Webinar: Classifying & Paying Exempt Employees

This session was presented on October 20, 2022

Presentation Slides


In the last few years, there has been more attention than ever on proper classification of employees. So how do you know if you’re doing it correctly? In this session, we’ll look at the most commonly used white-collar exemptions and how to determine if any of them apply to your employees. We’ll also discuss how to avoid jeopardizing the exemption and common mistakes such as improper salary deductions. Join us to find out what every employer should know about properly classifying employees.

Session Transcript:

Kara Govro (00:00:04):

Hello everyone. Good morning, good afternoon. We are here today to talk about classifying and paying exempt employees. My name is Kara Govro, I’ll be your presenter. I am the senior legal analyst here and practiced employment law for a while before joining the team. So a lot of the things we’re talking about today, I have some degree of personal experience with. Certainly researching them plenty, but also bringing some wage and hour claims. So I hope to impart to you how important all of this is and give you some good tips and information from the related laws to help you make sure you’re getting this process done right.


So our agenda … We’re not getting to the agenda yet, we’re getting to webinar 101, so just some housekeeping items. We will record this whole thing and we’ll send you the slide deck, and we’ll do that within about a day. So sometime today or tomorrow, you will get this recording, and that will be asked a couple more times no doubt in the chat. And we will answer that question again.


We’ve got a couple little polls, we’d love for you to participate in those. And then if you want to direct a question to me, use the Q&A box as opposed to the chat box, and I will monitor that throughout. And also if we have time at the end, I’ll take more questions from it at that time as well.


Okay, so with that said, let’s take a look at the agenda. So first up we’re going to talk about the Fair Labor Standards Act because that’s really where all of this stems from. Then we’ll spend the bulk of our time talking about how to determine whether an employee is legitimately exempt or not. Then we’ll talk about salaries, deductions that you can and can’t take, and schedules for exempt employees. And then if we’ve got time, we’ll we’ll do some more Q&A, which I expect that we will.


So let’s get started by talking about the FLSA. So the FLSA is the Fair Labor Standards Act. It was passed into law in 1938 and it’s tagline was that it was putting a ceiling on hours and a floor on wages. This was during the Great Depression and FDR declared it the most far-reaching, far-sighted program for the benefit of workers ever adopted in this or any country. And back then we didn’t really have many labor laws to speak of. Pretty much the only one we had at that time I think was the National Labor Relations Act and possibly some laws specific to railroads. So that wasn’t wrong. This was the beginning of laws that to private employers.


So at the time, it set the minimum wage at 25 cents per hour and the maximum number of hours per week at 44, at least before overtime had to be paid. It also put a lot of limits on child labor, which we did not have before. Previously you could send a six-year-old into a coal mine for 42 hours a week at 10 cents an hour, and that was legal. So this law, in many ways, really was about protecting children and their right to an education, or at least their ability to get an education. As opposed to be worked very hard in very dangerous situations for many hours per week. So that was an interesting thing that the FLSA did.


The FLSA itself, Fair Labor Standards Act is not very long. I printed the whole thing out once and I think it was only about 56 pages. So in terms of federal legislation, it’s not that hefty. It regulates minimum wage, overtime pay, record keeping, youth employment standards like we just talked about, child labor. It doesn’t regulate vacation or holiday leave. It doesn’t require that you give people Christmas off.


It doesn’t create any meal or rest breaks. It does have a bit of a rest break rule. If you give rest breaks, it has a few things to say about them, but it doesn’t require that you provide them. And it doesn’t say anything about premium pay for working on the weekend or anything like that. Pay raises, fringe benefits. So if you’re familiar with laws like that or policies like that, it’s either coming from something your company has just decided to do on its own or in many, many cases, state law.


States have definitely got into regulating a lot of this stuff and have been for quite some time. And of course, some states do more regulation than others. Certain states you’re only going to find two or three employment laws that would suggest that you should have a policy about them. Other states like California, Oregon, New York, Washington, Massachusetts, they’re going to have a lot.


So we’re here to talk about exempt employees and the Fair Labor Standards Act tells us when an employee can be exempt from minimum wage, overtime, and record keeping and when they cannot. But what does it mean to be exempt? Well, according to the dictionary, it means you’re either freed from an obligation, duty or liability to which others are subject. Or number two, more relevant, you are not subject to certain federal workplace laws or protections, especially those requiring overtime compensation.


So today we’re really looking at the exemption from overtime specifically, and we’re going to spend most of our time talking about the white collar exemptions. We’ll get to that in a moment.


What’s important for you to understand about classification is that it doesn’t matter if you do it wrong on purpose or out of ignorance or just strictly by accident. You might have even tried to do it correctly but failed. It’s ultimately on you. Ignorance of the law excuses not, if we get a little Latin involved. Because being non-exempt and getting overtime is considered a significant benefit for employees and an important protection for employees.


