Under the Fair Labor Standards Act (“FLSA”), employers must track and record time for non-exempt (i.e., overtime-eligible) employees. To be classified as exempt, the employee’s job generally must satisfy both a salary basis test and a duties basis test. Exempt employees generally must be paid on a salary basis, meaning they must be paid a fixed salary pay period. The U.S. Department of Labor (DOL) enforces regulations that define the salary basis requirement to satisfy the exempt status tests. Exempt, Administrative, Executive, and Professional employees must be paid a predetermined amount each pay period that is at least the minimum weekly salary required by the regulations. The current federal minimum is $455 per week, but will increase to $913 per week on December 1, 2016; however some states require a higher minimum weekly salary to satisfy this test. The amount paid may not be reduced because of a variation in the quality or quantity of the work performed.
Employers are now realizing that there are benefits to also tracking and recording time for exempt employees as well (even though they are not eligible to receive overtime pay). First, tracking and recording the time of all employees protects the employer in the event of a misclassification. If an employee was misclassified as overtime-exempt, when under the law they should have been classified otherwise, the employer will have the backup data needed to determine the precise amount of overtime, if any, that the employee earned. Without this backup, the issue can quickly devolve into a matter of the employee claiming that he or she worked overtime and the employer not having the valuable contemporaneously-recorded data needed to refute that claim. As unpaid overtime can carry with it significant monetary penalties and attorney fee awards, the cost of recording and tracking all employee time can pay dividends if even one employee is incorrectly classified.
There are also valuable business reasons to track all employee time. For example, an employer may opt to track an exempt employee’s hours for purposes of client billing. Tracking time also assists employers in determining the accrued benefits employees have earned under the Family Medical Leave Act (FMLA) or for company-specific programs such as 401(k) eligibility or hours-based benefits calculations. Some employers opt to track exempt employees’ hours simply to ensure the equitable treatment of all employees, regardless of classification in the company.
Should an employer opt to track the hours of exempt employees, the company must be careful in using this information. The exempt employee’s salary should not fluctuate based on the number of hours worked within the workweek, as pro-rating an exempt employee’s salary based on hours worked may result in the loss of the exemption which may be very costly for the business. The company may only take a deduction from an exempt employee’s salary under limited circumstances without jeopardizing the exempt status, such as when an employee is absent from work for one or more full days for personal reasons other than sickness or disability, or for penalties imposed in good faith for infractions of safety rules of major significance. While the company may opt to track the hours of exempt employees, the company must ensure that such information is not used to take deductions from their employees’ regular salaries, unless such deductions comply with the relevant guidelines.