Dilemma of the Month: Adjusting Employee Compensation

Back Q&A May 10, 2018 By Suzanne Lucas
We are a small business with a staff of three: myself, my husband and one employee. As a seasonal business, we are sometimes very busy and sometimes have hardly any business at all. Recently, our employee asked to convert from a salary to hourly pay. He made this request during our busy season, because he knew he would make a lot more money. We told him if he switched to hourly he could not go back to salary again. My question is: Do we have to pay him during a month when we have no business at all?

First, I need to know: Is this employee even eligible to be salaried exempt?

You can’t simply decide to put someone on a salary and not pay overtime. With a small business, your employee is clearly not managing other people (management exemption). But is he an independently working professional? Is he an IT or marketing or creative professional? Is he an outside salesperson? These distinctions are outlined by the Fair Labor Standards Act and are governed by federal law, and they determine who is exempt from overtime law. California has some additional distinctions that make it harder for someone to qualify as exempt.

Related: Dilemma of the Month: Changing the Terms of Employment

Related: Dilemma of the Month: Abruptly Made a Manager

If he’s doing manual labor, inside sales or — if your business is in California — isn’t earning at least $43,680 (a state rule for businesses with fewer than 26 employees), then he’s absolutely not eligible to be salaried exempt. If he doesn’t meet the criteria for both federal and local exemption laws, he not only must be paid by the hour, with overtime pay, but you have to go back and give him overtime pay for every time he qualified.

When an Employee is Eligible for Straight Salary

Let’s assume that he’s a CPA or in some position that definitely qualifies him to be a salaried exempt employee. Can you make him hourly? Yes. Do you have to pay him when he doesn’t work? No.

You can pay anyone by the hour. The exemption from overtime isn’t required by law, even if someone qualifies for it. So, you’re absolutely in the clear paying by the hour.

But, if you choose to pay by the hour, you also have to pay time and a half for overtime whenever he works more than 40 hours in a week or eight hours in a single day (in California and a few other states).

That’s the benefit he gains: overtime pay for those busy seasons. However, while you have to pay overtime for extra hours worked, you also only have to pay for actual hours. So, if he doesn’t do any work, he doesn’t receive any money. If he puts in five hours one week, he gets five hours worth of pay. If he comes in at 9 a.m., takes a two-hour lunch and goes home at 5 p.m., he gets six hours of pay.

Again, depending on what he does and what you do, he may be fine with this hourly arrangement — he may bank enough extra hours (and money) during the busy season that he’s happy to have free time. But he may not have thought through the consequences of his request.

Hidden Cautions

Often, I get the question the other way around: Bosses want to make someone exempt during the busy season and non-exempt during the non-busy season. Federal law prohibits that, even if the employee otherwise qualifies for the exemption. You can’t change a person’s pay structure repeatedly. So, if your employee wants to be hourly, he needs to stay hourly permanently. You and your husband were right to set this as a condition upfront.

The second hidden consequence is unemployment pay. If you drop his hours or don’t schedule him at all, he’ll be eligible for unemployment for the time period he’s not working. That will ding your business. It may not bother you, but some businesses go to great lengths to not allow employees to receive unemployment.

It’s Your Choice

Ultimately, though, you’re the boss and you don’t have to agree to his request if you don’t want to. Now, I always counsel people to be nice and accommodating as much as possible. If he’s a great employee, making him happy is critical. If he’s a lousy employee, you may want to consider how much bending over backward you’re willing to do.

Will this benefit your business? Will you become resentful of large paychecks headed his way during the busy time? Will you work yourself into exhaustion in an attempt to save a bit of money on this month’s paycheck?

As long as he can legally be exempt, whatever works best for the business is what you should do. But make a good decision, because you’re stuck with it for a long time. 

Have a burning HR question? Email it to evilhrlady@comstocksmag.com

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