If it’s done incorrectly, the FL … Not the FLSA. The DOL is going to be looking at you, the employer. It’s really your obligation to prove that someone is properly classified as exempt if that question arises and if you’ve done it incorrectly, it doesn’t matter whether you meant to do it or it was an accident or anything like that, you’re still going to be on the hook. And the cost of misclassification can be significant.


So generally, if you’ve misclassified someone as exempt from overtime and they go to the DOL or a private attorney and they say, “I don’t think I should have been exempt. I think I was a non-exempt employee and I’ve been doing overtime for the last two years that they never paid me for.” And they win, they’re going to get back pay for the overtime you owed them. They’re going to get liquidated damages, which means doubling that back pay. They’re going to get interest on the money that wasn’t paid. There will likely be some penalties involved.


And then there will probably also be the equivalent state laws, and in that case they can probably double what they take home. Because they’ll get the federal penalties and back pay and liquidated damages and all that jazz, and they’ll also get anything that the state entitles them to. You can actually stack these things. I’ve done it and I had to write the judge a memo about why I was allowed to do it. So imagine one set of laws getting you in trouble and then imagine another set of laws on top of that also getting you in trouble.


So here’s just a little sampling. This is from a case I had very early in my career. An employee was hired to do work for $800 per week. She was going to go on tour with this entertainment group for 10 weeks, and she did in fact do that. She was at the time someone who’d been … She was young, she was working minimum wage restaurant jobs in the state of Oregon. I think our minimum wage around that time was maybe $8.75 an hour or something. So $800 bucks a week was a lot, and she was happy to take that job and they just communicated via email and she signed up.


Well, she went on the tour and the owner was paying her in checks. He’d write her a weekly check every week for $800 bucks and she saved them all up to cash when she got home and they all bounced. So she actually just came to me to write a letter to her employer saying, “Hey, you need to issue some new checks because these bounced and I need my money.”


But she tells me her story and it becomes very apparent that she was misclassified, either as an independent contractor or as an exempt employee who’s working for a salary of $800 per week. Either way, it wasn’t legal. So we did the math and we figured out that she hadn’t even received minimum wage based on how many hours she’d worked. She also hadn’t received any of the overtime that she should have been entitled to the tune of almost $9,000. So this adds up. So she gets minimum wage that she was owed, she gets penalties for the minimum wages, which basically doubles it. Then there’s the state level penalties as well. In the end, this ended up being an $80,000 case just for this $8,000 that bounced. So these things definitely stack and they can add up.


All right, so just to get us started with a poll question, and I’m just going to have you guys answer this in the chat if you will. I’m just curious, what percentage of your workforce is currently classified as exempt? We won’t say whether they’re correctly classified, but what percent would you say are classified as exempt right now? Just a ballpark if you want to use the chat.


All right, so I see some 90%, some 40%, some very low numbers. 99%, wow. So some of these really high numbers where you’ve got 99% or 90% or even 80%, that does give me pause. It could be totally right, could be totally right, but 90% sounds really high. 90%, I would be surprised to find a workforce that’s properly classified as 90% exempt. Again, could be correct, it really depends on what you do. But 50, 50 might be more common. If you are a large manufacturing facility or grocery store, the numbers should be much lower.


But thank you for those answers. That’s great to see and we will move on. Thank you for sharing again. And we’ll start talking about how to determine exempt status, and then you could start thinking about whether you think you’ve done it right. Or in many cases, whether the people before you did it right. I know a lot of HR practitioners. You may not even be just an HR practitioner. You’re probably in many cases wearing a lot of hats. You might be wearing the payroll hat and the administration hat.


So it can be a lot to take in and be responsible for. So hopefully what we’re looking at today will help you out. But often you’re coming into that role and you’re just sort of adopting what has been done beforehand. So maybe you’ve come into a company where almost everybody’s classified as exempt, but they shouldn’t be. But do you have time to get into that? Do you have time to look at it? And do the owners or the people above you really understand the degree of liability that might be there? So we’ll learn more about that now.


So we are going to talk mostly about the white collar exemptions today, and those are the ones that are used most often and probably the ones that you use most. Of course, they are applicable to administrative, executive and professional employees, as well as outside sales, computer and highly compensated. We’ll get into that. Each of those categories though has a duties test that has to be passed just right out of the gate.


So if you’re classifying an employee as exempt, they need to have certain duties that they do on a regular basis as part of their job. If they don’t have those duties, we don’t go to the next step. They also need to be paid at a certain salary level. So there’s a minimum amount that they need to be paid, and they need to be paid that salary on a salary basis. We’re going to get into what all of these things mean specifically.


So I pretty much just said all of this, but for an exemption to apply, an employee’s job duties must meet all of the Department of Labor criteria. So again, we’ve got administrative executive professional, and they’re actually two kinds of professional employees. Then we’ve got outside sales, computer employees and highly compensated employees. We’ll talk through each of those, but they all have a unique test.


