What Every Entrepreneur Should Know About Exempt Employees 

The Fair Labor Standards Act, also known as the FLSA, is a federal law that was enacted in 1938 and amended several times since then. The FLSA is the predominant federal statute that governs many aspects of labor law, including child labor, overtime and minimum wage. One area of the FLSA that many entrepreneurs find confusing has to do with salaried employees and whether they are automatically exempt from the overtime laws.employee 

Paying every employee a fixed salary can simplify your payroll processing, and you may believe it is the most cost-effective way to control labor costs. You hire an office clerk and a shipping clerk, pay each employee a weekly salary of $400, and require each employee to work at least 40 hours per week. If they work more than 40 hours during a workweek, you do not pay them for the additional hours, but if they call in sick, come in late, or leave early, you dock their pay. You are in violation of the FLSA for a number of reasons.

 

Salaried Exempt vs. Salaried Nonexempt 

Salaried employees are either exempt or nonexempt. If they qualify as an exempt employee, you do not have to pay them the overtime rate for all hours worked that exceed 40 in a workweek. The key phrase in that statement is if they qualify. The FLSA is very specific about what it takes to qualify as an exempt employee.

1. The employee must receive a guaranteed minimum salary of $455 per week. Since neither employee in the stated scenario is paid that much, neither is an exempt employee under the minimum salary test. It does not matter whether you express the salary as a monthly, bimonthly or annual amount. For example, if you issue payroll every two weeks, each employee would have to receive at least $910 per pay period. 

  1. You cannot reduce the employee’s salary for a partial day absence during any week in which he or she performs any work. Therefore, if you are docking salaried exempt employees who must leave early or who arrive late, you are violating the FLSA. However, you can reduce their salary if they take a full day off for personal leave or if they have used up their accrued sick leave under the company’sbona fide sick leave plan. Without a formal sick leave plan, you cannot dock exempt employees for the hours they miss due to an illness. 
     
  2. Another way that many fledgling businesses run afoul of the FLSA has to do with slow periods. New businesses often find that there are certain times of the year when there simply is not enough work to keep employees busy for 40 hours a week. For example, if you decide to just keep your business open from Tuesday through Thursday, you will still need to pay your salaried exempt employees their full weekly salaries.
     
  3. Even if your office clerk and shipping clerk metall ofthe requirements contained in the first three points, they are probably not going to pass the final test, which is the duties test. The FLSA defines three categories of duties that can qualify an employee as exempt. These categories are executive, administrative and professional.• Executive: Job duties include the regular supervision of two full-time or the equivalent number of part-time employees. Management must be the exempt employee’s primary duty. Management tasks, in addition to supervising employees, include interviewing, training, firing or disciplining employees; setting pay rates; planning and allocating work; providing for workplace security and safety; selecting the materials or equipment that employees use; ensuring that work complies with regulatory or legal standards; and handling complaints or grievances lodged by employees.

    • Administrative: Administrative exempt employees must perform nonmanual or office work that is directly related to keeping the business running. A primary component of their work must involve their authority to exercise independent judgment about significant matters that affect the entire business or at least have a substantial impact on the company. An office clerk who also makes the decisions about marketing and advertising, has the authority to make major financial commitments for the company, ensures regulatory compliance, manages public relations, or performs other high-level tasks might qualify as an exempt employee. However, an office clerk who only performs basic bookkeeping and payroll tasks, answers the phone, responds to emails, orders supplies, or handles other low-impact tasks is unlikely to qualify as an exempt employee.

    • Professional: Exempt professionals may perform either intellectual or creative tasks. Intellectual professionals include doctors, teachers, architects, lawyers, dentists, engineers, pharmacists, scientists, accountants, registered nurses and actuaries. They must have a postsecondary education in academic fields rather than skilled trades. Creative professionals are those whose jobs require imagination, talent, invention or originality. Employees who might fall into this category include writers, musicians, cartoonists, actors and composers.

     

Exceptions 

Virtually every workplace is covered by the FLSA. The law states that the FLSA applies to any business with more than $500,000 in annual sales or that engages in interstate commerce. At first glance, you might think that your company is too small to be covered. However, the courts have taken a very broad interpretation of the term interstate commerce. If you use the United States Postal Service to send or receive mail across state lines, use a company phone to make or receive interstate calls, or use the internet to accept or place orders, the courts would probably rule that the FLSA applies to your business.

Some types of employees are exempt from the requirements of the FLSA. These include outside salespeople, newspaper delivery workers, casual babysitters, personal companions and certain computer professionals. Employees of local newspapers with circulations of 4,000 or less are not covered by the FLSA, and neither are workers employed by seasonal recreational or amusement businesses. In addition, workers in jobs covered by other federal labor laws are not covered by the FLSA. For example, the FLSA does not apply to truck drivers covered by the Motor Carriers Act or railroad workers covered by the Railway Labor Act. 

 

Conflict Between the FLSA and State Laws 

Since 1938, many states have passed their own labor laws. If there is a conflict between the state and federal laws, an employer must abide by whichever statute is more beneficial to the employee. For example, under the FLSA, an exempt employee must receive a salary of at least $455 per week. However, in the state of California, exempt employees must receive a salary that is at least twice what an hourly employee would receive for working 40 hours at the prevailing minimum wage. As of 2019, California requires employers with no more than 25 employees to pay a minimum wage of $11 per hour, so the weekly salary for an exempt employee would need to be at least $880. However, many cities and counties in California have established minimum wages that exceed the statewide minimum wage. For example, in Berkeley, the minimum wage from October 2018 through June 2019 was $15 per hour. Therefore, a salaried exempt employee in that city would have to receive a weekly salary of at least $1,200 to comply with the state’s labor laws. 

 

The Consequences of Misclassifying an Employee 

If you are found to have misclassified an employee as exempt, you could be assessed a penalty by the federal government as well as the state. Federal fines can be more than $2,000. Penalties assessed by states vary. In addition, you could be ordered to pay employees for unpaid overtime, any rest or meal breaks they did not receive, interest on the unpaid amounts, and their legal fees. 

 

Closing Thoughts 

Just paying an employee a fixed salary does not mean that you are not required to pay them overtime. Before deciding that an employee should be classified as exempt, be sure to review their job duties carefully. If you have questions about the laws regarding exempt employees in your state or city, call your state’s department of labor or consult an attorney.
 

 

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