How Are You Paying Non-Exempt Employees?

July 29, 2019

Paying non-exempt employees tends to be more complicated than paying their exempt counterparts. Tracking hours worked, calculating each employee’s earnings and staying compliant with overtime and minimum wage laws requires diligence. It gets more complicated when you opt to compensate these employees using an uncommon payment basis. Non-exempt employees are usually paid hourly – but other payment options exist that may be more appropriate for your company’s needs, even if they are a little confusing at first.

Determining Exemption Status

Classifying employees as exempt vs. non-exempt is a challenge for a lot of employers. Before making any decisions about pay schedules for non-exempt workers, make sure that you’re classifying them correctly.

Exemption status relates to whether or not an employee is subject to the overtime and minimum wage requirements outlined by the Fair Labor Standards Act. An employee’s work arrangement must pass two key tests to qualify as exempt. One is that the employee must be paid on a salary basis and must earn at least $455 per week.

The other test criteria relate to job duties, and they vary by role type. Exemptions are available only for workers, “employed in a bona fide executive, administrative, or professional capacity … or in the capacity of outside salesman,” per the text of the FLSA. Academic administrators and elementary and secondary teachers are also exempt. Employees in certain computer-related positions are automatically exempt. 

Any employee who doesn’t pass those exemption tests is non-exempt. These employees are (for the most part) covered by FLSA protections around overtime pay and minimum wage.

Ways to Pay Non-Exempt Employees

Paying salaried, exempt employees is fairly straightforward. A worker’s salary usually gets divided by 52 or 26 to determine the person’s weekly or biweekly pay. The amount of the person’s paycheck should be about the same each time, discounting bonuses and other fluctuations. An exempt worker who takes home $2,000 per week will earn the same amount for a 40-hour work week as for a 60-hour work week. (The same worker would also earn $2,000 for a 20-hour workweek, although employers may require exempt employees to work 40 hours per week.)

Non-exempt employees are typically paid an hourly rate. At the end of a pay period, the worker’s hourly rate is multiplied by the number of hours worked during that period. Any hours exceeding 40 per week must be paid at an overtime rate of 1.5 times the worker’s hourly rate.

That’s how the vast majority of employers pay non-exempt workers, but there are other options beyond the standard hourly rate. 

Salary: It’s uncommon but legal to pay non-exempt employees on a salary basis. The DOL approves of paying non-exempt workers on a salary basis as long as minimum wage and overtime provisions are met.

To determine the weekly wage for a salaried non-exempt employee, the employer would divide the employee’s annual salary by 52. That amount, multiplied by 1.5, represents the employee’s overtime rate. The employer must also make sure to calculate how the salaried amount breaks down in terms of the employee’s hourly earnings, to make sure it’s no less than minimum wage.

Day rate/piece rate: Non-exempt workers in construction and other production-based jobs are sometimes paid a day rate, also called a shift rate. In this scenario, the employer pays the worker a set rate for a day of work. The employer may require day-rate employees to work at least eight hours, or may allow them to leave early if they’ve completed their duties in less than eight hours.

Like a day rate, a piece rate is sometimes used in industries like construction and manufacturing, where an employee’s output can be easily quantified. A non-exempt employee who is paid piece rate is paid per piece or per task. A baker could be paid a set amount for every dozen rolls made, for example. As with paying a day rate, paying a piece rate is a strategy employers use to motivate employees to work quickly. The more pieces they produce, the more they earn. 

Again, day-rate and piece-rate employees are still owed overtime pay for any hours worked in excess of 40 per week. Overtime pay in a given week is calculated by determining the employee’s total pay for that week, then dividing it by the number of hours worked to find the worker’s average hourly rate.

Commission: Non-exempt employees may be eligible for commissions. Whether the employee is salaried or paid hourly, the DOL requires that commissions be included in the calculations to determine an employee’s regular rate. That’s especially important for non-exempt workers because the regular rate is used when calculating overtime.

If you have questions about how to pay non-exempt employees, you’re in good company. There are a lot more possibilities than many employers realize, and all that choice can be confusing. Join us for our free webinar Complex Wage and Hour Calculations on August 15 at 12:00 PM EST for a discussion on this topic and other unique payroll situations. Do you have specific questions about your business? Contact Commonwealth today. Our team is here to help.

Compare Plans View Demo Self Assessment Subscribe to Insights