Any employee can be classified as a nonexempt employee, although we generally recommend that all employees in the same role have the same classification.
That being said, exempt employees sometimes feel there is a certain “status” involved in being salaried and exempt. If you decide to reclassify an employee, aim to do so in a manner that does not belittle them or cause them to become disengaged.
When reclassifying employees from exempt to nonexempt, it’s important to clearly communicate the change in writing, make the change effective in payroll and job descriptions, and communicate your policies and expectations that will be affected. You’ll also want to ensure that managers understand all applicable wage and hour laws impacting nonexempt employees and how they may affect their day-to-day work. These may include:
Any employee can be classified as a nonexempt employee, although we generally recommend that all employees in the same role have the same classification.
When Exempt Status Is a Status Symbol
Finally, if you allow your exempt employees flexibility with their schedules, allow the same for the non-exempt employees when possible. Time tracking doesn’t have to mean rigid schedules or micro-managing, and for those who have been reclassified because of the new rules, maintaining a perk like scheduling flexibility can help keep morale high.
FLSA Changes: Updating Your Policies and Practices
Have you reviewed your policies and practices in light of the upcoming overtime changes?
Reclassified employees may have to follow procedures and policies that didn’t apply to them before—or that you didn’t have. Changing habits can be a challenge, but changing those of your formerly exempt employees with respect to hours worked and tracked is critical to preventing wage and hour violations.
Newly non-exempt employees are likely used to “running the clock” after hours. They may be in the habit of responding to work email, finishing up projects, taking client calls, or engaging in other work tasks during non-work hours. It’s therefore advisable that your policies are clear about expectations and the organization’s commitment to recording all time worked by nonexempt employees.
Consider that your previously exempt employees may not be familiar with your timekeeping procedures, such as tracking time to check emails and turning in recorded work time for each pay period. Review these procedures with them, keeping in mind that non-exempt employees must be paid for all time they are “suffered or permitted” to work. This doesn’t just mean time in the office, but all time, whether it’s approved by the employer or not.
As mentioned above, all hours worked by a non-exempt employee must be recorded and compensated, even those performed outside of the employee’s standard shift. Therefore, it’s critical to have a policy in place that informs employees that all time worked must be tracked, that off-the-clock work is prohibited, and that employees may be disciplined for not following their scheduled shift. Please note that refusing to pay for unauthorized time worked—whether it’s regular or overtime—is not permissible.
Employees Using Their Personal Electronic Devices
Time a non-exempt employee spends doing work from their smartphone, tablet, or personal computer is considered time worked, and employees may find this hard to resist if their phone is chirping at them from their pocket every time a new work email comes in. For this reason, you may want to prohibit a non-exempt employee from using their personal devices for work purposes at all, or only allow such use upon authorization from the company. For instance, if you’d like a particular employees to check and respond to work email over the weekend, build that time into their weekly schedule so it doesn’t lead to unexpected overtime.
Meal and Rest Period
Many states require meal and/or break periods for non-exempt employees. It’s important to inform employees of these breaks, explain the procedures for clocking in and out, and remind them that no work should be performed during this time.
This is an area where it will be particularly important for your managers to be willing to manage. Employees who previously worked through lunch at their desk and could put in their eight hours between 9 and 5 might not want to take an unpaid lunch period or break, thus extending their workday. State law, however, may be indifferent to their feelings. If employees ask to waive their meal or rest periods, you’ll want to check the Break and Rest Period pages under State Laws in the HR Support Center. Sometimes these breaks can be waived, but sometimes they cannot. And waiving them sometimes requires special circumstances and agreements between employers and employees.
Again, if work is performed, it must be compensated (and penalties may apply), so the policy should include instructions for notifying a manager or supervisor if a working meal period occurs.
Now is the time to ensure that you’re familiar with your state and local overtime laws. Although most employers will only be subject to the federal requirement to pay time and one-half for hours worked over 40 in one workweek, Alaska, California, Colorado, and Nevada each have daily overtime provisions, and Massachusetts and Rhode Island require some employers to pay a premium for work on Sundays and certain holidays. Employees and managers need to be aware of the rules for compliance. And you should make sure that your own expectations for overtime work are written in your policy and communicated to your employees.
