Reclassify the Exempt Employee

“I have an exempt (salaried) employee I’d like to make hourly instead. How do I do that?”

Your HR Survival Tip

When minimum wages increase, the minimum salary you must pay increases. At some point that salary may start to feel too high for a particular position. You may reclassify an exempt (salaried) employee to a non-exempt (hourly) employee but you want to think it through to avoid problems. You don’t want to just change a position to hourly without being aware of the potential legal issues.

The first thing is to confirm the legality of the employee’s current classification. In other words, was this person correctly classified as exempt? A proper classification of exempt means the position meets all the requirements listed in one of the Federal exemptions, including both the salary and duties tests. A good reminder for everyone is that even a high salary doesn’t automatically mean a position will qualify as exempt. The minimum salary requirement is easy because you are either paying sufficiently or not (2 X state minimum salary = the absolute minimum salary you can pay, regardless of how few hours they work). The duties test is more challenging because there is some subjectivity involved so be conservative to be safe.

If the employee was not correctly classified as exempt, you have some issues and need to make this transition very carefully. The problems include unpaid overtime, missed meal breaks, etc., that they would have received as an hourly employee. If this is where you are, you will want to talk with us or an employment law attorney about your risks and options.

If the employee was correctly classified as exempt, the transition to non-exempt is fairly simple. Even then, you’ll want to have a solid explanation of why you are reclassifying their position because they will ask. An explanation might be that California’s annual increases are causing the minimum salary to go higher than you can pay for the position, or the amount of time off the employee has been taking will work better in an hourly role, or the position is actually changing and will no longer qualify as exempt.

The transition itself is very simple. Create a memo, letter, or form indicating the effective date and hourly rate of pay. If this transition changes any benefits or the title, include that. Make sure the employee knows the new rules regarding tracking time, meal and rest breaks, and other non-exempt details. Although the total pay may not change, it’s still a good idea to give the employee a week or two notice of the change.

Keep in mind some employees feel the exempt classification is an acknowledgment of their value and level of position so they may feel they were demoted. That’s not the case so make sure they know you still value them.

Have a POP

“I just started offering health insurance to my employees. Now my broker is trying to sell me something called a POP. Do I need it?”

Your HR Survival Tip

Congratulations on providing health insurance for your employees. We know that’s a big financial hit but it does make your company better able to recruit and retain employees.

Yes, you want a POP. This is a “Premium-Only Plan” that allows you to deduct an employee’s share of the premium on a pre-tax basis. Without having a POP in place, you must deduct from the after-tax, net pay. Since a POP is typically only about $150 per year, it’s a very low amount to spend to ensure your employees save money when they elect your insurance.

A POP is one part of what the IRS allows under Section 125 in the Internal Revenue Code. The other parts are usually just called Section 125 plans or Flexible Spending Accounts (FSA). These allow employees to set money aside on a pre-tax basis for healthcare expenses that may not be covered by insurance, such as over-the-counter medications, eyeglasses, contact lenses, etc. Another portion can be used to pay for childcare with pre-tax monies.

While employees may like the sound of implementing an FSA, do so very carefully and after you fully understand it. Since the IRS rules this, there are pros and cons for your company and for your employees with the healthcare FSA. For example:

Sam wants to set aside $1,500 so you divide that between all his paychecks for the plan year. Sam could use the whole $1,500 in January and the company is covering that… and waiting to be paid back throughout the year by Sam’s deductions. However, if Sam quits in March, the company has no way to recover the full amount used by Sam. On the other hand, if Sam didn’t have the medical needs he thought he would have and only had $200 in eligible expenses to submit, Sam would lose the excess he set aside and it would revert to the company. The IRS feels the healthcare FSA balances out because sometimes the company is the loser and sometimes it’s the employee. However, if the plan is explained to employees carefully, they are less likely to lose much money. The IRS sets the maximum allowed for use in this plan but the company can set a lower maximum to lessen the risk.

The dependent care FSA is much simpler. The employee cannot submit a receipt for more than they have already put into the plan. Therefore, the company doesn’t provide any advance. If the employee understands the plan and knows their expected expenses, this works great for them, too.

While the FSA plans can be very good, you want to fully understand the risks and limit your exposure. Buy the POP because you and your employees will save on taxes. Don’t assume you have one just because you are taking those deductions pre-tax or you may end up paying back taxes. Ask your broker to be sure.

Interviews That Are Work

“I have job candidates do a 1-day working interview before I decide if I’ll hire them. I write the candidates a check for the time but don’t put them on the payroll. Is this okay since I’m paying them?”

