Founded in 1974 in San Diego, IES has grown into one of the city's largest women-owned businesses and been named one of its "Best Places to Work" for nine years in a row.

Peter joined IES in 2011 as the company's corporate controller. He was promoted to CFO the following year, and in 2013, he was also named company president. Prior to his work at IES, Peter worked for 3E Company, where he oversaw integration of the company's accounting, financial, and tax systems. He has also served as division vice president of finance and information systems at Follett Software Company.