No one expects a small business owner or employee to be experts in employment law. However, violating the Fair Labor Standards Act(FLSA) by misclassifying employees as exempt or nonexempt is more common than you might think – and those mistakes can be costly.
Recently, a cabinet maker in Texas misclassified employees as exempt from overtime rules and was ordered to pay $175,458 in back wages to 59 employees. Don’t let this happen to you!
Exempt vs. Nonexempt
Exempt employees are not subject to the overtime and minimum wage rules of the FLSA, but are still subject to the recordkeeping and child labor provisions. Nonexempt employees must be paid minimum wage, and when they work more than 40 hours in a week, they must be paid at time and a half for any additional hours. Watch out for the additional labor laws and regulations of many states.
How are Employees Classified as Exempt or Nonexempt?
Some types of jobs, such as outside sales, are exempt by definition. For most jobs, three criteria must be met to classify an employee as exempt:
- How much they are paid. Exempt employees must be paid a minimum salary of $23,600 per year or $455 per week.
- How they are paid. Exempt employees are paid a salary – a base amount they can depend on for doing any work. While they may receive other bonuses or pay on top of a salary, this baseline guaranteed pay cannot be docked for absences. They may be demoted, disciplined or fired, and vacation pay may be cut, but a salary can’t be cut for absences.
- What kind of work they do. This is the area that can trip up employers the most. In general, exempt employees do higher-level work for the business. Three general categories of employees are exempt, but just slapping one of these job titles on an employee won’t make them exempt if there’s a mismatch between the job title and their duties:
- Executive exempt employees regularly supervise two or more other employees, have management as their primary duty, and have meaningful input for job status decisions for other employees, including hiring, firing, promoting or work assignments. As a rule of thumb, executives are the ones in charge of a department or subdivision. They’re the “boss.”
- Professional exempt employees generally have specialized education or training. These include lawyers, doctors, dentists, teachers, architects, registered nursed, accountants, engineers, clergy, pharmacists and scientists. Certain creative professionals, such as artists, actors, musicians and writers, are also considered exempt.
- Administrative exempt employees perform office or non-manual work. This work must be directly related to managing the business, or the general business operations of the employer or the customers of the business. As part of their duties, these employees apply discretion and independent judgment. Examples include human resources, payroll, accounting, marketing and legal compliance.
Calling someone an administrative assistant does not make that employee exempt. To qualify, the employee must have the authority to make significant decisions for the company. This means the administrative assistant to the CEO could be exempt based on the level of decisions that person makes, but an administrative assistant with less critical job responsibilities would likely be nonexempt.
Highly Compensated Employees
Employees who are paid a minimum of $455 per week on a salary basis and whose overall compensation is more than $100,000 per year qualify as exempt under a special rule. If they do office work or non-manual work, and perform at least one of the exempt duties of an executive, professional or administrative exempt employee, they are treated as exempt.
Watch Out for Industry-specific Rules
There are a few exceptions. For example, computer employees who spend most of their time analyzing systems or programming, qualify as exempt if they’re paid a minimum salary of $455 per week. The DOL website has a large library of fact sheets that cover just about every industry and type of worker, so if you have doubts about how you are classifying employees, this is a good source of information.
Remember that violations of the FLSA can be costly and damage the reputation of a business as a good place to work, so make sure you understand the rules.
