Time tracking is important for any business to be successful. It provides important details to ensure you’re compensating employees correctly, billing clients accurately, and hiring or scheduling workers at the correct frequencies. Time tracking can also provide big-picture information on the success of your business and your team. Our article today is going to specifically look at the type of employee you have under US laws and how time tracking is required (hint: if you hate overtime--- keep reading!).

Whether you have exempt or non-exempt employees, time tracking is essential. However, if you have non-exempt employees (usually hourly paid employees), it becomes especially important in order to avoid the dreaded overtime pay. For exempt employees (usually salaried employees), time tracking can also still have merit for insight into your business (such as how to price services and how to bill clients).

This article will describe:

• The Difference between an Exempt & Non-Exempt Employee.
• An example of an Hourly Employee: "Rusty Retail Store."
• An example of a Salaried Employee: "Classy Consulting."
• How to decide when an employee should be classified as Hourly(Exempt) vs. Salary (Non-Exempt).
• Time Tracking and the basic Legal Requirements.

Difference between an Exempt and Non-Exempt Employee

Most easily explained in a table form, let’s look to the below to review the main 4 differences between exempt or non-exempt employees:

So as you can see, tracking the time of non-exempt employees is critical in order to determine their pay and if they have gone into overtime wages.

Let’s take a few examples to provide a bit more color on the situation.

Example 1: Rusty Retail Store

Rusty Retail Store is a retail shop in Dearborn, Michigan, that is a hardware store. It is open 7 days per week from 9 am until 5 pm and has about 20 hourly paid employees to cover its shifts.

The shifts include:

• 8:30 am - 2 pm: Opening Cashier
• 1:30 pm - 6 pm: Closing Cashier
• 8:30 am - 2 pm: Opening Floor Attendant
• 1:30 pm - 6 pm: Closing Floor Attendant
• 7:00 am - 12:00 noon: Stock & Inventory Attendant
• 8:30 am - 3:00 pm: Morning Manager
• 1:00 pm - 6:00 pm: Evening Manager

As you can see, each shift is less than 8 hours, which means the employees at Rusty Retail are not usually full-time, which is why salaried doesn’t make sense. However, in any business like a retail store, people pick up extra shifts when others call in sick, go on vacation, or during a busy season like Christmas time. Thus, all of the employees at Rusty Retail are non-exempt and eligible for overtime, even the managers.

Time tracking is crucial at a business like Rusty Retail in order to avoid excess costs like overtime, as well as to make decisions about hiring or laying off a worker and determining payroll.

Example 2: Classy Consulting

Classy Consulting is a management consulting firm located in Los Angeles, California. It has 10 employees who are all salaried and work in their office. All of the employees are salaried at $70,000 per year or more.

Classy Consulting is an example of a business whose entire employee base is considered exempt from overtime. While they probably all work at least 40 hours per week or more if a client requires it, they are not overtime eligible due to the amount of money they all earn, the fact that they are salaried, and the nature of their work (office setting).

How to Decide About Hiring Exempt vs. Non-Exempt Employees

What if the company Classy Consulting decides to hire a part-time Marketing Manager? This is a great example of when exempt versus non-exempt can become confusing. A Marketing Manager in Los Angeles, even when part-time, would likely make $40/hour. If that person is working 20 hours/week, then they are making well over the $455/week. But wait- they are paid hourly? So then, are they exempt or non-exempt? Let’s backtrack for a second.

There are some requirements from the Department of Labor that may require certain administrative, executive, and professional roles to be exempt. If there is no requirement in place, it can be helpful to look at the hours an employee will be working. If the employee is part-time with fluctuating hours, non-exempt may be the best option. However, if an employee is working full-time hours or very consistent part-time hours, salaried would likely be better. It ensures consistent pay for the employee while avoiding the extra expense of overtime hours. Thus, Classy Consulting could consider making their new Marketing Manager a part-time salaried employee to try to avoid this issue. Failure to properly classify an exempt and non-exempt employee can result in adverse effects.

Time Tracking: Legal Requirements For Non-Exempt Employees

Here it is in black and white, what you need to do for non-exempt employees:

According to the Department of Labor, Any time worked by non-exempt employees must be tracked by the hour and recorded by the employer under the Fair Labor Standards Act (FLSA). There is no mandated time tracking system as long as it maintains accurate records. Non-exempt employees must be paid at least minimum wage and are required to receive 1.5x their hourly rate for any hours worked past 40 a week.  

On the other hand, Exempt employees are paid a fixed salary and are not eligible for overtime pay, even if they work past 40 hours in a workweek. Employers can choose to track exempt employee time for billing clients or payroll and benefits administration. If an employer chooses to track hours for an exempt employee, the employee must comply. For exempt employees, an employer can choose a schedule and hold employees working a certain number of hours a week. If the employee does not work all hours required, the employer cannot deduct pay but address the issue through disciplinary measures.

Conclusion to Tracking Employees’ Time

Every business can find merit in exempt versus non-exempt employees. For example, Rusty Retail may decide to make a manager salaried if they can have a consistent schedule. Understanding what the labor law terms and how to time-track remain compliant is crucial in avoiding penalties.