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Exempt or Nonexempt? That is the Question!

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For many business owners, categorizing employees as exempt or nonexempt is a challenge. Misclassification is risky, so understanding what the law requires and how to comply is key. While the terms ‘exempt’ and ‘nonexempt’ can be confusing, they simply denote whether or not an employee is ineligible (exempt) or eligible (nonexempt) for overtime pay. These are more commonly referred to as salaried workers (exempt) and hourly workers (nonexempt).

Exempt workers receive the same pay regardless of the number of hours they work in a pay period. Nonexempt workers’ wages are based on the number of hours worked. Generally speaking, for hourly (nonexempt) workers, any time put in over 40 hours per week is required to be paid overtime wages (time-and-a-half for the excess hours) based on the federal Fair Labor Standards Act. The FLSA also sets the federal minimum wage.

However, it is important to note that in some states (California included), overtime pay is also required for hours in excess of 8 per day, whether or not the employee puts in a 40-hour workweek.

Defining exempt vs. nonexempt

There are two tests required by law to determine whether an employee should be classified as exempt or nonexempt. These are the Duties Test, and the Salary Test:

Duties Test for Exempt Workers

Under the FLSA, three main categories of workers are considered exempt from overtime pay:

  • Executive: these employees’ primary duty is managing the company or a department. They direct at least two full-time employees and have hiring/firing authority.
  • Administrative: these employees perform office or non-manual work directly related to the management or general business operations, and exercise discretion and independent judgment with respect to matters of significance. The administrative exemption is what most businesses assume the majority of their exempt employees fall under. However, this is a common mistake, and must be discussed with your HR consultant or in-house HR department.
  • Learned Professionals: these employees perform work requiring advanced knowledge, requiring consistent exercise of discretion and judgment. Their knowledge must be in a field of science or learning and is typically acquired through specialized intellectual instruction.
  • There are other categories of exempt workers, including computer professionals and outside sales
  • Note: Employers in California may be subject to additional duties’ test

Salary Basis Test for Exempt Workers

The Salary Basis is the next test to determine whether an employee is exempt. New minimums are set every year. For January 2020:

Executive, administrative and professional employees must be paid:

  • no less than $684.00 per week on a salary basis – annually: $35,568.00
  • For California employers:
    • Most exemptions must earn twice the state minimum wage, or a minimum of $54,080.00 for employers with more than 26 staffers, and $49,920.00 for 25 or less.

Many states have higher salary thresholds or more detailed duties’ tests. If there are conflicts, employers must meet the level most beneficial to the employee. Be sure to speak to your HR consultant/HR department to ensure that you are meeting the required minimums as of the date you are classifying the employee as exempt.

Exclusions Under the Law

In some states, highly compensated employees are exempt from overtime pay. Under federal guidelines, an employee who earns $107,432.00 or more annually, including at least $684.00 weekly on a salary or fee basis, and who performs office or non-manual work while routinely performing at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee, is excluded under federal guidelines. This highly compensated exemption does not apply under California, New York and Pennsylvania law.

Outside Sales representatives may also be exempt from overtime pay. These employees must be customarily and regularly engaged away from the employer’s place of business. Other requirements may apply.

Some Inside Sales employees who earn commission may be exempt from overtime pay if the following standards are met:

  • hourly rate exceeds one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked
  • more than half the total earnings in a representative period consist of commissions.

Most inside salespeople do not fall under this exemption. Furthermore, most are still eligible for meal and rest break requirements. Be sure to consult with your HR consultant or in-house HR department to ensure that you are meeting all the proper guidelines.

Penalties for misclassification

Improperly classifying an employee can be risky for business owners. Federal and state Departments of Labor can require back pay recovery and impose fines and penalties if they believe the misclassification was a willful violation of the law.

With new minimum wage laws in effect, and new thresholds for exempt status, employers must be thorough in determining employee classifications. If you have a question about categorization, contact the local Wage & Hour Division office or check their website for additional information. You are also welcome to contact your helpful People Person team, at info@peoplepersonhr.com.

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Employee-Handbook-PeoplePersonInc

Does Your Business Need an Employee Handbook?

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An employee handbook is a tool that employers often consider a low priority. They’re nice to have, but there isn’t a sense of urgency in creating one. Unfortunately, that’s a costly mistake many business owners make.

Why have an employee handbook?

Developing and issuing an employee handbook is an important tool to set guidelines, expectations and even outline the mission and culture of your organization. Your employees are your team – and like every team, they need to know the rules of the game. What is expected of them; what can they expect from you; and how does their role fit into the larger goal of the organization?  An employee handbook outlines each of these – providing team members with the information they need to excel. Organizations with a concise employee handbook have teams that work together, striving for a professional, respectful workplace. Organizations without an employee handbook may find their staff members lost at sea when it comes to expectations and goals.

Another important aspect of the handbook is non-discrimination. The rules are set for every employee and should be administered equally. With an employee handbook in place, it’s easier for every employee to follow the rules and guidelines.

So, how do you create an employee handbook?

One of the most common barriers to developing an employee handbook is knowing where to start. What should be included and what should be left out? While there are online templates that businesses can use to get the ball rolling, they are often missing key components and/or include laws and language which may not even apply to your business. The best course of action is to hire a qualified HR Consultant or employment attorney to draft your compliant employee handbook, tailored specifically to your company’s needs.

Some of the basics that should be included are expectations the company has of the employee. You may choose to include your mission statement and guidelines for employees to contribute to the mission. Legal requirements like non-discrimination and harassment laws, and company policies like sick leave, dress code, and performance standards should be prominently included to affirm an organization of compliance and respect.

When should employees be issued a handbook?

