As we begin 2017, it is often valuable to review lessons learned in 2016. On several occasions during 2016, we were asked to consider the same inquiry. The inquiry, which often took the form of a request to confirm a current pay practice was, "It's OK to pay all of our employees a salary, right?" Although the answer is simple, this question necessarily requires a review of the need to first properly classify all employees as either exempt or non-exempt under the law.
In short, a company may pay all of its employees a salary rather than an hourly wage rate. However, the real issue is whether the employee is entitled to receive overtime pay when working more than 40 hours in a workweek, under federal law, or more than other mandated hours under different state laws. In many cases, even salaried employees must be paid overtime for all hours worked at time and one-half the employee's regular rate of pay. Therefore, before considering whether or not to pay an employee a salary, rather than an hourly rate of pay, companies must first classify all of their employees as either (a) non-exempt or (b) exempt under both federal and state wage payment laws.
As a result of this initial classification requirement, every employee should be considered entitled to receive overtime pay, unless the employer may rely upon a specific legal exemption from the overtime pay requirements. The specific legal exemptions, which are known as the "white collar" exemptions, are the executive, administrative, professional, outside sales, computer professional and highly-compensated employee exemptions. To qualify for one of these exemptions (except outside sales), an employee must be paid on a salary or fee basis as defined in the regulations and must also have job duties that meet the requirements of the specific exemption upon which the employer intends to rely for classification purposes.
Based on our 2016 experience, an employee's actual job duties did not always match the requirements of the particular exemption being relied upon by the employer. For example, we were asked to consider the status of employees labeled "administrative assistants," "inside sales representatives" and "field service engineers" who are responsible for installing, repairing and replacing machinery. However, a review of their primary duties and the applicable legal guidance often resulted in a finding that these positions were non-exempt and therefore entitled to overtime pay. As a result, although an employer may pay these non-exempt employees a salary, they were also entitled to overtime pay.
To remedy this classification issue and to properly calculate overtime pay due, these salaried non-exempt employees must record and report the hours they have worked. Because some of the employers improperly treated their "salaried employees" as always "exempt," the employer had no time records to rely upon to calculate overtime payments these employees should have received. This unwittingly exposed the companies to wage and hour litigation and monetary liability for unpaid overtime.
The classification of employees is not always easy. Job titles alone are insufficient and job duties change over time. To properly classify employees and to ensure that all employees are being paid properly, all employers must periodically review the classifications of their employees. Even a minor improper payment issue may result in significant monetary damages and the award of attorneys' fees to the employee. Therefore, legal advice may prove necessary to manage the company's risk.
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