Wages and Hours - Minimum Wage and Overtime Exemptions: Payroll Implications
Not all employees are entitled to minimum wage or overtime pay. This section of Wages and Hours provides HR and payroll professionals with details the myriad payroll issues surrounding a determination of who is entitled to minimum wage and over time pay and who is not.
The following employees, among others, are exempt from both the minimum wage
and overtime pay requirements:
In order to establish that employees are exempt under the executive, administrative, and professional employee exemptions, the employer is required to establish the following:
Salary Basis Test
An employee is paid on a salary basis rather than on an hourly basis. To meet this payroll requirement the employee must receive a full salary for any workweek in which any work is performed without regard to the number of days or hours worked. The salary basis test does not apply to practicing doctors, attorneys and certain teachers.
Salary Level Test
An employee makes at least the minimum salary level required by the exemption. To meet this payroll requirement the employee must be compensated on a salary basis at a rate not less than $455 per week ($23,660 annually). Administrative, professional and computer employees may be paid on a fee basis at a rate that would amount to not less than $455 per week. Computer employees may also be paid an hourly rate of not less than $27.63 per hour.
Duties Test
An employee performs the type of duties required by the particular exemption sought to be relied on by the employer as follows:
Executive Exemption.
To meet the payroll duty requirements for the executive exemption the following must apply:
Administrative Exemption.
To meet the payroll duty requirements of the administrative exemption the following must apply:
Professional Exemption.
To meet the payroll duty requirements of the professional exemption the following must apply:
Note: To qualify for the creative professional employee exemption the employee's primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
As used for purposes of determining white-collar exemptions, primary duty means the principal, main, major, or most important duty an employee performs. Determination of an employee's primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole.
Salary Basis
As previously described, salary basis means an employee regularly receives a predetermined amount of compensation each payroll pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. However, exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee's predetermined salary (for example, because of the operating requirements of the business), that employee is not paid on a "salary basis." Thus, if the employee is ready, willing, and able to work, payroll deductions may not be made for time when work is not available.
Permissible Payroll Deductions from a Salaried Employee
Payroll deductions from the salary of an exempt employee are permissible under the following circumstances:
Note: An employer is not required to pay the full salary in the initial or terminal week of employment or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.
Improper Payroll Deductions from a Salaried Employee
The employer will lose the exemption if it has an actual practice of making improper deductions from an employee's salary.
If an actual practice is found, the exemption is lost during the time period of the payroll deductions for employees in the same job classification working for the same managers responsible for the improper payroll deductions.
Factors to consider when determining whether an employer has an actual practice of making improper payroll deductions include, but are not limited to, the following:
Note: Isolated or inadvertent improper payroll deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
Safe Harbor
Based upon safe harbor provisions, employers will not lose an exemption if the employer complies as follows:
However, the exemption will be lost if the employer willfully violates the
policy by continuing the improper payroll deductions after receiving employee complaints.
Fee Basis
Administrative, professional, and computer employees may be paid on a fee basis rather than on a salary basis. A fee basis means that an employee is paid an agreed sum for a single job, regardless of the time required for its completion. A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made.
To determine whether the fee payment meets the minimum salary level requirement to qualify for the exemption, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. For example, an artist paid $250 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if 40 hours were worked.
The following employees, among others, are exempt from both the minimum wage
and overtime pay requirements:
- Executive, administrative, and professional employees. (See White-Collar Exemptions section.)
- Outside sales employees.
- Certain skilled computer professionals.
White-Collar Exemptions
The FLSA exempts executive, administrative, and professional employees from the minimum wage and overtime requirements of the FLSA.In order to establish that employees are exempt under the executive, administrative, and professional employee exemptions, the employer is required to establish the following:
Salary Basis Test
An employee is paid on a salary basis rather than on an hourly basis. To meet this payroll requirement the employee must receive a full salary for any workweek in which any work is performed without regard to the number of days or hours worked. The salary basis test does not apply to practicing doctors, attorneys and certain teachers.
