Exempt vs Non-Exempt

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Exempt vs. Non-Exempt Employees: Minimizing the Impact to Your Bottom Line

October 13, 2016

KPA: Environmental Health & Safety | HR Management |Sales & Finance Compliance

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Questions

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• Questions will be answered at the end of the webinar

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Federal Changes

• Exemption from Overtime = $47,476 ($913 per week)

More than $455 but less than $913 will need to be reclassified

• No changes to duties test

• 3 year increases

• Ability to count bonuses, commissions and incentive

payments

Federal Exemptions

MINIMUM WAGE/ OVERTIME/ RECORDS

• Executive

• Administrative

• Professional

• Highly Compensated

The FLSA also has an exemption from the overtime pay requirements for certain

commission employees of a retail or service establishment. For this exemption to

apply, three requirements must be met: (1) The employee must be employed by a

retail or service establishment; (2) The employee’s regular rate of pay must exceed

one and one half times the applicable minimum wage; and (3) more than half of the

employee’s total earnings in a representative period must consist of commissions on

goods and services.

Federal versus State Law

• Federal law does not preempt state

employment laws

• Employees are entitled to the provision

most favorable to them

Three Factors

1. How is the employee paid?

2. How much is the employee paid?

3. What does the employee do?

The employee must be paid a salary, must make a minimum of $47,476 annually or $913 a week and must meet all of the qualification of one of the duties test to be classified as exempt under the FLSA.

FLSA provide an exemption from for computer systems analysts, computer programmers, software engineers,and other similarly skilled workers in the computer field who meet certain tests regarding their job duties and whoare paid at least $913 per week on a salary basis or paid on an hourly basis, at a rate not less than $27.63 an

hour.

What is Salary Basis?

• A salary is a predetermined amount paid for each pay period

on a weekly or less frequent basis, regardless of the number

of days or hours worked

• The amount is not reduced because of variations in the

quality of the work or the quantity of the work

• Salary is payment for the “job done” not the “hours worked”

The Duties Test

• Executive

• Administrative

• Professional

• Highly Compensated Employees

“highly compensated employee” exemption under 29 U.S.C. § 541.601. The relevant section of the regulation reads: “An

employee with total annual compensation of at least $100,000 is deemed exempt . . . if the employee customarily and

regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative, or professional

employee.”

Specific Guidance from Connecticut Department of

Labor

Executive Exemption

FEDERAL

• Is in charge of a department or sub department AND

• Supervises the work of two or more full time

employees AND

• Receives a salary or guarantee of at least $913.00

per week

FEDERAL

• Primary duty is performing non-manual work related to management policies or general business operations, and

• Exercises discretion and independent judgment with little or no supervision, (holds a position of responsibility) and

• Receives a salary or guarantee of at least $913/wk

Administrative Exemption

Discretion- Defined

An employee under the constant direction of supervisors is not likely to be exercising the degree of discretion contemplated by the exemption.The key question in determining the amount of discretion exercised by the employee, is whether the employee is making the decisions independently or whether he is simply following an established procedure. Even though an employee has significant discretion in judgment, if the discretion applies to the production process, the employee will not qualify under the administrative exemption. The employee must exercise discretion in respect to the company's policies or operations to qualify for this exemption.

Professional Exemption

FEDERAL

• Knowledge of an advanced type in a

field of science or learning that is

customarily acquired by a prolonged

course of specialized intellectual

instruction; or

• Invention, imagination, originality or

talent in a recognized field of artistic or

creative endeavor.

• Performs office or non-manual work, and

• Is guaranteed total annual compensation of at least $134,004 per year, and

• Performs any one of the exempt duties of an executive, administrative or professional employees

Highly-Compensated Employees Exemption

Commission-Paid Exemption (Federal)

• Employed at a “retail” establishment, and

• Receives the majority of his/her compensation from “commissions”, and

• Receives at least time and one-half minimum wage for all hours worked in an overtime week

Irrelevant Factors

• Employee is paid a salary- unless meets other factors for total compensation and duties test

• “We consider employee a manager”

• Employee could supervise someone, sometimes

• “When employee was hired, we agreed no overtime would be due”

• “We give them comp time when they work over 40 hours”

