Compensation

HR Glossary for HR Professionals

Glossary of the most common HR terms and acronyms to assist professionals navigating the ever-growing and ever-changing world of HR terminology.

Compensation

What is a compensation?

An employee’s regular salary or hourly pay, including other wages such as overtime, bonuses, retirement benefits, health benefits, stock options, and other non-financial incentives.

Direct Compensation

Direct compensation is money paid by the company to employees for labor and services. Direct compensation includes employees base bay (hourly or salary), commission, and bonuses. 

Indirect Compensation

Indirect compensation includes non-monetary benefits offered to employees such as health insurance, tuition reimbursement, maternity and paternity leave, retirement plans, and more. 

Types of Compensation: Exempt vs Nonexempt

The government has rules about whether you have to pay a given employee hourly or not. In other words, it is not up to your discretion and your opinion is irrelevant.

Employees who fall under the FLSA’s rules about overtime are often referred to by HR professionals as being “non-exempt”. Non-exempt employees generally have to be paid hourly. 

Employees who are not subject to the FLSA’s rules about overtime are often referred to by HR professionals as “exempt” (as in, they are exempt from the FLSA overtime rules). Exempt employees can be salaried rather than hourly.

The FLSA requires employers to classify employees as overtime exempt or non-exempt. To this end, when classifying employees as exempt or non-exempt, it’s important to ask the following questions:

How much do my employees make? As of January 1st, 2020 employees earning less than $35,568 per year or less than $684 per week should be classified as hourly pay, overtime non-exempt.

Duties Test

An employee’s day-to-day duties – not job title – should determine whether an employee is classified as exempt or non-exempt. There is a common misconception that only “blue collar” workers, working-class employees performing manual tasks, should be classified as hourly. This is not the case. Some “white collar” positions should actually be classified as hourly. For instance, many employers wrongly assume that commissioned inside sales people should be salaried when in fact, these employees should be classified as hourly and overtime non-exempt.

You can check to see if your employees should be classified as hourly or salary using the FLSA duties test. Each of the following six categories outlines duties performed by salary employees. If an employee performs duties that match with any of these six categories, they should be classified as salary.

If an employer does not properly classify an employee as non-exempt, the employer could be responsible for up to 3 years backpay and liquidated damages awarded by the court. Employers who misclassify employee exemption status on more than one occasion may be subject to civil penalties as well.

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