Your business is all set up and you’re ready to make your first hire. Congratulations! Is your employee going to be hourly or salary? exempt or non-exempt? haven’t thought about these questions yet? You’re in good company as misclassification of employees is the most common business mistake that leads to fines.
According to the United States Department of Labor, overtime pay violations may result in fines up to $1100.00 per violation. In order to determine if an employee is subject to overtime pay, you must first determine if they are exempt or nonexempt under the Fair Labor Standards Act (FLSA). How do you do that? Here is an extensive breakdown on the FLSA:
How to define an exempt vs. non-exempt employee
In short, exempt versus nonexempt status refers to an employee’s eligibility to overtime pay. Many states adhere to a typical calculation of overtime pay as anything beyond 40 hours per week. But some jurisdictions, like California, are more strict. In California, not only is a nonexempt employee entitled to overtime pay when working more than 40 hours per week, they are also entitled to overtime pay when working more than 8 hours in a day. FindLaw has a great guide on state by state breakdowns of overtime laws.
How do you know if an employee is entitled to overtime pay? The best advice is to seek employment counsel. It’s better to spend a little money now versus spending a much larger sum down the road in fines, overtime penalties and extended legal fees. As a general rule, exempt employees are salaried employees who are paid at least $455.00 per week and, as such, do not receive overtime. But, and this is important, there is also a duties test in determining exempt versus nonexempt. As a result, it is entirely possible that a salaried employee is entitled to overtime pay.
Define the employee duties
Once it is determined an employee sufficiently meets the aforementioned salary test, then an employer looks at the duties of the employee. There are five categories under which an employee could be exempt from overtime: executive; administrative; professional; computer related; outside sales. The three most common are executive, administrative and professional, which we will look at in more detail now. A great guide on these duties can be found here.
The FLSA defines exempt executive jobs duties as someone who regularly supervises two or more employees and whose primary duties are management and who has genuine input on job status of other employees. These components work together so mere supervision of other employees is not enough. To qualify under the executive exemption, an employee must not only supervise two or more employees but must also be in control or have input in the employee’s job duties, promotions, discipline and termination. Without these extra components, an employee will not qualify under the executive exemption.
The FLSA definition of exempt professionals is a bit more clear. When determining if an employee is exempt under the professional exemption, think advanced degree and intellectual work. Lawyers, doctors, teachers, clergy are all professions that require advanced degrees or advanced knowledge in their respective fields. Each of these individuals would be exempt under the professional exemption. Advanced degrees are not a requirement but are a fairly clear indication that an employee will fall under this exemption.
However, you can also think of this exemption as creative. So actors, musicians and writers would also fall under this exemption as those jobs require advanced knowledge and a special set of skills.
A common mistake business owners make
The administrative duties test under the FLSA is easily the most confusing and misunderstood. This also means it is most likely to get employers into trouble. The FLSA defines administrative duties as:
- office or nonmanual work, which is
- directly related to management or general business operations of the employer or the employer’s customers, and
- a primary component of which involves the exercise of independent judgment and discretion about
- matters of significance.
Confused? Think high-level employees here. A typical administrative assistant, while they have administrative in their title, won’t qualify under this exemption. To qualify under the administrative exemption, an employee’s work should involve discretion and judgment of matters significant to the daily operations of the business as a whole or in part. Human resources staff generally fall under this exemption because they have the ability to interpret company policies and employee job duties. Merely clerical work is insufficient.
Have you classified your employees correctly? Most business owners don’t even realize their employees are classified incorrectly. Unfortunately and with many areas of the law, ignorance is not a defense. If an employer fails to pay overtime to an employee who is entitled to such, not only is the employee entitled to backpay for the time worked but the employer will be required to pay double backpay, penalties, unpaid back taxes and any attorneys’ fees of the employee. One of the best ways to protect your business is to keep accurate records of your employees’ time punches, an online time tracking software can save you time and money but most importantly it can protect you from employees making false claims of overtime.
If you determine an employee has been classified incorrectly, fix it. Immediately. Alert the employee of the correction and issue any backpay that is owed, if you so choose. Whatever route you take, make sure the employee and management sign off on the resolution and the new classification.
The FLSA overtime rules are a complex area of employment. While you can attempt to tackle these classifications yourself, it is best to consult an employment attorney to ensure your classifications are correct and legally sound.
Author: Bryan John Driscoll
Bryan is a former lawyer, current freelance writer and HR consultant. Bryan prides himself on being able to provide quality written pieces and consulting expertise to his clients in a timely and defect free manner. Bryan loves to travel and, if he had his way, would constantly be jetting off to another destination.