Classify employees correctly using the exempt wages definition

One complicated issue that is often handled incorrectly is the classification of employees. Some companies are choosing to classify their employees as exempt. They may feel this practice will save them from the minimum wage laws. What is the Exempt Wages definition and how can you use it correctly?

payroll-300x200 Classify employees correctly using the exempt wages definition

The exempt wages definition can be found at https://www.dol.gov/whd/overtime/fs17g_salary.htm. Please review this fact sheet for additional information.

To qualify for exempt status the following must apply:

The exempt wages definition is found in Section 13(a)(1) of the FLSA. It provides an exemption from both minimum wage and overtime pay for employees. They must be employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for the exemption, employees must meet certain job duties tests. They also must be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status. To qualify for the exemption an employee’s specific job duties must meet all of the regulations.

In addition to the job duties requirement. there are also salary requirements.

Salary Basis Requirement

To qualify for exemption, according to the exempt wages definition, employees generally must be paid at not less than $455 per week on a salary basis. These salary requirements do not apply to outside sales employees, or teachers. Exempt computer employees may be paid at least $455 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour.

Being paid as an exempt employee means the employee is regularly paid. This can be paid at determined frequencies but should be consistent. It should also be paid if the employee does any work for the company. Deductions may be made if the employee does not show up for work such as for vacation, sick or non-paid time off. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available. This is an important consideration. If there is down time and the employee is able to work, they still must be paid.

The company may lose the exemption if there is an actual practice of making improper use of deductions from the employees pay. Documentation must be maintained by the company for all deductions from payroll for exempt employees.

Contract Employees

As a small business owner you are always looking for a way to save money and improve cash flow. One method you may use is to avoid payroll taxes by using contract employees instead of w-2 employees. However you have to be very careful if you choose this method. The IRS has very strict rules governing the use of contract laborers. You may find these detailed at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. (more…)