Employers frequently have questions regarding the appropriate methods and practices to ensure payroll compliance. One of the primary concerns employers face is how to properly classify employees.
Employee classifications turn on whether an employee is considered exempt or non-exempt. The key characteristics of an exempt employee is someone who is not entitled to overtime pay, who is paid a salary wage, and who earns at least $455.00 per week (certain states might vary on this number). On the other hand, a non-exempt employee is someone who is entitled to overtime pay equal to one and a half times their regular rate of pay, who is paid either a salary or an hourly wage, and is not required to earn a certain amount of wages per week.
To determine if your employee falls into an exempt classification, there are a few different tests to consider. These tests are called “duties tests” because the classification decisions are based upon the actual tasks, or duties, that an employee must do every day on the job. The categories of exemption encompass criteria that are labeled executive, professional, administrative, computer, outside sales and highly compensated. If an employee meets the duties outlined in these categories, then that employee will be exempt from the overtime provisions of the law.
Classifying your employees correctly is essential to avoiding penalties from the U.S. Department of Labor’s DOL. If an employee is misclassified as an exempt employee, the DOL will require payment of owed wages and can impose a penalty equaling the owed amount of back wages — essentially, doubling the amount paid to the employee. The DOL has useful information which can aid you in determining the proper classifications of your employees.
Beyond classification, many employers also have trouble with the correct way to compensate an exempt employee for a partial work day. When considering how to pay for a partial day worked, you must review your own internal policies. First, check to see if the company has an accruals plan. If so, you may be able to replace the unworked hours with paid time off (PTO), sick leave or vacation pay. If you do not have an accrual policy in place, the employee should be compensated for the full work day. Contrary to popular belief, deductions from salary can only be made if an employee misses one or more full days.
Another common scenario is how to handle overtime pay when an employee is not present for the entire work week. For example, if an employee works thirty-three (33) hours, but has eight (8) hours of PTO, does an employer need to pay overtime for the one (1) hour worked over forty (40)? Federal regulation says no because PTO, sick, vacation and holiday pay are not hours worked and do not factor into the calculation of overtime. Overtime pay will not trigger until the employee has actually worked more than forty (40) hours in a work week.
As you can see, complying with federal and state regulations can seem a tall task and not all businesses are able to handle this on their own. MBA’s payroll and HR departments offer a multitude of services that help you remain compliant and avoid unnecessary fines and fees. Listen to the podcast below. Please contact us for more information at 1-888-622-6460.