Are You Breaking The Law by Paying Salary-Exempt?

A lot of employers choose to pay employees on a salaried basis.  It’s easier on you to estimate your payroll costs from month to month, and your employees love the stability it gives them too.  So it seems like it’s a win-win on both sides… right?

However, I usually see problems when employers pay their team on a non-exempt salary basis.  Typically they offer this arrangement because they think that they won’t have to worry as much about tracking hours, and that’s where the legal issues begin.

WHAT IS A SALARY NON-EXEMPT EMPLOYEE?

There are two parts to this one.  First, is the “salaried” component.  According to the U.S. Dept of Labor, “Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.” This amount is not based on the number of hours worked in a pay period.

In the case of a non-exempt employee, they are entitled to benefits – such as minimum wage, overtime, and other rights and protections afforded to a standard hourly worker.

The key difference is that if a salaried non-exempt employee works 38 hours in a work week, and their salary was based on 40 – they will still get paid for 40.  If they work over 40, they will be paid overtime wages for any time over 40 hours in that week.

FLSA Requirements for salary non-exempt employees

For most employees, whether they can be considered for a non-exempt salary position will depend on how much they are paid, how they are paid, and what kind of work they do.

• Employees that are paid more than $23,600 per ($455 per week) qualify for salaried positions.
• The employee must have a guaranteed minimum amount they will be paid – and this amount can only be reduced in a few certain situations (such as personal leave, or disciplinary suspension)
• Only certain job functions can even be considered for exempt status, and because of this, most workers would be classified as non-exempt.  (see the list)

the biggest legal error we see employers make

Most employers choose to have employees that are classified as non-exempt salaried because they incorrectly think that they can avoid the time and hassle of tracking time for their team.  

They will tell them that they can’t work over 40 hours, and they have a salary of $x per year to be paid weekly/bi-weekly/etc.  and they sit back and enjoy having less paperwork to deal with and being able to have a more predictable payroll each time.  Employees are generally pretty ok with this arrangement too, since they won’t be required to work overtime, and they have a steady and reliable paycheck amount.

The problem is that the FLSA still requires you to track the time of these employees.  While they do let you pay non-exempt employees pretty much however you want to (hourly, piece-rate, salary, commission, etc), they still require that you are able to show that they employee receive at least the equivalent to minimum wage for every hour worked, and they received adequate overtime pay for any time spent over 40 hours in a week.

So, here’s how you get in trouble.

1. You tell your employee not to work over 40 hours.  You assume that they aren’t working more, so you don’t track it.
2. A few big projects come up… or there’s just a few extra things to do… and they aren’t leaving right at 5 anymore.
3. Or you ask them to work more to get something done, and give them a day off in exchange.
4. Then employee files a complaint.

If you didn’t have accurate records of hours worked, like you are legally required to do, then the U.S. Dept of Labor will just interview the employee(s) in question and they will estimate the actual hours worked.  The employee can easily claim to have worked overtime that they weren’t paid for.  Because you can’t prove any different, you’ll be held liable.  This can mean that you will be required to pay time and a half back pay for the duration of the time the employee has worked for you for all the hours over 40 they were not paid for.

OTHER LEGAL PITFALLS

Of course, tracking time isn’t the only legal issue.

• You have to be able to accurately determine a non-exempt salaried employee’s actual regular hourly rate for the purpose of calculating overtime.  If you pay on a salary per year basis (like most companies do), then you have to reverse engineer the hourly rate from that.  Which can get a little tricky… do you do it based on the 52 weeks in a year, 5 workdays in a week?  What about holidays in there, so maybe it’s actually supposed to be 51?  You need to be sure you have a standard calculation that applies to all salaried employees and is known by anyone dealing with the payroll at your company.
• You have to track and deal with employee absences.  This includes deductions to the weekly salary amount.  Which begs the question – if you are deducting for absences, and you still have to pay overtime – why are you even putting them on salary anyway.
• You also have to deal with the U.S. Dept of Labor and their restrictions on providing additional variable pay to employees working under “fluctuating workweek” arrangements.