As for the salary level, our executive, administrative, most professional and salaried computer employees need to be paid $6.84 per week as a minimum, and that needs to be paid on a salary basis. If we’re going to pay a computer employee on an hourly basis, that’s an option we have, an interesting option. It needs to be at least $27.63 per hour. This highly compensated exemption is super interesting, and those people need to be paid at least $107,432 per year, and $6.84 of that per week needs to be on a salary basis. And then we do have outside sales employees, and to me they feel like a totally different category, but we lump them in with white collar, at least as far as the statutes are written. So they do not have a minimum salary level.


What it means to be paid on a salary basis, which is also a requirement, is that the employee is paid a predetermined amount on a weekly or less frequent basis, meaning you can’t pay them daily or twice a week. Most of the time you’re probably paying people every two weeks or twice per month, occasionally once per month. And that amount isn’t subject to reduction because of how many hours they worked or what work they did or how much work they did.


So this is the rub. If we make someone an exempt employee, we don’t have to pay them extra for overtime. But if they only work 36 hours per week or 36 out of the 40 that we expect, we can’t take a deduction. We still have to pay them the regular full amount. So there is some give and take here.


One of you just asked, “What if they run out of sick days and they’re still out of the office?” There are some exceptions. We’ll get to that a few slides down the road. That’s a good question. So there are situations where you can take a deduction, but they are the exception to the rule.


So now we’re going to talk through each of the white collar exemptions and what they actually require as far as the duties test, and you may be surprised by some of these. You may discover that you’ve got some people who are classified a certain way who don’t actually meet the criteria.


So first up, perhaps the most commonly used is the executive exemption. So this is the one that you’re most likely applying to your managers, and what it requires is that the employee’s primary duty is the management of an enterprise in which they are employed or a customarily recognized department or subdivision. So it doesn’t necessarily mean that they manage a very small group within a group. It really needs to be a whole department or a whole, again, recognized subdivision. So just managing a couple people within a subdivision doesn’t count. This person also has to have the authority to hire, fire, or promote employees or make recommendations that are taken into serious account. So maybe you can’t just fire someone independently.


I’ve got a couple people who report to me. Honestly, I don’t know if I could fire them independently. I should probably need somebody to sign off on that. But if I went to my boss and said, “I want to promote this individual.” They would take my recommendation very seriously. Or if I said, “I need to fire this individual, they’re off the rails.” They would take that very seriously as well.


This individual also needs to customarily and regularly direct the work of two or more, the equivalent of two or more full-time employees. So if you are a very small employer, you might have a manager who only manages one other full-time employee. They don’t count as an executive. You might be able to squeeze them into the next exemption that we’re going to talk about, but they would not count as an executive for the purpose of making them exempt under this law. They have to direct the equivalent of two or more full-time employees.


An area where I think this probably gets misused a lot is employers just have manager in somebody’s title and therefore they think, “Okay, I can just apply the executive exemption.” But in many cases, that person doesn’t really qualify.


So the example I always like to use, sandwich shop. We’ve got either an assistant manager or maybe a night manager. This person is technically the person in charge, the PIC during the hours that they’re there, but they don’t really have the authority to change the day-to-day work of the employees they’re managing. They certainly don’t have the ability to hire or fire employees. Maybe we’re looking at an assistant night manager who’s a 19-year-old kid or someone who’s even still in high school, but they’re the most responsible high schooler in the group. The fact that they have manager in their title does not mean that they qualify for the executive exemption.


I would certainly say number one and number two would probably not be met in either of those situations. So we want to not go crazy with this one and be really disciplined about making sure that we meet all three of those criteria. And it’s not like if you meet two of the criteria but not three, you’re only in two-thirds as much trouble. You’re in all the trouble even if you know get partway there.


There’s another type of executive exemption, and that’s for business owners. So if someone owns a bonafide, meaning real, 20% equity interest in the company and they’re actively engaged in its management, then we don’t have to pay them minimum wage or overtime. As is the case with many startups, there’s no money. It’s just four people who got together with what was in their savings account and started a business and there’s going to be a good long while probably with no money, and it’s okay that they’re not themselves minimum wage or overtime because they are business owners.


If right out of the gate that startup decides to hire someone as an administrative employee and they’re like, “Oh, we don’t have the money to pay you. Do you just want to volunteer and we’ll get you back later?” That’s almost certainly not going to be legal. Might get away with it, but not likely to be legal.


All right, so if someone doesn’t meet the management, the executive exemption, they might meet the administrative exemption. Administrative is also very commonly used. So this person’s job is office or non-manual work. That’s key. We’re not applying this to anybody who does actual labor. Directed to the implementation, it’s very snooty sounding, of management policies or general business operations of the company or its customers. And their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.


I know it’s really annoying to read the slides, but each of these words is really important. So I wanted you guys to have it straight from the horse’s mouth here. So related to the implementation of management policies or general business operations. This is HR, this is payroll. You can think of those categories. But their primary duty includes exercise of discretion and independent judgment with respect to matters of significance.


