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Understanding Payroll Practices

by | Oct 4, 2023 | Business Law, Employment Law


If you are an employer, do you know if you are paying your employees correctly? And if you are an employee, do you know if you are being paid correctly?

For small employers, one of the most common misconceptions is that the company can decide whether to pay an employee by the hour or on a “salary” basis without regard to the circumstances of the employee’s duties. But, for white-collar employees, there are tests to determine whether an employee must be paid hourly. The proper terms are exempt and non-exempt. If an employee must be paid hourly, the employee is non-exempt, meaning the employee is subject to the overtime requirements of the Fair Labor Standards Act (FLSA). If the employee qualifies for an exemption from being paid by the hour, the employee can be classified as exempt and paid differently (discussed below).

Whether an employee is exempt or non-exempt has consequences.  A non-exempt employee is entitled to be paid overtime pay at the rate of 1 1/2 times the regular rate of pay for any hours worked over 40 in one week. In manufacturing facilities, this is relatively easy to calculate because most employees punch a time clock and are paid weekly. In many offices or service businesses, however, it is common for employers to pay every two weeks or twice per month. If a non-exempt employee is paid every two weeks or twice monthly, the employer must still calculate overtime based on a regular one-week period. For example, if an employee paid every two weeks works 50 hours in week 1 and 30 hours in week 2, the employee must be paid 10 hours of overtime for week 1 and straight time for week 2.  In that example, an employer paying 80 hours of straight time would be doing it wrong.

Suppose a non-exempt employee is hired based on being paid an annual salary, for example, $40,000 per year. In that case, the employer must calculate the regular hourly rate and pay overtime based on 1 1/2 times that rate, subject to a few exceptions.

Employees performing blue-collar type jobs are rarely exempt. Unless they meet certain requirements regarding performing some management type functions, they must be paid by the hour with overtime where applicable.


Non-exempt employees must be paid for any work they perform for the employer. Calculating what is considered work time is not always straightforward. Most employers keep track of a non-exempt employee’s hours by using a time clock or a modern equivalent of a time clock. If a non-exempt employee performs work before clocking in or after clocking out, that time, even if it is a few minutes, is work time, and the employee is entitled to compensation. In situations where employees must put on and take off uniforms or personal protective equipment before clocking in or after clocking out, they are not being paid correctly.  Employees who recognize this frequently file lawsuits against their employers for the time spent “donning” and “doffing” the uniforms or protective equipment.

If a non-exempt employee is on an unpaid lunch break, but the employee must be available to answer phones, or if the employee is asked to take a phone call or do something work-related during the lunch break, the employee has not been completely relieved of work responsibility during that time, and it would be considered work time.  For a lunch break to be unpaid, it must be at least 30 minutes.  Rest periods or breaks of 20 minutes or less are common in many industries and are generally considered work time. Waiting time can also often constitute work time. Similarly, being “on call” would generally be considered work time. When litigation arises, courts look at whether the time spent was for the benefit of the employer or employee to determine if the time is compensable.

Many employers use a time clock feature that makes an automatic 30-minute deduction for an unpaid lunch period.  While this may seem to make timekeeping more efficient, it is a dangerous practice. If an employee takes less than 30 minutes for the lunch period or misses it altogether, the employee must be paid for the time not taken. This requires a report to a supervisor to change the timecard. Many employees, particularly diligent ones, do not bother reporting when they take a short lunch period or skip it altogether. It does not matter that the employee did this willingly; it still creates a liability on behalf of the employer. While this practice is not recommended, if it is utilized, it is important to outline in the company’s Employee Handbook reporting procedures for situations where an employee misses a lunch break or takes a shorter lunch break.

In office or service business settings, if non-exempt employees are requested or expected to attend, or they just attend, training sessions, lunch and learn sessions, and similar types of activities during regular work hours, the time spent is work time. If a non-exempt employee is required to travel for the job, there is a set of complex rules to determine which travel time would be considered work time.

In office or service business settings, many staff or administrative employees receive an offer letter or a statement from the employer that they will be paid a fixed amount per year. It is unlikely that any of these people would qualify as being exempt, and therefore, the employer must calculate a regular base hourly rate of pay.  In those same settings, employees frequently use their smartphones to perform tasks before or after clocking in or outside regular business hours. Many of them never report that time as work time. Under the FLSA, that is work time, and there is potential liability to the employer.


An employee who is considered exempt must be paid on a salary basis.  “Salary” has a legal definition. To meet the test of being paid on a salary under the FLSA, an exempt employee must be paid a fixed amount of not less than $684 per week and must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. These rules do not apply to outside sales employees or teachers. There are special rules for employees in computer-related occupations and for certain highly compensated employees.

Several circumstances permit deductions from an exempt employee’s salary if those deductions are applied correctly. For example, illness, suppose an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability or full days due to illness or disability based on a bona fide sick pay plan. In that case, the employer may deduct pay on a full-day basis. Some rules permit employers to make deductions of one or more full days for certain violations of safety rules or disciplinary action imposed on the employee.

Exempt employees must be paid their full salary for the week even if they come in late or leave early, whether for medical or other reasons. If they perform any work during that week, they are entitled to be paid their full salary for that week. Generally, employers should not make deductions from an exempt employee’s pay based on hours or any period less than a full day.


Typically, employees who are considered exempt frequently work more than 40 hours per week. If an employee who should be classified as non-exempt is misclassified as exempt and works more than 40 hours per week, the employer is incurring potentially significant liability. In that example, the employee could sue the employer for improper pay practices and classification. The FLSA provides that, if successful on any point, the employee can recover not only back pay but also double the amount of back pay and attorney’s fees. In such a case, the employee can seek to collect back pay for two years or three years if the employer’s violation of the FLSA is considered willful.

In most areas of law, people are free to settle claims and waive their rights. This is not true for overtime compensation or minimum wage. It does not matter if the employee agrees to forego overtime compensation, whether to help the employer or for any other reason, even if the employee signs an agreement to that effect. Any such agreement is void.


Employers should have a written policy advising employees to report promptly any suspected improper deductions from their pay. If the employee is correct, the employer must promptly reimburse the employee for any improper deductions and commit to using proper pay practices in the future. This is commonly referred to as a safe harbor provision for employers.

Employers should also work with experienced employment attorneys to analyze an employee’s exempt/non-exempt status if there are questions. The employment attorneys at Cavitch often assist in company-wide audits regarding such status to limit potential employer liability. Additionally,  suppose a company engages in such an audit and has a good faith reason for employee classification. In that case, the Department of Labor sometimes waives punitive damages if there is an investigation.

For more information or should you require legal assistance, please do not hesitate to contact Michael C. Cohan at 216-621-7860.

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