Common Classification Mistakes

• Not considering differences in state and federal salary and duties tests

• Treating trainees as exempt before they fully qualify as exempt

• Failing to guarantee the proper minimum salary

• Prorating the salary of a part-time exempt employee to less than $913/week

• Making improper deductions from salaries of exempt employees

EXEMPT only means that these employees generally meet all the criteria

and are generally exempt from overtime

NOT EXEMPT only means that these employees generally do not meet the

criteria for this exemption and generally are not exempt

WARNING! Job titles are not controlling and paying an employee a salary does not exempt an employee from coverage under the minimum wage and overtime laws.

Every employment situation (employee/position) should be looked at on a case by case basis to determine if the position is exempt or non exempt.

CAUTION!

Minimizing the Impact

• $36,000

• $6,476

• $1,747

Business Example

Name Title Current Status Annual Salary

Nondiscreti

onary/

Incentive

Pay New Rule

Option A-

Salary

Increase,

Same Bonus Hourly Rate

Average

Weekly Hours

Average

Weekly Comp

Option B-

Non Exempt

Same

Hours/Same

Rate

Difference

Option

A/Option B

Increase

Base/Decreas

e Bonus

Decrease

Hourly

Rate

Owen Owner CEO Exempt 100,000 34,004 134,004 N/A N/A 0

Mary Manager Office Manager Exempt 41,000 0 47,476 6,476 19.7115385 45 936.298077 48687.5 -1,211 N/A $16.45

Amy Admin Administrative Assistant Exempt 32,000 0 47476 15,476 15.3846154 40 615.384615 32000 15,476 N/A 0

Sam Sales Sales Manager Exempt 36,000 10,000 47476 6,729 17.3076923 50 951.923077 59500 -12,024 1747 N/A

Base 36000 Base 43000

10% 4747 Bonus 4747

Total 40747 47747

Increase 6729

Bonus 5253

Total

Compensation 52729

Wage Payment Example- Salesperson

For each week of work the salesperson must be paid at least minimum wage, even if no commission is earned

• Commission only– Hours Worked = 42

– Commission = $550

– Minimum Wage: 42 x $7.25 = $304.50

– Minimum Wage Requirement Met

• Commission and Salary– Hours Worked = 42

– Commission = $150

– Salary = $300

– Minimum Wage: 42 x $7.25 = 304.50

– Minimum Wage Requirement Met

(1) The employee must be employed by a retail or service establishment; (2) The employee’s regular rate of pay must exceed one and one half times the applicable minimum wage; and (3) more than half of the employee’s total earnings in a representative period must consist of commissions on goods and services.

$1000 commission

$1200 salary

180 hours worked

Minimum wage x 1.5 for all hours worked 180 x $10.87 = $1956.60

Actual compensation = $2200

Does not meet requirements- less than ½ total earning were not commission based

Remember This

• You can pay commissions weekly, bi- weekly, semi-

monthly or monthly.

• You must satisfy minimum wage on the same basis:

weekly, bi-weekly, semi-monthly or monthly

• You can “loan” or advance a sales person money to

cover the minimum wage and then recoup it in

subsequent weeks or months

• You must pay for all hours worked: sales meetings, off

day deliveries, prospecting, etc.

Scenario One

• Q: My salespeople fall under the special exemption for auto dealers. What

happens if they do not meet the minimum amount in sales to be classified as

exempt? Do I pay them the difference?

• A: Yes, if an employee does not earn enough in nondiscretionary bonuses and

incentive payments (including commissions) in a given quarter to retain their

exempt status the DOL permits a "catch-up" payment at the end of the quarter.

The employer has one pay period to make up for the shortfall (up to 10

percent of the standard salary level for the preceding 13 week period). Any

such catch-up payment will count only toward the prior quarter's salary

amount and not toward the salary amount in the quarter in which it was paid. If

the employer chooses not to make the catch-up payment, the employee would

be entitled to overtime pay for any overtime hours worked during the quarter

Scenario 2

• Q:I have a salaried employee that makes 40,000 a year. Should I

increase their pay to stay exempt or should I adjust them to an hourly

rate?

