Originally published November 2014 in Trojan Today.
Which should you pay employees — an hourly wage or a salary? There are pros and cons to both approaches, with advocates on both sides. Even industry consultants differ in their recommendations.
Who is right? That depends on your specific circumstances. There is no one right method for compensating employees as long as the rules are followed. Each employer should make a determination based on his/her own business needs and management philosophy. Regardless of which way you choose to compensate your employees, it is important to adhere to applicable wage and hour requirements.
Before discussing the relative pros and cons of each method, let’s define terms that are important in understanding the issues.
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.
Payment on a salary basis means 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 pay period.
Under the Fair Labor Standards Act (FLSA), employees fall into one of two categories: exempt or non-exempt. Methods of compensation, such as salary or hourly, do not determine a legal classification of employee.
Exempt employees do not receive overtime pay; they are exempt from overtime pay requirements and calculations. Don’t you wish you could arbitrarily make every employee exempt? Not possible. This classification applies to executive, managerial, supervisory, and administrative positions, or government-defined professional positions that typically require special licensure. To qualify, there are specific rules that must be met regarding the amount of time spent in managing/supervising/administrating; the numbers of people managed/supervised/administered; and the type and authority of managerial/supervisory/administrative duties. Most employees do not qualify for the exempt classification because of the strict rules.
Non-exempt employees receive overtime pay at all times when it is worked, regardless of their method of compensation; they are not exempt from overtime pay requirements and calculations. This classification applies, by default, to any and all employees who do not meet the guidelines or definition of exempt, as outlined by the FLSA and/or state laws – and thus applies to almost all employees.
NOTE: The FLSA’s requirements for exempt status are extensive, specific, and stringent and cannot be covered here in detail. Suffice it to say that at least 95 percent of all dental staff is non-exempt. For specific questions about the criteria for one of your employees, call our office.
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. Be sure you are in compliance with both, if applicable.
Many employers fall prey to the myth that if they pay someone a salary, they don’t have to pay overtime. This couldn’t be more false. The method of compensation has no bearing on overtime requirements. Simply paying an employee a salary does not exclude you from having to pay overtime. “Salaried” is not a category for overtime purposes.
The determining factor for overtime is employee classification as mentioned above. Exempt employees are excluded from having to be paid overtime, while non-exempt employees, regardless of the method of compensation, must be paid overtime.
An important detail for exempt employees is they generally must receive their compensation in the form of salary. There are provisions that dictate what the minimum salary must be, which may significantly increase in the coming months. Generally, exempt employees must be paid for the full day even if they’ve only worked part of a day. Full-day deductions are strictly limited with rules that must be followed before doing so.
There is no rule that says non-exempt employees have to be paid a certain way. They can be paid a salary whether daily, weekly, or monthly. They can also receive 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, you may compensate at a rate and method of your choosing. Non-exempt employees must only be paid for time actually worked.
This means when employees are late, have to leave early, or take time off during the day, whether a half or a full day, it is not required they be paid. Unlike exempt employees who all have to be paid the same based on their classification, non-exempt employees need not all be compensated in the same manner. You can have some employees paid hourly, some daily, and some a salary depending on what will be best for your practice.
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, his/her salary can be reduced by the appropriate number of non-work hours. In order to avoid confusion and arguments, be sure you have clearly established policies, in writing, explaining you will avail yourself of this right.
SO…SALARY OR HOURLY?
As you can see, this question only applies to non-exempt employees. For this classification of employee, we do recommend hourly pay because it is simple, straightforward, and easy to understand and administer.
On the other hand, paying a non-exempt employee a salary often does have a psychological value for the employee, and it can be administratively easy if there aren’t overtime or time-off deductions.
If you decide to pay your non-exempt employees a salary, 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. Make 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 works only 28? Similarly, 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. And don’t forget that any hours over applicable daily and/or weekly overtime limits must be paid at time-and-one-half. All of which you should have in writing to ensure everyone is on the same page.
As you can see, there are many misconceptions and misunderstandings about paying employees on a salary basis, especially as it relates to non-exempt employees and overtime. It is not as simple as “just pay everyone a salary.” In fact, when you get right down to it, the cons can outweigh the pros depending on your circumstances.
Be sure you know the rules:
1. Classify your employees correctly.
2. Follow wage, hour, and overtime requirements.
3. Have any and all exceptions clearly defined in writing to avoid liability and misunderstandings.
Rebecca Boartfield is an HR Compliance Consultant for Bent Ericksen & Associates. For more than thirty years, the company has been a leading authority in human resources and personnel issues, helping dentists successfully deal with the ever-changing and complex labor laws.
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