01 Jul BOP Newsletter Summer 2022
BOP NEWSLETTER • Summer 2022
Salary Pay to Avoid Overtime: Does it Work?
by Rebecca Boartfield
“To avoid overtime, I’m just going to pay everyone a salary.”
We hear this phrase, or other iterations like it, a lot. And we’d love to say it was that easy. So many headaches and problems would just disappear if it were. Of course, it is not that easy (is anything when it comes to government regulations?). Sadly, paying an employee a salary does not, in and of itself, solve the overtime conundrum.
If you read no further in this article, know this: salary compensation is just a method of pay. It holds no other power as it relates to tracking employee hours, paying overtime, or having to adhere to other wage & hour laws that may be applicable.
The question of whether it is better to pay employees a salary really depends on a myriad of factors and hinges on your specific circumstances. This may vary between positions as well. Some could be salary and others not. There is no one right method for compensating employees so long as the rules, when applicable, are followed. The bottom line is this: overtime pay may still be required, regardless of the method you choose.
Before you make any decisions or changes, let’s take a closer look at compensation methods, some of the rules, how that may or may not affect overtime requirements, and what might be best for you.
While salary and hourly compensation are the most common methods of pay, there are more choices:
- Hourly Compensation: This is as straightforward as it gets. This method simply pays employees for each hour, or portion thereof, worked. This is easy to understand and administer.
- Salary Compensation: Payment on a salary basis means that an employee receives a predetermined amount of compensation on a regular basis such as weekly, bi-weekly, or monthly. This is usually regardless of the number of hours worked by the employee each week, or each pay period.
- Piece Rate: This is a system where an employee is paid a fixed amount for each unit produced or action completed. For example, an auto mechanic who is paid a certain amount per tune-up.
- Commission: This is a sum of money paid to an employee upon completion of a task, usually selling a certain amount of goods or services. This may be in addition to a salary or instead of a salary.
- Daily Rate: Employees are paid on a per-day basis as opposed to being paid hourly or salary. This is a flat rate for the entire day. For example, $400.00 per day.
To be clear, none of the above changes any overtime requirements. These methods simply change how an employee is compensated, which will only impact how overtime is calculated if it is worked.
On a federal level, the overtime trigger is 40 hours in a week. Anything over 40 hours in a week must be compensated at time and one half.
Some states, like California, have daily overtime triggers in addition to the federal weekly requirement. In those states, overtime is triggered for all hours worked over 8 in a day and/or hours worked over 40 in a week. Note: California actually has a complex set of overtime requirements which includes double time in some cases. A closer review of those laws is necessitated if you live there.
Wherever you are, it is imperative for all employers to know and understand their applicable overtime triggers and comply at all times.
The sole factor that determines whether overtime is applied or not is employee classification. We don’t mean full-time or part-time classification. We’re talking specifically about government classifications under the Fair Labor Standards Act (FLSA).
According to the FLSA, employees fall into one of two classifications: exempt or non-exempt. Exempt employees are excluded from having to be paid overtime, while non-exempt employees must be paid overtime.
“Salaried” is not a category for overtime purposes. Methods of compensation, as described above, do not determine the exempt or non-exempt status of employees.
Given that exempt employees do not receive overtime pay – they are exempt from the overtime pay requirements and calculations – don’t you wish you could arbitrarily make every employee exempt? Again, we wish it were that easy.
To qualify for exemption status, an employee’s job must meet the specific work duty criteria set forth by the FLSA and other state laws. The categories available under the law are: Executive, Administrative, Professional, Computer, and Outside Sales. To qualify, there are specific criteria regarding work duties for each category which includes:
- The amount of time spent managing/supervising/administrating
- The number of people managed/supervised
- The degree to which their primary duty includes the exercise of discretion and independent judgment with respect to matter of significance
- Hiring and firing authority
All of the FLSA’s requirements for exempt status are extensive, specific, and stringent and cannot be covered here in detail. For more details, click here.
For employees who truly meet exempt status, they generally must receive their compensation in the form of a salary or fee basis (computer and outside sales are exceptions). The salary or fee must be equal to or greater than $684.00 per week under the FLSA, but may be higher in states, such as California, that have their own, more rigorous rules.
Exempt employees are paid based on the job they perform, not the hours they work. Therefore, while employers do not have to pay overtime when they work more in a day or week, employers are restricted in being able to reduce an exempt employee’s pay when they work less. If an exempt employee works any portion of the week, they’re entitled to their full salary with few exceptions. Pay deductions for exempt employees are nuanced. For more details on this, please contact us.
