To most new business owners, employees typically fall into two pay categories, hourly or salaried. However, these terms fall under the much more complex classification standards of FLSA Exemptions. The Fair Labor Standards Act (FLSA) sets forth the criteria under which it is determined whether an employee is entitled to the benefits of overtime or if the employer is allowed to make that position exempt from that benefit. In a nutshell, when an employee's position satisfies certain requirements, it can be considered exempt and the employer may pay that employee on a salary basis. In other words, certain positions can be paid according to a fixed rate per pay period and wouldn't be entitled to receive additional compensation in the form of overtime if they worked past a certain number of hours.
It's often thought that classifying employees as exempt is better for the company's bottom line. However, most employers don't realize that paying someone on a salary basis comes with its own set of rules. For example, an exempt employee is entitled to receive a fixed minimum compensation regardless of the quality or quantity of work performed in that period. In other words, you're not allowed to reduce an exempt employee's pay because they spent less time working in one pay period over another. On the other hand, a non-exempt employee will only receive wages for the hours that they work, helping keep a tighter leash against paying for downtime.
The consequences for making a mistake on classification can be far worse than just an inefficient use of employee labor though. Criminal fines can be up to $10,000, with repeat offenders possibly being sent to prison. Civil penalties can reach $1,100 per violation, which would mean taking the number of employees affected multiplied by the number of times the wrong classification resulted in a violation. It goes without saying that taking shortcuts in this area can be a financial disaster. However, the damage can go much farther in the startup world, where investors are notoriously sensitive to ventures surrounded by bad press.
In the end, you're much better off having a professional help you make these classifications before you even have your first payroll processed so you can grow without fear and fulfill your aspirations of funding rounds and IPOs!