May 2022 Volume 4

OPERATIONS & MANAGEMENT

Employee Classification and Compensation: The Basics By Johanna Fabrizio Parker

regular salary. In other words, permissible deductions are limited, e.g., absences of one or more full days for sickness/disability, unpaid disciplinary suspensions of one or more full days. For those individuals who do not meet the exempt standard (and this can include employees paid a salary), the law requires various additional payments. Under federal law, these employees are entitled to overtime at one-and-one half times their “regular rate” for any hour worked over 40 in a workweek. (And more on “regular rate” below.) Again, some states impose greater obligations, e.g., daily overtime after 8 hours in a day. Depending on their state of employment, non-exempt employee also can be required to have certain (paid) rest breaks and (unpaid) meal breaks. Unpaid meal breaks generally must be at least 20 minutes, though multiple states require at least a 30-minute break. And rest break time is counted as work time. So back to the “regular rate.” It is not just the employee’s hourly rate. Per the FLSA, it includes “all renumeration for employment paid to, or on behalf of, the employee” unless specifically excluded by the statute. Statutory exclusions include gifts, payment for occasional periods when no work is performed (e.g., vacation), discretionary bonuses, insurance/retirement contributions, and premium rates. The most challenging are discretionary bonuses, especially in this time of hiring competition. Just saying something is discretionary doesn’t make it discretionary. To be discretionary, the employer must have sole discretion until at/near the end of the period to determine both whether to pay a bonus and the amount of the bonus. And the bonus cannot be subject to any contract or promise. With this standard, it is exceedingly difficult -- if not impossible -- to have both a true discretionary bonus that also meets the goal of attracting and retaining employees. Indeed, the Department of Labor even issued a recent opinion letter that a signing bonus must be part of the regular rate if it is linked to some timing requirement. In other words, if you offer an employee $5,000 to come work for you but it is payable only after 90 days of employment, per the DOL, that bonus must be considered as part of the regular rate for those 90 days. Similarly, any attendance bonus would be part of the regular rate. Once something is part of the “regular rate,” the complications only increase. There is a (not straightforward) mathematical equation to determine how to calculate overtime, but to be sure, the overtime rate is more than one-and-one-half times the base hourly rate, which is often the rate that employers are using, incorrectly. It may not be that much more in terms of actual dollars, but it can create potential wage claims (which come with the allowance of fee recovery for

According to the Bureau of Labor Statistics, the unemployment rate as of the end ofMarch 2022 declined to 3.6 percent. And the number of unemployed persons decreased by 318,000. As for specific sectors, the BLS reported job growth in leisure and hospitality, professional and business services, retail trade, manufacturing, social assistance, and construction. So, in sum, the numbers tell us that the hiring efforts continue, and anecdotally, I understand that recruiting and retaining employees continues to be a core “opportunity” for employers, as the corporate group likes to say. Employers are using various incentives in these efforts, which can have some unintended consequences in the wage and hour arena. But before I get there, I wanted to go back to basics in terms of making sure your compensation systemworks. The first step is employee classification. Are employees “exempt” or “non-exempt,” and this, basically, means: are employees subject to certain wage and hour rules like overtime. By default, employees are non-exempt, meaning they are subject to certain protections including the payment of overtime. However, an employer can take the position that certain jobs are exempt, meaning that they are not required to pay overtime. If challenged, it would be your burden as the employer to prove the exempt classification is correct. Under the Federal Labor Standards Act (FLSA), exempt employees need to be paid a regular salary and meet certain job duty requirements. (There are some exceptions to the salary rule, such as in IT and for teachers, but they are beyond my time here.) The salary threshold under the FLSA is $684/week (or about $35,600 annually). But some states impose greater salary requirements, so you need to look for those as well. And you need to make sure these individuals really do earn a

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