By default, all employees are assumed to be non-exempt. In other words, they are not exempt from the overtime pay requirements and calculations. Non-exempt employees are to receive overtime pay, regardless of their method of compensation, any time their hours exceed the overtime trigger. The non-exempt classification applies unless the employer can show that the employee’s work duties meet the criteria for being exempt, as described above.
There is no rule that says non-exempt employees have to be paid a certain way. They can be paid a salary whether that’s weekly, bi-weekly, or monthly. They can also receive their compensation in the form of a daily rate, an hourly wage, piece rate, or commission. So long as you are paying a non-exempt employee at least minimum wage for all hours worked, you may compensate them at a rate and method of your choosing.
Furthermore, non-exempt employees must only be paid for time actually worked. This means that when employees are late, have to leave early, or take time off during the day, whether that’s a half or a full day, they are not required to be paid.
Unlike exempt employees who all have to be paid on a salary or fee basis based on their classification, not all non-exempt employees have to be compensated in the same manner. You can have some employees be paid hourly, some on a daily rate, or some a salary depending on what you think will be best for those positions and your business.
While exempt employees are protected from a variety of salary reductions for work not performed, non-exempt employees are not. If a salaried, non-exempt employee fails to work the full schedule required, then his/her salary can be reduced by the appropriate number of non-work hours. Be sure you have clearly established policies, in writing, explaining that you will avail yourself of this right to avoid confusion and arguments.
So…Does Salary Pay Avoid Overtime?
If you’ve read this far, you know it doesn’t. Maybe now the question is: what is the best method for paying a non-exempt employee?
For non-exempt employees, we do recommend hourly pay because it is simple, straightforward, and easy to understand and administer. The other compensation methods, while valid, do come with more complications to manage.
That being said, paying a non-exempt employee a salary often does have a psychological value for the employee. And, it can be administratively easy if overtime isn’t worked or if time-off deductions are minimal. This will depend on the employee – their attitude, their motivation, their general nature, etc. This may drive one employee to be more successful while another may abuse the privilege.
If you decide to pay your non-exempt employees a salary, follow these guidelines:
- Be clear how many hours per week the salary is based upon. It can be any number up to 40 hours.
- As mentioned, you can dock the employee’s pay for time not worked. Make it clear how you’re going to handle this when the employee works less than the defined schedule. In other words, what will you do if you define the salary as 34 hours per week and the employee only works 28 unexpectedly?
- Know that if the employee works more than the defined schedule, you must increase their pay. In other words, a salary based on 34 hours must be increased if the employee works 38 hours. A poorly defined salary will result in this happening frequently, which is not advised. Audit your employee’s hours to determine the most ideal number of hours to base the salary on.
- Don’t forget that any hours over applicable daily and/or weekly overtime triggers must be paid at time and one half (or double time, as the case may be in CA for certain situations).
- Once the above is established, put it in writing to ensure everyone is on the same page.
There are misconceptions and misunderstandings about paying employees on a salary basis as it relates to overtime. Avoiding overtime pay is not as simple as “just pay everyone a salary.” It’s time to bust that myth once and for all. Spread the word; tell your colleagues. If overtime is an issue for your business, look for other ways to solve it or prevent it. Short of being able to classify someone as exempt, which is limited and fairly rare, you have no other choice.
Q: I interviewed and offered someone a position at my business. Turns out, she is currently employed by a nearby business associate who is also my friend. The information she provided states she will not be leaving his office for another couple of months, and she has asked me not to contact her employer. As a friend, I feel like I should, but, as an employer, I need to respect her confidentiality. Are there any laws that address this? Am I allowed to tell him?
A: That is a tough situation. Unfortunately, there is no law on this one way or another. Whether or not you withhold this information from the other business associate is entirely up to you.
In general, most would consider keeping it confidential as being the right thing to do even when no law requires that. Things could get messy if you told this employer and he ended up firing her as a result (or taking other adverse actions). That is why people want these things kept confidential – one never knows how the current employer will respond, and nothing prevents them from ending employment when they learn someone took a job elsewhere. It’s a risk. If something like that happened, the individual you hired could stir up problems for you, even if that didn’t rise to the level of a lawsuit or legal action.