Salary Level Test
An employee makes at least the minimum salary level required by the exemption. To meet this payroll requirement the employee must be compensated on a salary basis at a rate not less than $455 per week ($23,660 annually). Administrative, professional and computer employees may be paid on a fee basis at a rate that would amount to not less than $455 per week. Computer employees may also be paid an hourly rate of not less than $27.63 per hour.
Duties Test
An employee performs the type of duties required by the particular exemption sought to be relied on by the employer as follows:
Executive Exemption.
To meet the payroll duty requirements for the executive exemption the following must apply:
- The employee's primary duty must be to manage the enterprise or manage a customarily recognized department or subdivision of an enterprise.
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent (such as four part-time workers whose combined hours equal at least 80 hours per week).
- The employee must have the authority to hire or fire other employees or at the very least the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
Administrative Exemption.
To meet the payroll duty requirements of the administrative exemption the following must apply:
- The employee's primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers.
- The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Professional Exemption.
To meet the payroll duty requirements of the professional exemption the following must apply:
- The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
- The advanced knowledge must be in a field of science or learning.
Note: To qualify for the creative professional employee exemption the employee's primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
As used for purposes of determining white-collar exemptions, primary duty means the principal, main, major, or most important duty an employee performs. Determination of an employee's primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole.
Salary Basis
As previously described, salary basis means an employee regularly receives a predetermined amount of compensation each payroll pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. However, exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee's predetermined salary (for example, because of the operating requirements of the business), that employee is not paid on a "salary basis." Thus, if the employee is ready, willing, and able to work, payroll deductions may not be made for time when work is not available.
Permissible Payroll Deductions from a Salaried Employee
Payroll deductions from the salary of an exempt employee are permissible under the following circumstances:
- When the exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability.
- For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness.
- To offset amounts employees receive as jury or witness fees, or for military pay.
- For penalties imposed in good faith for infractions of safety rules of major significance.
- For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.
Note: An employer is not required to pay the full salary in the initial or terminal week of employment or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.
Improper Payroll Deductions from a Salaried Employee
The employer will lose the exemption if it has an actual practice of making improper deductions from an employee's salary.
If an actual practice is found, the exemption is lost during the time period of the payroll deductions for employees in the same job classification working for the same managers responsible for the improper payroll deductions.
Factors to consider when determining whether an employer has an actual practice of making improper payroll deductions include, but are not limited to, the following:
- The number of improper payroll deductions, particularly as compared to the number of employee infractions warranting deductions.
- The time period during which the employer made improper payroll deductions. The number and geographic location of the employee(s) whose salary was improperly reduced and the manager(s) responsible.
- Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
Note: Isolated or inadvertent improper payroll deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
Safe Harbor
Based upon safe harbor provisions, employers will not lose an exemption if the employer complies as follows:
- Has a clearly communicated policy prohibiting improper payroll deductions.
- Has a complaint mechanism within the policy.
- Reimburses employees for any improper deductions.
- Makes a good faith commitment to comply in the future.
However, the exemption will be lost if the employer willfully violates the
policy by continuing the improper payroll deductions after receiving employee complaints.
Fee Basis
Administrative, professional, and computer employees may be paid on a fee basis rather than on a salary basis. A fee basis means that an employee is paid an agreed sum for a single job, regardless of the time required for its completion. A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made.
To determine whether the fee payment meets the minimum salary level requirement to qualify for the exemption, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. For example, an artist paid $250 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if 40 hours were worked.
Outside Sales Exemption
To qualify for the outside sales employee exemption, both of the following tests must be met:- The employee's primary duty must be making sales (as defined by the FLSA) or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer.
- The employee must be customarily and regularly engaged away from the employer's place(s) of business.
Highly Compensated Employees
Highly compensated employees performing office or nonmanual work and paid a total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard duties test (see White-Collar Exemptions section).Computer Employee Exemption
To qualify for the computer employee exemption, the following tests must be met:- The employee must be compensated either on a salary basis or a fee basis at a rate not less than $455 per week or - if compensated on an hourly basis - at a rate not less than $27.63 an hour.
- The employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field performing the primary duties as following:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.
- The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.
- The design, documentation, testing, creation, or modification of computer programs related to machine operating systems.
- A combination of the previously mentions duties, the performance of which requires the same level of skills.
