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Classifying Employees

Calculating Payroll
Classifying Your Employees

Exempt / Non-Exempt Employees
The Fair Labors Standards Act (FLSA) applies to employees of enterprises that do at least $500,000 in business a year. It also applies to employees of smaller firms if the employees are engaged in interstate commerce or in the production of goods for commerce, such as employees who work in transportation or communications or who regularly use the mails or telephones for interstate communications.
It also applies to employees of federal, state or local government agencies, hospitals and schools, and it generally applies to domestic workers.

The Act (FLSA) establishes minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers.

The FLSA requires you to classify all of your employees as either exempt or non-exempt. You use the rules set out by the law (FLSA) in order to determine whether an employee is exempt or non-exempt and whether you have to follow special rules when paying some or all of your employees.

Note:State's also have laws and regulations governing how an employee must be paid. If a state's laws (rules) are more beneficial to an employee than the FLSA (laws) rules then you most adhere to your state's labor laws.

Exempt Employee Requirements
Basically to qualify as an exempt employee , the employee must (1) be paid on a salary basis, (2) perform exempt job duties, and (3) earn a salary of at least a weekly amount set by the law. Effective January 1, 2020, the minimum salary level to be exempt is $684 per week ($35,568 per year).

An employee who is not paid on a salary basis is nonexempt no matter what kind of work he or she does.

Note:Being paid on a salary basis does not automatically classify an employee as exempt. Non-exempt employees may also be paid on a salary basis. An employee who is paid on a salary basis is exempt only if they meet the exempt employee requirements stated above.

What does "exempt" mean?
The term used in your daily life means that you don't have to do something. It also has the same meaning when used in conjunction with the FLSA. If an employee is determined to be (classified) exempt from the FLSA, it means that you as an employer are not subject to any of the FLSA special rules for this employee and the employee is not entitled to any of the FLSA protection and benefits. This means that an exempt employee does not have to be paid overtime for hours worked in excess of 40.
If you want to be able to classify an employee as exempt, you must pay him or her a salary.

Most employers are well aware that employees must be paid on a “salary basis” to be considered exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). This means employees must receive the same amount of pay each week regardless of the amount or quality of work they perform for a given week. Accordingly, exempt employees must be paid their full weekly salary for any week in which they perform work, whether or not the employee has actually worked a full work week.

What does "nonexempt" mean?
Nonexempt is the exact opposite of exempt. It means you have to do something. If an employee is determined to be (classified) as nonexempt from the FLSA, it means that you as an employer are subject to all of the FLSA special rules for this employee and the employee is entitled to all the protection and benefits provided by the FLSA (law) such as minimum wage and overtime requirements. Any employee not paid a salary (hourly rate, piece rate, or commission) is automatically classified as non-exempt; however, as stated earlier you can have non-exempt employers that are paid a salary.

Classifying Ma's Employees

Let's take Ma's Employees and Classify them into their proper category based on the rules for determing exempt and non-exempt employees.

Our Employee Job Categories
Employee Job Categories
JobMethod Of Pay
Waiters/WaitressesHourly + Tips
Head ChefsSalary/Bonus
Line HelpersHourly
Food Preparers (Prep)Piece Rate
Current Employee Information
Employee Payroll Information

Method Of
Pay RatePay PeriodCategory
Fat ChefM-3Head ChefSalary + Bonus
$1,400 every 2 - weeks
or $700 every week
Note: Based on 45 hours
each week
Notbad CookM-1CookSalary
$1,000 every 2 - weeks
or $500 every week
Note: Based on 45 hours
each week
Goodwith CashM-2CashierHourly$8.00 per hourWeekly
Wet HandsM-1DishwasherHourly$7.25 per hourWeekly
Good WaitressM-1WaitressHourly + Tips$8.00 per hour + TipsWeekly
Handsome WaiterM-2WaiterHourly + Tips
$2.13 ($7.25-5.12)
Know ItallM-2ManagerSalary + Bonus
Betty BakerM-3Food PrepPiece Rate
Various Rates
Line ManM-1Line HelperHourly$7.50 per hourWeekly
Talk AlotM-1SalesCommission
20 % of Sales
Banquets & Events
Mom ToallN/AOwnerDrawsVariousVarious
What should you pick up from reviewing our job categories and employee list ?
  • You can establish different pay periods for different employee job categories.
  • You can have different methods of calculating pay for different employee job categories.
  • We've used our allowed maximum tip credit of $5.12 in determining the $2.13 ($7.25 - 5.12) rate per hour for Handsome Waiter.
  • Since Mom's organized as a sole proprietorship she is not included in payroll. Instead she receives draws. Mom is not actually considered an employee. We'll discuss Ma in a later Lesson.

Let's see how we determined the classification of our employees as exempt or nonexempt as required by the Fair Labor Standards Act. Let's do the easy part first. Any worker that is not paid a salary is automatically classified as non-exempt.

What exactly is a salary ? Salaries-compensation based on a fixed amount and paid to an employee for management, professional, administrative, or similar services (exempt type of jobs). A salary is usually stated in terms of a weekly, monthly, or yearly amount. Note: Although salaries are normally used to pay for the so called exempt types of jobs, they may also be used as the payment method for skilled or unskilled employees in non management or supervisory jobs , the so called non-exempt types of jobs. With a "true" salaried position the employee is paid the same amount regardless of how many hours the employee actually works during the pay period.

Don't be led astray, just because an employee is paid by the salary method does not necessarily mean you don't have to pay that employee overtime. If the employee is also exempt you don't have to pay overtime; however, if the employee is nonexempt you are required by law to pay overtime.

So based on this, our Non-exempt Employees (those not paid by the salary method) include:
  • Goodwith Cash
  • Wet Hands
  • Good Waitress
  • Handsome Waiter
  • Line Man
  • Betty Baker
  • Talk Alot

For employees that we're paying a salary we need to see what type of job and the duties and tasks that the employee performs and if their salary is at least $684 per week ($35,568 per year) in order to determine if the employee is exempt or nonexempt. In general, all administrative and managerial type of jobs are exempt.

Since Knowit All's job is the manager and he makes more than $684 per week, he falls under the exempt category.

Exempt Employees:
  • Knowit All

Fat Chef's salary stated on a weekly basis is $700 which is greater than the $684 a week needed to qualify as an exempt employee; however, his job duties do not qualify for the exempt status.

Notbad Cook's salary stated on a weekly basis is $500 which is less than the $684 a week needed to qualify as an exempt employee. We don't have to analyze his job duties because based on his salary he is already classified as a nonexempt employee. Although Fat Chef and Notbad Cook are paid a salary their job duties and/or salary amounts do not qualify them for an exempt status.

Additional Non-exempt Employees:
  • Fat Chef
  • Notbad Cook

You should note that our only exempt employee (not subject to the laws and regulations of the Fair Labor Standards Act) is our manager. All the rest of our employees are non-exempt and covered.

What's Next ?

Payroll Information

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