Should you pay your managers and office or executive staff an hourly rate or salary? Which way is the “right” (i.e. legal) way to compensate these types of employees?
This topic of exempt versus nonexempt status can be confusing and difficult for busy business owners and restaurateurs to navigate, but it’s one task that you absolutely must get right. If you don’t, the ramifications can be downright disastrous.
And because this is such an important topic, if you don’t have time to read this article in its entirety right this minute, head over to YouTube and watch my quick, two-minute video overview on how to properly classify your employees. It’ll be time well-spent.
Otherwise, let’s get to it.
Exempt and Nonexempt
The first part of the Exempt employees classification equation is knowing the difference between exempt and nonexempt employees. The Fair Labor Standards Act (FLSA) provides extensive guidance here. But to keep this as simple and straightforward as possible, here’s a quick breakdown of the primary differences:
- Generally includes employees who function in an executive, administrative, professional, computer, or outside sales role;
- Are ineligible for overtime; and
- Are salaried employees.
- Typically includes all other employees;
- Are eligible for overtime after working 40 hours in one week; and
- Are paid hourly.
Put Each Employee to the Test
There are a few ways to test if you have determined the correct classification for your employees.
First, to assign exempt status to an employee such as a manager or office staff, the following three things must hold true for that employee:
- Must be paid at least $684 per week ($35,568 per year)*; and
- Must be paid on a salary basis; and
- Must perform exempt job duties as their primary function (i.e. for restaurants, most often this means managerial or executive duties such as overseeing at least two or more employees, participating in hiring, firing, scheduling decisions, etc.)
Where employers tend to get into trouble is when an employee performs a mix of duties. In a restaurant, for instance, that may mean that they manage a crew but also wait tables, answer phones, and prep plates. This behavior of stepping in where they’re needed is exactly what you want an ideal manager to do, but it all too often muddies the classification waters for employers.
This is where the primary duties test can provide some much needed clarity. You simply separate the employee’s primary duties from their collateral tasks — even list them out on a piece of paper so you can visualize it better — and see in which category the employee spends most of their time.
In our example above, let’s assume the employee spends 80 percent of their time doing managerial tasks and is paid a salary of $684 per week. Since their primary function is managerial in nature and they meet the additional salary requirements, you would classify this employee as exempt.
I mentioned earlier that flubbing up employee classification — no matter how much of an honest to goodness mistake it is — can bring about lots of trouble.
A quick Google search of “restaurant overtime lawsuits” brings up quite a few that affect employers of all sizes — from worldwide chains like Chipotle to independent restaurants like Blue Hill Stone Barns. Outside of the restaurant realm, Groupon was at the center of a massive overtime lawsuit too that resulted in a $2.5 million settlement.
And while I am in no way trying to paint these businesses in a negative light, it serves as a tangible reminder that failing to accurately interpret and execute this law can cause huge consequences with lasting repercussions. Getting it right from the start with each and every employee is the goal!