More often than not, the true definition of an hourly or salaried employee is misunderstood by managers. As human capital consultants, we see this happen pretty frequently. The terms ‘hourly’ and ‘salaried’ refer to the method in which an employee is paid, either hourly based on each hour worked or salaried as a set amount each pay cycle based on the employees standard hours of employment. It sounds easy to understand, right? Well what the terms ‘hourly’ and ‘salaried’ do not define, is an employee’s eligibility for overtime pay under the Department of Labor’s Fair Labor Standards Act. See it’s a little tricky, the mere fact that an employee is set-up to be paid in the payroll system as hourly or salaried does not dictate the appropriate FLSA status as exempt or non-exempt from overtime pay at a rate of one and one half times the regular rate of pay for every hour worked over 40 in a work week.
Determining Overtime Eligibility
The Fair Labor Standards Act has defined exemption tests that must be used to evaluate the duties and responsibilities of all jobs within an organization in order to determine overtime eligibility. Specific exemption test categories include Administrative, Executive, Outside Sales, Creative/Learned Professional, and Computer Professional. Details on the criteria for each exemption test can be found here.
Job duties and responsibilities, as well as pay approach (salaried or hourly), and pay rate must meet all of the criteria for at least one of the FLSA categories to be considered exempt from overtime. Otherwise, the position is considered to be eligible or non-exempt from overtime pay and must be paid overtime for hours worked beyond 40 in a workweek. Non-exempt positions may be paid as hourly or salaried; however, they must be compensated for overtime. Salaried non-exempt categories are found in some organizations as a mechanism to treat all employee in the company similarly in terms of paying them the same amount each pay cycle or on a salaried basis; however, non-exempt employee must also report all hours worked and any overtime worked within the pay cycle must be paid in addition to the salaried amount.
Most companies find it easier to distinguish non-exempt employees as hourly paid within the payroll system and often pay those employees in arrears to pay for hours worked and overtime compensation due at the same time. However you decide to set-up your pay approach for employees, it is critical to ensure that there is a thorough understanding of the wage and hour obligations under the Fair Labor Standards Act and establish processes for compliance with all overtime pay regulations.