The Payroll Book

CHAPTER 3Earnings

We are now going to move into the heart of payroll, earnings. The first thing you have to do, now that you know who is an employee and who is not, is to make a further distinction.

Who earns a salary and who is paid hourly?

We will cover commissions, piecework tips, and the rest a little later. You don't get to choose who is a salaried worker and who is an hourly worker, nor do the employees get to choose. It comes down to a provision of the Fair Labor Standards Act (FLSA), which is the federal law that governs much of wages and employment. FLSA sets out the rules on who is entitled to overtime pay if they work more than 40 hours in a work week. Those who are entitled to overtime are referred to as “nonexempt” (from overtime rules) and they are paid by the hour. Those who are not subject to overtime rules are referred to as “exempt” and they are normally paid a salary. Let's dive in.

SALARY

If you are a small business owner and you are hiring only labor and clerical help, this is simple. You are paid a salary and are exempt and everybody else is hourly and nonexempt. The labor department has statistics that show that as many as 70% of employers misclassify employees. The cost can be staggering, as you and your company may be liable for all unpaid overtime and taxes going back for years.

We are going to lay out some fairly specific criteria for determining ...