It sure seems like wage-and-hour lawsuits are flooding Arizona court dockets these days. And most of the defendants appear to be small to mid-size business owners. These lawsuits — typically brought by employees against their former employers — usually arise from one of the following three situations:
- Unpaid overtime wages
- Unpaid commissions
- Unpaid tips
This article will discuss each of these three situations with the goal of educating and helping Arizona employers avoid making some of the most common wage-and-hour mistakes.
Unpaid Overtime Wages
Many employers (mistakenly) believe that salaried employees are not entitled to time-and-a-half overtime wages simply because they are paid a salary. Unfortunately, the analysis is more nuanced than that.
The Fair Labor Standards Act provides that all employees are entitled to overtime wages unless they are exempt under the FLSA. The most common exemption is for white-collar employees (e.g., executive, administrative, professional, computer and outside sales).
Here is a quick summary of each white-collar exemption:
- An executive employee’s primary duty must be managing the enterprise, regularly directing the work of at least two full-time employees, and they have discretion over personnel decisions in the workplace.
- An administrative employee’s primary duty must be performance of office or non-manual work related to the management or general business operations, and they must have discretion when it comes to matters of significance.
- A professional employee’s primary duty must be performance of work requiring advanced knowledge in field of science or learning, which is typically acquired through specialized intellectual instruction.
- A computer employee is typically employed as a computer systems analysis, programmer, software engineer or other similarly skilled worker in the computer field.
- An outside sales employee’s primary duty must be making sales or obtaining orders away from the employer’s place of business (i.e., “in the field”).
But falling within one of the above categories is only half the analysis. To be exempt from receiving time-and-a-half overtime wages, a white-collar employee must also be paid an annual salary of at least $43,888. This salary threshold will increase to $58,656 on January 1, 2025. This increase in the salary threshold is estimated to affect millions of workers. This means that a computer programmer who is paid an annual salary of less than $58,656.00 in 2025 will not be exempt from the FLSA, and thus would be entitled to overtime wages at time-and-a-half.
Arizona businesses should review their payroll records and ask the following two questions about their exempt employees: (1) Does the employee’s job duties fit within the white-collar exemptions and (2) will the exempt employee’s annual salary exceed $58,656 in 2025? If the answer to both of those questions is “yes,” then the employee is exempt from the FLSA and is not entitled to be paid time-and-a-half for overtime wages.
Unpaid Commissions and Bonuses
Arizona law’s definition of wages includes commissions and non-discretionary bonuses. Failure to pay commissions and non-discretionary bonuses is illegal and carries severe monetary consequences (including damages up to three times the amount of unpaid wages plus reasonable attorneys’ fees and costs).
The starting point to determine whether commissions or a bonus is owed to an employee is always the same: Is there an agreement between the employer and employee that addresses how commissions and/or bonuses are to be paid?
The key analysis to look for is whether the agreement defines: (1) how the bonus is calculated and (2) when the commission/bonus is “earned” by the employee.
An employer cannot be held liable for failing to pay a discretionary commission or bonus. But failing to pay a non-discretionary commission or bonus — meaning the employer has a contractual obligation to pay the amount if certain performance metrics are met — is a legal basis for an unpaid wages claim under Arizona law.
A well-drafted agreement that identifies whether a bonus or commission is discretionary or non-discretionary, including the exact requirements that determine when and how much is owed to the employee, is the key to preventing a costly wage dispute.
Unpaid Tips
An employer in Arizona can pay tipped employees $3.00 per hour less than the minimum wage [editor’s note: This may change, depending on the outcome of Proposition 138 on Arizona’s Nov. 5 election ballot] if the employee ultimately receives at least minimum wage for all hours worked (including tips). The FLSA provides that all tips received by an employee must be retained by the employee regardless of whether the employer utilizes the tip credit. The FLSA also prohibits any arrangement between the employer and the tipped employee that results in any part of the tip received becoming property of the employer.
Employers can implement a valid tip pooling arrangement but must first notify tipped employees of any required tip pool contribution amount. In addition, the tip pooling exception allows only “the pooling of tips among employees who customarily and regularly receive tips (i.e., servers, bartenders, bellhops, etc.,). The FLSA expressly excludes dishwashers, cooks, chefs and janitors from participating in tip pooling arrangements.
Employers should implement a comprehensive written tip notice and pooling policy. An invalid tip pooling policy will open an employer up to liability for unpaid wages.
A lot of Arizona employers — especially small and mid-size businesses — are facing unpaid wage claims. The best way from being on the wrong end of these lawsuits is to ensure that employees are properly classified as exempt or non-exempt under the FLSA, have clearly defined agreements pertaining to the payment of commissions and bonuses, and ensure that tip credit and tip pooling arrangements have been properly reviewed by competent legal counsel.
Lindsay Leavitt is an attorney with Gallagher & Kennedy. He represents and advises companies of all sizes in employment and business litigation matters. From mom-and-pop shops to publicly traded corporations, Leavitt’s clients value his aggressive yet practical approach to resolving their legal disputes.