All new employees should receive a copy of the employee handbook on their first day on the job. They should be asked to read through the handbook and ask any necessary questions. For established employees, a new handbook should be issued to the team with the same opportunity to request further information if needed.

Do employees need to verify that they’ve received the handbook?

Businesses should ask for verification the employee has received, read, and understood the handbook. A signed acknowledgement should be in every employee’s personnel file.

A hard copy handbook isn’t always necessary: an online version is acceptable as long as all employees have access to the handbook and acknowledge that they have received it via an online signature. Online handbooks are easier to update, as well. Keep in mind that you must notify all employees whenever an update has been made and what the update entails.

What are the legal benefits of having a handbook?

For many organizations, an employee handbook is an affirmative defense in the event of a charge of harassment or discrimination. If your employee handbook specifically prohibits sexual harassment or discrimination in the workplace and an employee has violated that rule, affirmation they knew the rule and chose to disregard it can shift some liability away from the company. While the handbook doesn’t indemnify an organization (you’ll still need to investigate and resolve any complaints), it can help bolster a defense in the event of a charge.

The employee handbook can also present an affirmative defense in the event of a wrongful discharge claim. If your handbook outlines expectations that were not met, your company may be able to demonstrate the legitimate business reason for the dismissal. Additionally, if an employee was terminated for cause, you may be able to defend against an unemployment insurance claim as well. If policies were violated and disciplinary steps were followed, the employee’s claim for benefits could be denied.

An employee handbook gives your staff members the information they need to work as a cohesive team. It sets the tone for a respectful workplace that values employee rights and provides equal benefits for all. All businesses should prioritize creating a strong employee handbook, and issuing one to every staff member.

Need help with your employee handbook?

People Person is here to help you create an employee handbook to ensure that you’re compliant with current employment laws.
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California’s AB 5 – What Does It Mean For Your Business

California’s AB 5 – What Does It Mean For Your Business?

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You’ve likely heard about AB 5, one of the newest California employment laws to take effect this month. As it may have wide-reaching implications for your business, it’s important to understand what it all means. 

What is AB 5?

AB 5 amends the California labor code of workers which businesses utilize as independent contractors. Signed into law September 18, 2019 and effective January 1, 2020, the new law requires businesses that use independent contractors to reclassify them as regular employees, or restrict their use.

AB 5 is intended to push employers to provide ‘gig’ workers with the same benefits and protections that regular employees enjoy, including provisions of the California unemployment code, wage and hour code laws, and other benefits. The fallout of the new law, for employers and for workers, may be that many lose their jobs, rather than be put on the payroll.

Will your business be impacted by AB 5?

A majority of California workers and businesses who are part of the gig economy may be affected by the new law, but organizations in other parts of the country that leverage the talents of California independent contractors will also feel its impact. An estimated 10% of US workers are part of the gig economy: over 1.5 million are Californians. Under the legislation, any worker previously categorized as an independent contractor will need to be hired or released, unless they are specifically exempted under the law. 

Initial response from ride-share giant Uber and food delivery Postmates has been a lawsuit filed in US District Court alleging the law unconstitutional. Until that decision has been made, however, many classifications of workers are covered under the law, while others, some with significant lobbying power, are excluded: 

Physicians, dentists, podiatrists, psychologists, veterinarians are exempt from the law, but other categories of health providers including occupational and speech therapists, optometrists, nurse practitioners, physician assistants, marriage and family therapists and others are impacted by the law. Transcriptionists are already seeing clients refusing to work with California contractors because of AB 5. 

Real estate and insurance agents are exempt, along with lawyers and investment advisors. However, freelance journalists and photographers are limited to 35 submissions per year under the new law. The fallout for freelance writers has already begun. Online freelancer platform ‘Scripted’ suspended accounts for California writers. ‘Vox’ let go of 200 freelance writers in advance of AB 5’s effective date. 

While truck drivers were initially covered under AB 5, a Los Angeles Superior Court judge has ruled the legislation unlawful because it contradicts Federal law that covers owner-operators. 

Several other categories of workers and industries are exempt from compliance, leaving the remaining gig workforce not specifically listed covered under its terms. For businesses owned and operated in California, along with workers who reside in the state, AB 5 remains in force unless legal challenges overturn it. If your organization uses independent contractors for web administration or tech support, or other categories of work, it might be wise to review the law and its impact on your business and contractors.

Legal basis for the new law

AB 5 leverages the ruling of the 2018 California Superior Court decision in Dynamex Operations West, Inc. to classify workers versus independent contractors. Under existing California law, a three-part test is used to determine if a worker can be legally classified as an independent contractor. This ‘ABC test’ requires they: 

  1. are free from the control and direction of the hiring company;
    1. the worker must be able to determine when, where and how assigned work is performed
  2. perform work outside the usual course of the hiring entity’s business
    1. contractors don’t perform the necessary and daily functions of the organization; and
  3. are customarily engaged in that trade, occupation, or business
    1. the contractor has performed the work previously and/or has other clients for which they have or perform the same work.

The implications of AB 5 

For organizations outside California, the bill may not seem to have implications. But if any Californians are part of a company’s pool of workers, AB 5 will apply. The legislation covers workers and employers. While there are many exemptions and nuances to the law, businesses will need to assure they are in compliance unless and until any pending lawsuits make significant changes to the legislation.  

If your contractors don’t pass all three requirements of the ABC test, you’ll have three choices: put them on the payroll as a regular employee; release them from your contract, or, under some categories (like writers), limit the amount of work they submit on an annual basis. 

People Person will continue to provide you with updates to AB 5 as they arise. In the meantime, we strongly recommend that you engage your HR team and employment attorney to ensure that your business is in compliance.