The Fair Labor Standards Act requires that virtually all employees be paid at least the federal minimum wage for hours worked, plus for any hours over 40 in any given work week. It is critical for small businesses to know which employees are considered “exempt” from the overtime rules and which are “non-exempt,” meaning they must be paid overtime.
Many small businesses and non-profits assume that if they pay an employee a salary, then they don’t have to worry about the overtime rules. But this vastly oversimplifies how overtime actually works! And the penalties for misclassifying employees and failing to pay overtime can be steep.
Before adopting a policy of simply not paying overtime (or making everyone a salaried employee), ask yourself three questions:
- What is the employee’s salary level?
- What is the employee’s salary based on? In other words, how do you determine the employee’s paycheck each pay period?
- What are the employee’s duties?
Salary Level Test
For most employees, the minimum salary they must earn to be considered exempt from the overtime rules is $455 per week (or an annual salary of $23,660). However, there are a number of exceptions for outsides sales reps, blue collar workers, and computer employees.
Salary Basis Test
Next, the employee’s salary must be fixed on a weekly or less frequent basis, predetermined, and not subject to reduction because of variations in the quality or quantity of work performed. Generally, the employee must be paid their full salary for the entire week if the employee performs any work that week, regardless of the number of days or hours worked. Again, there are a number of exceptions when the employee does not have to be paid their full weekly salary, including disciplinary suspensions, absences covered by a bona fide paid leave policy, and personal absences.
Duties Test
Finally, the employee’s job duties, regardless of job title, must fit into certain categories. Here are some of the most common:
Executive: An executive employee’s primary duty must be managing the business. They must also be responsible for supervising at least two full-time employees.
Administrative: An administrative employee must be primarily engaged in office or non-manual work that is directly related to management or general business operations. But they must also be allowed to exercise discretion and independent judgment in significant matters (which rules out your typical administrative assistant).
Outside Sales: Sales employees must be primarily responsible for making sales or obtaining orders that a client or customer will pay for. Sales employees must do most of their work away from the employer’s place of business (including their home office).
Other duties that can make a position exempt from overtime include professionals with advanced degrees, creatives, computer employees, and a catch-all category for highly compensated employees.
Like most areas of the law, there are, of course, numerous exceptions to the general rules. You should always discuss your employees’ classifications with your attorney or HR professional.