In my opinion, your responsibility/obligation as an employer is greater than your loyalty to your friend. I would hope that your friend would understand the need to keep your business free of potential harm and damage even if it means not being as forthcoming as a friend.
Q: Is it legal for me to ask an employee not to share their wage with other employees? I know they talk, and I can’t do anything about that, but can we at least request that from someone?
A: As a result of the National Labor Relations Act and other state and local laws, employees are allowed to discuss their wages, working conditions, and benefits with each other. Since this is a protected right, employers should not take steps to prohibit those discussions. This would include asking or requesting them to not share this information with others.
Q: We will be closed on Monday for a national holiday. This will be a paid holiday for those employees who are eligible. We will then work Tuesday through Saturday for a total of 40 hours. For those with holiday pay, they will receive 48 hours of pay for the week. Does that mean that Saturday should be considered overtime pay?
A: No, it should not. Federal law on overtime is based on time actually worked during the week. Since employees are not working on Monday, the holiday does not count towards overtime hours for the week even though some are being paid for the day. As a result, Saturday would only be overtime pay if one of your employees worked 40 or more hours between Tuesday and Friday.
Some states have daily overtime laws, which would still be in effect regardless of the holiday pay. For example, if any employee worked over 8 hours on any day in CA, overtime would apply even though the employee may not have worked over 40 hours for the week.
Q: This might not be a human resources issue exactly, but we have patients who try to bring their dogs into the office during their appointments. They are telling us the dog is a therapy dog. Can we request paperwork to prove this is accurate? Are there rules surrounding this that we should be aware of? Thank you so much for any assistance you can provide.
A: You’re right that this pertains to public accommodation laws rather than HR or employment, but we’ve been asked this before, so we can provide some information. The following is a link to a website that breaks this down really well and should provide the answers you need: https://beta.ada.gov/topics/service-animals/
West Virginia Enacted Changes to the Wage Payment Law Involving Payroll Cards?
Effective on June 9, 2022, under Senate Bill 245, which amends Sections 21-5-3 and 21-5-4 of the Wage Payment and Collection Act, the employer may unilaterally elect to pay employee wages via payroll card, provided the employer discloses in writing any applicable fees associated with the payroll card. Previously, both the employer and the employee had to agree to use of the pay method. Additionally, the following applies:
- The employee must have the ability to make at least one withdrawal or transfer from the payroll card per pay period without cost or fee, for any amount up to the amount contained on the card.
- The employee must be able to make unlimited in-network withdrawals or transfers from the payroll card without any cost or fee, for any amount up to the amount contained on the card.
- Employers who use payroll cards must give employees the option of being paid by direct deposit instead.
The Governor of Illinois Signed One Day Rest in Seven Act Amendment into Law?
Illinois Governor JB Pritzker signed into law Senate Bill 3146, an amendment to the One Day Rest in Seven Act (ODRISA). ODRISA provides meal breaks to all employees and a consecutive twenty-four-hour rest period to most employees. The amendments are effective January 1, 2023. Here’s the highlights:
- The amendment has deleted “calendar week” and instead provides that beginning next year, employers must allow most employees “at least twenty-four consecutive hours of rest in every consecutive seven-day period.”
- The amendment provides that “[a]n employee who works in excess of 7½ continuous hours shall be entitled to an additional 20-minute meal period for every additional 4½ continuous hours worked.” The amendment specifies that “a meal period does not include reasonable time spent using the restroom facilities.”
- The amended ODRISA will require employers to “post and keep posted, in one or more conspicuous places” where notices are customarily posted, a notice provided by the director of the Illinois Department of Labor (IDOL) “summarizing the requirements of [ODRISA] and information pertaining to the filing of a complaint.” For “employees who do not regularly report to a physical workplace, and instead work remotely or travel for work, employers will be required to “provide the notice by email … or on a website, regularly used by the employer to communicate work-related information, that all employees are able to regularly access, freely and without interference.”
- The amendment provides that an employer that violates ODRISA’s rest and meal break provisions “shall be guilty of a civil offense.” The penalties are as follows:
- “For an employer with fewer than 25 employees, a penalty not to exceed $250 per offense, payable to the Department of Labor, and damages of up to $250 per offense, payable to the employee or employees affected.”
- “For an employer with 25 or more employees, a penalty not to exceed $500 per offense, payable to the Department of Labor, and damages of up to $500 per offense, payable to the employee or employees affected.”
