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Do I have to classify some employees as hourly?

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HR Best Practices blog series

Navigating the world of HR can be overwhelming—period. That’s why we’ve created a blog series to answer common HR questions. To help answer each question and define best practices, we have three HR heroes with very different approaches to HR: Bythe Booke, Sam Blackheart, and Peggy Prag. You may find yourself relating to one (or more) of our heroes depending on the given situation. To see full descriptions of each character, reference our first blog of the series using this link.

Last time we covered, “Do I really have to store I-9s separately from personnel file documents?” Now, let’s see what Bythe, Sam, and Peggy have to say about our next question.

Background

The short answer to this question is a definite “maybe.” The longer answer is that the government has rules about whether you have to pay a given employee hourly or not. In other words, it is not up to your discretion and your opinion is irrelevant.

Employees who fall under the FLSA’s rules about overtime are often referred to by HR professionals as being “non-exempt”. Non-exempt employees generally have to be paid hourly. Employees who are not subject to the FLSA’s rules about overtime are often referred to by HR professionals as “exempt” (as in, they are exempt from the FLSA overtime rules). Exempt employees can be salaried rather than hourly.

 

Is there a law and/or regulation?

Yes. The FLSA requires employers to classify employees as overtime exempt or non-exempt. To this end, when classifying employees as exempt or non-exempt, it’s important to ask the following questions:

How much do my employees make? Employees earning less than $23,660 per year or less than $455 per week should be classified as hourly pay, overtime non-exempt.

Which tasks are my employees responsible for? An employee’s day-to-day duties - not job title - should determine whether an employee is classified as exempt or non-exempt. There is a common misconception that only “blue collar” workers, working-class employees performing manual tasks, should be classified as hourly. This is not the case. Some “white collar” positions should actually be classified as hourly. For instance, many employers wrongly assume that commissioned inside sales people should be salaried when in fact, these employees should be classified as hourly and overtime non-exempt.

You can check to see if your employees should be classified as hourly or salary using the FLSA duties test. Each of the following six categories outlines duties performed by salary employees. If an employee performs duties that match with any of these six categories, they should be classified as salary.

 

Is there a risk of a lawsuit?

The risk of a lawsuit is highest when employers classify non-exempt employees as exempt. The risk is highest in this scenario because the employer is opening itself up to an argument that the misclassified employees were not paid overtime wages that they should have been paid under the FLSA.

If an employer does not properly classify an employee as non-exempt, the employer could be responsible for up to 3 years backpay and liquidated damages awarded by the court. Employers who misclassify employee exemption status on more than one occasion may be subject to civil penalties as well.

 

What is the cost of compliance?

Many small employers might say that the administrative burden of tracking employee hours is a cost that they are trying to avoid by classifying employees as salaried rather than hourly. To that end, taking on that administrative burden to track hours for non-exempt employees is a cost to comply.

 

What is the risk of bodily harm?

There is no risk of bodily harm.

 

What is the risk of negative public relations?

The risk of negative public relations is medium. While many employers misclassify employees, if you have a misclassified employee or group of employees sue it can attract a lot of negative attention for you as the employer.

 

Is there risk of jail time? 

There is no risk of jail time. 

 

What would our HR Heroes say is the best practice?

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Bythe Booke: The distinction between exempt and non-exempt employees seems pretty clear-cut. Let’s clearly define all employees based on FLSA regulations and document each employee’s exemption status within our HRIS for record-keeping purposes. Then, let’s make sure we track hours and pay non-exempt employees overtime as appropriate.

  

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Sam Blackheart: There doesn’t really seem to be a way around this one. Let’s classify employees as exempt or non-exempt based on FLSA standards. We can cut overtime costs by capping employee hours at 40 hours per week and enforcing clear time management standards. Maybe we’ll even save some money in slow weeks where employees only work 36 hours.

 

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Peggy Prag: The law is the law and we’re certainly not looking to be sued. Let’s continue to use our best judgement when classifying employees as exempt and non-exempt, as well as track their hours and pay overtime when we are supposed to.

 

 

Have a question you’d like to see our heroes answer next? Let us know in the comments section below!

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