Overtime and Exemptions:
Q: My state requires overtime after working 8 hours in a day. Am I still required to pay overtime to an employee who works more than 8 hours one day, but leaves early the next day?
A: States that require daily overtime generally prohibit employers from averaging employees’ hours over more than one workday. Therefore, if an employee works more than the threshold for daily overtime, you must generally pay them overtime regardless of the number of hours they work the following (or previous) workday.
Note: The same is true for weekly overtime under federal law. If an employee works more than 40 hours in any workweek, they must receive overtime pay. For the purposes of determining whether overtime is due, employers are prohibited from averaging hours over more than one workweek.
Q: Can you have a “salaried” employee who works only 15 hours per week?
A: In general, there is no minimum number of hours an employee needs to work to be paid a salary. However, there are certain pay requirements with which you must comply based on whether the employee is classified as exempt or non-exempt.
Employers can pay non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when due. Therefore, if a non-exempt employee works 15 hours in a workweek, the salary must be enough to comply with the applicable minimum wage. For example, if the applicable minimum wage is $12 per hour, the employee’s salary must be at least $180 for a 15-hour workweek (if the employee works more than 15 hours in a workweek, this employee must receive additional compensation to meet the minimum wage requirements).
Under the Fair Labor Standards Act (FLSA), to be classified as exempt from overtime, an employee must generally:
Meet the minimum salary requirement (currently $455 per week for the professional, administrative, and executive exemptions);
Receive their full salary in any week they perform work, regardless of the quality or quantity of the work; and
Meet certain primary duties criteria.
Both full-time and part-time employees must receive a salary of at least $455 per week (and meet the duties tests) to be classified as exempt. Employers cannot prorate the salary and consider the employee exempt from overtime. Generally, if you pay the employee a salary less than the current $455 minimum, the employee must be classified as non-exempt.
Note: Several states have their own tests for exemption, some of which require a higher salary. Check your state law to ensure compliance.
Q: Can an employer offer different benefits to exempt employees than it does to non-exempt employees?
A: Generally, there is no law that expressly bars employers from offering different benefits to exempt employees than it does non-exempt employees, but employers must ensure benefit plans do not discriminate (intentionally or unintentionally) on the basis of a protected characteristic, such as age, race, or sex.
No federal or state law requires employers to offer vacation, and employers may generally offer more generous paid vacation time to exempt or non-exempt employees, keeping in mind any potential discriminatory impact.
Several states and local jurisdictions require employers to offer sick leave to employees. All of these laws require employers to offer sick leave to non-exempt employees, and most apply to exempt employees as well. As long as all covered employees are provided with enough sick leave to meet the requirements of the law, employers generally aren’t prohibited from offering more generous sick leave to exempt employees versus non-exempt employees or vice versa.
Section 125 Cafeteria Plans:
Employers that offer cafeteria plans under Section 125 of the Internal Revenue Code must ensure that their plan design doesn’t discriminate, among other things, in favor of highly compensated employees.
Federal law generally allows health plans to base distinctions on bona fide employment-based classifications, such as exempt versus non-exempt or full-time versus part-time status. Keep in mind that there may be compliance requirements regardless of whether the employee is classified as exempt or non-exempt. For example, under the Affordable Care Act (ACA), employers with 50 or more full-time and full-time-equivalent employees must generally offer health coverage to their full-time employees and their dependents. The ACA defines full-time employees as those who work on average 30 or more hours per week.
Note: The ACA also contains a rule prohibiting group health plans from discriminating in favor of highly compensated employees, but enforcement of this rule is on hold until regulations guiding compliance are issued.
Q: Does an employer need to have a signed contract with an independent contractor?
A: Strict federal and state tests must be satisfied for an individual to be considered an independent contractor. The most commonly used test is the Internal Revenue Service (IRS) Common Law Test, which is used for federal tax purposes. Among other things, this test assesses whether the company has the authority to direct and control the individual’s work, whether the worker realizes a profit or loss, the length of the relationship, and whether there is a written contract between the parties.
Under this test, employers must weigh a variety of factors and no one factor stands alone in making a classification determination. While a written contract by itself doesn’t establish an individual is an independent contractor, it is a factor that should be considered when making a classification determination.
Note: Other tests are used for determining worker status under other laws. For instance, the Department of Labor (DOL) “economic realities” test is used to determine whether workers are covered by the FLSA and entitled to minimum wage, overtime, and other wage and hour rules. Some states have their own tests. Make sure your independent contractors satisfy all applicable tests.
Q: Can an individual be both an employee and an independent contractor for our company at the same time?
A: There are very limited circumstances in which an individual can be an employee and independent contractor for the same employer. In instances where an individual provides services in two distinct roles to the same business, employers should examine the relationship between the worker and the business for each role separately. If, after performing the applicable tests, an employer-employee relationship is found in both roles, then the individual must be classified as an employee for both roles. However, if an employer-employee relationship is found in only one of the roles, the individual may generally be classified as an independent contractor in the other. Again, this is very rare. A worker is presumed to be an employee unless they meet specific tests under federal and state law.
Background: The use of probationary or introductory periods can lead to confusion regarding “at-will” status, since employees sometimes think that once they successfully complete them, they are no longer at risk for termination based on their performance. Generally, “at-will” means that in the absence of an express or implied contract, the employer or the employee may end the employment relationship at any time for any lawful reason. At-will employment is recognized in all states but Montana.
Q: What is the point of a probationary period if employees are at-will anyway? Why would employers use it?
A: Probationary periods originated in union environments. It was a way for employers subject to a collective bargaining agreement to have a short period of time to evaluate employees in which they would not be governed by the same termination requirements as during the regular employment period. Some non-union employers have since adopted the practice as a way to assess whether a new hire or newly promoted employee is a good fit for the position. However, given the confusion it can cause, it’s a best practice to avoid such labels. Instead, help new hires get started on the right foot with a comprehensive orientation process to familiarize them with the company (and vice versa). Provide new hires with frequent feedback, and the information, tools, training, and support they need to succeed. Employers that use probationary or introductory periods should carefully assess the benefit of having such periods, and if they wish to continue using them, consider working with legal counsel to develop and implement them.
Q: Can we use probationary periods for earning benefits?
A: These are typically called “waiting periods” instead of probationary periods. Generally, a waiting period is the period of time that must pass before coverage for an otherwise eligible employee can become effective. Your ability to impose waiting periods may be limited in some cases. For example, the ACA generally prohibits all health plans from requiring an otherwise eligible individual to wait more than 90 days to enroll in the plan. Additionally, most paid sick leave laws require that employees begin accruing time off on their first day of employment, though employees may be required to wait a certain period before they can use leave. Check the laws that apply to your business before imposing a waiting period.
Make sure you understand and comply with the federal, state, and local rules that apply to employees and independent contractors.