Two things every business owner needs to know about paying employees' salary - Human Resources Hero

Two things every business owner needs to know about paying employees’ salary

Tracking employee hours can get complicated, especially if you have employees that work remotely or are always on the clock. And with more employees working out of the office than ever before due to the COVID-19 pandemic, many businesses are deciding to just pay employees a salary to avoid the hassle and headache of constantly tracking hours.

If you’re considering moving some of your employees to salary, or if you already have employees who are paid salary, you need to be aware that there are very strict rules surrounding employee salaries that can have a huge impact on your business.

Most business owners today know that regular employees are entitled to things like minimum wage, meal breaks, and overtime when they work long hours, but salaried employees don’t get these things. Common sense might suggest that paying your employees a fixed wage or salary is a good way to avoid tracking breaks and paying overtime, but nothing could be farther from the truth.

In reality, reclassifying your employees and paying them a salary without doing your due diligence can lead to one of the most expensive business mistakes you could make.

Last year alone the US Department of Labor recovered a record $322 million in unpaid wages on behalf of employees, bringing the 5 year total of recovered wages to $1.4 billion. Over 1.3 million workers received back wages – that’s nearly 10 percent of the total US workforce.

On top of that, nearly every state levies fines and penalties on companies who are forced to pay back wages to employees and in more than 30 states those penalties are at least double the wages recovered. This means that if you owe an employee $1000, you are likely to pay at least $2000 in additional fines and penalties for not paying the employee in the first place.

Here is how those numbers may impact your decision to pay an employee a salary.

Exempt Vs Non-Exempt

Most business owners don’t realize that, in order to pay an employee salary and avoid overtime and meal breaks, the employee must be classified as exempt. Generally, an exempt employee is the only employee that you should be paying a set salary to on a monthly basis.

To be classified as exempt, employees must meet a very strict set of criteria. The Federal Government sets these criteria, but states also have the right to expand these rules. If you do business in an employee friendly state, you may have to follow even tighter regulations.

In order to be classified as exempt, employees need to meet two different sets of criteria completely. The first set of criteria has to do with the duties that the employee is performing inside your business. Currently these duties fall into several categories, the most common being Executive, Administrative, and Professional.

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The Duties Tests

According to the current Department of Labor Fact Sheet, an employee can only fall under the Executive exemption if their primary duties include:

  • Managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise
  • Directing the work of at least two or more other full-time employees
  • Hiring or firing other employees
  • Making recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees. These recommendations must be given significant weight.

In order to meet the Administrative exemption, the employee’s primary duties must include:

  • Office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers
  • The exercise of discretion and independent judgment with respect to matters of significance

And in order to meet the professional exemption, the employee’s primary duties must include:

  • the performance of work requiring advanced knowledge. This is work which is predominantly intellectual in character and which includes the consistent exercise of discretion and judgment. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
  • Performing work in a field of science or learning

If you do decide to classify an employee as exempt you need to make sure they have a written job description that states the duties that they should be performing on a regular basis it needs to be aligned with the duties allowed by the Department of labor or the more specific state law.

Minimum Salary Requirements

Once you’re confident that the employee will meet the duties test, you also must ensure that they make the minimum salary. Currently, the federal minimum salary is $35,568 which means that, if the employee makes a salary less than $35,568 annually, they can not be classified as exempt even if they meet the duties test. And some states require a higher minimum salary. For example, California requires a minimum salary of $54,080 in 2020 and has slated increases every year.

When taken together, the duties and salary tests for exempt employees mean that most employees in your business can not be classified as exempt and therefore must be paid overtime, lunch breaks etc.

What To Do Next

If you have been treating an employee as exempt and not tracking their time or documenting their breaks, you are at significant risk of penalties, fines or a lawsuit. Even if the employee never works overtime and always takes breaks, the lack of records puts you at the mercy of the employee if an issue does arise. It’s your responsibility as the employer to provide adequate documentation and without time sheets, employees can state that they worked overtime or did not get breaks and you will have no way of proving otherwise.

If you think you might have misclassified employees that you are paying a salary, make sure to consult an HR professional right away to explore your options and limit your liability, and for more information on the top HR mistakes to avoid in your business, you can watch our free on demand webinar.

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