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Exempt Employees, Minimum Wage, & More: Your FAQs Answered

In the second part of our answers to frequently asked questions from our recent webcast Compliance Trends to Watch in 2021, we cover rules governing employees who are exempt from overtime, minimum wage, background checks, and nondiscrimination.

Exempt Employees

Q: What is the difference between an exempt and non-exempt employee?

A: The federal Fair Labor Standards Act (FLSA) requires employers to pay most employees at least the federal minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. Employees entitled to the minimum wage and overtime are known as non-exempt employees.

The FLSA allows for exemptions from the overtime and minimum wage requirements for certain employees who work in administrative, professional, and executive jobs. These are known as exempt employees. To be considered "exempt," these employees must generally satisfy three tests:

  • Salary-level test. Employers must pay employees a salary of at least $684 per week.
  • Salary-basis test. With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
  • Duties test. The employee's primary duties must meet certain criteria.

Many states have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. In many cases, the state criteria are harder to meet than the federal criteria.

Note: The FLSA also has exemptions for certain computer-related and outside-sales jobs, which have slightly different tests. Specifically, the exemption for computer-related occupations allows employers to pay employees on a salary basis (at a rate of least $684 per week) or on an hourly basis (at a rate of at least $27.63 per hour). The exemption for outside sales has no minimum salary requirement.

Q: In California the minimum salary requirement is two times the minimum wage. Is the minimum wage used for this purpose the state or my city minimum wage?

A: In California, exempt employees must meet certain salary and duties tests and must be paid at least twice the state minimum hourly wage based on a 40-hour week. The city's minimum wage isn't considered when determining the minimum salary requirement in California.

The state's minimum wage differs based on the size of the employer, and therefore so does the minimum salary requirement for exemption. For the administrative, professional, and executive exemptions under state law, the minimum salary is as follows:

Employer size

Minimum per week in 2021

26 or more employees

$1,120

Fewer than 26 employees

$1,040

Q: Can I make a deduction from an exempt employee's salary if they miss one day of work?

A: When an employee is classified as exempt, federal law limits salary deductions to the following circumstances:

  • When an employee is absent for one or more full days for personal reasons other than sickness or disability;
  • For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
  • To offset jury or witness fees, or for military pay;
  • For penalties imposed in good faith for infractions of safety rules of major significance;
  • For unpaid disciplinary suspensions of one or more full days imposed in good faith for serious misconduct, such as sexual harassment, workplace violence, drug or alcohol use, or for violations of state or federal laws. The suspension must be imposed pursuant to a written policy applicable to all employees;
  • In the employee's first or last week of employment if the employee does not work the full week; or
  • For unpaid leave taken by the employee under the Family and Medical Leave Act.

The FLSA doesn't permit deductions from exempt employees' salaries for any other reason.

Q: If an exempt employee takes a sick day but has exhausted all of their sick leave for the year, can I reduce their salary?

A: Under the FLSA, deductions may be made for an exempt employee's full-day absence due to sickness after the employee has exhausted the leave allowance under the plan. For example, if your sick leave plan provides each employee with 10 paid sick days per year, and an exempt employee has exhausted the 10-day leave entitlement, a deduction of one or more full days from their salary may be allowed if all other available/applicable leave has been used. There can be no salary deduction for a partial-day absence.

Q: Can I dock the pay of an exempt employee who arrives to work late every day?

A: No. You may make salary deductions for unpaid disciplinary suspensions of one or more full days imposed in good faith for serious misconduct, such as sexual harassment, workplace violence, drug or alcohol use, or for violations of state or federal laws. This provision doesn't apply to performance or attendance issues.

Q: The federal minimum salary requirement equates to $35,568 per year. What if I have employees who are paid a salary of $30,000 per year?

A: If employees are paid less than $684 per week, they must be classified as non-exempt and would be entitled to overtime whenever they work more than 40 hours in a workweek, even if they satisfy the exempt duties test.

Note: Under federal law, employers are permitted to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually. Note that some states don't allow employers to count these other forms of compensation toward meeting the state's minimum salary requirements.

Q: We don't have enough work for our exempt employees. Can we prorate their salary based on actual hours worked?

