Is Your Startup Classifying Employees Correctly? Here's Why You Should

If your startup is scaling up like a small army, you likely have a few concerns on your mind. Are my managers well-equipped for interviewing? Will our new office have enough space? Is pizza really the tastiest crowd-pleaser when welcoming a new hire? (Spoiler alert: It 100% is.)

Likely not high on your to do list: classifying employees as exempt or nonexempt to determine overtime pay. A quick rundown: Nonexempt employees are employees that are entitled to overtime—often hourly employees, interns, and those with less latitude for making strategic business decisions. Exempt employees do not receive overtime. They are often salaried employees, executives, managers, and strategic decision-makers.

Seem unimportant? Some startups think so, and they end up throwing everyone a salary and slapping an “exempt” label on almost all job roles. But that’s not the best idea. Below, we give three reasons why you should always give employee status careful consideration.

After discovering why statuses are important, find out how you can straighten up yours inside Namely’s latest eBook, Walking the Exempt and Nonexempt Employee Line, featuring Ashley Pelliccione, Director of People at Namely.

Get a handle on those employee classifications, so you can get back to curating the ultimate selection of office pizzas (Hint: One cheese, one veggie, and two dozen meat lover’s.).

Why You Should Carefully Define Exempt and Nonexempt Statuses


1. Getting job titles and statuses right the first time avoids retitling jobs—and employees—into lower positions later on. 

“In startups, what you’ll find is you can give someone any title—titles are free,” says Ashley Pelliccione, Director of People at Namely. “And so you give them this lofty title which would be tied to an exempt job [one that isn’t subject to overtime pay], but actually they’re doing nonexempt responsibilities.”

What if a higher-skilled new employee joins the department and you’re faced with “demoting” an existing employee by means of a title change? Instead, avoid mislabeling so employees don’t flip-flop across positions and statuses.

2. Your company will compensate hardworking interns and hourly workers with the pay they deserve—and steer clear of legal hassles.

Even if companies do have their exempt and nonexempt statuses straight, they can still run into trouble, as Pelliccione mentions, if they restrict their nonexempt people to working 40 hours a week in order to avoid paying time and a half for overtime.

In most positions—white-collar positions, that is—there’s an expectation that some work still needs to be done at home either on nights or weekends. But for nonexempt employees, it’s a different story. Companies quickly find themselves in legal messes if nonexempt employees aren’t compensated for all hours worked, especially if they leave on bad terms. Two words: back pay.

Pelliccione would tell a nonexempt employee, “You need to be clocking every hour you’re working, even if it means paying you overtime. It’s the right thing to do.”

3. Accurate statuses gauge where new hires are necessary—and reflect performance expectations for team members.

When you closely track overtime for the appropriate positions, you’ll be able to see exactly where employee time commitments become more intense, or potentially unreasonable.

“I understand the company only wants nonexempt employees to work X hours, but if the performance the company expects means working more time, then the company either needs to budget more hours or change its expectations,” Pelliccione says.

Change can come in the form of a new hire to take on additional work. Or, maybe a manager needs a new level of understanding for what an employee can contribute. That’s an HR issue you’ll have successfully uncovered.

Getting overtime right can be a challenge for even the most seasoned HR pro. Our guide breaks down the most complicated overtime rules.

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