Exempt, Non-Exempt, and Salaried Employees: What You Don’t Know Could Cost You

Legal

Some of the most common FLSA violations involve overtime and misclassification. Be sure to calculate and pay overtime in accordance with federal and state law, and apply tests for exemption correctly now and when the new rules are issued.

By Aldor Delp

Understanding the differences between non-exempt, exempt, and salaried non-exempt employees is key to understanding your compliance requirements under the federal Fair Labor Standards Act. Complicating matters are the U.S. Department of Labor’s proposed revisions to the rules governing who can be classified as exempt.

Below are the key differences between these classifications and the potential impact of the DOL’s proposed changes on your business:


Non-Exempt Employees

Under the FLSA, non-exempt employees must be paid at least the minimum wage for each hour worked and overtime (1.5 times the employee’s regular rate of pay) whenever they work more than 40 hours in a workweek. Your state may require overtime in additional circumstances. Most non-exempt employees are paid on an hourly basis. However, employers may pay non-exempt employees on a salary basis, provided the employee’s pay for each hour of work meets or exceeds the minimum wage and the employee is paid overtime whenever he or she works more than 40 hours in a workweek. Most employees are classified as non-exempt.


Exempt Employees

To be classified as exempt, an employee must generally:

  • Be paid on a salary basis;
  • Be paid at least $455 per week (administrative, professional, executive exemptions);
  • Receive their full salary in any workweek in which they perform work; and,
  • Meet certain duties tests. Each type of exemption has its own set of primary duties that must be performed in order for the employee to qualify for the exemption.

Exempt employees aren’t entitled to minimum wage or overtime. Before classifying an employee as exempt, carefully review the tests for each exemption (Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act) at the DOL’s Wage and Hour Division’s webpage: http://1.usa.gov/1LsM4UQ.

Salaried Non-Exempt Employees

While employers sometimes use the terms “salaried” and “exempt” interchangeably, not all employees who are paid a salary are exempt. As mentioned above, employers can pay non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when he works over 40 hours in a workweek.

Under the FLSA, calculating a salaried non-exempt employee’s regular rate of pay, for overtime purposes, depends on the number of hours the employer and employee understand that the salary is intended to cover, provided the employee is reasonably expected to work that number of hours. For example, if the employer and employee understand the salary to cover 45 hours, then the employer may calculate the regular rate of pay by dividing the weekly salary by 45 hours. Some states have different rules. For example, California limits employers to dividing the weekly salary by a maximum of 40 hours when calculating the regular rate of pay for salaried non-exempt employees.


Proposed Changes to Overtime Exemptions

In July 2015, the DOL proposed changes that would substantially increase the minimum salary requirement for the administrative, professional and executive exemptions under the FLSA. The proposal would raise the minimum salary requirement for these exemptions from $455 per week to about $970 per week in 2016. The DOL also proposed increasing the minimum salary requirement for the highly compensated employee exemption. The DOL is currently reviewing public comments on the proposed changes and is expected to issue a final rule later this year.


Potential Impact

Since the rules would only apply to exempt employees, you wouldn’t be required to make changes to your non-exempt employees’ pay. However, if the proposed increase becomes final and your exempt employees’ salaries fall below the new minimum, you would either have to:

  • Raise their salaries to the new requirement; or,
  • Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.

Assessing Impact

Assess the potential impact on your company now by determining how many exempt employee salaries would fall below the proposed rate and how many hours they typically work per week. If you don’t have information on the hours they work, ask exempt employees to track their hours, or talk with the employees and their supervisors. Compare the costs of raising these employees’ salaries versus what it would cost to reclassify them as non-exempt and pay them overtime when they work more than 40 hours in a workweek.


Reclassifying Employees

If the potentially impacted employees rarely work more than 40 hours in a week and you don’t want to increase your compensation costs, you could reclassify these employees as non-exempt and convert their salary to an hourly wage (divide their weekly salary by 40 hours). You could also re-classify them and continue to pay them a salary. In either case, they would be entitled to overtime if they worked more than 40 hours in a workweek.

If the potentially impacted employees are working regularly more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium in your calculation when you reclassify them as non-exempt. Here’s an example:

An exempt employee’s current salary is $715 per week, the employee regularly works 50 hours per week, and you want to convert this employee to an hourly employee but keep your costs the same. You would calculate the hourly wage as follows:

___________________________________________________________

$715 weekly salay /  [40 hours + (10 overtime hours x 1.5)] = $13 hourly rate 

This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each
hour of overtime.

___________________________________________________________

Communication

If you make changes as a result of the final rules, it is important to have open communication with affected employees. For example, if you intend to reclassify employees as non-exempt, some employees may see this as a “demotion” if they attach a certain level of prestige with being exempt. You can address this concern by explaining the benefits of being classified as non-exempt, such as receiving overtime pay whenever the employee works more than 40 hours in a workweek. 

Additionally, if you raise the salaries of some exempt employees to comply with the new rules, their colleagues may ask why their pay isn’t increasing. As with any change in employment status, notify employees in advance and in writing, explaining the impact of the change and the reasons for it.

Some of the most common FLSA violations involve overtime and misclassification. Make sure your company is calculating and paying overtime in accordance with the FLSA (and your state law) and that you apply tests for exemption correctly — both now and when the new rules are issued. ADP is closely tracking the proposed rules and will continue to keep you abreast of any developments. For more information, visit ADP’S FLSA page at http://bit.ly/1SB4KEy

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Aldor Delp is division vice president and general manager of Resource and HR Solutions for ADP. Find him at fransocial.franchise.org