Your HR Survival Tip

Most “working interviews” involve having the candidate actually do the work they would normally do if hired. When you do that, you have created an employee who should be on your payroll. Writing a check to them instead of putting them on the payroll could be considered fraud because it shows you actually know you shouldn’t have them working without compensation.

The biggest problem is you aren’t paying state and federal payroll taxes and that can upset the governmental entities. The candidate can and might file unemployment on you, bringing you to the attention of EDD (CA’s Employment Development Division). Plus, if the candidate were injured during a working interview, you’d have to pay all medical bills yourself because this person isn’t on payroll so they won’t qualify for workers’ compensation.

The better interviewing solution is to develop some testing you can do with each candidate to give you a clearer picture of their skill or knowledge. Testing should be completed within 2 hours at most. Here are a few examples:

  • Administrative – Provide the candidate with a printed letter or form to duplicate that has some particular formatting challenges, like a table, bold words, tabs, etc. When they’re done, look at the digital file to determine if they did it using the expected software features.
  • Sales – Provide the candidate with an item to verbally sell you and see how they do.
  • Data entry – Provide the candidate with a stack of forms that need to be input and watch their time and accuracy.
  • Accounting – Have a dummy company set up already and have the candidate enter a few invoices, pay a few bills, and set up a couple of accounts.
  • IT – This might be a questionnaire with issues the candidate needs to resolve or, for lower levels, the candidate might be put in front of a computer and asked to get it up and running (not knowing you left a cable unplugged).
  • Physical ability – If you’ve been clear the job requires the ability to lift or move around items, present them with that physical test. Can they lift this object off the floor to table height and back down to the floor?

You must be consistent and provide the same test to everyone interviewed for that position or you could be seen as discriminatory. Every job has something you can test; you just need to be creative in figuring out what would give you the most information.

Promises to Be Paid

“I gave a large advance to an employee and we started deducting money from his paychecks to pay it back. However, he just resigned and still owes me $750. What are my options for getting the rest of my money?”

Your HR Survival Tip

Whenever a company “lends” money or provides equipment to an employee, you will always take the chance you won’t get it back. California does not allow you to deduct anything from that final paycheck. Yes, even if they have your phone or laptop or an outstanding loan, the value cannot be deducted without the employee’s express permission (in writing, to be safe).

At a minimum, at the time the money was advanced or loaned, you should have put into writing a repayment schedule and agreement for the employee to sign. You don’t want to start deducting money from an employee’s paycheck for any reason without written authorization (aka proof that it’s a legitimate deduction) from the employee.

Once the employee terminates, all bets are off. Since you can’t deduct the remainder owed from the final paycheck, you either have to hope the employee will send you the money or take them to small claims court. However, most companies don’t have the time or patience to use small claims court so the remainder is usually written off.

How can you avoid the loss? Instead of just setting up a repayment agreement, formalize the advance/loan with a promissory note. This should be a template from an attorney to ensure it has language allowing you to take legal action if repayment stops or even fails to begin. A legal promissory note gives you more options for collecting monies owed to you, including sending it out to a debt collector.

Of course, you avoid this problem if you only advance what can (and will) be repaid with the next paycheck. The employee could still terminate employment before the end of the pay period, but that’s less likely than over a longer period of time. Have your attorney create a template you can use if you tend to lend.

Short Days

“If I have someone come to work one day just for a 30-minute meeting, do I have to pay them for the whole day? Also, what if they come to work but I don’t need them at all that day?”

Your HR Survival Tip

These are actually two different topics but they both fall under short days so we’ll cover both scenarios.

When you schedule an employee to come to work for less than a normal day, you only have to pay them for the scheduled time. You could schedule an all-hands meeting on Saturday that only lasts 30 minutes and you’d only be required to pay for that 30 minutes. Although, let’s be honest, your employees would probably stage a mutiny if you made them attend a short meeting on one of their days off! Be considerate and try to squeeze those short meetings into the regular workweek.

The other scenario happens much more often. You have 4 employees scheduled to work all day Thursday. However, Thursday morning arrives and you realize there isn’t enough work for all of them so you decide to tell Sam to go back home. You will owe Sam “reporting time pay.”

Reporting time pay means you are paying for one-half of their scheduled hours… but no more than 4 hours and no less than 2 hours. So, if Sam was:

  • Scheduled for 8 hours, you’d pay for 4 hours (one-half of the scheduled amount).
  • Scheduled for 2 hours, you’d pay for 2 hours (the minimum amount of reporting time pay).
  • Scheduled for 6 hours, you’d pay for 3 hours (one-half of the scheduled amount).
  • Scheduled for 10 hours, you’d pay for 4 hours (no more than 4 hours is due with reporting time pay).

