Salaried or Hourly?

Rather than "salaried or hourly," the question actually should be, "Exempt or non-exempt? The Fair Labor Standards Act requires that employees subject to it (i.e., non-exempt employees) be paid time and a half for all hours worked in excess of 40 in a one-week period. Those who are exempt need not be compensated for overtime. In theory, an employer could pay a non-exempt employee with a salary. But if that person worked over 40 hours in a week, the employer would have to calculate her/his overtime pay by dividing the salary by the number of hours actually worked and multiplying that figure by 1.5. Most retailers find it clearer and simpler to pay non-exempt employees on an hourly basis.

Non-exempt status

Before we discuss what conditions make an employee exempt from the requirements of the law, here are some points to keep in mind about non-exempt status:

Work week: Ifyour pay period is longer than a week, you can't average an employee's "regular rate of pay." This includes bonuses or incentives tied to productivity, attendance, longevity or quality of work. If you have a plan that distributes profit or provides gain-sharing based on hours worked, you must pay one and a half times the profit or gainshare for any overtime hours worked by non-exempt employees during the period covered by the plan. On the other hand, a purely discretionary bonus, in situations where no promises have been made to employees about whether a bonus will be paid or the amount of the bonus, need not be included in the "regular rate of pay" for calculating overtime.

Comp time for non-exempt employees: While public employees can request paid time off for overtime in lieu of cash, private sector workers don't have that choice, except in a very limited way. If the employer has a written "time off plan," employees who rack up overtime in the first week of a pay period can take "time and a half off' in the second week of the pay period. But if the overtime hours occur in the second week, they must be compensated in cash.

Surveys show that the vast majority of US workers want the freedom to choose whether to take their overtime compensation in time or money. But when Congress passed a bill in 1996 extending this choice to the private sector work force, President Clinton vetoed it at the urging of labor unions. A similar bill has been introduced this year.

Compensable working time: For the purposes ofcalculating overtime, not every hour paid is an hour worked. You don't have to count vacation, sick leave or holidays. Time spent in training is considered "hours worked" if the training takes place during the person's regular work hours, or if it is required by the employer, of if it is directly job related, i.e., it is "desigued to make the employee handle his job more effectively, as distinguished from training him for another job or for a new or additional skill."

Who's exempt

Exempt positions require a different mindset from that of hourly employees. The focus moves from number of hours worked to getting the job done. The purpose of creating an exempt position should not be to exploit people by making them work 50 hours for the price of 40. Rather, it is to give people control over their own time to accomplish their work in the most effective way.

To be exempt a position must meet one of the Fair Labor Standards Act's tests for executive or administrative status (there are other categories that are not relevant to retails), and the pay must be at least $250 a week "on a salary basis."

Executive and administrative exemptions: To earn executive status, an individual's primary duty (i.e., 60 percent or more of her/his time) must consist of management of the entire business or of a recognized department, and her/his duties must include the regular supervision of two or more full-time employee equivalents. Supervision here means hiring, training, evaluating employees, taking disciplinary action, planning the work to be done and assigning tasks.

To qualify for administrative status, an individual's primary duty must consist of office or non-manual work related to management policies or general business operations, and that work must regularly require the exercise of independent judgement and discretion. Those who are not engaged in policy-making must at least carry out assignments that affect the operations of the employer "to a substantial degree," and they must be free from immediate direction or supervision.

Although these definitions sound clear enough, it can be surprisingly hard to apply them. A general manager easily fulfills the requirements for an executive exemption. Department managers in a larger store would also. Assistant department managers probably would not. Meat and produce managers in supermarkets have both won and lost claims to be non-exempt. In some cases these managers did so much of the regular work of the department that their primary duty" was not considered to be management. In other cases, the managers in question did enough buying, pricing, merchandising and supervisions to be determined exempt.

Financial, human resources and member relations managers are likely candidates for the administrative exemption. But the Department of Labor has made it clear that clerks and bookkeepers do not perform exempt work even though an error in their work could impact the employer "to a substantial degree." Would this category apply to a floor manager? What about a highly skilled and autonomous vitamin buyer who supervises a part-time employee? There are no easy answers. You're going to have to analyze each job carefully and make a judgement call.

Salary basis: Another criterion for exempt positions is that the people holding them be paid the same, pre-determined amount each pay period regardless of the number of hours they worked. The employer must pay for every day that the exempt employee is ready, willing and able to work. The only permissible deductions are for:

  1. absence for a whole day due to sickness or accident, following an established policy;
  2. absence for a whole day or more for personal reasons;
  3. partial days off taken as designated family or medical leave;
  4. holidays that the store is open and the employee chooses not to work;
  5. the initial or final week of employment, if a person doesn't work the full week.

You may not deduct from an exempt employee's salary for absences of less than a day (except for family and medical leave) for jury duty, military leave, disciplinary action or any absence "occasioned by the employer or by the operating requirements of the business."

Comp time for exempt employees

Although not required by the Fair Labor Standards Act, some employers give extra time offto their salaried employees in compensation for working extra hours in a week. When handled informally between the employee and the supervisor, this arrangement can work well. If an exempt employee works late attending a board meeting, it is appropriate for hen him to come in later the next day, or take a few hours off elsewhere in the week, with the agreement of the supervisor. General managers usually do this without anyone's permission, but they are expected to keep other staffinformed oftheir schedule.

However, in my experience a formal written comp time policy leads to nothing but trouble. When employees expect to receive paid time off for every hour they work over 40, they are no longer operating in the mindset of exempt positions. They are focusing on hours worked instead of getting the job done. They have no incentive to be efficient. But even if they were performing at an excellent level, camp time often proves to be a cruel illusion. It is rare to find organizations that can actually spare their exempt employees long enough to let them use all their accumulated camp time.

Rather than let exempt employees rack up masses of hours over their scheduled work week, a wise supervisor actively monitors their work to prevent burnout. Some companies require exempt staff to fill out time sheets so that supervisors can track workload and discuss problems before they become crises. The Department of Labor has specifically ruled that it does not violate the "salary basis" criterion for exemption if the employer requires exempt employees to keep records of their hours. If people write down their hours on a time sheet and sign it, they are more likely to be honest about their use of vacation, sick leave and personal holidays, and they can be confronted more easily if there are discrepancies between what they claim and what the supervisor observes. The co-op has an interest in ensuring that these benefits are given and used equitably by all exempt staff.

See other articles from this issue: #070 May - June - 1997