When you’re so focused on quickly growing your company—getting new hires through the door, celebrating important team milestones, and hey, maybe finding a few hours to sleep—it’s easy to give less attention to your least pressing HR tasks. Or, let’s be honest, you might take a handy dandy shortcut or two. Determining an employee’s overtime pay status is one issue you may have skimmed over at your startup or growing company. When defining exempt or nonexempt status, it’s easy to just give almost everyone a salary, slap “exempt” on the position, and return to your daily work pile. Easy, sure. But as your company grows, that quick fix makes for one shaky org foundation down the line.
Ashley Pelliccione, Namely’s Director of People, has some helpful tips when it comes to defining exempt vs. nonexempt status.
In this eBook, she'll show you:
With a better structure to your overtime pay, you can firmly plant an organizational diving board for you and your employees. The only thing left to do is get a running start and jump right into your growth.
According to Max Muller’s The Manager’s Guide to HR—an approved book for SHRM certification—there are basically two kinds of employees that exist under the Fair Labor Standards Act of 1938 (FLSA), the federal statute that sets minimum standards for overtime entitlement. Imagine a line stretching across all jobs in an organization—across every function—that separates two kinds of employees.
On the lower half of the line are nonexempt employees. They must be paid overtime, generally time and a half, for all hours worked over forty in the workweek. Usually, they are interns and those employees who require more guidance. They have less latitude for making strategic business decisions as opposed to their managers.
On the upper half of the line are exempt employees, those who are not paid overtime. In general, these are your executives, your managers, and employees who make independent judgement calls on business decisions. Think department heads, general managers, and directors.
The terms themselves are counterintuitive—remember, nonexempt workers are entitled to overtime.
When determining an employee’s status, the first factor to consider is salary. At the time of this writing, in order to qualify for exemption, generally employees must be paid no less than $455 per week. According to The New York Times, while President Obama has directed the Labor Department to raise the overtime threshold to effectively make many more workers—potentially millions—eligible for overtime pay, disagreements between the Labor Department and the White House are stalling any changes to the threshold at this time. As you begin refining your policy, be sure to check the exact FLSA guidelines that apply within your state and to your specific jobs.
The second determination for any exempt vs. nonexempt status audit is responsibilities —the employee’s actual work. As an HR professional, you already have a general idea of what each job function does and what departmental goals are. But when it comes to exempt and nonexempt status, you need to go granular. “I need to understand what this person is doing,” Pellicione says. “It’s the day-to-day that matters.”
You will gain the most understanding the fastest by defining organizational structure. Of each of the teams you already have, who reports to whom? When new roles are created, where will they fit in the org chart? Separate those who manage from the managed—while still keeping an eye out for lone employees who may still be nonexempt.
“After I look at what jobs we have in the org, the next step will be what job descriptions tie to the job structure,” Pellicione says. To the extent that you are able, audit current roles to determine what job titles fit each position best. Title new roles appropriately from the get-go while being mindful of the differences between, say, an HR Generalist (exempt, independent in nature) and an HR Coordinator (nonexempt, requires more guidance and direction on day-to-day tasks).
Not only should you polish them up anyway, they are truly what determine exempt vs. nonexempt status. It’s important to know that job titles alone do not determine exempt vs. nonexempt status. Day-to-day work does. “What exactly are you doing on a day-to-day basis?” Pellicione asks. “And what does your job description say you’re doing?”
Reclassification may be necessary for employees you have already classified. If it turns out an exempt employee’s job responsibilities are in fact nonexempt, you may owe that employee unpaid overtime. That’s a point in favor of tracking all employee hours to avoid not knowing how much overtime an employee has worked. Or, at least, be careful to audit new positions thoroughly before beginning to compensate.
After reviewing FLSA guidelines, consult legal counsel to be sure you’re handling the reclassification appropriately, and that you comply with any fines or penalties to the United States Department of Labor (DOL), the department behind the FLSA.
Lastly, don’t forget to formally inform the employee of the switch, why it took place, and how it will affect him or her. A sit-down chat may be appropriate.
Working through all of your employee statuses doesn’t just keep all of your legal ducks in a row. It sets your company up for success. Get employee job titles and statuses right the first time to avoid retitling jobs—and employees—into lower positions.
Startups have a habit, Pelliccione says, of dreaming up impressive-sounding job titles and slapping them with an “exempt” label. “In startups, what you’ll find is you can give someone any title—titles are free,” she says. “And so you give them this lofty title which would be tied to an exempt job, but actually they’re doing nonexempt responsibilities.”
Say a higher-skilled new employee joins a department—a real powerhouse. When assessing the new hire’s job responsibilities, you then uncover that another current employee in the same department, perhaps at a similar level, is actually doing nonexempt work. You’re now faced with “demoting” that current employee with a lower title— along with a nonexempt status—below the new hire.
By auditing job responsibilities first, avoid mislabeling job roles altogether so employees don’t flip-flop across positions and statuses.
Even if companies do have their statuses straight, they can still run into trouble, Pelliccione mentions, if they restrict their nonexempt people to working 40 hours a week in order to avoid paying time and a half for overtime.
In most positions—white-collar positions, that is—there’s an expectation that some work still needs to be done at home either on nights or weekends. But for nonexempt employees, it’s a different story. Companies quickly find themselves in legal messes if nonexempt employees aren’t compensated for all hours worked, especially if they leave on bad terms. Two words: back pay.
Pelliccione would tell a nonexempt employee, “You need to be clocking every hour you’re working, even if it means paying you overtime. It’s the right thing to do. It doesn’t matter if it’s in the budget or it’s not in the budget.” What about interns? “Just pay them minimum wage! It’s super cheap and keeps you out of trouble.”
When you closely track overtime for the appropriate positions, you’ll be able to see exactly where employee time commitments become more intense, or potentially unreasonable.
“I understand the company only wants nonexempt employees to work X hours, but if the performance the company expects means working more time, then the company either needs to budget more hours or change its expectations,” Pelliccione says.
Change can come in the form of a new hire to take on additional work. Or, maybe a manager needs a new level of understanding for what an employee can contribute. That’s an HR issue you’ll have successfully uncovered.
Exempt and nonexempt status, perhaps at its most refined, is an issue of company culture. Employees feeling fairly compensated is central to how they interact with their managers.
“The employee sometimes thinks, ‘I don’t want them to know I’m working all these hours,’” Pelliccione says. “What if they don’t think I’m efficient enough?” “It’s a mutual understanding,” she continues. “And it’s the employer making sure the employee knows, ‘Hey, it’s ok if you have to work more hours.’” When an employee knows that they can contribute more time—and that that time is deeply valued—the sky’s the limit when they do decide to leap.