Start-up companies face a number of unique employment law issues. Many times they are not large enough to fall within the purview of certain state and federal employment laws, but as they grow, they will become subject to these laws and may not be fully aware of them. Generally, start-ups do not have a professional HR staff or a general counsel to consult. Therefore, it is important that emerging company owners have a thorough working knowledge of the various employment laws that can trip them up.
Every employer is subject to state and/or federal wage and hour laws, despite size. These laws can be complicated and confusing. If they are violated, employees can get a windfall recovery of back wages, penalties, interest and attorney fees that can eclipse the wages owed. The points below are intended to address some of the most common wage and hour questions.
Is Your Employee “Exempt” or “Non-Exempt?”
Whether or not an employee is entitled to overtime pay depends on whether they are “exempt” or “non-exempt.”
There are three narrow categories of white-collar exemptions: Executives (supervisors), administrative employees, and professional employees. In addition, outside sales professionals and certain highly paid computer professionals may be exempt. Each job description has to be carefully analyzed against the legal test. The exempt employee must be paid on a bona fide salary basis regardless of hours worked. All other employees are non-exempt and must be paid hourly and paid overtime. There are some slight, but important differences between state and federal law on many of these exceptions. The following deals just with federal law, so consult your legal counsel about differences in the law depending on where your employees are located.
Exemptions: Executive, Administrative, and Professional
Federal wage and hour laws exempt certain types of employees from additional overtime pay for working more than 40 hours in a week. Once an employee qualifies as “exempt,” the employer must be careful to maintain this exempt status or else risk overtime claims and related penalties under federal or state statutes. The common term for the most frequently used exemptions is “white collar”. There are additional exemptions for computer professionals and outside sales that will be addressed in subsequent blogs. The white collar exemptions require that the employees meet two tests: (1) the salary basis test and (2) the duties test.
Salary Basis Requirements
White collar exempt employees must be paid on a salary basis. Paying an employee on a salary basis requires that the employee receive a predetermined amount of pay each week, regardless of the quality or quantity of hours worked. Thus, employees must receive the same salary whether they work more or fewer than 40 hours a week. An improper salary deduction may destroy the employee’s exempt status. Employers are always permitted, under state and federal law, to give employees additional compensation beyond salaries.
Minimum Salary: Current federal regulations require exempt employees be paid a salary of at least $455 per week ($23,660 per year).
Permissible Deductions From Salary: Federal law permits deductions from an exempt employee’s salary only in the following circumstances:
- Absences of one day or more for personal reasons other than sickness or accident;
- Absence of a day or more due to sickness or disability if made in accordance with established policy;
- Disciplinary suspensions for violations of safety rules of major significance;
- Disciplinary suspensions for infractions of workplace rules (harassment, drug and alcohol violations);
- For partial work weeks in the initial or terminal weeks of employment; and
- When leave banks are exhausted, deductions from salary may not be made for partial-day absences, except:
- In particular circumstances set forth elsewhere in the regulations (generally allowing salary reductions in FMLA qualifying circumstances and prohibiting other salary deductions, except in full-day or whole-week increments);
- For public employees only, deductions from salary for partial-day absences may be made if there is an established policy of public accountability; and
- Public employer may make deductions for partial day absences when the employee who takes an unpaid leave for personal reasons or illness does not use accrued leave, and provides for deductions for furlough absences authorized by law.
In addition to the salary basis requirements, exempt employees must also meet duties requirements. Because federal and state laws differ slightly regarding duties tests, the employer must comply with both when evaluating an employee’s status as exempt or nonexempt. Here are the general “duties” rules for the exemptions.
Executive Exemption: In addition to being paid a salary of at least $455 per week, an executive must:
- Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision;
- Customarily and regularly direct the work of two or more full-time employees or their equivalent; and
- Have the authority to hire, fire, promote or demote other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, promotion or demotion or any other change of status of other employees.
The regulations also recognize as exempt any employee who owns at least a 20% equity interest in the enterprise in which the employee is employed. This exemption will cover many start ups.
One difficult issue for retailers has been that supervisors in retail establishments frequently have both exempt supervisory duties and non-exempt duties. Under the federal rules, a retail supervisor can maintain exempt status even though the supervisor also performs tasks such as serving customers, cooking food, stocking shelves, and cleaning the establishment, if the manager’s (or assistant manager’s) primary duties include activities like scheduling employees, assigning work, overseeing product quality, ordering merchandise, managing inventory, handling customer complaints, authorizing payment of bills or performing other management functions. This is particularly true where the individual has the discretion to decide when to perform exempt work versus non-exempt work.
