A common misconception many small business owners have is that if an employee is paid a salary (instead of by the hour), the business does not have to pay the employee overtime. This is a critical mistake that can get you and your business into significant trouble. Paying an employee a salary is just ONE element necessary to exempt the employee from overtime.
The Fair Labor Standards Act (“FLSA”) requires that employers pay their employees a minimum wage and, for employees who work more than 40 hours a week, overtime pay of at least 1.5 times their regular rate of pay. However, the FLSA, exempts “any employee employed in an executive, administrative, or professional capacity” from overtime pay requirements.
Generally, an employee must meet each of the following three tests to be classified as “exempt”:
1. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed, known as the “salary basis test”.
2. The amount of salary paid must meet a minimum specified amount, known as the “salary level test”. Currently, the minimum weekly salary is $684.
3. The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations, known as the “duties test”.
i. Executive– an executive employee’s duties generally include managing the business, or a branch or department within the business. The employee must be able to either hire and fire other employees or their recommendations about employment decisions must be taken into consideration by the business. Typically, these employees will supervise the work of other full-time employees.
ii. Administrative – Here the duties of the employee will include office work related to the business’s management or general operations and employee has ability to exercise independent judgement.
iii. Professional – a professional employee is one whose job requires specialized or advanced knowledge. This includes jobs such as accountants, attorneys, doctors, engineers, etc. The fact that the employee is an accountant or an engineer by itself does not exempt the employee, the professional employee’s job duties require that employee perform work in the capacity of their respective profession.
Only after satisfying all three tests will the employee be exempt from overtime pay. If the position does not satisfy all three tests and the employee is not paid overtime, your business risks punitive damages, penalties, court costs, and attorney’s fees that will significantly impact your bottom line much more than paying overtime in the first place.
If you have any questions or concerns with respect to the way you compensate your employees and whether they are exempt or non-exempt, give us a call at 305-222-7282 to schedule a consultation.
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