December 28, 2018

Exempt or Not?

Ensuring employees are properly classified to avoid expensive consequences

by Karen Poling, Karen Poling Law LLC & Sharon DeLay, GO-HR

Most employers believe that paying a consistent salary every pay period is easier than tracking time and calculating hourly employee pay.i Salaried employees also don’t receive overtime pay, so controlling payroll costs by making employees salaried seems like an attractive alternative.

Misclassifying employees, however, can cost far more than occasional overtime pay.

It’s important to use correct terminology when discussing classification. We frequently interchange salary and hourly with the correct terms ‘exempt’ (from overtime) and ‘non-exempt’. Correct terminology is necessary because an employee can be classified as salary non-exempt, which means they receive a guaranteed salary every pay, but are still owed overtime wages paid at 1.5 times their calculated hourly rate for hours worked in excess of 40 in a workweek.

Each classification has pros and cons for employers and employees.

Non-exempt:

  • Pros for employers: Easy to calculate (hourly rate X number of hours), wage deductions for missed time
  • Pros for employees: Overtime is paid at a premium
  • Cons for employers: Payroll will be variable, must be closely managed to avoid overtime
  • Cons for employees: Can be psychologically de-motivating
Exempt:
  • Pros for employers: Easy to calculate (set salary every paycheck), “Salary” can be psychologically motivating, No need to worry when an employee works over 40 hours in a week
  • Pros for employees: Pay is consistent
  • Cons for employers: No allowable wage deductions (with a few exceptions), “Work a minute, work a day” pay
  • Cons for employees: No overtime for time worked over 40 hours

The Department of Labor Wage and Hour Division provides a great deal of guidance on determining if a position is exempt or non-exempt. The first threshold is that, “the employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week,” or $11.37 per hour or less. If compensation does not surpass this weekly amount, then the employee is non-exempt. Please note that states may have separately set higher amounts.

If the employee’s wages exceed this minimum amount, then the employer must evaluate the position’s primary duties based on the DOL’s Fact Sheets. If both the wage threshold and the duties tests are met, the position is probably exempt. While there are benefits to classifying every employee as non-exempt regardless of compensation or duties, an employer would be wise to maximize the benefits of the exempt status.

Failure to properly classify positions can result in unpaid wages, overtime, liquidated damages and attorney fees. Recently, a federal judge in Alabama approved an $8.3 million settlement because Dollar General allegedly failed to properly pay store managers for overtime.

i. R.C. 4111.08 requires employers to keep records of all hours worked each day regardless of classification.