Employee classification

Employee classification can be confusing! The term “employee classification” can refer to a few different categories.  It could be a determination of whether the individual is an “employee” or an “independent contractor.”  It might refer to whether they are full-time or part-time, depending on the number of hours they work in a week.  It also might be a determination of whether they are an exempt or non-exempt employee.   Let’s dive into what exempt and non-exempt employee classifications mean.

Exempt and non-exempt are classifications set forth in the Fair Labor Standards Act (FLSA).  This Federal law was established in 1938 and has undergone several updates and revisions in the years since.  The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for almost every employer in the United States.  In this post, we will focus on the overtime pay requirements.

Under the FLSA, covered nonexempt employees who work more than 40 hours in a week must receive overtime pay at a rate of not less than one and one-half times the regular rate of pay.  (This is according to federal law.  Some states have overtime laws. In cases where an employee is subject to both the state and federal overtime laws, the employee is entitled to overtime according to the higher standard (i.e., the standard that will provide the higher overtime pay).

Exempt employees are not entitled to overtime pay under the FLSA.  So, why wouldn’t an employer classify an employee as exempt and limit overtime pay?  In order to be classified as exempt, a position must meet certain qualifications set forth by the FLSA.  First, the position must be paid on a salary basis.   As of January 1, 2020, the minimum weekly salary must be $684, or at least $35,568 per year. In addition to setting a minimum salary level, the FLSA also sets forth other requirements that must be met before a position can be classified as exempt.  In order to classify a position as exempt, the duties and expectations of that position must meet certain requirements that are generally referred to as “white-collar exemptions” and include the following categories:  Executive, Administrative Professional, Computer Professional, Outside Sales, and Highly Compensated Employee.  Each of these categories has a list of “tests” that must be met in order for a position to qualify for the exemption.  Detailed information about each of these categories and the requirements to qualify can be found at https://www.dol.gov/whd/overtime/fs17a_overview.pdf.

An employer is never required to classify an employee as exempt, even if the position qualifies for the classification. However, classifying an employee as exempt whose position does not qualify can be very costly.  If a determination is made that an exempt position should be non-exempt, then the employer will be held liable for all unpaid overtime, going back as far as three years prior to the date of the claim.  In addition, the court may levy penalties against that employer in the form of liquidated damages in an amount equal to the sum of unpaid wages the employee is owed, effectively doubling the amount of unpaid wages an employee may recover.

Furthermore, those employers who willfully and/or repeatedly misclassify employees as exempt are subject to up to $1,000 in civil penalties for each violation and may be criminally prosecuted as well, exposing them to a fine of up to $10,000 and/or incarceration. Another factor to keep in mind is the possibility of multiple employees being misclassified.  If a single claim is made or a random audit held, the Department of Labor is going to look at each employee’s classification, and back wages, damages and fines will be assessed for each employee.  This could be an exceptionally costly mistake!

In order to avoid potential calamity, employers should critically evaluate each of their positions against the acceptable exemptions to see if the position qualifies.  Remember, positions are exempt, not employees.  So, if a previously exempt employee changes positions, be sure you are classifying them according to the position they are filling.

Classifying employees correctly and adhering to the FLSA and applicable state and local laws and regulations can feel overwhelming and frustrating. Your HR Manager can help you navigate your obligations related to federal and state laws and regulations.

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