Administrative Exemption: In addition to being paid a salary of at least $455/week, an administrative employee’s primary duty:
- Must involve office or non-manual work directly related to the management or general business operations of the employer or its customers. Examples in the regulations include work in areas such as finance, accounting, budgeting, auditing, quality control, purchasing, marketing, personnel management, public relations, or database administration as well as those who act as advisors or consultants to the customers.
- Must include the exercise of discretion and independent judgment with respect to significant matters. Factors to be considered include, for example:
- Whether the employee can formulate, interpret or implement management policies.
- Whether the employee has the authority to commit the employer to matters of significant financial impact.
- Whether the employee can deviate from established policies without approval.
- Whether the employee is involved in planning long or short-term business objectives.
- Whether the employee investigates and resolves matters of significance on behalf of management.
- Whether the employee represents the company in handling complaints, etc.
- The regulations clarify that “exercise of discretion and independent judgment” does not necessarily mean that the employee has final authority. Rather, “discretion” may consist of recommendations for action, rather than the final decision to take that action. Furthermore, discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or standards in manuals.
- Additionally, the new federal regulations provide useful examples applying the standards. These examples include insurance claims adjusters, certain employees in the financial services industry, team leads for major projects, certain executive assistants, human resource managers, and purchasing agents.
Professional Exemption: In addition to being paid a salary of at least $455 per week, a professional must either:
- Have a primary duty of performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, and whose duties require consistent exercise of discretion and judgment. The regulations discuss a number of examples and include the following positions within the exemption if they involve completion of a degree program: certified medical technologist, registered nurses, dental hygienists, physician’s assistants, accountants, chefs, athletic trainers, and licensed funeral directors.
- Or have a primary duty requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. This includes musicians, composers, cartoonists, painters and some journalists.
Computer Professional Exemption: In addition to the other white collar exemptions, computer professionals who do not possess the requisite degree or education to qualify as professionals, may be exempt under a separate category. Be sure to check state law to determine whether it contains a similar exemption or any differences from the federal version.
- Compensation: To qualify for the special computer professional exemption under the FLSA, employees must be paid at least $27.63/hour if paid on an hourly basis, or must meet the minimum salary of $455/week required for the professional exemption if paid a salary. In other words, they may be paid on an hourly or a salary basis.
- Primary Duties: If the compensation prong is met, the employee’s primary duties must include some or all of the following work:
- Application of systems analysis techniques and procedures, including and consulting with users, to determine hardware and software functional specifications;
- Design, development, documentation, analysis, creation, testing or modification of computer systems or programs based on and related to user specifications;
- Design, documentation, testing, creation or modification of computer programs related to machine operating systems; and / or
- A combination of the above duties, the performance of which requires the same level of skills.
Outside Sales Exemption: A sales employee is exempt only if he or she:
- Is customarily and regularly engaged away from the employer’s place of business making sales or obtaining orders or contracts for services or facility use. The regulations emphasize that the outside sales employee is “an employee who makes sales at the customer’s place of business or…at the customer’s home.” It does not include sales by mail, telephone or Internet unless that contact is incidental to the personal sales call.
- Has the primary duty of making sales or obtaining orders or contracts for services.
Retail or Service Establishment Employees Paid by Commission: Under the FLSA commission employees of retail or service establishments (RSEs) are exempt from the FLSA overtime requirements if at least 50 percent of their earnings are from commissions and they are guaranteed pay in excess of time and one-half the minimum wage for all hours worked.
Highly Compensated Employees: The federal regulations include a special, streamlined rule for employees paid $100,000 or more annually. These highly-paid employees are automatically exempt if they perform non-manual work and if they have any identifiable executive, administrative or professional function as described in the standard duties tests discussed above. In other words, they do not have to meet all the elements of the standard duties test to qualify for exempt status.
In conclusion, it is critical for startup employers to pay their employees correctly since a small violation can carry huge penalties and create financial difficulties for a small business. Consult your legal counsel or an HR consultant who is an expert in wage and hour law. Pay your employees correctly, do not “cut corners” in this area of the law!
Chrys Martin focuses her practice on employment law and employee benefits issues. She offers her clients 31 years of experience in complex employment and ERISA litigation, including class actions. Chrys applies her depth of knowledge in litigation to counseling employers and training management in pragmatic risk avoidance.