This article was originally published on HR.com on September 1, 2023 and is republished here with permission from the publication.

Paying salaries to exempt and non-exempt employees

Highlights:

• Distinguish between exempt and non-exempt roles for proper salary allocation based on tasks and hourly wages tied to responsibilities.
• Complying with FLSA, employers must ensure minimum weekly payments and clear attendance policies for exempt roles.
• When salaried, non-exempt roles need careful handling: meeting minimum wage, precise hour tracking, and grasping overtime rules.

Whether an employee is exempt or non-exempt is a question that every employer should answer when determining whether to pay hourly or provide a salary. A good rule of thumb is that hourly employees are typically paid to complete a task, while salaried employees are paid to complete a mission.   

So, what is a salary? A salary paid to an employee is a fixed amount of money paid for a set period of time, usually weekly, biweekly, or monthly, that does not change based on the quality and quantity of work performed. A more precise definition of “salaried” is provided in Section 13(a) (1) of the Fair Labor Standards Act (FLSA) according to the Regulations, 29 C.F.R. Part 541: “Being paid on a ‘salary basis’ means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employees’ work. 

Subject to some limited exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a ‘salary basis.’ If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.”  

This definition is for employees who meet the qualifications for an exemption from overtime requirements. Exempt employees must also be paid the minimum weekly salary of $684 as required under Department of Labor regulations.  

Employers who make deductions from exempt employee pay for partial-day absences, being tardy, or requiring employees to clock in and out as punishment, for example, may find themselves defendants in a lawsuit for violating FLSA requirements. Employers do not violate the FLSA by requiring exempt employees to clock in and out or otherwise provide proof of hours worked. Discipline issues that may be attributable to attendance should be dealt with as a performance issue. 

Employers can, however, satisfy the salary requirement by making deductions from an employee’s paid leave balance to make up for partial-day absences. As long as the exempt employee receives at least their weekly minimum pay, regardless of whether the sum includes regular pay or a combination of salary and paid leave, the employer meets the salary requirement. Employers can also suspend exempt employees without pay for designated inappropriate conduct so long as the guidelines are clearly established. Employers should be sure to communicate these policies to employees.

Paying a Salary to a Non-Exempt Employee

The FLSA allows employers to pay a salary to non-exempt employees under certain circumstances. The definition of a salary is roughly the same except that when a non-exempt employee, better known as an employee, entitled to overtime, is paid a salary, the employer has certain record-keeping and payment requirements: 

• The employer must be clear about the number of hours the employee is expected to work each week for the salary being paid.
• The salary being paid must ensure that the employee is paid the state or federal hourly minimum wage.  
• The employer must require the non-exempt employee to keep accurate time-keeping records because the employee must be paid overtime for all hours worked over 40 in a workweek. 
• If the salary the non-exempt employee receives is expected to be the straight-time pay for all hours worked during the workweek, the employer should be very clear about that. For example, if the non-exempt employee is scheduled to work 38 hours in a workweek, the employer should tell the employee that there is no additional pay if the employee is required to work two additional hours in that workweek, bringing the total to 40 hours. 
• If a salaried non-exempt employee works 45 hours in a workweek and receives a salary that pays straight time for all of the hours worked, the employee is only entitled to half-time pay for the five hours of overtime. 

Paying a salary for a non-exempt employee typically works best when the non-exempt employee rarely works overtime, or the overtime is predictable.

A Few More Words About Record Keeping

Once a non-exempt employee has worked 40 hours in a week, the employer can flex days off within the work week to avoid paying overtime. However, if an exempt employee has worked 40 hours and it’s only Wednesday, the employer can expect the exempt employee to continue working for the rest of the week. In the private sector, there is no such thing as compensatory time (comp time), so the employer must pay the non-exempt employee overtime as it’s earned. In the public sector, comp time is available. This means that instead of paying the employee for time and a half for all hours worked over 40 at the time the employee works the hours, the employer can accrue the overtime worked at time and a half and allow the employee to take time off at another point.  

Whether paying employees a salary or an hourly wage, the employer should remember the differences and requirements of each and fully understand the important role of record keeping. Being mindful of the risks and benefits of paying a salary will help employers avoid visits, letters, and phone calls from the Department of Labor and plaintiff lawyers.