A salaried employee is any employee that receives a predetermined compensation for each pay period.  Many employers choose this method to compensate their staff, but when is it right for you, and in what circumstances are right to offer this to your employees?

A few rules are associated with the right to compensate an employee on a salaried basis, thus exempting employers from both minimum wage and overtime wages.  According to the Fair Labor Standards Act, Regulations 29 CFR Part 541 Section 13 (a)(1), an employee must make a minimum of $455 per week as well as be working in either an administrative, executive, professional, or outside sales capacity to be considered for this method of payment.  Section 13 (a)(17) of the FLSA also notes that certain computer employees may also be deemed to be of an exempt basis.  Other types of tests that you can measure to determine if this is right for you and your staff is to look at these items:

Salary Level Test

The Salary level test determines that your employee is making a minimum salary of $455 per week ($23,600 annually).  This salary may not be the entire compensation that an employee receives but can be utilized as a base with performance or goal-based incentives or additional flat sums that can be added to the payable amount based on performance, goals, or other incentives. Some exemptions to this rule are if the employee role includes: outside sales, teachers, or employees practicing medicine or law.   The legislation was presented to review a new compensation amount that was to go into effect. Still, shortly after this was introduced, multiple states filed grievances and suits against this change. No changes have yet been made. 

Duties Test

Salaried or exempt employee job descriptions must fall into specific categories to meet the duties test component of establishing if a salaried role is proper for your employees. The title alone is not sufficient to determine if an employee is eligible to receive this exempt status.  According to  Section 541.2, “A job title alone is insufficient to establish the exempt status of an employee.  The exempt or nonexempt status of any particular employee must be determined based on whether the employee’s salary and duties meet the requirements of the regulations in this part.”  An employer must be careful to ensure that the employees they are considering to be exempt are not deemed blue-collar, production line, or non-management (and non-administrative) employees.  Employee’s who are working in a non-managerial, yet administrative capacity that directly impacts the general business operation or directly impacts the businesses of the customers’ that the business supports and is of a non-manual status would qualify under this heading; while to qualify as a manager, the individual would need to have at least two direct reports on a regular basis, can hire, fire, or whose suggestions have the opportunity to impact an employee status change in addition to additional managerial duties as well.  Executive staff must be either in an executive-level role, such as CEO, or other high-level role within your organization.  Employees that fall into the professional category, such as lawyers, doctors, nurses (not LPNs), or teachers, must fall into either creative or learned professional criteria that must be met.  Other types of employees included in this status are outside sales employees, who are directly responsible for FLSA determined sales or obtaining contracts or orders directly benefiting the business. Computer employees must be highly dependent on both computers and programs and not limited to repairing or manufacturing computers.

Click here to identify additional fact sheets regarding each type of executive, administrative, professional, computer, and outside sales role according to the FLSA.

Scheduling and Required Hours for Salaried Employees

Salaried employees are not required to work or maintain a set number of hours other than what is decided between the employer and employee.  Salaried employees can work either on a part-time or a full-time basis but do not qualify for overtime or additional compensation. They are paid whether they are working or not.  Salaried employees can also be required to work mandatory overtime if determined by their employer.  According to the Fair Labor Standards Act, employers are not able to deduct or penalize employees for time missed, whether excused or unexcused, except in the circumstances below:

• Employee is absent one or more full days for personal reasons other than sickness or disability
• Sickness or disability are allowable if following a plan
• Offset of any amounts received by either military pay, witness, or jury duty
• Penalties imposed in good faith for infractions of safety rules of major significance
• Unpaid disciplinary actions of one or more days for workforce conduct infractions
• Weeks off under FMLA
• Initial or terminal week of employment 

Benefits of Salaried Employees

Some of the benefits incorporated to employers regarding their salaried employees include:

• Fewer time requirements spent on payroll classifying, converting, and calculating payroll
• Clear expectations for both employee and employer, allowing both parties to concentrate more on the responsibilities of the role and not focus on fixed timelines
• Flexibility with scheduling and flextime more allowable as employees are not worrying about achieving or maintaining a certain number of hours.
• Exempt employees do not receive overtime pay, limiting unexpected spikes in payroll costs and allowing for clear-cut budgeting and payroll allowances. 

Downsides of Salaried Employees

For every benefit, there are also downsides or negatives to having exempt employees, including instances such as: 

• Employees are paid a set compensation, even if workload or necessary labor costs fluctuate.
• Exempt employees are entitled to full compensation, even if they have attendance issues and miss less than one full day or habitually come in late/leave early.
• Labor costs cannot be lowered, even if employees work fewer hours due to decreased labor needs.
• Employers are required to track and justify any deductions that have been made and need to be careful to consider both volume and severity of deductions. If an employer has made improper deductions, they could lose their exempt status and be required to pay employees under hourly classification.

How to Determine if Salaried Employees are Suitable for Your Company

Now that we have determined the types of employees and the criteria that make up these roles, you, as a business owner and leader, can examine how the status of exempt or salaried employees would affect your business.  While considering both benefits and downsides of this status, for both the company and its employees, you as an employer may ask, “What is best for everyone?” and determine a case by case basis while ensuring that the proper requirements and criteria are in place.

To obtain additional information regarding the Department of Wage and Labor, as well as the Fair Labor Standards Act, at:  http://www.wagehour.dol.gov  or by calling 1-866-4USWAGE (1-866-487-9243).