So this doesn’t mean everyone in HR, it doesn’t mean everyone in payroll. It probably means your HR director and your head of payroll. Certainly your CFO is going to qualify for this exemption. But if you have HR assistants, they’re probably not using a lot of discretion or independent judgment. They’re probably doing what you tell them and following certain processes and procedures.


Likewise, if you’ve got accountants doing the money stuff, they’re probably not using discretion and independent judgment. Could they? Maybe, yeah. I mean, you might trust them to use that if needed, but is it needed or are they just number crunching in accordance with the rules you give them about how you want the numbers crunched? So again, you want to be careful with this one as well. Make sure you’re realistically applying it and checking all of those boxes.


Next up, we’ve got the professional exemption, and it has two types. It’s got the learned professional and the creative professional. Talk about both of them. So first up, we’ve got our learned professional and their primary duty is the performance of work requiring advanced knowledge, predominantly intellectual and character, and includes the consistent exercise of discretion and judgment. Not just occasional, but consistent. And that advanced knowledge needs to be in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction.


What that generally means is a four year degree or more, so four year college degree. This is not trade school and it’s not a two year certification program for something. It’s maybe biology to work in a lab, just is suggested by the picture there. You needed a specialized skill, you had to earn it through quite a long time in college. This also applies to doctors and lawyers and dentists.


Many federal courts have taken these cases over the years to determine whether certain individuals apply as learned professionals, and the results are not all completely consistent. But quite a few rulings have said that EMTs don’t count, paramedics don’t count, social workers. Many nurses, most paralegals do not count as learned professionals. So paralegals go to school for a couple of years, but they do not count as a learned professional. And I know paralegals are like, “But we do all the work and we know the laws.” Yep, I get it, but you didn’t go to law school, and basically that’s what this exemption requires.


Some of you were asking me questions in the chat. If you could move that over to the Q&A, it’s just a lot easier for me to read that one. But some of you were saying, “Accountants and CPAs.” You’re going to have to run the test on them. Like I just discussed at length, are they using discretion? This requires consistent exercise of discretion and judgment. So you’re going to have to decide. You’re going to have to apply the test yourself.


There’s no across the board rule that accountants are qualified or not qualified. So yeah, again, you’re just going to have to apply the tests and use your own independent discretion and judgment to determine whether these people qualify. And when in doubt, just make them non-exempt. That’s really the takeaway at the end of this entire presentation, is if you’re not sure if they’re exempt, just make them non-exempt because the cost of doing it wrong is too high.


Okay, so the other kind of professional we have is a creative professional, and this person’s primary duty is the performance of work that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. So think actor, musician, composer, novelist, painters, cartoonists. Those people are definitely going to be creative professionals.


There was an interesting court case. There was a graphic designer who worked for a plaintiff’s attorney who did personal injury work. So that involves getting a lot of professionals to testify, gathering a lot of evidence, and the graphic designer was hired to basically make a PowerPoint presenting all of this to juries. And the employer, the plaintiff’s attorney, wanted this person to be exempt as a creative professional because they were getting to be original and talented in the field of making a PowerPoint because they were a graphic designer.


But the court said no because that person was following pretty explicit instructions from the plaintiff’s attorney about what they wanted and how they wanted it to look. And if the plaintiff’s attorney had hired another graphic designer, the output would have been very similar. So there wasn’t really room for invention, imagination or creativity there.


All right, so a couple of you have said, “Why wouldn’t social workers?” Well, they might. Did they go to four years of school? Do they have a master’s degree? Are they using discretion, et cetera, et cetera? They might qualify, but you need to do an individualized analog. Same as someone said, “Furniture designers.” I don’t know. Are they designing furniture based on fairly specific criteria or are they going wild and they can build a 12 foot tall couch if they so desire?


Again, you got to put them through the test yourself. There is no absolute yes or no on these. They’re pretty much balancing tests. And you can always hire an attorney to give you a legal opinion and walk you through this and if they’re comfortable defending the choice you’ve made, then I’d certainly be more comfortable with that. But I can’t tell you just offhand whether a particular job title will be exempt or not. And that’s also how the DOL feels. The DOL does not have a list that’s like, “These people are exempt. These people are not exempt.” Every time, you got to do the test.


So the highly compensated exemption is perhaps the strangest. This applies to people who are really well paid but maybe don’t do really high level work. So the example I tend to use here is maybe an executive assistant who is maybe directing the work of another executive assistant or two other executive assistants. Like in a hedge fund, somewhere where the money is really just flowing. So it requires that this person’s primary duty is non manual work. Again, they’re probably in an office. They are customarily and regularly performing at least one duty of an exempt executive, administrative or professional employee.