Both your employees and your budget would appreciate better scheduling so you don’t have more employees showing up than is needed for the available work. Check your workload and the schedule… call employees (pre-bedtime ideally) to let them know you won’t need them tomorrow. They won’t have to get up early and you won’t have to pay them reporting time pay.

Long Lunches

“I have a couple of employees who like long lunches and sometimes take 2 hours. They still work 8 hours but do I need to let them continue this?”

Your HR Survival Tip

There are practical and legal issues to consider when looking at long lunch breaks. While California requires non-exempt (hourly) employees to take at least a 30-minute meal break, the state can frown on breaks of more than one hour.

You do not have to allow any longer than 30 minutes for meal breaks but consider allowing just slightly longer (35-45 minutes) simply because you need to make sure they take at least 30 minutes. It’s hard to take exactly 30 minutes every day unless you have a very rigid schedule.

On a practical side, even if the employees work 8 hours, do their 8 hours work for you? If your business hours are normally 8a-5p but these employees stay until 6p to make up for the long lunch, is that last hour as productive for the business? Probably not if there are no customers after closing or the employees they may need to interact with have left for the day.

On the legal side, if you require the employee to take more than one hour for a meal break because you actually need them to work that hour later, this is considered a split shift. California has a payroll calculation for split shifts. The cost of using split shifts is one additional hour of minimum wage each day it happens. However, the way it’s calculated may not cost you anything. California has you apply anything over minimum wage normally paid to the employee toward that split shift pay. For example, if the employee is making $19/hour and the minimum wage is $16, you have a $3/hour overage you can apply to that one hour of minimum wage due. In a normal 8-hour day, the employee making $16/hour will have an overage of $24 ($3 x 8 hours) so you have covered split shift pay.

Overall, it’s best to stick with a standard meal break period and have employees request the additional time off as they need or want it. You then have the opportunity to approve or deny the extra time based on the business needs that day. Remember, you’re the boss!

Required New I-9 Form

“I’ve heard a new I-9 form is available. Do I need everyone to complete it?”

Your HR Survival Tip

The USCIS Form I-9 is used to confirm each worker is able to legally work in the U.S. You may obtain a copy online from USCIS. The form includes the effective date of 08/01/23 in the lower left corner and the expiration date of 7/31/2026 in the upper right corner.

The new form has been changed and simplified. The basic form is just one page, with additional pages for the list of acceptable documents, translator certification, and rehire/re-verification. There is also a new instruction manual you should take the time to read.

Here are a few tips to help you:

  • The new form is used only for new employees hired or rehired after 8/1/2023. Do NOT have current employees complete the new form… employees must always use the form that was current on their date of hire.
  • You must provide both the form and instructions to the new employee, either in print or electronically.
  • You cannot suggest or recommend which forms of identification the employee presents as proof. You can only show them the page that lists the acceptable documents and remind them they either need one from List A -or- one from both Lists B and C.
  • The employee must present to you their unexpired documentation within 3 business days of starting work for pay. If they don’t or can’t present you with ALL the documents needed to complete the form by that time, the employee must stop working until they can provide you with the correct documentation.
  • You must review the employee’s documentation in their presence. You may keep copies of the documentation but it’s not necessary or required unless you participate in E-Verify.
  • Regardless of how the form is filled out (handwritten or on a computer), you must print a hard copy to sign and date.

This is a form that’s been required for many years and will continue to be updated periodically. If you’ve never read the instructions, we recommend you do so. It’s easy to get lax but the penalties for dates that are later than they should be, skipping a space that should have an entry, or just bad information can be severe. This is just one more reason it’s important to have your hiring process and timing in place to avoid issues.

Personal Disability

“I just had another employee asking for a personal leave because she’s under a doctor’s care. Do I have to give her the time off?”

Your HR Survival Tip

This can be a bit tricky and your options depend upon the number of employees you have. If you have fewer than 5 employees, this is a personal leave of absence and that will be this article’s focus. In companies with 5+ employees, the leave is likely to be protected for up to 12 weeks under CFRA (California Family Rights Act) and/or FMLA (Federal Medical Leave Act).

As a first step, ask for a doctor’s note stating the employee will be unable to work from [start date] to [end date]. A doctor usually provides an initial note citing anywhere from 2 to 6 weeks. Make it clear to the employee that they will be expected back to work on [end date] or will need to provide another doctor’s note requesting an extension.

