In an effort to help you steer clear of legal trouble, The Legal Review shares findings from relevant legal cases.  We’ve found that the easiest way to gain a practical understanding of complex tax and labor law is by reviewing real-life situations.  These stories will illuminate potential legal landmines, and more importantly, show you how to avoid them.

Nanny vs. Family: How Overtime Became an Oversight

Many families throw their household employment obligations at their personal income tax accountant because they think it will be a convenient solution.  Sometimes it works out fine.  But, since most accountants rarely work in the household employment realm (it’s very different from the corporate or individual income tax processes) and labor law and payroll management are usually beyond the accountant’s scope of services, things frequently fall through the cracks and create expensive problems.  This case exemplifies the kinds of miscommunications and oversights we see on a regular basis.

The Mistake

After hiring their first nanny, a family in California contacted their personal income tax accountant for help with fulfilling their employer tax obligations.  The accountant assured the family that he could prepare and file the appropriate reports with the federal and state tax agencies.  He helped the family determine the taxes that should be withheld from the employee’s gross wages, and he collected the payroll information at the end of each quarter.

The family paid their nanny $15 per hour for a 45-hour work week.  The accountant wasn’t well-versed in household employment law, and therefore, wasn’t aware of the overtime law that applies to household employees.  As a result, the employee was underpaid for her overtime hours for over a year.

The Law

Household employees are covered by the Fair Labor Standards Act which requires that they be paid overtime for hours worked in excess of 40 within a 7-day period.  The overtime rate must be at least 1.5 times the regular rate of pay.  There is no statute of limitations on collecting for unpaid overtime hours.

Furthermore, the state of California requires that an employee receive their final wages on their last day of work, or within 72 hours of their last day.  (The time period imposed depends on the terms of the separation).  If the employer fails to comply with the state’s final pay requirement, they incur a penalty equivalent to the employee’s daily rate of pay for each day the employee’s earned wages go unpaid.  This penalty can be assessed for up to 30 days.

The Mess

• The family had to end the relationship with their employee due to a work-related relocation.  During a conversation with one of her friends a couple of weeks later, the nanny learned that she had not been fairly compensated for her overtime hours.
• The nanny contacted her former employer and requested that she be paid for her overtime hours.
•  The family was shocked to be presented with this information and immediately contacted their accountant to find out how the overtime went unnoticed.
• The accountant defended himself by saying that he never claimed to be an expert in household employment labor law.  He viewed his role as just to prepare and file the appropriate tax returns.

     

   

The Outcome

The family decided to contact Breedlove & Associates for clarification on the law.  We walked them through their obligation to pay 1.5 times the regular rate of pay for overtime hours.  We also let them know that they may have exposure to the waiting time penalty since the nanny was not paid the full amount she was due on her final day of work.   The family ended up paying the nanny over $2,000 in back overtime pay for the year she worked and owed another $200 in employer taxes on the payment.  To avoid any future legal trouble, they also paid her the $1,500 penalty for the 2 weeks she waited to receive her overdue overtime.

How the Whole Thing Could Have Been Avoided

If the family had sought the guidance of a comprehensive service like Breedlove & Associates from the start, they would have known of their obligation to pay their employee an overtime rate.  (In fact, the family could have incorporated the overtime pay into the salary.  If handled properly in the Employment Agreement, the family could have complied with overtime law without incurring additional wage expense—feel free to call us for details).

While some personal income tax accountants can effectively manage the tax portion of the household employer obligations, they generally have limited knowledge of labor law issues and lack a business structure to provide client support and counsel in this area.

 If you have additional questions, please call 888-BREEDLOVE (273-3356).  We’re here to help.