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One of the biggest questions potential new hires want answered revolves around their compensation and whether they’ll be paid an hourly wage or annual salary. Making this determination isn’t always cut-and-dry, however.

The Fair Labor Standards Act (FLSA) gives set rules and offers protections for hourly and salaried workers based on a variety of factors. Small and mid-sized businesses (SMBs) need to abide by these rules when establishing a pay structure or auditing existing employee compensation.

In this post, we’ll take a look at the pros and cons of hourly and salary compensation, how the FLSA determines exempt and nonexempt status, and offer guidance to help SMBs make the right determination.

The Pros and Cons of Hourly vs. Salary

In general, most workers want to be exempt and receive a set salary they can count on for every paycheck. Employers like it because it’s a controlled cost, whereas unexpected overtime for hourly positions can erode profits. There are benefits and disadvantages in either scenario, however.

Hourly nonexempt workers are guaranteed a specific rate of pay for every hour worked and can receive overtime pay. But their paychecks can dip if hours are reduced, and they may not receive the same benefits as salaried employees.

Exempt workers who receive a set salary have the security of a consistent paycheck and may receive better benefits, but there’s no overtime pay. Someone could work 60-hour weeks or more to accomplish their required workload and not receive any additional compensation.

No matter what the preferences of workers or employees are, however, FLSA regulations still need to be followed.

What is the FLSA?

In addition to setting rules regarding exempt and nonexempt workers, the FLSA also establishes the minimum wage, youth employment and recordkeeping standards. This federal law guarantees overtime pay for hourly employees that exceed 40 hours of work in a workweek at a set minimum rate.

The federal minimum wage is currently set at $7.25 per hour, which includes Wisconsin. But several states and cities have a higher minimum wage which employers must adhere to. Illinois, for example, sets their minimum wage at $8.25, while the rate inside the city of Chicago will increase to $12 per hour in July 2018.

The FLSA also has established rules concerning the exemption of executive, administrative and professional employees.

Which Types of Businesses Need to Comply with FLSA Rules?

In general, the Department of Labor (DOL) does not have exceptions for businesses, including SMBs. If a company has an annual growth volume of sales totaling $500,000 or more, it must comply. In addition, employees of hospitals, businesses providing medical or nursing care for residents, public and private schools, and public agencies are covered by the FLSA regardless of revenue.

However, even if an employer isn’t covered, some employees may still require FLSA compliance if they’re involved in interstate commerce, for example. There are many nuances within the laws and knowing all the ins and outs of the DOL ruling is complex, so seek the expertise of a qualified HR expert for clarification.

Which Job Titles Qualify for Exemption?

Many employers wish it were as easy as delineating exempt and nonexempt status based on an employee’s job title. But job titles do not determine whether employees qualify for exempt status. For an exemption to apply, an employee’s job duties and salary must meet specific requirements provided in the DOL’s regulations.

How Can I Know Which Employees Qualify for Exemption?

There are various employee categories that can qualify for exempt status. One such category is the executive employee exemption. This term can be confusing to many employers because some organizations consider “executives” as those who occupy the C-suite.

But the DOL characterizes executives as employees who earn a minimum of $455 per week and whose primary duties are managing an enterprise — or a division or subdivision of a company — with two or more full-time direct reports. If that employee also has the authority or a strong influence on the hiring and firing of other employees, they’ll generally be categorized as an executive as well. By this definition, many managers and supervisors could qualify in addition to chief officers or directors.

On the contrary, an “executive assistant” may not necessarily qualify for exemption even though the term appears in his or her title. If the person doesn’t meet the executive requirements as defined by the FLSA or the requirements for administrative exemption, such as work directly related to the management or general business operations of the employer or customers (in addition to other specifications), they must be classified as nonexempt and receive an hourly wage.

Additional classification categories include employees who have special professional, creative, computer or outside sales roles — each having its own test for exemption qualifications.

It can all be very confusing and, even when an employer strives to comply, they often miss details and end up miscategorizing a number of employees.

What are the Risks of Noncompliance?

Unfortunately, some employers don’t discover they’re in violation of FLSA until a DOL auditor shows up in their lobby. If it’s discovered that an employer is in noncompliance, considerable fines will likely be issued. In addition, if an employee discovers that he or she should have been paid hourly, but was classified as exempt, back pay for unpaid overtime could be awarded if a lawsuit is filed. Such a ruling could result in significant financial implications to an organization.

How Can an HR Services Provider Help with FLSA Compliance?

By partnering with an HR services provider, you can help mitigate the risks of noncompliance. A provider should initially conduct a full-blown compliance review which will include I9 forms and FLSA, a handbook evaluation, job description reviews, an assessment of personnel files and more to establish where compliance concerns are most prevalent. Then, they’ll provide tools and assistance for taking corrective measures. As part of an agreement, your provider will continue to consult in these areas and thoroughly assess any new hires to ensure continued compliance.

The rules aren’t black-and-white, so check out our Workplace Compliance Guide by clicking the link below.  

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A collection of articles from the McClone team with the helpful knowledge and insights to ensure your organization is well protected.