Class 10: Employee Compensation – Wages, Hours, and Pay Equity

Summary of Core Topics: In Class 10, we examine the laws governing wages, working hours, and other forms of employee compensation. The backbone here is the Fair Labor Standards Act (FLSA) – the federal law that establishes a minimum wage (currently $7.25 federal) and overtime pay at 1.5x for hours over 40 in a week (for non-exempt employees). We discuss who is “non-exempt” vs “exempt” under FLSA (the categories like executive, administrative, professional exemptions, etc., and the salary basis test). We also explore child labor rules under FLSA and the concept of “hours worked” (e.g., what counts as compensable time – training, travel, breaks). On the state side, Illinois law sets a higher minimum wage and its own overtime rules: Illinois’ minimum wage is $15.00 as of Jan 1, 2025, higher than the federal floor, and will adjust thereafter; Chicago and some cities have even higher local minimums. Illinois generally mirrors FLSA overtime (time-and-a-half after 40 hours) but also requires certain meal breaks (Illinois’ One Day Rest in Seven Act mandates a 20-minute meal break for 7.5+ hour shifts and at least 24 hours rest in every 7-day period). We cover wage payment laws: the Illinois Wage Payment and Collection Act, which ensures employees receive earned wages (including final paychecks, commissions, vacation payout) timely and allows recovery of penalties for non-payment. Wage theft issues are highlighted – like off-the-clock work, misclassification of employees as independent contractors or as exempt to avoid overtime, and illegal deductions. We also talk about pay equity: the Federal Equal Pay Act of 1963 (requiring equal pay for equal work regardless of sex) and Illinois Equal Pay Act. 

Additionally, Illinois (like many states) bans employers from asking about an applicant’s salary history and protects employees’ right to discuss compensation. Another important topic is gig economy and misclassification – distinguishing an employee (protected by wage laws) from an independent contractor. We introduce tests like the economic realities test and mention that Illinois uses the ABC test in some contexts (like unemployment insurance) which is stricter. We also cover tipped employees and tip credit rules: federal law allows a lower cash wage ($2.13) for tipped workers if tips make up the rest to minimum wage; Illinois requires 60% of minimum ($9.00 as of 2025)

Drafting Assignment:  For an employer, draft a section of a handbook addressing overtime compensation. 

Hypothetical 1: Sally works as a clerk in Illinois, paid $14/hour. She regularly works ~50 hours/week but only gets paid for 40 hours (no overtime rate) because her boss says she’s salaried at $560/week. Is this legal?

Model Answer: Likely not legal. Illinois’ minimum wage is $15.00/hour as of 2025, so first, $14/hour is below Illinois’s minimum – that’s unlawful unless perhaps Sally is a tipped worker (not indicated here). Even ignoring that, the boss classifying her as “salaried” at $560/week does not automatically exempt her from overtime. To be exempt under FLSA (and Illinois law follows FLSA exemptions), a job must meet a duties test (executive/administrative/professional duties, etc.) and generally pay a salary above the threshold (currently federal ~$684/week, which is $35,568/year). Sally is paid $560/week which is below the federal salary minimum for white-collar exemptions – so she doesn’t qualify as exempt on that basis. Plus, as a “clerk,” likely her duties are not the kind that meet an exemption category. Therefore, she’s a non-exempt employee entitled to overtime pay (1.5x) for hours over 40. Working 50 hours, she should get 10 hours at time-and-a-half. Paying her just a flat $560 (which equates to 40×14) for 50 hours violates overtime requirements. Also, paying $14/hour violates Illinois minimum wage (should be $15). So this scenario raises wage violations: (1) sub-minimum wage and (2) failure to pay overtime. Sally could file a complaint with the Illinois Dept. of Labor or U.S. DOL or sue for back wages. She’d be entitled to the extra $1/hour for all hours to meet minimum wage, plus overtime premium for hours over 40 (here overtime rate would be $21/hour – 1.5 × $14, or if we correct to $15, then 1.5 × $15 = $22.50/hr). The employer cannot avoid overtime by simply calling someone “salaried” – job title or pay method doesn’t override legal criteria. Only true exempt roles (e.g., a manager making say $50k+ with supervisory duties) can be salary without overtime. In sum, Sally’s boss is likely violating both state and federal law, and Sally can recover unpaid wages plus damages (FLSA allows liquidated damages equal to unpaid amount, Illinois allows 5% penalty per month or similar). The fix: the employer should raise her pay to at least $15 and pay overtime or reclassify her properly if trying to salary (they’d need to meet exemption tests and pay above threshold or just treat her hourly with overtime).