• A: Depends. First you would want to figure out how many hours this

employee is actually working. For instance if the employee works 50

hrs/week this would calculate to $14.54/hr for 40 hours of straight time

putting the employee at $582/week. You would then add the 10 hours of

OT at time-and- a- half pay, which would be an additional $218 for a

weekly total of $800. The $800 is less than the $913 so it may make

sense to adjust this employee to an hourly rate.

Scenario 3

• Q: I have decided to reclassify some of my employees from exempt to

non-exempt. They feel like this is a step back or a demotion. How do I

explain to them that it is not?

• A: Remind employees that this is a decision about compliance and not

status or performance at work. Eligibility for OT ensures they are paid

for their time and hard work. Hourly pay can also provide for a better

work-life balance. They will be essentially getting paid the exact same

amount but will not have to work late hours or answer calls/emails after

their 8 hr day.

Scenario 4

• Q: I have an employee on a pay plan that doesn’t always meet the $913/week threshold. Do I need to change their actual pay plan? Also, should this employee begin tracking their hours?

• A: Lets do an example: Bob is a used-car manager who makes $40,000 per year in base salary ($769.23 per week). He also averages an additional $40,000 in sales commissions. Bob usually works 50 hours per week (40 regular hours plus 10 overtime hours). Now let’s look at the dealership’s options to satisfy the new rules:

• Increase Bob’s salary to meet the new minimum threshold and maintain his overtime exemption status: As long as Bob earns 90% of the minimum threshold in base salary (equivalent to $42,728.40 per year, or $821.70 per week), sales commissions can cover the remaining 10%. Total increased cost for your dealership would be $52.47 per week.

• Convert Bob to an hourly, non-exempt employee and pay him overtime at 1.5 times his regular rate of pay: Bob’s regular rate of pay will vary week by week based on commissions, as his regular rate includes an average of all base pay plus commissions for the week. If you pay him an hourly rate of $20, and he earns commissions of $800, his regular rate for the week is $20 x 50 hours = $1,000 + $800 commissions = $1,800/50 hours = $36/hr. Now multiply the latter by 1.5 and his overtime rate is $54. Total increased cost under the new rule is $540 per week.

6 Steps To Help Communicate a Change in FLSA

Status to Employees

1. Explain Why the Change is Occurring

2. Apprise The Employee of Changes in Compensation

3. Ensure Managers are Aware of the Changes To Their Employees.

4. Familiarize Employee With the Payroll Process.

5. Discuss Any Limits on Hours Worked and Overtime

6. Provide Necessary Training

Calculating Overtime (Premium)

1) Divide amount of salary, bonus, commission, etc. received in a week by the hours worked in the week.

2) Then take ½ of that figure times the number of overtime hours

3) That gives you the additional overtime due

If an employee is not exempt from overtime…

The employer must pay overtime premium on all

compensation the employee receives

$ Hourly wages

$ Salary

$ Commissions

$ Bonuses

$ Spiffs

$ Payments from the manufacturer or third parties

Reminder- Accurate Recordkeeping is Critical

• The employer must maintain an accurate record of the hours worked by each non-exempt employee each day and each week

• The employer can delegate this duty to employees, but it remains responsible for compliance

• Failure to comply with timekeeping requirements should be treated as a disciplinary issue

• No required format: Punched time cards, handwritten time sheets, computer log, etc., so long as they are accurate

• Without good time records, you are at your employees’ mercy if there is a dispute on wage payment

• Most accurate: Punched time card, swiped card or biometric identification

True and Accurate Records

• Name

• Home Address

• Occupation

• Total daily and total weekly hours worked, showing beginning and ending time computed to the nearest unit of 15 minutes

• Total hourly, daily or weekly wage basis

• Overtime wages as separate from basic wages

• Additions to or deductions from wage by each pay period

• Total wages for each pay period

• Other records stipulated by state regulation/rule

True and Accurate Records – Exempt Employee

Employer must maintain and retain the following information

and data on each individual employed in a executive,

administrative or professional capacity.

• Name

• Home Address

• Occupation, bonus point of having a job description

• Total wages for each pay period

• Date of payment and the pay period covered by the payment

• Other records stipulated by state regulation/rule

Questions and Answers

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