Recently I came across the story of a grocery store in Portland, Oregon, that has to pay nearly $100,000 in back wages and damages to 11 workers. What got the store in trouble is actually a fairly common misunderstanding.
The store had paid the 11 workers a straight salary for all the hours worked in a week, with no overtime. The problem? None of the workers met the criteria to be considered exempt, which means they should have been paid overtime anytime they worked over 40 hours in any workweek.
According to the store owner, the reason he had been paying the workers a straight salary was that the workers themselves wanted to be paid on a salary basis rather than hourly.
And that’s fine. As a business owner you can choose to pay by the hour or salaried, as you see fit.
Salaried Does Not Equal Nonexempt
The problem is: just because someone receives a salary, that doesn’t mean they’re exempt from overtime. Sure, being paid on a “salary basis” is one of the criteria, but it’s not the only standard the job has to meet to be considered exempt.
As of the time of this writing, to be considered exempt a job must pay at least $455 per week, or $23,600 per year. (At least, that’s true for now. The DOL is proposing changes that will likely raise this threshold in the future.) Honestly, that’s not a hard standard to meet. Based on a 40-hour week, you’re only talking about the equivalent of around $11.38 an hour.
What trips up most employers on the “exempt versus nonexempt” question is the “duties” criteria. To be exempt from overtime, an employee’s job duties must fall into certain categories. And another common stumbling block: the determination is based on actual duties, not job title.
So you can call someone your Director of Interior Maintenance and pay them $1,000 a week in salary, but if their job is sweeping the floors and emptying wastebaskets, you’d still better be paying them time-and-a-half overtime if they work over 40 hours in a week.
So, what should this grocery store owner have done?
Don’t Toss Your Time Clocks Just Yet
To start with, if you (or your workers) think paying a salary means nobody has to clock in and out anymore, you’ll all need to rethink that.
Since these workers are not exempt from overtime, you must track the hours they actually work. Otherwise, how do you prove you’ve paid them for any overtime they might have worked? (And, no, just telling the DOL inspector that they can trust you, none of your people have ever worked any overtime, is not going to fly.) Not to mention, maintaining accurate time records for nonexempt employees is required by the Fair Labor Standards Act.
So, yeah, they’re still going to have to clock in and out. (In fact, a strong case can be made to have everyone clock in and out.)
If you think dealing with those manual records takes too much time, you might want to look in to an automated solution. Acroprint offers both installed software and a cloud-based solution that can support PC-punch, various badge swipe terminals and biometric alternatives for clocking in and out. Plus since they can export time to your payroll system (or in the case of AcroTime, offer a built-in payroll system), they all can save you a significant amount of time and money on your payroll processing.
If your workers still want to be paid on a salary basis and you’re willing to accommodate, you may find yourself having to do some math from time to time.
If a salaried nonexempt employee works more than 40 hours in a week, they must receive overtime at one-and-a-half times their “regular rate of pay.” Many employers mistakenly assume this is the same as their equivalent hourly rate, either their salary divided by their normal scheduled work hours or their salary divided by the number of hours they actually worked that week. While that might work out to be true sometimes, the law says other payments (such as non-discretionary bonuses) may need to be included along with the salary when calculating overtime payments.
It gets complicated, deciding what might need to be included and what can be excluded. I strongly suggest you consult with a qualified employment law attorney to ensure you’re including everything you should when calculating each employee’s “regular rate of pay.”
Another area where you should consult with your attorney: accounting for absences and short work days.
For employees who are exempt from overtime regulations, there are only a few very limited circumstances under which you can dock their pay without jeopardizing their exempt status.
With nonexempt employees you have a little more leeway when it comes to docking pay, but one thing you need to make sure is you don’t accidentally dock their compensation to below minimum wage levels. The smartest course is to work with your attorney to draft a set of rules to govern docking — make sure your supervisors and payroll staff are aware of them — and check back with your attorney for guidance if anything out of the ordinary arises.
More Trouble Than It’s Worth?
I know some employment law attorneys who strongly advise their clients against paying nonexempt employees on a salary basis, simply because of all the hassles and potential pitfalls for the unwary. You may well also decide it’s more trouble than it’s worth to keep track of all the possible issues.
Whether you decide to pay your nonexempt workers hourly or on a salary, Acroprint offers a variety of accurate and affordable time tracking options to help ensure you pay them correctly under the law.