So maybe they manage the work of two or more full-time employees, and so that puts them in the exempt executive category, but they don’t do that other stuff. Or maybe they’re heavily involved in a particular bit of policy administration but don’t otherwise fully qualify as exempt being administrative. But they’re paid a ton of money, so we’re basically less concerned that the employer is taking advantage of them. So if they’re making at least $107,432 per year, with $6.84 of that every week, and they do one of those other types of things, just one thing out of the list for an exempt administrative professional or executive employees, then we can say they are a highly compensated employee and use the exemption for them.


So somebody asked, “What about software engineers?” Well, they’ve got their whole own category. So it’s called computer employees, which is way too broad. It should probably be more like software employees and hardware employees or something. But here we go. So there are fairly specific criteria on this. Application of systems analysis, design, development, analysis or testing of computer systems or programs or design testing, creation of computer programs related to operating systems. So really this is for software engineers. It’s not for just your IT people.


So you might have someone absolutely brilliant working in IT, fixing computers, helping people download software or get the malware off their computers or anything like that. They are not exempt under this. Almost certainly, I should say, almost certainly not exempt under this category. So this is very much for, again, programmers, computer engineer types who are working Microsoft, Intel, et cetera. Probably not your IT people. Granted the head of your IT department very possibly qualifies under the administrative exemption. So you don’t have to use this exemption just because the person does something with computers. You can certainly look at the others.


This one is interesting, I mentioned earlier. Because if someone qualifies into this, you could choose to pay them by the hour and they could still qualify as exempt. So what that means is you pay them at least $27.63 per hour every hour, and then when they go over 40 hours per week, you can still keep paying them as long as you’re paying at least $27.63 per hour. You don’t have to stack overtime on top of that as well. But you can do either or on this one. So you could pay by the hour or you could do the salaried exempt route.


Outside sales is our last white collar exemption. This is the one that I think is a little bit of an odd duck. So this is for people whose primary duty is making sales or obtaining orders or contracts for services or the use of facilities, and they’re customarily and regularly engaged away from the employer’s place or places of business. And place or places of business does include that employee’s home office.


So they literally need to be out in the field. We do mean outside, out of doors, going door to door, customer to customer, potential customer to potential customer. So if they’re sitting at home and doing what we you call inside sales, calling potential customers on the phone, that does not qualify here. And this one does not have any salary requirements. It doesn’t have a minimum and it doesn’t require that you pay on a salary basis. Customarily and regularly means much more than occasional, but doesn’t necessarily have to be constant.


A lot of states have come up with a number because they know that that is uncomfortable. Customarily and regularly, what the heck does that mean? So certainly I think every state on the West Coast, like Oregon, Washington, California, all have their own rule about where a percentage of an outside sales employee’s time has to actually be outside, so out of their home. And I think they range between 60 and 90% of the time depending on which state you’re looking at. And I don’t know them offhand, so don’t ask. But you can definitely look that information up. We do have it available. So the states are a little picky about this one at times.


So there are some other exemptions, particularly for commissioned employees. So if we’re going to make someone commissioned. And this is inside sales could apply to someone in retail for instance, or a service establishment, their regular rate of pay needs exceed 1.5 times, so overtime or the overtime rate of the applicable minimum wage for every hour worked in a work week if they work over 40 hours in that work week. It’s a super interesting rule.


So once they hit let’s say 42 hours in a work week, then every single hour needs to math out to one and a half times the applicable minimum wage. And more than half of their total earnings in a period, it could be almost any period you choose, must consist of those commissions that you’re offering them.


And there are specific exemptions for car dealerships, which a couple of you have asked about. We’re not covering those today, but you can certainly read about them. The Department of Labor might actually have a fact sheet on car dealership exemptions and car sales exemptions. I suspect they do, and we may have information on the platform available as well. But yeah, there is an exemption for that written right into the law.


And there are some other exemptions as well. So we exempt certain police and firefighters, agricultural employees have exemptions, casual babysitters. Live-in domestic employees have their own rules. And a bunch more, like boat salespeople, livestock auction workers, seamen on American vessels, airline employees in some cases, et cetera. So if you wanted to look at the whole list, you certainly could. I feel like it’s not unreasonable. Most people are at least vaguely familiar with the types of jobs that can be exempt from minimum wage and overtime. But there is a list right there in the law that you can check out and I do believe it’s on the platform as well.


All right, so we’re going to have another chat/poll question and I’m just curious how confident you all are in your classifications. You may have inherited them, as we discussed. You may not actually be the HR person. Maybe you’re in payroll and you’re just here because it sounded interesting. So you can opine on whether you think this has been looked at lately or not.


Some of you are mostly confident. Ooh, somebody says a 100%, 99%. Love it. Great to hear. Some of you are not very confident. So hopefully this is helpful for you. Again, we will send a copy of the presentation and the slide deck. So you’ll have this for referent. Oh, I love how many of you are confident. That’s great, that’s great. But it never hurts to think about it some more and know that you still feel comfortable with it.


All right, so if you have an exempt employee, what do we need to know about getting them paid?