Provide them with the brochure about California’s state disability program and let them know it is their responsibility to file a claim. If the employee has any sick time remaining, use the rest of it for work time missed. Companies frequently approve the initial leave request and, if you do, there is an assumption you will hold their job. However, we like to send out a certified letter explaining certain things related to the leave:

  • Their doctor’s note has cited the day they are expected to return to work but the doctor will be expected to provide another note requesting any extension.
  • Health insurance, if any, will continue but the employee must continue paying their share of any premiums. Failure to pay their share may result in coverage stopping but COBRA would be offered. (The timing of COBRA is dependent on a policy in your Employee Handbook.)
  • Explain any job protections the employee may have.
  • Note how often you want to hear from the employee, if the leave will be over a couple of weeks.
  • Prior to returning to work, they will need a doctor’s note clearing them to return to work.

California’s EDD (Employment Development Division) will send you a 2-sided form that’s printed in red ink. This form asks for basic information they will use to compare with the information on the claim the employee filed. EDD will also notify the employee’s doctor of the claim and the doctor must provide EDD with the medical backup for the disability.

If an extension of the leave is requested, it’s time to talk with your HR consultant or attorney about your options. Even though there may not be job protection, you don’t want to just jump immediately toward termination. Every situation is different and you want to be able to fully justify any action you take.

Tears and Anger

“I have an employee who gets very emotional whenever I let them know they’ve made an error or try to tell them how to do something better. How do I deal with someone like this?”

Your HR Survival Tip

Dealing with emotional employees is often stressful for managers. It doesn’t matter whether you’re getting tears or anger, their emotional reaction makes it harder to get your point across to the employee.

Often the employee is so wrapped up in their emotions that they have stopped listening to you. This means the problem is likely to occur again instead of being corrected. How do you get past this so you don’t end up repeating the situation time over time? There are two things that can help.

The first thing is you stand up. That’s right… when you are in a meeting where emotions have taken over, you stand up. Tell the employee “I can see you’re upset so I will give you a minute to collect yourself and then we will continue” and leave the room. When you return, act normal and continue the conversation, complete the paperwork, or whatever is needed. You, of course, are expected to be a complete professional throughout this meeting and not let your own emotions take control.

The second thing that helps is to ask the employee to send you an email or a memo that summarizes the conversation you just had, including what changes must be made. This will confirm whether the employee actually heard what you said and understood it. If what the employee gives you is incorrect, have another meeting… and ask them again to write it up. Eventually, you’ll get a real summary of the conversation.

The advice above about leaving the room was not meant to be used when an employee initiates the meeting and wants to talk with you about something that raises their emotions. You’ll need to hear them out but, if the emotion gets too far out of control, it’s a courtesy to allow them some time to settle down. Some people can’t control strong emotions and may be embarrassed. Leaving the room for a moment here is a kindness so don’t confuse the two situations.

I9 Form Deadline

“I know we need to start reviewing I9 identification again soon. How do I check a remote employee’s identification they provided for the I9 Form?”

Your HR Survival Tip

Since the first I9 form was required, we have been responsible for confirming that an employee’s provided identification was legit. Thanks to COVID, that rule was suspended for a couple of years. However, that ends on 7/31/2023, and you now only have until 8/30/2023 to review and confirm all those IDs you previously received.

Directly from the site: The employer or authorized representative must “physically examine each document to determine if it reasonably appears to be genuine and to relate to your employee presenting it.” If you determine the document does not reasonably appear to be genuine and relate to your employee, allow your employee to present other documentation from the Lists of Acceptable Documents.

Your M274 Handbook for Employers (available online by searching for that title) dictates who an authorized representative may be and what their responsibilities for the I9 Form include. Although an employee may not be their own authorized representative, the employer “may designate, hire, or contract with any person you choose to complete, update or make corrections to Section 2 or 3 on your behalf. This person is known as your authorized representative. The authorized representative must perform all the employer duties described in this handbook, and complete, sign and date Section 2 or 3 on your behalf. You are liable for any violations in connection with the form or the verification process, including any violations of the employer sanctions laws, committed by your authorized representative.”

Start by pulling the I-9 Forms for all employees hired or recertified since 4/1/2021, and ask each employee to present the (original) identification used on the form for your review. You are merely looking at the ID they provided, not something different, and no photocopies. If you are using an authorized representative, provide sufficient instruction and training to ensure this review is completed correctly.

Since the suspension of physically viewing identification was unusual, we haven’t found information dictating how we are supposed to show the ID has now been reviewed. We suggest you or your authorized representative make a note in the box for Additional Information on page 2 of the form. The note should state “ID reviewed on MM/DD/YYYY by [Name of reviewer]” so you have proof of compliance.