Start-Up Services
Here is an excellent article provided to through our partnership with the payroll service we use (ADP). You do not want to make a decision that will wind up with you in a lawsuit requiring you to pay penalties and overtime due to an employee. This is something to consider when setting up your new medical practice.
TIP OF THE WEEK
‘Salaried’ vs. ‘Exempt’: Common Misconceptions
The terms “salaried” and “exempt” are often used interchangeably. However, simply because an employee is paid on a salary basis does not mean the employee is “exempt” under the Fair Labor Standards Act (FLSA). Rather, very specific tests must be met in order for an employee to be considered exempt.
Background:
Employees are either classified as exempt or non-exempt under the FLSA. Non-exempt employees must be paid at least the minimum wage for all hours worked and they are entitled to overtime for hours worked in excess of 40 in a workweek. However, there are exemptions from these minimum wage and overtime requirements for bona fide executive, administrative, professional, and outside sales employees. If one of these exemptions applies, such employees do not need to be paid a minimum wage per hour and also are not entitled to overtime pay.
‘Exempt’ Employees:
To qualify as exempt, specific tests must be satisfied. These tests involve an evaluation of:
The amount the employee is paid (salary level test)
The manner in which the employee is paid (salary basis test); and
The primary duties the employee performs (duties test)
An employee must meet the criteria of each of these tests in order to be exempt. For this reason, more often than not, employees are considered non-exempt.
Salary-Level Test:
For the executive, administrative, and professional exemptions, the employee must be paid on a salary basis at a rate no less than $455 per week, exclusive of board, lodging, or other facilities. Note: To satisfy the outside sales exemption, the employee is not required to be paid a minimum salary; however, specific duty requirements must be met.
Salary-Basis Test:
Exempt employees must be paid on a salary basis, and but for a few narrow exceptions, they must receive their full salary in any workweek in which they perform any work (regardless of the number of hours worked or the quality of their work).
Duties Test:
The duties test involves an analysis of the employee’s “primary duty,” or the principal, main, major or most important duty that the employee performs. To qualify for an exemption, an employee’s primary duty must involve performing exempt-level work. 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. Before classifying an employee as exempt, carefully review the duties test for each exemption.
Bottom Line: The exemption criteria above illustrate that simply paying an employee a salary each week isn’t enough to qualify for an exemption. In addition to the salary-basis test, the employee must also meet the salary-level and duties tests. If he or she does not, the employee is non-exempt.
Salaried Non-Exempt Employees:
Employers have the option of paying non-exempt employees on a salary basis. However, all non-exempt employees (including those paid on a salary basis) must receive overtime for hours worked in excess of 40 in a workweek.
Deductions:
Certain types of deductions are generally permitted from a non-exempt employee’s salary as long as they do not reduce the employee’s pay below the applicable minimum wage.
Example:
A non-exempt employee with a fixed schedule earns a weekly salary of $400 and is expected to work 40 hours for that salary. In the applicable workweek, the employee works 20 hours because he left 4 hours early each day for personal reasons. The employer is permitted to reduce the employee’s salary accordingly. This type of deduction wouldn’t be permitted for an exempt employee, since exempt employees must receive their full pay in any week in which work is performed.
Calculating Overtime Pay:
Under the FLSA, overtime pay is determined by using an employee’s regular rate of pay. The regular rate of pay for an employee paid on a salary basis is obtained by dividing the salary by the number of hours for which the salary is intended to compensate.
Fluctuating Workweek Method:
A non-exempt employee with hours of work that fluctuate from week to week may be paid a stipulated weekly salary that constitutes straight-time pay for all hours worked, provided:
– There is a clear understanding of the arrangement between the employer and employee (such agreements should be made in writing);
– The salary is sufficient to provide compensation to the employee at a rate no less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours he or she works is greatest; and
– The employee receives extra compensation for all overtime hours worked at a rate no less than one-half his or her regular rate of pay.
Note: If using the fluctuating-workweek method, you may not reduce an employee’s salary in workweeks in which the employee works fewer hours. In the example above, the employee would be entitled to $500 in salary even if he or she worked only 20 hours.
Conclusion:
Remember that merely because an employee is paid a salary does not mean the employee is exempt from overtime. Employee classifications involve a thorough review of an employee’s primary duties. Employers should audit employee status on a regular basis to ensure that they are consistent with federal and state laws. Keep in mind that as job duties change, an employee’s classification status may also change.