It is not legal but it is not tax fraud. If you are a non-exempt worker entitled to overtime under the Fair Labor Standards Act then it is a violation of federal law. You should contact a local attorney experienced in overtime litigation and the FLSA.
As accurately stated by my colleague, this is not an issue of tax fraud but one of failure to pay overtime under the FLSA. In addition to any federal claim, most states have their own laws that cover and provide legal remedies for overtime issues that often include attorney fees.
Speak with a local employment lawyer to discuss options.
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Labor value measurement is under state rules. For example, california has an 8 hour per day rule and most of the other U.S. is 40 hours per week. Could this be the source of your disagreement?
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Certified Tax Specialist by the California Board of Legal Specialization
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As stated by the other responders, this is not a tax fraud question at all, but a question of what might be required by contract and state and federal law. I'm not sure I understand what you mean when you say:
"They instead were given 5 hours to their checks, supposedly by the employer."
The bottom line is that if the employer for any reason owes them more than they received, they can make a claim and very well may be in a position to seek penalties, attorneys fees and/or interest.
Is there enough at stake to make it worthwhile? Discuss the circumstances with an employment lawyer and sort it out.
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In Oregon it is a crime, and can result in civil liability.
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