Salary basis, so we’ve talked about this. Salary basis means we are paying them the same amount every pay period regardless of their output or how many hours they did. There are some exceptions. We’ll get to those on the next slide. But in general, what do we need to know about this?


Well, you can expect these employees to work more or less than 40 hours per week. If you want to hire an exempt employee and say, “We expect 48 hours a week. That is our expectation.” You can do that. Or you can say, “We expect 40,” and maybe they do 36. If they don’t meet your expectations, your option is to discipline them, to talk to them about it, to say, “You’re not meeting my expectations, this is not acceptable job performance.” And work through that with them through your on paper disciplinary process.


What you don’t want to do is just take that deduction. They only work 36 hours instead of 40 and it doesn’t fit into a permissible deduction category, you need to just pay them and then get them in trouble for not meeting your expectations. So you can track hours, but we don’t want to be doing it for the purpose of calculating pay because we’re not functioning that way with exempt employees in most cases.


I said base bonuses on projects completed or objectives met rather than hours worked. Again, that’s a best practice just so if you ended up in trouble with this person, you could say, “Look, we weren’t super focused on their hours.”


There are ways, however, that you can pay extra for extra hours worked. It’s a little bit complicated under the law and it’s also a little bit squishy. So I don’t get into it here because honestly I would tell most employers not to try to do it because I just think it would be too easy to screw up. But it is possible to base bonuses on extra hours if you really, really want to. You can figure out how. But in general, I think it’s a good idea to use project completion or objectives met. If you do want to use a bonus system, which of course you don’t have to. You’re not required to provide bonuses. And of course we want to be really careful when we’re making pay deductions. So let’s take a look at those permissible deductions.


So we can take a deduction from an exempt employee’s weekly salary to, one, offset amounts paid for serving as a witness or juror or for military pay. Let me be really clear, this is not that you can take a deduction if they’re gone for jury leave. So if they’re out to jury leave for six hours or a full day, we cannot take a deduction just because they’re absent.


What this is saying is that you can take a deduction for the probably $15 that they’re going to get paid by the county in order to show up for jury duty on that day. A lot of counties pay some piddly amount. If you really want to reduce their pay by the piddly amount that they’re being paid by the county, that’s legal. You can take a deduction for unpaid FMLA or most medical leave.


There should be an asterisk on that because you want to check on medical leaves. The law is kind of hazy on whether it only applies to FMLA or whether you could apply it to similar leaves as well. But if someone is using FMLA even intermittently, you can take deductions for that.


You can also take a deduction for disciplinary suspensions of one or more days, not a half day. If it’s a full day or more, you could take a deduction. But this needs to be in your company policies. This needs to be written. It can’t be a spontaneous, “This is what we decided your punishment is.” It has to be written down somewhere that you would actually cause someone to have a day or longer suspension for violating your policies or for a major safety infraction. If you don’t have that in a policy, you don’t want to do it.


You can take a deduction for partial weeks when they start and when they finish employment, when they’re terminated or leaving or resigning. So if they start on a Wednesday, you can pay them for Wednesday, Thursday, Friday. If they leave on a Tuesday, you can not pay them for Wednesday, Thursday, Friday. But this is not like before and after vacation or anything like that. This is literally when they start working for you and stop working for you.


You can take deductions if someone is gone for a personal reason, but only if they’re gone for a full day, not a partial day. And same with sickness or disability, like someone asks very early on. You can take a deduction if they’re gone for a full day, not a partial day, not two hours. You can’t take a deduction for two hours if they’re sick. And you can only do this last one for sickness or disability if you have a bonafide paid leave plan.


So what the heck is a bonafide paid leave plan? Well, it provides defined sick leave benefits. It’s communicated to all eligible employees. It can’t be a secret plan. It has to operate as described within your policy. It needs to be administered impartially. So you can’t be discriminatory about it. You can’t be like, “Oh you’ve been … Your work hasn’t been great lately, so we’re not giving you sick leave. Or we’re only giving sick leave to certain employees that we like the best or whatever. Or only men or only to women or whatever.”


The plan can’t be designed to evade the requirements that exempt employees be paid on a salary basis. So really whatever your plan is, it needs to be in good faith. If you write the plan just so you can take a deduction at some point in time and you’re really squirrely about letting employees use it, that could get you in trouble certainly down the road.


And then, and this is from a Department of Labor opinion letter, which is not technically law. The plan needs to provide at least five days per year, five paid days that can be used for sickness. So you can have a PTO plan. If you have a joint PTO sickness, whatever, it’s a bank of leave that employees can use for anything, that’s fine as long as it’s five days or more paid per year and they could use it for illness. You can’t deny it for illness and tell them they can only use it for a trip to Disneyland.


If it meets all of these criteria, then if an employee has used up all of their sick leave or all of their joint PTO that qualified and they are sick again later in the year after using up all their days and they’re gone for a full day or longer, then you can take a deduction from their salary.


