The blank in the title is intentional. Many property owners and employers pay – or tell me they want to pay – a flat monthly salary to their on-site managers, maintenance workers, you name it. Doing so seems so much simpler to them than needing to track hours and pay different amounts each pay period. But it’s a bad idea, especially if overtime may be involved.
Because this comes up so frequently, I decided an article on this topic might be helpful. So here goes – the ABCs of “exempt” versus “non-exempt” employees in California and the practical ramifications for you.
The Basics
An employee in California is either “exempt” or “non-exempt,” which everyone but employment lawyers frequently – and inaccurately – translate as “salaried” or “hourly.” But really, “exempt” means exempt from the overtime rules and non-exempt means, well, not exempt from the overtime rules.
It is true that an “exempt” employee will be salaried, but the converse is not true: merely paying someone a “salary” does not make her “exempt” (and she may not be). Therefore, the problem with using terms “exempt” and “salaried” interchangeably is that doing so causes people to believe they are synonymous and that someone paid a salary – i.e., a set amount each month – is automatically exempt from the numerous (some would say onerous) rules that govern hourly employees. This belief is wrong – and dangerous.
What Makes Someone “Exempt”?
Now that we’ve established that earning a salary does not necessarily qualify an employee as “exempt,” let’s explore what actually does (I am going to stop using quotes each time I write the word exempt. By now you know I am using it as a term of art.)
The law uses a two-part test to determine whether an employee is exempt. The first part, which is relatively straightforward, is the salary threshold test. To be exempt, an employee must earn a fixed salary equaling at least twice the California state minimum wage for full-time employment. This number changes along with the California minimum wage, but currently is $70,304. Other details come into play regarding how payment must be made, but that is the basic rule. Simple. Easy to articulate and understand.
The second part is not at all straightforward, so the explanation that follows is necessarily a vast oversimplification intended only to offer a broad overview. The second test focuses on the employee’s job duties. To be exempt, in addition to passing the salary test, an employee must also qualify for one of three types of exemption based on the employee’s job duties: the (1) executive exemption, (2) administrative exemption, or (3) professional exemption.
For the executive exemption to apply, the employee’s duties must involve managing the business or a structurally recognized department within the business. She must regularly direct the work of two or more full-time employees and hold the authority to hire, fire, or command significant input into personnel changes.
The administrative exemption applies when an employee performs office-based or non-manual work directly related to management policies or general business operations. This means the employee assists with running or servicing the business, as distinguished, for example, from working on a manufacturing production line or selling a product. They also must also exercise discretion and independent judgment on matters of significance.
The professional exemption applies, as the name suggests, to professionals – lawyers, doctors, dentists, accountants, engineers, etc.
As you can see even from my very high-level explanation above, most on-site managers, handymen, and maintenance workers will not qualify as exempt. Or, put another way, they are non-exempt employees. As such, they are entitled to a boatload of protections afforded by the wage and hour laws, including an entitlement to meal breaks, rest breaks, and overtime.
The Dangers of Paying a Salary to a Non-Exempt Employee
Now back to our original premise: paying a regular salary to a non-exempt employee – while not unlawful – is a bad idea.
One problem is practical. Many employers assume that if they are paying a salary, they do not need to worry about things like collecting and maintaining time records, providing meal and rest breaks, and paying overtime. Wrong. Because the employee is non-exempt, all these rules apply, regardless of how they are paid. Failing in any one of these areas can have serious legal consequences and give rise to significant exposure to wage and hour claims.
The other problems are more technical, but no less troublesome. A non-exempt employee must be paid for all hours worked, and her hourly rate of pay must be recorded as a line item on her pay stubs. If you pay the same flat amount every week, that hourly rate necessarily will fluctuate based on the hours the employee worked in a given workweek. So unless the employee works the exact same number of hours each workweek – which, for most on-site managers, is not plausible – you will constantly need to run the math to calculate the hourly rate for each workweek so as to appropriately report it on the employee’s pay stub.
Furthermore, a fixed salary paid to a non-exempt worker is legally deemed to compensate the employee only for her non-overtime hours. For example, if you pay $500 for a particular workweek and the employee worked 10 hours that week, her hourly rate is deemed to be $50. The hourly rate will matter – and come back to bite you – if overtime or meal break penalties come into play, because the rate at which both need to be paid is based on the hourly rate.
So, to offer an unrealistic example for illustrative purposes only, say the employee worked all 10 hours within a single day. You would owe that worker an additional $150. Why? Because she will have worked two hours of overtime (anything more than 8 hours in a workday is overtime), the $500 you paid is not deemed to have covered any overtime, her hourly rate will be calculated at $500 divided by 10 hours ($50), and the two hours of overtime must be paid at time-and-a-half, i.e., $75/hr. Gnarly, huh?
This is not theoretical. I have litigated these cases – where overtime is claimed and calculated at a much higher hourly rate than the employer ever contemplated.
So, the point is that what may seem like a good idea to simplify your recordkeeping – paying the same flat amount each month – is anything but simple. And if you do so to the exclusion of all your other legal obligations, including time records and offering and recording meal breaks, then doing so can end up costing you way more than you bargained for.
Gary Ganchrow Chairs the Litigation Department at the 113-year-old downtown Los Angeles law firm of Parker Milliken Clark O’Hara and Samuelian, has served as an Adjunct Professor at the USC School of Law, and is a frequent contributor to AOA Magazine. He regularly advises on, litigates, and writes about a variety of employment, property management, and business matters, and can be reached at 323-509-1135 and gganchrow@pmcos.com. This article is for informational purposes only and should not be considered legal advice or establishing an attorney-client relationship.