Legal Regulations and Employee Pay Many aspects of how you pay employees are mandated by federal and local laws. Here's a brief primer on some of the rules you need to be aware of.

There are many state and federal laws that regulate the paying of employees, including the calculation of overtime, minimum wage, frequency of payment, and rules for payment upon termination. Because your business may be subject to both state and federal laws (the primary federal law being the Fair Labor Standards Act, or FLSA), which are often quite different and conflicting, you should check with the applicable government agencies, your local chamber of commerce, and appropriate financial and legal experts to determine which laws apply and how to correctly apply them.

Nonexempt and Exempt Employees
Under the FLSA, all employees are classified as either exempt or nonexempt. A nonexempt employee is entitled to a minimum wage and overtime pay as well as other protections set forth in the FLSA.

Exempt employees are not protected under these rules. However, if you wish to classify an employee as exempt, you must pay him or her a salary. Anyone paid on an hourly basis is automatically considered nonexempt; however, there can be nonexempt employees who are paid a salary.

If salary is not the determining factor, what factors determine whether an employee is exempt? Under FLSA and most state laws., an exempt employee is one whose job responsibilities, more than 50 percent of the time, involve the regular exercise of discretionary powers and can be characterized as:

  • Executive: usually a manager who directs the work of other employees and has the authority to make recommendations affecting the status of those employees (e.g., hiring, firing, promotions, etc.)
  • Administrative: a person who performs office or nonmanual work under general supervision and which primarily involves special assignments or requires specialized training, experience or education.
  • Professional: a person who is engaged in a recognized profession such as medicine or law or in a field of learning that is specialized and predominantly intellectual or creative.

There are additional exempt categories for more specialized employees, such as professional artist, computer professional or outside salesperson. In addition, your business may be subject to both federal and often more restrictive state laws governing the exempt status of employees. In those instances, an employee must meet the requirements for exemption under both federal and state law.

Tip Credits
States sometimes set minimum wage laws above or below the federal minimum wage standard. If your business is subject to both state and federal wage laws, you'll have to pay the higher of the two.

Under federal law (the Small Business Job Protection Act of 1996), you may apply tips received by an employee against the employee's minimum hourly wage, provided that: 1) The employee makes at least $30 in tips, 2) the employer pays at least 50 percent of the federal minimum wage, 3) the employee has been informed of the applicable law governing minimum wage and tip credits, and 4) the employee retains all the tips received by him or her (no tip pooling with other employees). However, if the hourly wage paid by the employer when added to the tip credit is less than minimum wage, the employee must make up the difference.

Once again, you will need to make sure there are no contrary state laws governing if and when you can use tip credits to meet your minimum wage than federal law and thus applies to California employers and employees. Because California law prohibits crediting tips against minimum wage payments, tip credits are unavailable in California.

Overtime Requirements
Excluding certain industry-specific exceptions, federal and sate law requires that nonexempt employees be paid overtime. Under the FLSA, nonexempt employees must be paid one-and-a-half times their normal rate of pay for hours worked in excess of 40 hours during a workweek. A workweek is defined as seven consecutive 24-hour periods. Although a workweek can begin on any day, it must be fixed for that employee and cannot be changed so as to evade applicable overtime laws. Most states also have their own overtime laws, and if they are more favorable to employees, those are the ones you must follow. For example, under California law, employees who work more than eight hours during a single day are entitled to overtime, even if they do not work more than 40 hours during a given workweek (the federal requirement)

Remember, nonexempt employees can be salaried as well as hourly. So don't make the mistake of assuming that, just because an employee is salaried, he or she is exempt from overtime.

This article was excerpted from Start Your Own Business.

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