Hypothetical 2: Marco is a delivery driver in Illinois classified by his company as an independent contractor. He wears the company uniform and drives a company vehicle on scheduled routes. He works full-time, and the company closely dictates his delivery schedules. He wonders if he’s misclassified and should be an employee – what factors will determine that?

Model Answer: Marco’s situation has several indications of being an employee rather than an independent contractor. Key factors include the company’s control over his work (they set his schedule, routes, and even provide uniform and vehicle) and that he is performing work integral to the business (delivery is core to a delivery company). Under various tests (IRS test, economic realities test under FLSA, Illinois Wage Acts), control and independence are examined. Here, Marco seems economically dependent on the company (full-time, presumably only working for them). He doesn’t appear to have a separate delivery business of his own (he uses their branded uniform and truck). Illinois, for unemployment and wage laws, often uses an ABC test: (A) the worker is free from control in contract and fact, (B) the work is performed outside the usual course of company’s business or outside all the company’s places of business, and (C) the worker is engaged in an independently established trade or business. Marco fails (A) because of control, fails (B) because delivering is the usual business and likely at least within their business operations area, and fails (C) because he’s not shown to run an independent delivery enterprise. So by that test, he’s an employee. Under FLSA’s economic realities test, factors (control, opportunity for profit/loss, investment in equipment, permanence of relationship, etc.) also lean employee: the company provides equipment, presumably covers his expenses like fuel perhaps, and the relationship is permanent and full-time, not project-based. If he’s an employee, he would be entitled to minimum wage, overtime, reimbursement for certain expenses under Illinois law (IL Wage Payment Act requires expense reimbursement for required expenses), etc. Misclassification is common in delivery/gig industries – but increasingly scrutinized. So, if Marco challenges this (e.g., filing for unemployment or a wage claim for overtime), a court/agency will likely find he was misclassified. That means the company could owe him back wages (if he wasn’t paid overtime for over-40, for example) and the company could face tax and insurance consequences. In Illinois, the law even has penalties for misclassifying in construction and trucking (the Illinois Employee Classification Act for construction). While delivery isn’t covered by that act, general principles still apply. The bottom line: the more the business treats someone like a regular employee in practice, the less likely calling them a contractor will hold up. Marco likely should be an employee with all legal protections, and he can seek legal determination of that status.

Real-Life Example in Practice: A prominent example is the case of Dynamex (California) which led to the strict ABC test adoption there – drivers were misclassified as contractors while the company exerted significant control. In Illinois, we’ve seen cases like a group of home healthcare aides misclassified as contractors; once reclassified as employees, they recovered unpaid overtime. Another real-life scenario: a suburban Chicago restaurant was found to have violated minimum wage and overtime laws by paying cooks a flat salary for 60-hour weeks (similar to Sally’s hypothetical). The DOL recovered thousands in back wages and the restaurant had to start tracking hours and paying overtime. On pay equity, Illinois recently fined several companies for failing to submit their Equal Pay certification or for evidence of unjustified pay gaps – demonstrating Illinois’ aggressive stance. One high-profile instance: in 2022, the U.S. women’s national soccer team (though not Illinois-specific) settled an equal pay lawsuit, which brought a lot of attention to equal pay issues; in Illinois, the law now explicitly covers pay disparity based on sex or race for similar work, pressing employers to self-audit. Also of note, Chicago has been cracking down on wage theft through an ordinance that can even suspend business licenses of repeat wage thieves. For example, a well-known franchisee had its license threatened after multiple wage violations – a strong real consequence beyond just paying back wages. All these illustrate that wage laws are actively enforced and evolving (with societal push for higher minimum wages and pay transparency).

Employer Perspective: For employers, compliance with wage laws is crucial because mistakes (or intentional evasion) can lead to hefty back pay and penalties, not to mention reputational damage. It’s important to train managers that no off-the-clock work is allowed – for instance, no asking staff to “just finish up that task after clocking out” or checking emails off hours without accounting for it. If non-exempt employees work remotely or have company smartphones, employers must capture that time (some employers have policies requiring advance approval for overtime, which is fine, but if it happens it must be paid regardless of approval). 

