How Employers Exploit Loopholes in Wage and Hour Laws to Underpay Workers

In today’s economy, many workers are struggling to make ends meet, despite working long hours and holding multiple jobs. One of the key contributors to this growing problem is wage theft and the underpayment of workers. While wage and hour laws are designed to protect employees, some employers find creative and often unethical ways to sidestep these rules. 

At Toni Jaramilla, A Professional Law Corporation, we help Los Angeles clients understand the most common loopholes employers exploit in wage and hour laws, the legal gray areas they manipulate, and what employees can do to fight back. If you believe you’ve been affected by underpayment, this guide can help you identify the signs.

The Basics of Wage and Hour Laws

The Fair Labor Standards Act (FLSA) governs most wage and hour issues in the United States, setting forth minimum wage requirements, overtime pay standards, recordkeeping rules, and youth labor protections. However, despite its broad scope, the FLSA leaves room for interpretation and has several exemptions that employers can manipulate to reduce labor costs.

The Misclassification Loophole

One of the most widespread methods of underpayment involves misclassifying employees as independent contractors or as exempt from overtime laws. This tactic allows employers to avoid paying benefits, overtime, and payroll taxes, significantly reducing their labor costs. Workers then lose out on critical protections, often without realizing their rights have been violated.

Independent Contractor Misclassification

When a worker is labeled an independent contractor rather than an employee, the employer isn’t required to pay minimum wage or overtime, nor are they responsible for payroll taxes or workers’ compensation. However, many workers classified as independent contractors still work as employees, with set schedules, managers, and duties similar to those of regular staff.

By misclassifying these workers, employers not only avoid paying what’s legally due but also strip employees of essential benefits and protections. This kind of underpayment can be difficult to identify unless the worker is aware of their rights. This is one area where an attorney can help.

Exempt vs. Non-Exempt Employees

Employers may also incorrectly classify workers as exempt from overtime laws. Exemptions are supposed to apply to employees in executive, administrative, professional, or outside sales roles who earn above a certain salary threshold. However, some employers stretch the definition of these roles to avoid paying overtime. 

Manipulating Work Hours and Schedules

Another tactic used to facilitate underpayment is manipulating time records and schedules. Employers use subtle, and sometimes outright fraudulent, methods to reduce payable hours and avoid overtime obligations. Here are some of the most common methods employers may use to adjust payable hours.

Time Clock Rounding

While rounding clock-in and clock-out times is legal under certain circumstances, it must be done in a way that doesn’t consistently favor the employer. Some companies round down employee time (e.g., from 8:58 AM to 9:00 AM) while rounding up clock-out times (e.g., from 4:58 PM to 4:45 PM). Over time, those lost minutes can add up to substantial wage theft.

Off-the-Clock Work

Employees are often asked, or feel pressured, to work before or after their shifts without pay. Whether it’s setting up equipment before clocking in or finishing paperwork after clocking out, this unpaid labor is illegal. Employers may suggest it’s part of the job or claim it’s voluntary, but the law typically requires compensation for all work performed.

Meal and Rest Break Violations

State laws often mandate specific break times. Yet, employers sometimes fail to provide these breaks or automatically deduct them from payroll, even when the employee worked through the break. This not only constitutes underpayment but also violates the basic labor rights owed to employees.

Wage Theft Through Tip Pooling and Service Charges

For workers in the service industry, tip pooling laws and service charge policies are common areas of abuse. Employers often blur the lines between legal and illegal practices, making it difficult for employees to know when their rights are being violated. These abuses can lead to significant underpayment.

Illegal Tip Pooling

While tip pooling can be legal under certain conditions, employers can’t require tipped employees to share tips with managers, supervisors, or non-tipped staff like dishwashers and cooks. Unfortunately, many employers set up illegal tip-sharing schemes that reduce the wages of front-line servers and bartenders, contributing to underpayment.

Service Charges Not Passed On

Some restaurants and hotels include a “service charge” on the bill but fail to distribute that charge to the employees who earned it. Customers often assume this charge functions like a tip, but when it goes directly to the employer, it can be used to subsidize operating costs instead of going toward wages.

Salary as a Shield Against Overtime

Being on salary doesn’t automatically mean you’re exempt from overtime. Many employees believe, or are told, that salaried employees aren’t entitled to overtime pay. This isn’t true unless the employee also meets specific duties tests under FLSA guidelines and earns more than the minimum salary threshold (as of 2025, approximately $43,888 annually).

Employers take advantage of this misconception by placing hourly workers on a salary and then requiring excessive hours without additional compensation. This form of underpayment is particularly common in industries like retail, hospitality, and construction. Over time, the unpaid hours can add up to thousands of dollars in lost wages for affected employees.

Exploiting Language Barriers and Immigration Status

Immigrant workers, especially those with limited English proficiency or precarious immigration status, are among the most vulnerable to wage abuse. Employers may exploit fear of deportation or lack of legal knowledge to justify underpayment, deny overtime, or avoid paying wages entirely.

Gig Economy and App-Based Exploitation

Gig economy platforms like ridesharing and delivery services often argue that their workers are independent contractors, even when those workers rely on the platform as a primary source of income and follow strict operational guidelines. These platforms benefit immensely from not having to pay minimum wage, overtime, or benefits.

While some states have introduced legislation to reclassify gig workers as employees, many legal challenges and corporate lobbying efforts have stalled meaningful reform. As a result, underpayment in this sector remains a widespread issue. Without stronger enforcement and clearer legal standards, gig workers will continue to face a lack of basic labor protections.

What Employees Can Do About Underpayment

If you suspect you’re a victim of underpayment, taking prompt and informed action is essential. Many employees are unaware of the steps they can take to recover lost wages and protect themselves from future violations. Understanding your options is the first step toward asserting your rights and holding your employer accountable.

• Keep detailed records: Track your hours worked, breaks taken, and job duties in a personal log. This documentation can serve as critical evidence if your employer’s records are incomplete or inaccurate.
  

• Review your classification: Determine whether you’ve been properly classified as exempt, non-exempt, or an independent contractor. Misclassification can result in lost overtime pay and other legal entitlements.
  

• Consult an employment attorney: A knowledgeable lawyer can assess your situation, explain your legal rights, and help you seek compensation for unpaid wages. They can also guide you through intricate state and federal labor laws.
  

• File a complaint: You can report wage violations to the U.S. Department of Labor’s Wage and Hour Division or your state labor agency. These agencies have the authority to investigate employers and enforce compliance with wage and hour laws.

Taking action may feel intimidating, but you don’t have to face it alone. Legal support and government resources are available to help you reclaim the wages you’ve earned. By speaking up, you not only protect your own rights, but you also help prevent underpayment from continuing unchecked in the workplace.

Speak With an Experienced Employment Lawyer Today

Wage and hour laws exist to make sure that hard-working employees are fairly compensated for their labor. However, many employers bend the rules or exploit legal gaps to reduce payroll costs, often resulting in significant underpayment.

At Toni Jaramilla, A Professional Law Corporation, we help clients in Los Angeles, California, and the surrounding areas fight back against underpayment. Contact us today so we can assess your situation and help you fight for justice.