Salary or Hourly?

Misclassifying exempt employees can be a costly mistake.
Salary or Hourly?

As an attorney specializing in employment law issues, I will occasionally receive a call from a client who has an employee demanding to be paid overtime. The client will explain to me that all of the company’s employees are paid a salary and, therefore, the company does not pay overtime. While it seems logical that if an employer and employee agree to a form of wage payment—such as salary, hourly or commission-based—then there shouldn’t be a problem; this unfortunately is not the case.

The law provides very tight parameters regarding which employees may be paid strictly on a salary basis. These employees are considered “exempt” because they are exempt from most wage and hour rules, including those governing overtime, timekeeping and meal periods, which may apply in certain states.

There are also specific rules that determine who may be paid on a commission basis. These individuals are also considered exempt. But, unlike salaried employees, some wage and hour rules still apply to certain exempt, commissioned employees.

All other employees are considered non-exempt, which means they must maintain time records and be paid overtime. They must be provided certain rest breaks and meal periods (in some states), and the employer must provide pay stubs that show the number of hours worked and applicable rates of pay. These individuals are considered non-exempt because they are not exempt from the wage and hour rules.

The most important thing to understand is that, in order to qualify as exempt, the duties of the position held by the employee must meet certain, specific minimum standards. Title alone does not determine exempt status.

Who Is Exempt?

The federal Fair Labor Standards Act (FLSA) defines the types of positions that qualify as exempt. Many states have additional laws that define exempt status within that state. By law, an employee is exempt only if he or she meets all of the criteria listed under one (or more) of the following categories.

The Executive (or Managerial) Exemption: Under federal law, the individual must earn a fixed salary of no less than $455.00 per week. It is important to be aware that the minimum wage in some states is higher, so this would increase the minimum salary requirements for an exempt employee. For example, a California exempt employee must be paid no less than $3,120 per month, or $37,440 per year, based on the minimum wage of $9.00 per hour.

In order for an employee to be exempt under the Federal Executive Exemption, the person’s primary duty (the main or most important duty) must be managing the enterprise or a division of the enterprise and must also involve managing at least two employees.

If the employee performs the same tasks as the workers and, in addition, is the manager of those workers, the individual would probably not qualify as exempt. This is because the majority of his or her time is spent performing non-managerial tasks, even though he or she is always the manager. For example, a medical office manager who manages a staff of three, but spends most of the time answering telephones, scheduling appointments, and billing (tasks that are clerical, as opposed to managerial, in nature) will probably not qualify as exempt.

The individual must have authority to make management decisions, such as hiring, firing and evaluating workers. The individual must regularly exercise independent judgment and discretion. Keep in mind that this does not include decisions for which the company guidelines are fairly structured, but means the individual actually has authority to make material decisions. For example, a chief financial officer who: manages a group of five accountants; does not generally perform billing or bookkeeping functions; and decides who to hire, promote, demote, discipline and fire, is probably exempt.

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