Correctly classifying a position within an organization as exempt (salaried), or nonexempt (hourly) with regards to minimum wage and overtime is often something that is overlooked. While misclassifying employees is relatively common among many organizations, it poses a significant risk to organizations in the form of costly fines, negative exposure, and time-consuming law suits. The following is in-depth information on how to correctly classify employees under the Fair Labor Standards Act (FLSA).
There are two main classifications or exemption statuses under the FLSA; exempt (salaried) and nonexempt (hourly). An employee that is exempt is one that primarily performs work that is not subject to the overtime provisions of the FLSA. In other words, an exempt employee is “paid to get the job done” and is paid the same amount each pay period, regardless of how many hours they work per week. Nonexempt employees, on the other hand, are paid for every hour that they work and are subject to the FLSA’s minimum wage and overtime pay requirements. Therefore, an employee that is classified as nonexempt must be paid overtime (one and one-half (1 ½) times their regular rate of pay) for any hours worked over 40-hours in a workweek in accordance with the FLSA. The FLSA does not require that overtime be paid to nonexempt employees for hours worked in excess of eight-hours per day or on weekends or holidays.
As previously stated above, when an employee is properly classified as exempt under the Fair Labor Standards Act (FLSA), he or she is exempt from the FLSA’s minimum wage and overtime pay requirements. But how does an organization determine whether an employee qualifies to be classified as exempt in the first place? The employee must “pass” two tests; the salary basis test, and the duties test.
First, to past the salary basis test, the employee must be earning a salary of at least $684 per week. If the employee is not earning at least $684 per week ($35,568 annually), the organization must determine if the employee is a computer professional (which will be defined shortly) who is earning at least $27.63 per hour, or more. If the answer is still no, then the employee must be classified as nonexempt. However, if the employee is being paid a salary of at least $684 per week, the employee has “passed” the salary basis test. As with many employment laws, many states have passed laws that go above what the federal law states. For example, New York has a multilevel minimum pay threshold for exemption status. In New York City, employees who fall under the executive or administrative exemptions must make at least $1,125 per week to be categorized as exempt in companies with 26+ employees. In Nassau, Suffolk, and Westchester counties, the threshold is $1,050 per week. Similarly, in Maine, the minimum salary threshold is $700.97 per week for exemption status. It is highly recommended that employers check their state and local laws to make sure that they are compliant with the minimum salary threshold in their area. In cases where there is a conflict between state and federal overtime exemption laws, the law that is more beneficial to the employee applies.
Remember, the employee must pass both the salary basis test and the duties test to be classified as exempt under the FLSA.
The duties test is where things tend to get tricky for organizations who are working to correctly classify their employees per the FLSA. Under the duties test, the FLSA outlines specific exemptions under which a position may be classified as exempt. The classifications and each requirement include the following:
- Executive Exemption:
- The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise; and
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
- Administrative Exemption:
- The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the organization or the organization’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to “matters of significance”. More on what defines “matters of significance” later in this article.
- Learned Professional Exemption:
- The employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.
- Creative Professional Exemption:
- The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual or physical work.
- Computer Exemption:
- The employee’s primary duty must consist of the application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional applications; or design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or a combination of duties described above to which the performance of the duties requires the same level of skills; and
- The employee must be a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field.
- Outside Sales Exemption:
- The employee’s primary duty must consist of making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- The employee must also be customarily and regularly engaged away from the organization’s place or places of business.
- Highly Compensated Exemption:
- Highly compensated employees (those who earn at least $107,432 annually) are exempt if they customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee; earn at least $684 per week paid on a salary or fee basis; and have the primary duty of performing office or nonmanual work.
With regards to “matters of significance” under the administrative exemption,factors to consider in determining whether something is a “matter of significance” include the following:
- Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices.
- Whether the employee carries out major assignments in conducting the operations of the business.
- Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business.
- Whether the employee has the authority to commit the employer in matters that have significant financial impact.
- Whether the employee has authority to waive or deviate from established policies and procedures without prior approval.
- Whether the employee has authority to negotiate and bind the company on significant matters.
- Whether the employee provides consultation or expert advice to management.
- Whether the employee is involved in planning long-term or short-term business objectives.
- Whether the employee investigates and resolves matters of significance on behalf of management.
- Whether the employee represents the organization in handling complaints, arbitrating disputes, or resolving grievances.
If an organization determines that an employee fits into one of the exemptions listed above and can, in good faith, state that the employee meets the requirements of one of the exemptions, the employee may then be classified as exempt from overtime under the FLSA. If there is a doubt that an employee’s duties fall under one of the exemptions, it is best practice to either consult an employment law attorney or HR consultant who specializes in the FLSA, or err on the side of caution and classify the employee as nonexempt.
It is a common mistake for organizations to misclassify employees under the FLSA. Unfortunately, all it takes is one upset employee to file a complaint with the Department of Labor (DOL) Wage and Hour Division to raise the red flag. This may ultimately result in mandated back pay not only to the employee who filed the complaint and those who are current working for the organization, but also to other employees who were misclassified and are no longer working for the organization. Organizations should take the time to audit their current employee classifications by utilizing the previously described methods under the FLSA. Doing so may help the organization avoid costly fines, negative exposure, and time-consuming law suits in the long run.
For additional information on the classifying employees correctly under the FLSA, please contact us at www.NewFocusHR.com
Written By: Patrick McKenna, SHRM-CP