A: Under the FLSA, employers are prohibited from reducing an exempt employee's salary based on short-term, day-to-day, or week-to-week operating requirements. However, you may change exempt employees' salaries prospectively to reflect long-term business needs, provided such adjustments are not related to the quantity or quality of work performed and the employee still receives at least $684 per week on a salary basis. For instance, you could reduce all exempt employees' salaries by five percent for the upcoming fiscal year because of budgetary constraints (provided the reduced salary still meets minimum requirements). By contrast, you could jeopardize an employee's exempt status by making a short-term deduction for reductions in scheduled work.

Minimum Wage

Q: If we operate in one state but an employee is working from home in another state, which state's minimum wage would apply?

A: In general, the minimum wage where the employee works would apply, but check state and local law to be sure.

Q: Where do we find each state and city minimum wage?

A: In addition to the resources available on HR411®, the federal government and many state, and local governments publish information on the minimum wage on their websites. Additionally, the U.S. Department of Labor (DOL) publishes a list of state minimum wage rates here.

Q: How do we provide minimum wage posters to employees who are working remotely?

A: In recent guidance, the DOL said that an employer may use electronic means to post the notice as a substitute to the hard copy notice only if all employees:

  • Exclusively work remotely;
  • Customarily receive information from the employer via electronic means; and
  • Have "readily available access" to the electronic posting at all times, such as via an internal or external website or a shared network drive or file system. Simply emailing these notices to employees wouldn't comply with the guidance.

If you have some employees on-site and other employees working remotely, you must post the hard copy of the FLSA notice in the workplace and are encouraged to post them via electronic means for remote employees.

States and local jurisdictions may have different rules.

Hiring and Background Checks

Q: Can we ask an applicant what their salary expectations are?

A: Many states and local jurisdictions have passed laws that restrict employers from asking about an applicant's pay history during the hiring process (under the premise that pay history may reflect discriminatory pay practices of a previous employer). These laws generally allow you to provide the candidate with the starting salary (or salary range) for the position and ask whether it would be acceptable if the candidate were offered the position. The answer to the question of whether they permit inquiries about salary expectations can vary by jurisdiction, so check applicable laws before asking these questions. To err on the side of caution, you may want to state clearly that the candidate shouldn't reveal what they earned in their previous job when providing salary expectations. Additionally, keep in mind that the applicant's salary expectations could be low because of past discrimination.

Q: Can I ask about criminal history on application forms?

A: In numerous jurisdictions, employers are prohibited from asking about criminal history on application forms. In many cases, these laws require employers to wait until later in the pre-employment process, such as after a conditional job offer, before asking about criminal history. While there's no federal law specifically prohibiting employers from asking applicants if they've ever been convicted of a crime, the Equal Employment Opportunity Commission (EEOC) recommends employers avoid asking for this information on an application form. If and when you do ask about convictions later in the selection process, the inquiries should be job-related and consistent with business necessity.

Q: Can I ask, during an interview, or at the time of onboarding, if candidates have any garnishments? If they answer yes, can I refuse to hire them?

A: Title III of the Consumer Credit Protection Act (CCPA) expressly prohibits an employer from discharging an employee whose earnings have been subject to garnishment for any one debt. Some states have greater protections for workers. Additionally, keep in mind federal, state, and local nondiscrimination laws since screening applicants based on garnishments could have a disproportionate effect on a protected class (such as race, color, national origin, religion, or sex).

Nondiscrimination:

Q: Do hairstyle discrimination laws apply to all races?

A: In the past few years, several states and local jurisdictions have enacted laws expressly prohibiting employers from discriminating against applicants and employees because of hair texture and hairstyles that are historically associated with race. These hairstyles include but aren't limited to braids, locks, and twists and the laws aren't limited to a specific race.

Grooming and appearance standards must comply with federal, state, and local nondiscrimination laws. To avoid potentially discriminatory practices, consider simply requiring employees to keep hair kempt. However, conscious and unconscious biases may impact what decision-makers view as "kempt," and some may wrongly presume that certain hairstyles are inherently messy or disorderly. Clarify that kempt means that the hair is clean and well combed or arranged, and that employees can comply with a variety of hairstyles, including but not limited to locks, cornrows, and Afros that meet those criteria.

Q: Can a workplace require that employees' hair be pulled back for safety reasons?

A: Where an employer has legitimate health or safety concerns, they may consider hair ties, hair nets, head coverings, and alternative safety equipment and should be consistent in enforcing such rules.

Conclusion:

Make sure your pay practices, hiring practices, and grooming and appearance standards comply with federal, state, and local laws.

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