An “offense” under ODRISA “shall be determined on an individual basis for each employee whose rights are violated” as follows:
- “Each week that an employee is found to not have been allowed 24 consecutive hours of rest … shall constitute a separate offense.”
- “Each day that an employee is found not to have been provided a meal period … shall constitute a separate offense.”
- A violation of the notification requirements will constitute a single offense and be subject to a civil penalty not to exceed $250, payable to the IDOL.
Rhode Island Legalized Recreational Marijuana and Protects Off-Duty Use?
The new law, which took effect immediately on May 25th, legalized recreational marijuana in the state. Adults age 21 and older now can possess up to an ounce of cannabis, may grow cannabis within their primary residence (up to certain limits) and possess up to 10 ounces of cannabis in addition to live plants. Retail sales may begin as early as December 1, 2022.
Here’s the impact on employers:
- They are not required to accommodate the use or possession of marijuana, or being under the influence of marijuana, in any workplace or other location where the employee is performing work (including remote work).
- They are permitted to refuse to hire, terminate, discipline or take other employment action based on an individual’s violation of a workplace drug policy or because the individual was working while under the influence of cannabis.
- They are generally prohibited from terminating or taking disciplinary action against an employee “solely for an employee’s private, lawful use of cannabis outside the workplace and so long as the employee has not and is not working under the influence of cannabis.”
- Further, the law also provides for automatic expungement of certain civil and criminal convictions related to the possession of marijuana. All eligible records will be expunged by July 1, 2024. Employers may not require an employee to disclose a sealed or expunged offense unless otherwise required by law.
Colorado Expanded the Notice Requirement for Unemployment Benefits Upon Termination?
The new law, Senate Bill 22-234, which became effective immediately on May 25th, requires employers to provide each employee with written notice regarding the potential availability of unemployment benefits upon termination, whether voluntary or involuntary.
The written information must include:
- The availability of unemployment compensation benefits;
- Employer’s name and address;
- Employee’s name and address;
- Employee’s ID number or the last four digits of their SSN;
- Employee’s first and last dates worked, year-to-date earnings, and wages for the last week worked; and
- Reason for separation.
We anticipate the state will provide a form for giving notice to separated employees that will include the above criteria.
Beginning January 1, 2023, Washington will Require Employers to Disclose Salary Range and Wage Scale in Job Postings
Earlier this year, Washington Governor Jay Inslee signed into law Senate Bill (SB) 5761, which revises a 2019 amendment to Washington’s 2018 Equal Pay and Opportunities Act.
SB 5761 applies to employers with 15+ employees, and does not specify that all of those employees must be in Washington State. Once in effect, SB 5761 requires employers to affirmatively disclose in each job posting open to applicants the salary range or wage scale to be offered, as well as a general description of all benefits and other compensation for the position.
A job “posting” is defined as “any solicitation intended to recruit job applicants for a specific available position, including recruitment done directly by an employer or indirectly through a third party, and includes any postings done electronically, or with a printed hard copy, that includes qualifications for desired applicants.”
The law does not appear to require job postings, but if a company chooses to post a job, the law would apply.
New Jersey Employers are Required to Make a Retirement Savings Vehicle Available to Employees
According to the official website, “Governor Phil Murphy signed the New Jersey Secure Choice Act (P.L. 2019 c. 56) in March of 2019, authorizing the creation of the Secure Choice Savings Program – a state-sponsored retirement plan designed to help more private sector employees save for the future. The program is independently administered by the Secure Choice Savings Board, which held its first organizational meeting on December 15, 2021.”
In short, the Act requires certain employers in the state to establish a payroll deposit retirement savings arrangement that will permit eligible employees to participate in the Secure Choice Savings Program. Currently, the program is not yet operational.
To learn more or to join the mailing list for updates on the Program, click here.
Maryland & Delaware
Maryland and Delaware to Provide Paid Family Leave in 2025 and 2026, respectively
Maryland: Under the new law, eligible employees will receive up to a weekly maximum of $1,000 for up to 12 weeks of leave on an annual basis. Additionally, employees taking leave will receive job protection for taking advantage of the paid leave benefits. The payroll tax to fund the program will take effect on October 1, 2023, and paid leave will be available on January 1, 2025.
Delaware: Under the new law, eligible employees will receive up to 12 weeks of leave and benefits for certain parental, family caregiving, and medical reasons. The benefits will replace up to 80% of an eligible employee’s average weekly wage. Employer and employee contributions will begin on January 1, 2025. Employees will be able to utilize the job-protected paid leave beginning on January 1, 2026.
