Chapter 2

2. You’re Not Exempt from Responsibility

How to Handle Legal Issues in Compensation

Paying people fairly isn’t just the law—it’s the right thing to do, and it’s the best thing for your organization.

In this chapter, I’ll go over some legal considerations for your compensation program, including recent (and not-so-recent) legislation that you should be familiar with. Let’s start with the most impactful one: the Fair Labor Standards Act.

Why You Need to Know About the Fair Labor Standards Act (FLSA)

The FLSA was passed in 1938, and it hasn’t changed much since then. It came about to ensure companies didn’t abuse their employees, particularly their employees in low-level hourly positions. It limits the number of working hours, it establishes a minimum wage, it protects educational opportunities for youth (meaning it keeps young people from focusing on work instead of going to school), and it defines which employees are exempt from overtime pay and which employees are entitled to overtime pay. We’ll get into more details on exemption and how it’s determined in a few minutes but very briefly:

• Nonexempt Employees
  • In general, these are your hourly employees, and they are given protections such as minimum wage, overtime pay, and maximum hours worked.
• Exempt Employees
  • These are the employees on salary who are not entitled to overtime pay.

On the one hand, it’s fortunate that the FLSA is still in place today because people need it. On the other hand, it’s sad that it’s still necessary and relevant, but, sadly, many businesses still try to circumvent labor laws. Don’t be one of those businesses.

Exemption Criteria

In order to be exempt from the FLSA (and not be eligible to earn overtime), an employee must satisfy three criteria:

• Salary Level—The employee must earn a minimum of $684 per week (or $35,568 per year).
• Salary Basis—The employee must be paid on salary, not hourly.
• Job Duties—The employee must perform certain executive, administrative, and professional job duties.

The Exemption Test

The first two criteria are very objective, and therefore leave no room for interpretation. The third criteria is where people get mixed up. Here’s how to test if your employee is exempt for administrative reasons:

• First of all, a job that is exempt from overtime will likely take place in an office, and will not consist of heavy manual labor. It will, instead, be directly related to managing or running business operations.
• It does not include working on a production line or selling a product in a retail or service establishment.
• The primary duty includes exercising discretion and independent judgment with significant business matters.

Here’s a common job that trips people up when determining exemption status: administrative assistant. You could argue that it’s an office job where you’re assisting someone with running the business, so it should be exempt from overtime, right? But the difference is right there in the job title: they’re assisting with the operation of the business, not doing it themselves. Moreover, they have to exercise discretion and independent judgment with matters of significance in order to be exempt. The administrative assistant doesn’t fit that description, so they will not be exempt from overtime and would, therefore, be entitled to time-and-a-half overtime pay.

To ensure you’re in compliance with the FLSA exemption laws, you should go to the Department of Labor website and run every job in your company through the exemption tests found here: dol.gov/agencies/whd/flsa.

Exemption Is Not a Status Symbol

A lot of managers prefer their team to be exempt because they see it as a status symbol. It’s proof that your team is not hourly, blue-collar workers. It’s a very misguided notion. If your employees are getting exempt status and they shouldn’t be, they are not only being robbed of their earned overtime pay, but you also put yourself in legal trouble.

It doesn’t make sense when you think about it: it’s not just the legal trouble that should worry you. It doesn’t make financial sense either. If you get caught fraudulently paying non-exempt employees as exempt employees (meaning you’re not giving them their earned overtime), the money you save from underpaying them will almost certainly come back to bite you in the form of lawsuits, fines, and back pay.

Here’s a perfect example…

Inside Sales—Exempt or Nonexempt?

Inside sales reps take inbound calls from customers and qualify those leads, putting them into their CRMs and sending those leads to the outside salespeople. Now, outside salespeople, as you know, are highly compensated with both salary and commissions. Unlike inside salespeople, who talk to customers over the phone, outside salespeople meet directly with customers face-to-face.

Now, the department of labor has made it very clear that outside salespeople are exempt from overtime pay. However, inside sales are usually nonexempt, which means they are eligible for overtime.

So from the manager’s perspective, if you have a national company with thousands of salespeople across multiple time zones, you might be in trouble if you have offices full of inside salespeople taking inbound calls from customers, doing casual overtime beyond forty hours a week, and not getting compensated at time-and-a-half.

That’s when I come in and have a hard conversation with them. After reviewing the sales jobs I tell them, “You need to reclassify these inside sales roles before one of them makes a complaint and the Department of Labor comes around. They won’t just fine you. They’ll force you to make back payments, too. Fix this, and give your inside salespeople their overtime pay.”

Without fail, they’ll say, “We don’t have the budget for that!”

And every time I’ll respond, “Do you have the budget to get fined six figures plus back pay?”

The answer is, of course, no. Then they’ll take one final swing: “Our inside salespeople can’t get all of their work done in less than forty hours a week.”

“Then you either need to add more people, or you need to split people’s shifts. Whatever it is, you have to fix it.”

These fines are no joke. Take them seriously.

Here are a few other pieces of legislation you should be familiar with as a compensation expert:

Sherman Antitrust Act of 1890

This law came about to fight monopolies and preserve a competitive business environment. Its impact on you is that in order to have a safe harbor, your salary survey sources must meet these criteria:

• The salary survey is managed by a third party.
• The information provided to survey participants is based on data more than three months old.
• There are at least five organizations reporting data, and no individual organization’s data represents more than 25 percent of the sample.
• The salary data must be aggregated so you cannot identify the compensation paid by any particular organization.

Equal Pay Act of 1963

This act serves as an amendment to the FLSA and applies to everyone...