All right, let’s look at impermissible deductions. So this is everything else basically is considered an impermissible deduction. So we’re not going to take a deduction for a partial day absence. Can you use PTO to fill the hole? Yes. If the employee has PTO available and they’re gone for two hours, let’s say maybe for a personal reason, they’re going to go get their taxes done. You can require that they use hours out of their PTO bank to fill that hole. Absolutely. However, if they don’t have any time in their PTO bank to fill that hole, too bad. You’re going to have to pay them for it anyway.


If they’re gone without your permission, you could certainly discipline them for being gone. You don’t necessarily have to let them go see their accountant in the middle of the day for a couple of hours. You could just deny their leave request to be gone. But if they’re gone anyway, your recourse is to discipline them, but you still need to pay them for that time.


You don’t have to pay for jury duty if they’re gone for an entire work week. So again, if they’re gone for a full day, you need to pay for it. If they’re gone for three full days, you need to pay for it. But if they’re gone for a whole work week and they don’t do any work, then you don’t have to pay them.


Granted, I think most exempt employees if they’re absent for an entire week for jury duty, are probably going to do some work. They’re either going to be on their phone during lunch or the breaks or they’re going to be working at night or whatever. So that doesn’t just mean work during the work day. It means any work at all.


We can’t take a deduction for temporary military leave and we can’t take deduction if the absence was caused by us, the employer. So if we close the office for bad weather, the email server goes down, you have nothing for them to do. Those are things that you need to continue to pay for and not take a deduction from their pay.


If you’ve got appropriate policies, you can potentially make them use their PTO. Once again, if you’ve got a good policy that says, “PTO will be used if we have to close for bad weather.” That’s fine. But if you don’t have that policy or they don’t have PTO available, you can’t take the deduction.


All right, I think we only have one slide left and then we’ll get to Q&A because I know a lot of you have good questions there. So exempt employees, we talked about this already, but they can be held accountable to how many hours a week you want them to work. It’s not just like you hire someone and they’re exempt and therefore they only have to work 28 hours if they want or 36 hours if they want. That’s not how it works. You can absolutely have expectations.


You can even track their time and that might make sense. And I know there are a lot of environments where you’re actually billing for employees time, so you need them to track their time really carefully so you can bill your client for the time your employees spent doing the work. So that is fine, we can track. We just don’t want to use that information to take deductions unless, of course, it’s that two hour deduction. It’s not a deduction because we’re filling it in with PTO.


So you can have standards, absolutely. It’s just that if those standards are violated, oftentimes your recourse is only to have the conversation, call it discipline and get them in trouble and talk about it.


Okay, that was pretty much it. Let’s take your questions now because there are a bunch. All right, I’m going to … Give me just a moment to look at these.”If a salaried team member wants to take PTO for a half day, is it okay to allow them?” Absolutely.”Can you deduct from PTO to adjust for consistently short worked weeks or partial sick days?” Yes, you can. Of course if it’s consistently short weeks, you should probably talk to the employee about what’s going on and see if you can’t solve that problem. And again, really you want your policies to say what you’re going to do.


So you’ve got a PTO policy, it’s a big bank, it covers sickness, it covers personal reasons for leave. If you’re going to use that when an exempt employee misses hours, it should really say that. If it doesn’t say that now, can you still do it? Probably. Is it legal? Probably. But if you end up in litigation about this kind of thing, it’s just so much better to have it written in a policy. So I just strongly encourage you to write out what your plan is.


Someone wanted to clarify if the PTO bucket includes sick and vacation, is it still bonafide? Yes, as long as all five days or more could be used for illness, it can be bonafide. Again, it needs to meet all those other criteria. And I would say, one of primary use, one of the things about that criteria is that it’s not, wasn’t listed there. But you need to let them use the sick leave. If you give them, let’s say a bank of 10 days, but you never let them take the time off, they call you and they say, “I’m sick right now, I feel bad. It might be COVID.” And you’re like, “You sound fine, come in anyway.”


Even though they had PTO available to use for illness, if you end up finding yourself in litigation and they explain that they never get to use their sick leave to the Department of Labor or the plaintiff attorney or whatever, that’s not probably going to look like a bonafide plan because you’re not executing it in good faith. So you got to be careful about that.”If the employee is out of sick leave, can we dock them for a partial day for doctor’s appointments or personal appointments?” You can’t dock them. No, no, not for partial days. If they were gone for a full day and had no sick leave left, then you could take a deduction. If it’s a partial day, you just need to pay them like regular. That’s just the way it goes.


That’s the benefit you get for having … That’s the trade off, I should say, for the benefit you get. With that exempt employee, you don’t have to pay them overtime when you work them really hard for a while and they’re doing 50 hours a week. But if they’re out of sick leave and they need to go to the dentist on a Thursday afternoon and they’re gone for three hours, you cannot take a deduction, not for a partial day. And that is spelled out on the slide. So when you get this deck, you should be able to refer back to that. It very specifically says, “For full day absences if you have a bonafide sick leave plan and it’s been used up.”


