Auto Mechanics, Technicians and FLSA Overtime Pay
Our last blog post spoke of when to hire and who to hire for your shop. This post will deal with the things you need to know from an “HR” or human resources perspective.
There have been countless wage and compensation claims and lawsuits within the automotive service and repair industry. The answer depends on whether you have a flat rate or flag rate pay structure.
The resulting Fair Labor Standards Act (FLSA) lawsuits address minimum wage, regular wage, and overtime claims on behalf of auto mechanics and technicians who are subjected to the sometimes confusing flat rate and flag rate systems.
Flat Rate, Flag Rate, Piece Rate, and Booked Hours Pay Structures
Most shops use the flat rate system to price jobs and pay employees. On a flat rate and flag rate system, the customer is charged a certain number of assigned or “booked” hours per job, regardless of the actual time, it takes a mechanic to perform the job. The mechanic is paid a set hourly wage for each flagged hour completed. Businesses often believe this piece-rate method of service increases productivity and may also allow them to escape paying overtime. The flag hours come from estimating systems such as the Mitchell estimating system.
Difference Between Mechanic Booked Hours And Actual Hours Worked
When a mechanic is paid for the hours “booked” this does not take into account the actual on the clock hours the mechanic worked, this creates some unpaid and overtime wage questions. Any time the mechanic is not working on a car but is instead of spending time putting tools away, cleaning their work bay, prepping tools, performing other assigned tasks, and waiting for customers to appear, it technically unpaid work.
Pep-Boys was sued over this in 2012. It is a pretty complicated issue because of how mechanics are paid, but here is the Federal Fair Labor Standards Act On Mechanics (FLSA).
Section 7(i) of the FLSA provides an exemption from the overtime pay requirement for any employee of a retail or service establishment if:
Although the phrase “commissions on goods and services” is not defined in either the statute or regulations, the Department of Labor acknowledges in some cases that the flat rate system constitutes a commission under section 7(i), and in other cases, it constitutes a piece-rate or job-rate system. Employees paid on a piece-rate or job-rate are absolutely entitled to overtime under the FLSA, while those paid on “commission” may be exempt under 7(i).
In short, whether mechanics and technicians are entitled to overtime wages depends on (a) where they work (auto dealer or repair shop), (b) how they are paid (commission or not), (c) how much they make (regular hourly rate and commissions), and (d) the state in which they work.
In Addition to issues with how to define employee wages for your mechanics, here are some other Human resource items that you should be familiar with at your shop when you hire your first techs.
An EIN is a nine-digit number assigned by the IRS that identifies you as a business entity and allows you to hire employees legally. The easiest way to do this is to visit the IRS online. You can apply by clicking here.
It may seem silly to have to collect this info because you don’t have to submit this form to the federal government. However, U.S. Citizenship and Immigration Services (USCIS) requires all employers to verify an individual’s eligibility to work in the United States by completing IRS Form I-9. The last page of Form I-9 specifies what documentation new hires must present to employers to attest to their employment authorization, regardless if they’re a citizen or noncitizen. Most employers create a file on each employee and include this information on their first day.
To be compliant with federal and state regulations, you must adequately classify your workers as either employees or independent contractors. If you are farming out your bookkeeping to a freelance bookkeeper, for example, the individual will be responsible for reporting and paying her own Social Security and income taxes.
If you decide to hire either part-time and full-time employees, the employee must fill out IRS Form W-4, Employee’s Withholding Allowance Certificate, to indicate the number of allowances he or she is claiming for tax purposes.
As an employer, you’re responsible for withholding certain taxes—based on the number of allowances the employee claims on his or her Form W-4—from your employee’s paycheck. These include federal income, Social Security and Medicare taxes, as well as Federal Unemployment Taxes. You may also be required to withhold state and local income taxes, depending on your state’s laws.
As an employer, you’re also responsible for reporting the amount of wages paid and taxes withheld for each employee using a Form W-2.
Your best bet early on will be to hire a reputable payroll company to run your payroll for you. They are trained in how to do this, and the last thing you want is to get fined by the IRS because you miscalculated something.
One of the key provisions of the Personal Responsibility and Work Opportunity Reconciliation Act is that all employers must report new-hire data to their state’s directory within 20 days after the date of hire (however, some states also accept reporting by the first regularly scheduled payroll date if after the 20-day deadline).
Once again, your outsourced payroll company can help you with all of this or do it for you.
You are required by law to obtain workers’ compensation insurance for employees who may get injured on the job. Workers’ compensation laws across states differ slightly in detail, such as benefit rates and the procedural rules governing employers, employees, and insurance firms. Since you already have a garage keepers insurance policy in place, ask them about bundling your workers’ comp insurance with your plan.
Have you ever walked into a small business and seen those labor law posters posted near their business license? With the exception of Texas, every U.S. state requires employers to display up-to-date posters highlighting federal and state workers’ rights in a conspicuous area in the workplace.
While this may seem like a daunting list of things to worry about as a new employer, rest assured that many of these things can be accomplished in a few hours. This is not a complete list. If you are interested in learning everything, you need to know to start and successfully run your own shop, then consider purchasing our course. You can download the learning materials right to any device, and before you know it, you will be ready to open the doors to your very own auto shop.