Since non-exempt employees must be paid for all time worked, you may need to consider travel time for those customarily engaged in work travel. There are a few narrow exceptions when travel time isn’t payable (e.g. when the employee is a passenger in a vehicle outside of regular work hours or during a standard morning/evening commute), but it’s good to assess your non-exempt employees’ travel schedules to ensure proper pay.
Incentive pay: Per FLSA requirements, overtime must be calculated weekly based on the employee’s “regular rate of pay.” Incentive pay (non-discretionary bonuses, commissions, or any other non-hourly pay) is included in the regular rate of pay calculation. For weeks in which a non-exempt employee earns both overtime and incentive pay—whether provided at the time or retroactively—you must calculate (or recalculate) the employee’s regular rate of pay so that it includes both their base pay and incentive pay for the week. The new amount should then be used for overtime calculations.
Workweek: Every company must have an established workweek that is not adjusted or altered to avoid overtime. This is the 168-hour period during which you will track each employee’s hours to determine their pay and if they are owed overtime, e.g. Sunday at 12:00 am through Saturday at midnight. Each workweek is assessed individually for overtime calculations, and overtime must be paid for each workweek in which it is earned. Payroll, managers, and employees should know what the set workweek is.
If these policies and practices aren’t currently covered in your employee handbook, we recommend adding them now, or distributing them separately as handbook amendments. Once distributed, employees should sign-off to acknowledge their acceptance and understanding of these important policies. If your policies and practices are already covered in your handbook, reemphasize them with the newly reclassified employees.
FLSA Changes: FAQ
The Department of Labor has released their final rule to increase the minimum salary for exempt employees.
What are the new minimum salary levels, and when will they go up next?
Under the rule, exempt executive, professional, administrative, and computer employees must be paid at least $684 per week ($35,538 annual), on a salary basis.
Employees who are exempt under the Highly Compensated Employee (HCE) exemption would need to be paid at least $107,432 per year. The HCE exemption is an option available for employees who don’t meet the full duties test to be an exempt executive, administrative, or professional employee, but are allowed to be classified as exempt because they are paid very well. However, this classification is not allowed in a number of states, including California, Oregon, and Washington. Most employers will never use this exemption.
Can a part-time employee be exempt?
The salary threshold does not fluctuate based on the number of hours worked by an employee. They also must be paid on a salary basis, meaning their pay doesn’t fluctuate based on number of hours worked or the quantity or quality of their work. Finally, they must also pass the duties test for at least one of the FLSA’s exemption categories.
What’s the difference between a non-discretionary and discretionary bonus?
The FLSA defines non-discretionary bonuses as those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with an organization. If there is an established set of criteria that an employee must meet, and the bonus is guaranteed to be earned once those criteria are met, the bonus will be considered non-discretionary. All non-discretionary bonuses must be included in the regular rate of pay and will impact the overtime rate when they are issued in the same workweek in which overtime is earned.
Discretionary bonuses, however, may be excluded from the regular rate of pay and overtime calculations. A discretionary bonus can be given to an employee for any reason or no reason at all. Generally, they’re given out of appreciation, loyalty, or good service. While employees may have a sense that they might get such a bonus, they are neither announced nor guaranteed to employees ahead of time.
Can non-discretionary bonuses and commissions count towards the minimum salary threshold?
Under the proposed rule, non-discretionary bonuses, incentive payments, and commissions (collectively, “incentive pay”) may account for up to 10% of the total for executive, administrative, professional, and computer employees, so long as they are paid out on at least an annual basis. Incentive pay can account for the difference between $35,568 per year and the total pay of someone exempt as an HCE, but may not cause a reduction in their $684 per week that is paid on a salary or fee basis.
Does this change even apply to me?
Almost certainly. There are two ways in which employees can be covered by the FLSA. One or both will apply to almost every employee in the country.
The first kind of coverage is called “enterprise coverage.” This applies when an employee works for an employer who has an annual dollar volume of cash sales or business done of $500,000 or more. It also applies if the employer is a hospital, business providing medical or nursing care for residents, school or preschool, or government agency, regardless of the amount of sales or business done.
