Employment Law Blog

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Aug 24, 2015

What’s the risk in paying a non-exempt employee a salary rather than hourly wage?

Q&AWage and Hour 

Q: We have several employees who don’t meet the overtime exemption requirements, but who prefer to be paid by a salary rather than an hourly rate. The employees really like the flexibility of a salary. Is there any risk to not making them hourly?

A: Yes. The biggest risk is that you will not pay them correctly under wage and hour law. Even if an employee is paid a salary, if the employee doesn’t meet the requirements to be exempt from overtime, he or she must be paid 1.5 times their regular hourly rate for all hours worked over 40 in a workweek. When you pay a salary, you likely aren’t tracking the number of hours the employee works in a week, so you may not know whether they are entitled to overtime. In addition, there are other pay situations that could complicate matters. For example, when a non-exempt employee receives a bonus, you may be required to retroactively pay overtime. If you aren’t making that determination because the employee is paid on a salary basis, you could be violating wage and hour law and probably have exposure for unpaid wages and penalties. If you want to retain the flexibility of salary, but still comply with wage and hour law, you should evaluate whether it makes sense to switch the individual to a salary, non-exempt employee. This arrangement would allow the employee to earn a salary, but would still be entitled to weekly overtime. The risk of owing back wages for failing to pay a non-exempt employee proper overtime is pretty high, so it’s best to consult with an attorney when establishing your compensation structure.

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