All right, let’s see what else we got here. Okay, here’s a really good question. “If we have been unknowingly misclassifying an employee, what’s the appropriate remedy? Obviously correcting them moving forward, but do we owe them back pay to when they were originally misclassified?”


So if you’re pretty sure that you’ve misclassified someone, you should call a lawyer. I hate that that’s the answer, but that really is what you should do. Because you are going to owe them back pay from when they were originally misclassified.


Under the law, what you owe them. You may be able to reduce some of your liability by getting ahead of it and having an attorney come in, look at what’s owed and draft a letter. It’s possible that you could get the employee to release some claims or at least think that they’ve released some claims so they’re less likely to sue you about it. Because of course when we say, “Oh, we’re reclassifying you and we’re cutting you a check for $4,000.” That’s going to tip the employee off that something was awry. And if they call a plaintiff’s attorney and say, “I’ve just been misclassified and they gave me back pay for the last six months, but not more than that. Do I have anything to go on here?” The plaintiff’s attorney is going to say, “Heck yeah. We can get back wages for two years, possibly even three years if it was willful.”


In your example, if you didn’t do it on purpose. So probably two years of back pay, and then possibly state law on top of that. So I would strongly encourage you to get the advice of an attorney if you need to fix someone who’s misclassified. And just so you know, we get asked this question all the time, it’s not uncommon, it’s not just you. And hopefully if you talk to an employment attorney in your state, they’ll have dealt with this at least once before as well, or you can look for someone who has and get their opinion on that.”Can a non-exempt employee be salaried, they would still be paid for overtime?” Yes, there is such a thing as a salaried, non-exempt employee. There are specific rules about them, generally including that they are still paid for overtime. So we call it that the easy button. If you’ve got someone who is very consist … They’re non-exempt, but they’re consistently working exactly 40 hours or occasionally here and there to go to the dentist 38 hours. If you just want to say, “Yep, we’re just going to pay that person the same amount every week.”


You can hit the easy button. You could call them salaried non-exempt. But generally they do need to also be paid for overtime if they do it. So you still need to track their time. You still have that overtime obligation. Good question.


All right, so someone asked, “What if the employee does not have leave yet?” Okay, good one. If they’re a brand new employee but you have that bonafide paid leave plan set up that they will be able to use within a reasonable amount of time, then you can apply the permissible deductions as they were listed on the slide. But the rules about full day and whatnot still apply. And I think the DOL, I think has a fact sheet that’s really specific about that and we may have it the specifics on the platform as well. But basically if that plan exists, you can take deductions for full day absences before they are eligible to use that plan.


All right, let me take a couple more here. “Is there a certain amount of time they have to be at work for it to be considered a partial day? For instance, if they work one hour and then leave?”


Great question. That is a partial day, so you need to pay them for the full day, even if they’re only there for one hour and then leave. Again, if they’ve got PTO, you know can fill in the next seven hours or however long their shift was if your policy says that you’re going to do that. If they don’t have any of that time left, then you’re just basically stuck paying them for the rest of that day and can potentially discipline.


All right, let me take one or two more. A lot of you have really great questions that I would encourage you to submit to us because I’m not going to be able to get to all of them. And it looks like lots of you are asking pretty similar questions. And I will answer one more time that we are going to send the entire presentation, including all the audio and the slide deck within about one day. So a number of you have just asked that.”What do we do if we have an exempt employee that doesn’t fall into any of the classifications listed as exempt?”


Well, that’s a situation where you’re going to want to reclassify them and quite possibly call an attorney to figure out what your liability is. I did not discuss every single exemption. I suspect we have them all listed on the platform. If not, we probably have a link to where they are all listed in the law. So it’s possible you have some employees who are exempt but not as white collar employees, which is what we spent most of our time on today.


So there are a few others. They’re fairly unique, but this is a common problem, which is why I’ve got a whole hour long webinar on it. A lot of employers think that they can, for instance, just pay someone a salary and if the employee agrees to accept a salary that they become an exempt employee and that’s all it takes.


The example I gave early on with my client, her employer may not have even realized that what he was doing wasn’t legal and she didn’t realize it wasn’t legal either and so they both just assumed that the salary was fine and made it fine and the fact that she had agreed to it in email made it fine. But you can’t wave these requirements. An employee can’t wave it. You the employer can’t wave. It doesn’t matter if you both sign in blood, the DOL says there’s a way to be exempt and everyone else is non-exempt, and that’s sort of just the way it is.


All right, let’s see if I can wrap up here. Okay, we’ll end with this. Is there a preapproved certification number for SHRM? Unfortunately, we do not have a pre-approved number for you, but this definitely qualifies so you can self-submit for SHRM credit or HRCI credit.


All right, thank you all for joining me today. Again, we’ll send you a copy of all of this within the next day or so and you can certainly learn more on the platform. Have a wonderful rest of the week and I look forward to seeing you all at a webinar in the future.

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