Knowing about minimum wage compliance is key for new managers. It’s important to understand the difference between salaried vs hourly workers. Misclassifying one employee can cost your company a lot.
The U.S. Department of Labor says over $322 million in back wages were paid to workers in 2022. My mentor said, “The most expensive mistakes are the ones you don’t realize you’re making until it’s too late.”
In my ten years helping businesses, I’ve seen many new managers struggle with employee classification. It’s not easy because of all the rules from federal, state, and local governments.
This guide will teach you about managing salaries and hours legally. You’ll learn how to set up systems that follow the law. And you’ll avoid mistakes that even experienced managers make.
Quick hits:
- Proper classification prevents costly legal penalties
- Overtime rules differ between payment types
- Record-keeping requirements vary by classification
- State laws often exceed federal standards
- Regular audits protect your business integrity
Overview of salaried wage structure
Salaried wage structures follow certain rules. New managers need to know these rules to classify employees right. Not knowing these rules can lead to big fines.
Employees get the same pay every pay period, no matter how many hours they work. But, not all salaried workers get overtime pay. Some get overtime, even if they get a salary.
The Fair Labor Standards Act (FLSA) sets these rules. It deals with minimum wage, overtime, and more. It affects workers in many places.
“The most common and costly mistake I see new managers make is assuming that paying someone a salary automatically makes them exempt from overtime requirements.”
When you use a salaried wage structure, think about your business and the law. Salaried jobs attract people who want stable pay. But, you must follow the law.
Exempt Versus Nonexempt Salary Status
Exempt and nonexempt status are key in salary classification. Exempt workers don’t get overtime pay for extra hours.
To be exempt, workers must get a salary, meet a pay threshold, and have certain job duties. The salary basis test says they must get the same pay every pay period.
| Exemption Category | Primary Duty Requirements | Typical Positions | Common Misclassification Risks |
|---|---|---|---|
| Executive Exemption | Managing the enterprise or a department; directing work of at least two employees; authority to hire/fire | Store managers, department directors, operations executives | Managers who mainly do the same work as others |
| Administrative Exemption | Office work related to management or business; makes decisions on their own | HR specialists, compliance officers, administrative assistants with decision power | Administrative assistants without much decision-making power |
| Professional Exemption | Work that needs advanced knowledge; mostly uses their brain and makes decisions | Engineers, doctors, certified public accountants, lawyers | Technical workers without advanced degrees |
The duties test looks at what workers really do. It’s different for each exemption. For example, executives must manage, while professionals need advanced knowledge.
Here’s a quick look at the main FLSA exemptions:
- Executive Exemption: For those who manage, direct others, and can hire or fire.
- Administrative Exemption: For office workers who make big decisions.
- Professional Exemption: For workers with advanced knowledge in science or learning.
Nonexempt salaried workers face special challenges. They get a salary but must track hours and get overtime pay. Their overtime rate is 1.5 times their regular pay.
Misclassifying workers is a big risk. If you call a nonexempt worker exempt, you could owe them overtime. You might also face fines and legal fees.
Keep good records of your decisions. Write clear job descriptions that show why workers are exempt. Check these every year, or when the rules change.
State laws might have extra rules. Some states have higher pay limits or stricter rules. Always check your state’s rules when classifying workers.
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Overview of hourly wage structure
Hourly wages have special rules that new managers must learn. Unlike salaried jobs, hourly workers get paid for each hour. This makes tracking and paying them more complex.
New managers often don’t realize how hard it is to follow hourly wage rules. The Fair Labor Standards Act (FLSA) has strict rules for hourly pay. You must keep detailed records and make sure payments are correct.
Hourly wages let businesses control costs and help employees see how they’re paid. It works well for jobs that change a lot, like retail or manufacturing. But, it also means more work for you.
“The most common wage and hour violations stem not from intentional wrongdoing but from misunderstanding timekeeping requirements and overtime obligations. Proper systems and training can prevent most compliance issues before they start.”
Timekeeping Requirements and Challenges Daily
Keeping accurate time records is key for hourly wages. The FLSA says employers must keep detailed records of hours worked. This includes start and end times and any breaks.
There are many timekeeping systems, from simple clocks to digital ones. Choose one that works well for your business. It should track all work hours, even if it’s not obvious.
Managing meal breaks is hard. Federal law doesn’t require them, but if you do give breaks, they must be 30 minutes or more to be unpaid. Some states have their own rules.
Rounding time can be tricky. The FLSA lets you round to the nearest quarter hour, but it must be fair. If it’s not, you could face big fines.