Employers also need to periodically audit their classifications: Are certain employees misclassified as exempt? Review their duties and salary. Are any “independent contractors” really functioning as employees? It’s safer to correct proactively than wait for a lawsuit or IDOL audit. With Illinois’ rising minimum wage, employers had to budget for increases each year – now that it hit $15, future rises may be inflation-indexed. Small businesses especially must plan for the higher wage costs. However, they should also remember a happier workforce paid decently can mean better retention. On overtime, some employers try to circumvent by giving a fixed salary – as seen, that only works if the person is genuinely exempt; otherwise, you still owe overtime. Illinois employers must also abide by unique laws like providing a wage notice to new hires (Illinois doesn’t require a formal notice like some states do, but employers must give notice of rate of pay at hire and keep records).

Employee Perspective: Employees should be vigilant about their pay. You have the right to at least the minimum wage (in Illinois $15) – if you’re in a traditionally low-wage job like restaurant or retail, check that your hourly rate meets state law (and if you’re a tipped worker, ensure your tips plus base pay at least equal the minimum; if not, your employer must make up the difference). Also, track your hours. If you regularly work overtime (over 40 a week) and aren’t getting an overtime premium, question that. It could be you’re classified as salaried exempt, but ask: do your job duties truly make you exempt? (e.g., if you’re an assistant manager spending 90% of time doing non-managerial tasks, you might actually be owed overtime even if given a “manager” title.) Know that job titles don’t determine overtime eligibility, actual duties do. Don’t be afraid to raise wage issues – you can talk with coworkers about pay (it’s legally protected) and approach HR or management. If you suspect wage theft (like being asked to clock out but continue work, or not being paid for prep time or cleanup time), document it. Keep your own log of hours if possible, especially if you think the employer’s records might be off. Some wage theft is subtle – like not counting short breaks correctly or automatically deducting lunch breaks even when you worked through lunch. You have the right to be paid for all work time. Also, be aware of misclassification: if you’re labeled a contractor but feel like an employee (you only work for them, they direct your work heavily), you might be owed benefits like overtime, unemployment insurance, etc. You can report misclassification to state agencies. For pay equity, Illinois offers robust protections: if you find out a coworker of a different gender or race in the same role is earning more, and there’s no legitimate factor like seniority or performance, you can bring that up – potentially even a legal claim. 

Practical Tips and Takeaways:

• Keep Good Records: Employees, keep a personal record of the hours you work, especially if you’re not clocking in/out. A simple notebook or notes app entry daily can help if there’s a dispute later. Employers, maintain accurate payroll records (FLSA requires keeping for 3 years). Illinois specifically requires employers to provide an itemized statement each pay period – so as an employee, expect a pay stub; as an employer, produce them.
• Be Cautious with “Salary” Offers: If you’re offered a low salary that seems to equate to an hourly rate below minimum or that doesn’t include overtime, question it. For example, calling a $30,000/year position “salaried” doesn’t exempt it from overtime if the job doesn’t meet an exemption. Employers should avoid “salarizing” non-exempt roles to dodge overtime – instead, if they salary a non-exempt, they must still track hours and pay OT (salaried non-exempt is allowed, but OT must be paid).
• Overtime Calculations: Note that overtime isn’t just hourly rate × 1.5; if you earn bonuses or commissions, those often must be factored into the regular rate for overtime. Employers, ensure you’re calculating OT properly – there are DOL guides for this. Employees, if you get, say, a $100 bonus in a week you worked overtime, you’re due a few extra dollars in OT because that bonus raises the regular rate. Small detail, but it can add up, and failing to include it is a common error.
• Avoid Illegal Deductions: Illinois law forbids deductions from pay except for things you’ve agreed to or that are lawful (taxes, etc.). Employers, don’t dock pay as punishment (e.g., for a broken tool) – that’s generally unlawful. Employees, if you see deductions you didn’t authorize (for uniforms, cash register shortages, etc.), you likely have a right to that money back.
• Salary History and Negotiation: Job seekers in Illinois should know you can decline to reveal your past salary – and if an employer insists, that’s a red flag (and illegal). Instead, focus discussions on your expected salary or the range for the position. Employers, train recruiting staff not to ask prior pay; instead evaluate pay based on skills and market data. This can help close pay gaps and avoid legal issues.