Finances and Taxes

7 Payroll Mistakes to Avoid With Your Salaried Non-Exempt Employees

Jennifer Carsen Recovering employment lawyer 
colleagues sitting around a table laughing

The idea of overtime pay is pretty straightforward—non-exempt employees get extra pay when they work more than a regular 40-hour workweek—but actually getting it right in real life is a lot more complicated. 

This is particularly true when you’re dealing with salaried non-exempt workers. In some ways they may seem different than hourly workers, but assuming that the overtime rules don’t apply to them is a dangerous misconception.

Read on to find out seven common—and potentially costly—mistakes small employers make when it comes to salaried non-exempt workers, and how to avoid them.

Mistake #1: Assuming an employee is exempt if they are paid on a salary basis

“If an employee gets paid a regular salary each week, I don’t have to pay them overtime, right?”

Wrong. 

It’s true that an employee must generally be paid on a salary basis (or, in some cases, a fee basis) in order to be exempt from the overtime requirements, but that by itself is not enough. The employee must also:

Mistake #2: Assuming that salaried managers are always exempt

Wrong again. In order to satisfy any of the duties mentioned above, a worker’s title doesn’t matter too much—what’s really important is what the employee spends most of the day doing.

In order to qualify for the executive exemption, the employee must:

  • Manage the business, or a department or division of the business, as his or her primary duty;
  • “Customarily and regularly” direct the work or two or more other full-time employees or their equivalents; and
  • Have the authority to hire or fire other employees—or, the employee’s suggestions and recommendations as to hiring, firing, promotions, or other employee status changes are given “particular weight.”

In order to qualify for the administrative exemption, the employee’s primary duty must:

  • Be performing office or non-manual work that is directly related to the management or general business operations of the employer or the employer’s customers; and
  • Include the exercise of “discretion and independent judgment with respect to matters of significance.”

That last part, in particular, is important and misunderstood by many employers. This is not surprising, given that “discretion and independent judgment” is a squishy term with a lot of room for interpretation. 

The DOL’s Wage and Hour Division has issued additional guidance on the administrative exemption, but the bottom line is that it’s not a gimme to qualify. An employee needs substantial authority and autonomy in order to be considered an administrative exempt worker. 

Mistake #3: Miscalculating the regular rate of pay

Non-exempt employees must be paid overtime at a rate of at least 1.5 times their regular rate of pay when they work more than 40 hours in a given workweek. The “regular rate of pay” can trip employers up sometimes—it encompasses more than just a standard hourly rate. 

This means you cannot, in some cases, simply divide a salaried non-exempt employee’s weekly pay by 40 and call it good when you are calculating time-and-a-half for overtime purposes.

The DOL recently updated—for the first time in more than 50 years—the definition of “regular rate” for overtime purposes, and it now includes a lot less than it used to.   

As of January 15, 2020, employers can exclude the following from an employee’s “regular rate of pay”:

  • The cost of some parking benefits, wellness programs, onsite specialist treatments, gym memberships and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance;
  • Payments for unused paid leave, including paid sick leave or paid time off;
  • Payments of certain penalties imposed by state and local scheduling laws;
  • Reimbursed expenses—including cellphone plans, credentialing exam fees, organization membership dues, and travel—even if the expenses are not incurred “solely” for the employer’s benefit;
  • Some sign-on bonuses and longevity bonuses;
  • The cost of office coffee and snacks provided to employees;
  • Discretionary bonuses; and
  • Contributions to benefit plans relating to accidents, unemployment, legal services, or other similarly undesirable future events 

Calling a bonus a “discretionary bonus” does not necessarily mean it’s discretionary from the DOL’s point of view. Also, under the new rule, call-back pay no longer needs to be “infrequent and sporadic” to be excludable from the regular rate, but it still can’t be excluded if it’s prearranged.

Fall in love with modern payroll

Mistake #4: Not requiring salaried nonexempt workers to track their time

Salaried non-exempts are, by definition, not exempt from the overtime pay requirements. This means that you need to track their hours in order to know when they are working beyond a regular 40-hour week. Along similar lines…

Mistake #5: Not paying salaried nonexempt workers for all time worked

When an employee is salaried and exempt, it doesn’t matter if that person comes in a little early, leaves a little late, or checks email or voicemail at home in the evenings or on the weekends. 

It does matter, however, for salaried non-exempts. Non-exempt workers must generally be paid for all time worked, even if that time is a little here and a little there outside regular work hours, or during a regularly scheduled meal or rest break

You even have to pay for time that an employee works in violation of direct orders not to (you can discipline the person for doing this, but you still need to pay them for that time).

Note, too, that time an employee spends on-call is sometimes required to be paid, depending on how restricted the employee is during that time. 

Mistake #6: Failing to keep proper timekeeping records

When there’s a dispute about overtime payments or other wage/hour issues, it often comes down to the employer’s word versus the employee’s word. And if you don’t have complete, accurate timekeeping records, it’s very hard to establish that you paid someone properly.

Paying someone a salary doesn’t mean you can overlook this crucial recordkeeping task. You need to track the hours of all non-exempt employees and maintain appropriate records. 

You don’t have to do it all yourself, though: Gusto offers time tracking support for salaried non-exempts, so we can take part of this task off your plate.

Mistake #7: Not paying your salaried non-exempt employees overtime

This mistake, of course, is what happens as a result of making one or more of the mistakes discussed above—and it’s a biggie, both because of the penalties that can apply and because overtime errors often affect multiple employees. 

Don’t hesitate to get help if you need it

Mishandling pay for your salaried non-exempts is just one of many common wage/hour mistakes small businesses tend to make. But it’s avoidable. Get help from a qualified employment law expert in your area if you need it (especially if you have questions about Mistakes #2 and #3 above—these areas can get particularly complicated).

Jennifer Carsen
Jennifer Carsen Jennifer Carsen is an enrolled agent and recovering employment lawyer. She creates memorable content for small business owners and HR professionals on various topics, including employment law and benefits compliance.

Comments

*Required fields

Your email address will not be published.

Back to top