Nonexempt vs. Exempt Classification: Are Salaried Employees Automatically Exempt?

In a BLR webinar titled "Exempt or Nonexempt: How to Find and Fix Misclassification Mistakes," Kara E. Shea outlined further guidance on the salaried basis of payment – what that means, what you can deduct from salaried employee pay, and how to stay in compliance for exempt workers.

Nonexempt vs. Exempt Classification: Salary Alone is Not Enough

Paying an employee a salary – even a high salary – is not sufficient to ensure exempt status. "You can have nonexempt salaried employees," Shea explained. However, equating the two is a common misconception. It’s an easy mistake to make – some people equate nonexempt with hourly and exempt with salaried status, though the two are not equal. Shea clarified it further: "Salary is the way you’re paid. Exempt is your legal status."

That said, the reason for the confusion often stems from the fact that a salaried basis of payment is one of the requirements for some of the most commonly-applied exemptions. While the exemptions that may apply in your workplace are many, the so-called white collar exemptions are the most common, and that’s what we’re referencing here. While "white collar" is not an exemption class, this phrase is used as a catch-all to describe the most commonly-applicable exemption categories: executive, administrative, professional, outside sales, and computer employees. To qualify under these exemption categories (with the exception of outside sales), an employee must have a non-fluctuating salaried basis of at least $455 per week and they must perform exempt duties.

Assuming your exempt employees meet the second half of the equation – performing exempt duties – how do you ensure you’re meeting the requirements of a salaried basis of payment? To be paid on a salaried basis, employees must receive their full salary for any week in which they perform work, regardless of number of hours worked. Shea further explained that "if you make improper deductions from the salary of an exempt employee, the exemption will be lost. It will be lost for that individual employee that had the deduction, but – even worse – it could be lost for all employees in that same category who are subject to similar deductions."

Knowing that, are you clear on what is or is not a permissible deduction from salaried pay?

Nonexempt vs. Exempt Workers: What Salary Deductions Don’t Change Exempt Worker Status?

You may be wondering how this can work in real life, given that there are any number of reasons that an employer may consider deducting a salaried worker’s pay. When it comes down to it, there are in fact some reasons that a salaried employee can have pay deducted, but they are very clear:

• when the employee has performed no work at all during the entire work week
• when the employee is absent for a full day for personal reasons other than illness or an accident
• when the employee is absent for a full day where the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary due to sickness, where the employee has not yet become eligible to participate in the plan or has exhausted all accrued leave allowed under the plan
• when an employee has violated a safety rule of major significance
• when an employee misses any work (whether a full day or partial day) due to taking leave under the Family and Medical Leave Act (FMLA)
• when the employee misses work during his first or last weeks of employment

These deductions can be tricky when you add in today’s technology. You want to avoid a situation where a salaried employee is working from home (such as via a smart phone or laptop) – which would mean they should be paid – during a time when they are otherwise not due to be paid.

Keeping Nonexempt vs. Exempt Workers Classified Correctly: Tips for Maintaining Salaried Basis of Payment

Besides getting the deductions right, what else can you do to properly maintain a salaried basis for exempt workers? Shea outlined some tips:

• Make sure employee’s pay is same every week, regardless of the hours worked.
• Use non-monetary means of disciplining exempt employees for attendance or performance problems.
• Dock or deny bonuses or other "extra" payments (if otherwise permissible) rather than salary.
• Never dock the pay of an exempt employee for a partial day absence.
• Avoid policies or practices of making deductions based on lack of work.

By keeping these guidelines in mind, you’ll be well on your way to ensuring your exempt workers are paid on a salaried basis properly.

For more information on exempt workers, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Attorney Kara E. Shea, a member at Miller & Martin PLLC, provides advice on issues and compliance to national, regional, and local employers of all sizes, ranging from Fortune 500 companies to small businesses in a variety of industries. She also represents employers on a variety of employment issues such as wage and hour cases, including class actions.