Maine Employers Must Payout Accrued and Unused Vacation Upon Termination
On April 7, 2022, Governor Janet Mills signed into law Legislative Document (L.D.) 225, “An Act Regarding the Treatment of Vacation Time upon the Cessation of Employment.” The law amends 26 M.R.S.A. § 626 to require each employer with more than ten employees to pay its employees, on the cessation of employment, “[a]ll unused paid vacation accrued pursuant to the employer’s vacation policy on and after January 1, 2023.”
Under L.D. 225, employers with “vacation policies” would appear to be required to pay unused, accrued vacation pay to employees regardless of the reason for their separation from employment.
Massachusetts: Late Paid Vacation Leave of $9,0000.00 Becomes an Award of Over $100,000.00
On April 4, 2022, the Supreme Judicial Court of Massachusetts (SJC) issued a decision that should shock employers in Massachusetts. In Reuter v. City of Methuen, the SJC held that all violations of Massachusetts’ Wage Act, even those remedied by the employer prior to the employee filing suit, entitle the aggrieved employees to recover three times the total amount of unpaid wages as liquidated damages.
Back story: Ms. Reuter was terminated from her job on March 7, 2013 after being convicted of larceny. Upon separation, Ms. Reuter was entitled to approximately $9,000 in accrued but unused paid vacation leave. Three weeks after her termination, the City of Methuen paid her for her vacation time. Over a year later, the City of Methuen paid Ms. Reuter an additional $185.42, which represented three times the interest that had accrued on her vacation time from the date of her termination to payment three weeks later. Ms. Reuter then filed a suit against the City of Methuen in which she argued that she was entitled to three times the total amount of unpaid wages as liquidated damages, not just three times the lost interest.
The SJC decision: the SJC rejected the notion that the liquidated damages provision included in the Wage Act can be interpreted as requiring the trebling of only lost interest, as opposed to the trebling of the total amount of unpaid (or late paid) wages. Further, the SJC held that the City of Methuen was now obligated to pay these liquidated damages regardless of its intent in not originally paying Ms. Reuter on time. In other words, the SJC clearly expressed its view that there is no “good faith exception” to qualify or to reduce the liquidated damages otherwise available under the Wage Act.
As it currently stands, the City of Methuen faces the very real possibility of a final award of over $100,000, which includes a requirement to pay Ms. Reuter’s roughly $75,000 in attorney fees (to say nothing of the City’s own attorneys’ fees and costs). According to the SJC: “[t]he Legislature’s command is clear: if you choose to terminate an employee you must be prepared to pay him or her in full when you do so.”
Texas Supreme Court Clarifies Standard for Payment of Commissions When an Employment Agreement is Silent
On May 20, 2022, in Perthuis v. Baylor Miraca Genetics Laboratories, LLC, the Supreme Court of Texas clarified the standard to be applied when an employee is discharged from employment and is owed commission on sales made prior to termination.
Back story: Thomas Brandon Perthuis was vice president of sales and marketing for Baylor Miraca Genetics Laboratories. The signed, two-page employment agreement provided the following: “Your commission will be 3.5% of your net sales.” The agreement contained no other explanation concerning the commission arrangement. In January 2017, Perthuis completed negotiations on an amendment to a sales contract with a prominent client, making the contract the largest of its kind in the company’s history. The company terminated Perthuis’s employment on January 23, 2017. The next day, the client signed the contract amendment that Perthuis had negotiated. The company did not pay Perthuis any commission on the amended contract. Perthuis sued, seeking payment of the unpaid commissions from the contract.
The Texas Supreme Court decision: in a reversal of the appellate court’s decision, the Texas Supreme Court held that in the absence of specific language delineating the terms of payment in a commission agreement, the “procuring-cause doctrine” controls. Under this standard, an employee will be entitled to a commission on sales, even after his or her employment is terminated, if the employee is the proximate and but-for cause of the specific sales.
The Supreme Court of Texas’s decision provides clarity concerning situations where an employment agreement is not clear as to when a commission is earned or whether it will be paid after the termination of employment. One lesson from this decision for Texas employers concerns the importance of clearly articulating in an agreement with a commissioned employee when a commission will or will not be paid (e.g., commissions will be paid only if the employee is still employed at the time of scheduled payment).