Off-the-clock work is a big risk. You must have strict rules against working without recording it. This includes checking emails or taking calls after hours.
| Timekeeping System | Pros | Cons | Best For |
|---|---|---|---|
| Paper Timesheets | Low initial cost, no technology barriers | Error-prone, easy to falsify, manual calculation required | Very small businesses with few hourly employees |
| Physical Time Clocks | Simple to use, creates physical record | Buddy punching possible, limited reporting capabilities | Small businesses with single-location operations |
| Biometric Systems | Prevents time theft, highly accurate | Higher cost, privacy concerns | Businesses with significant time theft issues |
| Mobile Apps | Location tracking, flexibility for remote workers | Requires smartphone access, connectivity issues | Businesses with field employees or multiple locations |
Overtime Calculation Legal Obligations Core
Getting overtime right is very important. The FLSA says non-exempt workers must get 1.5 times their regular pay for extra hours. But, there are many details to remember.
The “regular rate” is more than just the hourly wage. You must include bonuses and other payments in the overtime rate. For example, production bonuses count too.
What defines your workweek is key for overtime. The FLSA says it’s a fixed 168-hour period. You can pick any seven-day period, but changing it often is not allowed.
Some states have their own overtime rules. California, for example, requires daily overtime for long days, even if the week isn’t over. Always check your state’s rules.
Use systems that warn you about overtime. This helps you plan and avoid extra costs. Your payroll system should also do overtime calculations for you.
Keeping good records is vital for overtime. Keep records of all hours, overtime, and payments for at least three years. These records help protect you in audits or disputes.
Remember, trying to avoid overtime by making employees work off the clock is against the law. It can lead to big fines and legal costs.
Setting up a good time tracking system takes effort but saves you money and trouble. By understanding hourly wages, you can keep your business safe and fair for your team.
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Minimum wage applicability for salaries
Many think salaried workers don’t need to follow minimum wage rules. But, this is not true under federal and state laws. I’ve seen many Idaho businesses face big fines because they didn’t understand this.
To follow the rules, just divide the salary by the hours worked each week. The hourly rate must be at least the minimum wage. The federal minimum is $7.25, but some states have higher rates.
For example, if a worker makes $600 a week and works 50 hours, they make $12 an hour. This is more than the federal minimum. But, it might not be enough in states like California or Washington.
“The most common compliance mistake I see is assuming that paying someone a salary automatically removes minimum wage obligations. This misunderstanding has cost employers millions in back wages and penalties.”
The fluctuating workweek is tricky. Nonexempt salaried workers must be checked every week. If they work long hours, you might need to pay extra to meet minimum wage.
I’ve helped many businesses use “salary shortfall” tracking systems. These systems help find when extra payments are needed. They track hours, calculate hourly rates, and alert when rates get close to minimum wage.
For exempt employees, you must pay them their full salary no matter what. You can’t cut their pay for missing part of a day without losing their exempt status.
The only times you can deduct from exempt employees’ pay are:
- Full-day absences for personal reasons
- Full-day absences due to sickness (if under a bona fide sick leave plan)
- Penalties for major safety rule violations
- Unpaid disciplinary suspensions of one or more full days
State laws often have extra rules beyond federal ones. For example, California says exempt employees must make at least twice the state minimum wage monthly. Always choose the standard that helps employees the most.
| State | 2023 Minimum Wage | Minimum Salary for Exemption | Special Provisions |
|---|---|---|---|
| Federal | $7.25/hour | $684/week ($35,568/year) | Standard duties test applies |
| California | $15.50/hour | $64,480/year | Twice minimum wage calculation |
| New York | $15.00/hour (NYC) | $58,500/year (NYC) | Regional variations apply |
| Washington | $15.74/hour | $65,478/year | Adjusted annually for inflation |
When you hire new salaried staff, make sure their pay meets minimum wage laws. This is very important for jobs with long hours. I suggest making a form that explains:
- The employee’s exempt or nonexempt status
- Expected work hours and pay
- How to keep up with minimum wage rules
- How to report any pay or hour issues
This form helps protect your business and teaches your employees. It sets clear expectations from the start. This way, you avoid misunderstandings that could lead to problems or legal issues.
Minimum wage applicability for hourly pay
Managing hourly employees means knowing all about minimum wage rules. Many new managers think just paying the federal minimum wage is enough. But it’s not that simple, mainly if your business is in different places or has special workers.
Every hour worked by hourly employees must be paid at or above the minimum wage. If your business is in many cities or states, you must pay the highest minimum wage where they work. For example, if your company is in places with different minimum wages, workers must get the higher rate.
Tip Credit and Tipped Employees
Federal law lets employers take a tip credit of up to $5.12 an hour for tipped workers. This means they only have to pay $2.13 an hour. But, there are strict rules for this.
You must tell employees before you start taking a tip credit. Also, you must make sure their tips and wages add up to at least the minimum wage. If tips are not enough, you must make up the difference. As I tell managers, “The tip credit isn’t a way to pay less—it’s a different payment structure with its own compliance requirements.”
