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Insider Louisville
June 12, 2017

You have obtained the necessary financing, signed a lease, purchased supplies, hired employees, and are ready to open your business to the public. You believe you are ready to start this new adventure in business.

But have you thought about the ins and outs of paying your employees properly? (Determining what constitutes an employee or independent contractor is a topic for its own article!)

Many entrepreneurs have found unique products to sell, created wonderful menus, or have a service that everyone needs. Despite understanding their field and what it takes to be a successful chef/craftsperson/salesperson/etc., many small (and large) business owners do not know how to properly pay their employees. Unfortunately, simple, small mistakes can be costly and shutter a once profitable business.

Properly classifying your workforce

Both the Federal Labor Standards Act (FLSA) and the Kentucky Wage and Hour Act set a minimum wage, have overtime regulations, provide certain recordkeeping requirements, and create youth employment standards for employees. A common mistake many employers make is paying non-exempt employees a set weekly salary regardless of the amount of time an employee works. Most employees are happy with this arrangement and, in reality, it can benefit the employee.

However, most employees are “non-exempt” and, therefore, cannot be paid a flat weekly salary. There are exemptions contained within the FLSA in which specific categories of “white collar” employees are exempt from overtime and certain recordkeeping requirements. Common exemptions include executive and professional employees, computer professionals, and outside sales employees. Employees that qualify for these exemptions are not paid overtime nor paid based on the amount of hours they work.

While it can be “easier” to classify an employee as exempt, pay a set weekly salary, and not worry about tracking an employee’s time, simply labeling a position as “salary” v. “hourly” does not make it so. In other words, a job title or agreement concerning how much someone will be paid for a week of work does not allow an employer to classify an employee in one category or the other. Instead, there are complex, narrowly construed tests used to determine whether an employee may be classified as exempt.

These tests focus on the tasks an employee performs. For instance, in addition to earning a minimum weekly amount of pay, for an individual to qualify for the executive exemption (manager), the employee must manage the business or a recognized department, regularly direct the work of at least two full-time employees, and have the authority to hire, fire, and promote employees or have their suggestion be given particular weight.

Most employees working in a service industry, restaurant, or retail establishment will be categorized as non-exempt. These employees must be paid at least minimum wage for all hours worked and overtime at time and one-half their regular rate of pay for all hours worked over 40 hours in a week. For example, a dishwasher cannot be classified as an “exempt” employee and earn a set weekly salary, even if that salary is much more than the current minimum wage. However, the head chef of a kitchen who supervises sous chefs, dishwashers, and other kitchen help may qualify for an exemption and be paid a weekly salary.

Penalties for improperly paying employees

Unfortunately, improperly classifying an employee can result in hefty penalties that can be devastating to a business. Employees who successfully prove that their employer failed to properly pay them may be entitled not only to recover the amount of money they were underpaid, but also liquidated damages — a penalty equal to the amount of the unpaid wages.

Stated another way, improperly paying an employee may cost a business double what it would have owed its employee had it properly paid them in the first place. Moreover, if the employee engages a lawyer to assist in the collection of his or her unpaid wages the employer may be required to pay the employee’s attorney fees. The same cannot be said for an employer who successfully defends a wage claim. Therefore, even the defense of a wage claim can be very costly to a business.

To understand and ensure your business is properly classifying your employees, it is advisable to have clear and concrete job descriptions and employment policies in place that have been reviewed and approved by an attorney. Maintaining time and pay records is also very important.

Click here to view the article on Insider Louisville.

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