Employees: Exempt vs. Non-Exempt
When you think of hiring an employee, I am sure you have an idea of how much you will pay them, but how many small businesses out there think about exempt vs. non-exempt employees or how you will calculate overtime if there is any? It is hard enough just running a business, much less knowing all of the laws and regulations.
The Fair Labor Standards Act (FLSA) is a federal law that deals with minimum wage, overtime pay, recordkeeping, and child labor standards. The administration of the FLSA is under the jurisdiction of the Wage and Hour Division of the U.S. Department of Labor (DOL). The DOL is responsible for issuing rules, regulations, and interpretations under the act and for conducting inspections and investigations for compliance.
Employees in the U.S. are covered by this act if a true employer-employee relationship exists, and the requirements of one of the following tests are met:
a) two or more employees are sufficiently engaged in interstate commerce or in the production, handling, or selling of goods or materials moved or produced for interstate commerce; and
b) the employer has gross annual sales of not less than $500,000, unless working in an enterprise not subject to this dollar-value test (i.e., hospitals and nursing homes); or the employee´s own actions involve the handling or production of goods in interstate commerce. This includes employees who regularly use the mail or telephone for interstate communication, or work for employers who contract to do clerical, custodial, or other work for businesses engaged in interstate commerce.
Under the FLSA, a covered employer may have employees who are exempt from certain provisions of the act, including minimum wage and overtime pay regulations. These include the following:
Executive - Primary duty is management of the enterprise or of a customarily recognized department or subdivision; and customarily and regularly directs the work of two or more employees; and has the authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight.
Administrative - Primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer´s customers; and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Professional - Primary duty is the performance of work requiring advance knowledge defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment; in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
Salary or fee basis on all of the above is at least $455 per week.
Computer Software Professionals - Salary basis of at least $455/week or hourly if paid at least $27.63/hour.
Outside Sales Personnel - No salary level or salary basis requirement.
Highly Compensated Employees - Total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis).
The FLSA states that non-exempt employees must be paid at least minimum wage which is currently $5.15 per hour for the first 40 hours worked in a workweek and must receive an overtime rate of at least time and one-half their regular rate of pay for all hours worked over 40 in a workweek. Some examples of non-exempt positions include bookkeeper, bank teller, and secretary. Under the FLSA, a non-exempt employee may either be paid on an hourly basis, a salaried basis, piece rate, or commission basis as long as they receive at least minimum wage for all hours worked and the appropriate overtime pay.
There are some state wage laws that may be more beneficial to the employee. An employee must be exempt under both state and federal law to be exempt from overtime payments.
The salary level and salary basis tests do not apply to doctors, lawyers, teachers, certain computer-related occupations paid at least $27.63 per hour, or outside sales employees. Additionally, exempt administrative or professional employees may be paid on a fee basis (paid an agreed sum for completing a single job, regardless of the time required to complete the work). A fee payment will meet the minimum salary level required for the exemption if, based on the time required to complete the job, the fee is at a rate that would amount to at least $455 per week if the employee worked 40 hours. Exempt employees who qualify under the executive, administrative, or professional exemptions are almost always paid on a salaried basis and are not required to receive overtime pay.
Exempt employees should receive their full salary every pay period. The salary amount should never be reduced because of variations in quality or quantity of work performed or generally for absences of less than a full day. Exempt employees cannot have their salary reduced for absences occasioned by the employer or by the operating requirements of the business. Generally, if the employee is ready, willing, and able to work, no deduction may be made from the predetermined salary when work is not available.
When calculating overtime, each workweek stands alone. The pay frequency, whether weekly, bi-weekly, etc., does not affect exempt or non-exempt classification or an employer´s obligation to comply with overtime regulations. Overtime is generally calculated at one and one-half the regular rate of pay for all hours worked over 40 in a week. (Some states have more stringent overtime laws, which would take precedence.) The regular rate includes all remuneration for hours worked, except for certain payments that may be excluded, such as expense reimbursements, discretionary bonuses, gifts, paid vacation days, holiday pay, and paid sick days. Examples of appropriate methods for calculating overtime, depending on the method of payment, are listed below.
1. Hourly employees receive one and one-half times their regular rate for all hours worked over 40 in the week.
2. Salaried, non-exempt employees who have agreed to work a fixed number of hours for a specified salary receive one and one-half times their regular rate of pay for all hours worked over 40 in a week.
3. Salaried, non-exempt employees who have agreed to work an unspecified fluctuating number of hours each week for a specified salary receive one-half their regular rate of pay for all hours worked over 40 in that week. This is considered a "fluctuating workweek principle" and must be agreed to by both the employer and the employee prior to hiring. However, under this method, employers are limited in making deductions for absences of less than a week.
Non-exempt employees cannot waive their rights to overtime pay. Employees subject to the FLSA overtime provisions must be paid at the overtime rate even if they agree to receive straight time. In addition, private employers will generally incur overtime liability if they permit employees to trade overtime pay for compensatory time.
Misclassification of exempt or non-exempt status may result in a combination of fines, penalties, or the payment of unpaid wages, as imposed by the Department of Labor. Willful violations may result in criminal prosecution and the violation may be fined up to $10,000. Second convictions may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay provisions of the FLSA are subject to civil money penalties of up to $1,000 for each violation.
For in-depth, easy to understand guidelines regarding payroll issues, including the information found in this article, visit Paychex, Inc., a leading national provider of payroll, human resource, and benefits outsourcing, at https://www.paychex.com.
"When people go to work, they shouldn't have to leave their hearts at home." ~ Betty Bender