“Employers often misunderstand that the tip credit is not automatic—it requires proper notification, accurate recordkeeping, and regular verification that employees are actually receiving enough tips to reach minimum wage.”
Special Minimum Wage Provisions
There are special rules for minimum wage, like training wages and youth minimum wages. Training wages let you pay new employees less for a short time. Youth minimum wage lets you pay workers under 20 $4.25 an hour for their first 90 days.
Some states also let you pay new employees less during training. These rules have strict time limits and rules you must follow to stay legal.
| Wage Type | Federal Rate | Time Limitation | Documentation Required |
|---|---|---|---|
| Standard Minimum Wage | $7.25/hour | None | Regular payroll records |
| Tipped Minimum Wage | $2.13/hour | None | Tip declarations, notice to employees |
| Youth Minimum Wage | $4.25/hour | 90 calendar days | Age verification, hire date records |
| Training Wage | Varies by state | Typically 30-90 days | Training program documentation |
Piece-Rate and Commission Compliance
For employees paid by piece-rate or commission, you must do extra math. Their total earnings divided by hours worked must be at least the minimum wage. If they don’t make enough, you must pay them more.
I suggest checking weekly before payday for piece-rate workers. This helps catch problems early and adjust as needed.
Regional Pay Considerations
Some places have extra pay rules beyond the basic minimum wage. For example, in New York, you must pay extra for long workdays. You might also have to pay extra for long breaks.
It’s key to know the rules in each place you have employees. What’s okay in one city might not be in another.
Posting and Communication Requirements
Minimum wage posters must be up in places where employees can see them. You must update these posters when wages change. Clear talk about wages helps avoid confusion.
Update your employee handbook every year to show the latest wage rules. Talk about how minimum wage applies to each job, like for tipped or piece-rate workers.
Remember, you can’t take away pay for things like uniforms or tools if it makes their hourly rate too low. Even small deductions can cause big problems.
Switching between salary and hourly systems
Switching employees from salary to hourly or vice versa is tricky. It needs careful planning to avoid mistakes. Changes can affect how your business runs and how happy your employees are.
When you switch from salary to hourly, it’s usually because of new rules. Going from hourly to salary might mean more work or simpler payroll. Both changes need clear plans and good talks with your team.
Think about overtime costs before making changes. A worker who used to get a salary might now get more pay for overtime. This can change their total earnings.
Conversion Calculations and Communication Tips
To switch to hourly, divide the yearly salary by the yearly hours worked. For a full-time job, that’s 2,080 hours. But, you might need to adjust for overtime pay.
For example, if someone earns $52,000 a year and works 45 hours a week, their pay might go up. You might need to lower their hourly rate to keep costs the same and follow the law.
To switch from hourly to salary, multiply the hourly rate by yearly hours. Then add overtime hours that will now be covered by the salary. Use a spreadsheet to show how their pay will change.
| Conversion Type | Basic Calculation | Adjustment Factors | Documentation Needed |
|---|---|---|---|
| Salary to Hourly | Annual Salary ÷ 2,080 | Overtime expectations, minimum wage compliance, benefits impact | Job duty changes, exemption status justification, new hourly rate calculation |
| Hourly to Salary | Hourly Rate × 2,080 | Typical overtime hours, on-call requirements, schedule flexibility | New job description, exemption qualification evidence, compensation comparison |
| Temporary Reclassification | Based on project duration | Return conditions, timeline, performance metrics | Temporary assignment details, duration, return process |
Talking clearly with employees is key when changing their pay. Meet with them two weeks before the change. Talk about:
- The reasons for the change
- How their pay will be figured out
- Any worries about status or work hours
- Changes to benefits
- New rules for tracking hours
Keep good records of the change. Make a file for each employee. It should have the reasons for the change, how pay will be figured, and any new job duties.
Having a follow-up meeting 30 days later helps. It lets you fix any problems and makes sure everyone understands their new pay. This builds trust during a big change.
Check out the below:
Actionable compliance checklist for businesses
I’ve made this checklist from years helping businesses with wage rules. Start with a quarterly employee classification review. Remember, it’s the job duties, not titles, that matter under FLSA rules.
Make sure your timekeeping system tracks all work hours, even remote ones. This is key for payroll compliance. Check if your lowest wages match current minimum rates in all places you work.
Look at your overtime policy every quarter to make sure you’re paying right. Keep time and pay records for at least three years for recordkeeping requirements.
Put up the right minimum wage posters where everyone can see them. Update your employee handbook every year with the latest wage rules and how to complain.
Do wage and hour training for all managers yearly, and keep records. Have a regular wage compliance audit to find problems early.
Give each task to a team member with a deadline. Think about getting a wage and hour lawyer for a full DOL compliance check every two years. These steps will lower your risk and make your employees trust you more.