The second type of cover is called “individual coverage.” Even when there is no enterprise coverage, the FLSA will cover individuals engaged in interstate commerce. If an employee places telephone calls to another state, sends or receives out-of-state shipments, processes credit cards, debit cards, or personal checks, or partakes in any number of other basic business activities, they will qualify for individual coverage.
That said, California and New York (and soon Washington) already have laws in place that make the minimum salary for exempt white collar employees higher than these proposed thresholds. As employers must follow the law that is more beneficial to employees, the new proposed federal minimums would not affect employers in these states.
It is suggested to review and follow the existing inclement weather policy, should the company have one.
But… What is the actual law?
If the company closes for weather-related reasons, nonexempt employees are not entitled to pay. The employer can allow nonexempt employees to use accrued paid time off, vacation, or sick (PTO) to cover their absences. If PTO is not available, the time off is unpaid. Some employers have mandatory use of PTO policies which is acceptable.
Some employers provide a fixed number of paid inclement weather days per year.
As for exempt employees, the application of weather-related absences is more complicated. In the case where an employer is open for business but an exempt employee chooses to stay home, that employer is not entitled to pay the employee for that day because he/she chose to remove themselves from the workplace for personal reasons. If the employer has a PTO policy and the employee has accrued time, the employer can use the PTO to cover their absence. In the event there is no accrued PTO available, the employer can reduce the employee’s pay for the absence, in full-day increments, without violating the salary-basis test of the FLSA.
However, if the employer decides to close for weather-related reasons, the employee’s full salary must be paid for the week even though he/she may not have worked the full workweek. In this scenario, the employee is available for work, but it is the employer who has made the work unavailable to the employee.
Bottom line… Employers should not reduce the weekly compensation from exempt employees for partial days caused by bad weather.
For a relevant DOL opinion letter, check out the link below.
Federal Fair Labor Standards Act (FLSA) lawsuits numbered over 7,000 in 2012 alone. Companies such as Walmart, Staples, Merrill Lynch, JPMorgan Chase, Oracle, CVS, Tyson Foods, Lowe’s and AT&T have been subject to significant FLSA penalties.
FLSA lawsuits don’t target specific types of companies; every company could be faced with this challenge and the ensuing penalties.
In order to determine violations, investigators generally look at the following five areas.
Your company’s earnings codes may be the easiest way to identify compensation being improperly excluded from the regular rate. In an FLSA lawsuit investigation, investigators tend to first look at safety, incentive, bonus, auto allowance, operator incentive and per diem.
Looking at your list of deductions codes can also reveal existing issues such as appropriate deductions or if the deductions reduce wages below minimum wage. Investigators will pay special attention to advances, laundry, safety glasses, tools, uniform fees and shoes and union dues.
It’s important to remember to document anything that requires employee authorization and to avoid deductions that cause pay to go below minimum wage.
Your time system
Your time and attendance rules and the resulting employee time punches can be one wage and hour issue, but there are several causes:
- Rounding rules – make sure rounding is fair
- Automatic meal period deductions – single largest reason for litigation; if you require employees to punch out/in rather than auto deduct, you have proof of meal periods
- Time clock rules treat clocking in early or late the same for everyone
- Shift hours overlaps work weeks; this may cause underpay one week and overpay the next week
Time card dangers
There are a few areas which investigators focus on as possible clues to inappropriate time clock management.
- Identical in/out and meal period times for almost every day – is the employee actually punching?
- No out/in and meal time punches – hard to prove if nothing is documented
- Exact time punches when shift begins
- Employee time punches are almost the same exact time – possibly buddy punching
Pay stub issues
- Paid for fewer hours than shown on time record
- Deductions for work required equipment (e.g., uniforms, tools)
- Employee was paid a shift differential or bonus instead of overtime pay
Avoiding difficult, expensive and time-consuming business problems are now a part of our reality with FLSA lawsuits. Proper record keeping and documentation is vital, along with a time and attendance system that integrates with payroll and other business functions.
Your systems should have consistent rules across the board, maintain documentation, have easy data management and reports to prove your compliance.