Are You Classifying Your Employees Correctly?

How can you properly determine if you’re classifying employees as exempt or hourly? Exempt employees, unlike nonexempt employees, aren’t subject to the minimum wage and overtime pay requirements of the Fair Labor Standards Act (FLSA). However, there are certain Department of Labor (DOL) requirements that must be met for an employee to be classified as exempt.

It is a common misperception that job titles determine whether jobs are exempt from overtime or minimum wage laws. It is crucial that employers correctly identify and classify employees because incorrect employee classifications can expose your company to significant fines, legal action and negative publicity.

Some Background

The FLSA requires most employees in the United States to be paid at least the federal minimum wage for all hours they work, plus overtime pay for hours over 40 worked in a work week. The FLSA provides exemptions from these requirements for employees in certain executive, administrative, professional, outside sales and computer positions (or “exempt positions”).  A number of criteria must be met for an employee to be considered exempt.

For example, an executive exemption requires that an employee’s primary duty consist of managing an enterprise or one of its recognized departments or subdivisions. The employee must regularly direct the work of at least two other full-time equivalent employees.

An executive, to be classified as exempt, must have the authority to either hire or fire employees, or have their recommendations regarding hiring, firing and promoting other employees be given particular weight. Finally, the executive must earn at least $455 per week on a salary basis. Paying an exempt executive on an hourly basis rather than on a salary basis voids the exemption, resulting in significant exposure.

There are also criteria to be met to classify employees in administrative positions as exempt. For instance, in addition to being paid at least $455 per week on a salary or fee basis, the DOL states that administrative employees must be able to “exercise discretion and independent judgment with respect to matters of significance.…” to be classified as exempt.

The DOL categorizes professional employees as either learned or creative for the purpose of determining whether they’re exempt. Learned professionals’ work is mainly intellectual in nature and requires a consistent exercise of discretion and judgment. Creative professional employees’ primary work requires “invention, imagination, originality or talent.” Similar to administrative employees, professional employees must earn at least $455 per week on a salary or fee basis.

Additional Requirements

Aside from a few exceptions, exempt employees must receive their full pay for any weeks in which they’ve performed work, regardless of the number of hours or days worked.

If exempt employees are ready, willing and able to work, their wages cannot be reduced because no work is available. Employers that improperly deduct pay from exempt employees’ salaries risk losing the exempt status for these employees.

Positions Matter

There are a number of positions for which exemptions are not permitted; these include manual laborers and non-management employees in production, maintenance, technical, construction and similar occupations. Regardless of how high their wages are, these types of workers are covered by the FLSA’s provisions for minimum wage and overtime pay.

Employers are also required by the FLSA to maintain certain records for their nonexempt employees. These records must include their daily and weekly work hours, as well as the rate or basis of pay and terms of compensation.

Do Well By Your Employees

Distinguishing between exempt and nonexempt employees is difficult as it is often based on specific job duties. Furthermore, the employer bears the burden of proof that a position is exempt. So make sure you review the FLSA’s requirements and the DOL rules, as well as any state or local employment laws and regulations. It is also good practice to consult a legal or HR professional when determining employees’ classifications.

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