Hourly or Salaried?

When I talk to prospective clients I always ask, “how many employees do you have?” They tell me a number, then I ask “how many are exempt from overtime and how many are hourly?” Often they say something like “oh they’re all full time.” That’s when the red beacons start flashing, the sirens go off and I run out of the room yelling, “DIVE DIVE DIVE!”

Many employers believe that when you hire someone full time, that automatically means they get paid a set salary, so they don’t need to clock in or out, their sick time doesn’t matter and they don’t get paid overtime.

SPOILER ALERT: None of those things are true.

Exempt and Non-Exempt

All employees fall into one of two categories: Exempt and Non-Exempt, that is, from overtime. Non-Exempt employees are paid by the hour, even if they have a minimum salary. None of this has anything to do with being full or part time.

Non-Exempt and “Salaried Hourly”

Take an administrative assistant making $52,000 per year. In reality they make $25 per hour ($52,000 divided by 52 weeks, divided by 40 hours). Why does this matter? It matters because if they work more than 40 hours per week they’re entitled to overtime. And if they’re in Alaska, California, Nevada, Puerto Rico or the Virgin Islands, they’re entitled to overtime after working 8 hours in one day, or 12 hours in Colorado.

Except via collective bargaining with a union or other regulated association, an employee cannot agree not to be paid overtime.

The “salary” paid to an hourly employee is effectively a minimum guaranteed by the employer. If the employee works 7 hours on Monday but 9 hours on Tuesday, it comes out in the wash until you hit 40 hours in the week (unless your state has daily overtime), but the calculations are all based on hours. From a compliance perspective your “salaried hourly” employees are treated exactly like any hourly employee, including mandated meal breaks and rest periods.

For your payroll to be compliant, your “salaried hourly” people need a mechanism to clock in and out. It DOES NOT need to be a timeclock on the wall like a factory.

Exempt and Salaried

Why bother with all that timekeeping? Why not just make him Exempt from overtime? Good question.

To be considered exempt, an employee needs to pass a series of tests. It gets complicated pretty quickly (moreso in California… predictably) but typically the work they’re doing has to be executive, administrative or professional; primarily creative or intellectual; and they must exercise independent judgement on matters of significance. Clear as mud, right?

There are also salary thresholds and detailed rules regarding how and when exempt employees get paid, at the federal level and in some states, and in New York some municipalities. For example, in California the salary for exempt workers has to be twice the state minimum wage (in this case a local minimum wage does not apply). In no case does our person qualify in California unless they makes (as of April 2025) at least $68,640 per year. That’s calculated by $16.50 x 40 hours per week x 52 weeks per year x 2.

Classifying Employees

Properly qualifying an employee as exempt can be straightforward: the CEO is Exempt. But with mid- and lower-level creative roles it can get tricky. What is independent judgement for an art director? What is a “matter of significance?”

What’s more, the penalty for getting it wrong is steep. Essentially it opens the employer up to claims for non-payment of wages or not providing breaks, possibly going back years. In California, the employer is also open to litigation under the dreaded Private Attorneys General Act.

It’s all fun and games until someone loses an Industrial Welfare Commission Order.

Timekeeping with a heart

I already know what you’re going to say. “We’re a design firm! We can’t ask people to clock in and out like a factory! They are artists!” I get it!

Especially if you haven’t been doing any sort of timekeeping before, it’s a buzzkill to put that tablet up next to the water cooler and make everyone clock in and out. But that’s not the only option. In fact, as more and more people are working remotely, it’s not even a good option. Most service businesses are tracking time one way or another, it’s just a matter of tweaking that system to be compliant with hourly payroll.

For example, at Tee Lex we’re structured for remote, asynchronous work, meaning people work where they want, when they want. We don’t bill by the hour but we do track time for managerial and HR insights, whether you are exempt or not. We use Harvest and it enables people to keep their time on mobile, on desktop and even inside Asana tasks. They find it where they work and it folds seamlessly into everyone’s day. This gives us the insights we need to run our business, provides compliant information to run payroll and makes for a good experience for the team, no matter how they prefer to track their time.

Lots of popular time tracking apps can be configured to enforce this kind of timekeeping, some can even do it at the employee level for maximum flexibility.

Conclusion

There’s no doubt that it’s easier to just say that everyone is exempt, we’re all one big happy family and we don’t need to do any of that silly timekeeping. But there are two things I’d urge you to consider:

1. It may be true that you are all one big happy family right now, but if one of those relationships sours, you just don’t have any defense against legitimate overtime claims. Misclassification of employees is the bread and butter of every PAGA-ambulance-chasing attorney in California

2. It’s just not scalable. People come to Tee Lex wanting to know how to scale their business without losing their culture. We are super sensitive to the cultural needs of creative businesses; it’s one of the reasons I founded Tee Lex. But there are some issues that need to be sorted out to protect a growing business and set it up for long-term success, and wage-and-hour compliance is one of them.

I promise it can be done while keeping your culture intact.

If you need help classifying your employees, implementing timekeeping or mitigating HR risk in your business, drop me a line at joe@teelexinc.com