Employee Misclassification: The Fine Line between Non-Exempt & Exempt Employees

For as long as the Fair Labor Standards Act (FLSA) has governed the rules of employee classification, the confusion surrounding non-exempt and exempt classifications has continued.  Although many people generally view “non-exempts” as non-managers and “exempts” as managers, the truth is that there is a fine line between the two.  That line often gets employers into hot water and can cost them significantly in terms of fines, back overtime pay, and future Department of Labor (DOL) monitoring.

Defining Non-Exempt & Exempt Employee Status

Before looking at how non-exempt versus exempt status has become muddled, let’s define each.

Non-Exempt:

Non-exempt employees are generally entitled to minimum wage and overtime and have jobs that do not meet the requirements of the FLSA’s exemption tests:

  • Minimum Wage.  Non-exempt employees must be paid the minimum wage or  more.  The current federal minimum wage is $7.25 per hour.  Some states have rates that are higher or lower than the federal rate and employees are entitled to whichever is greater.  If an area has a living wage (a wage that is high enough to maintain a normal standard of living and which is generally much higher than either the federal or state rate), the living wage prevails.
  • Overtime Pay. Non-exempt employees are entitled to overtime pay (time and a half) for any time worked beyond 40 hours in a given week.  Some states, such as California, Nevada and Alaska, require overtime after working eight hours in one day.  Others, such as Colorado, require overtime pay if an employee works more than 12 hours in one day.
  • Type of Work. Contrary to popular belief, the type of work an employee performs is not generally a defining factor of a non-exempt classification.  Instead, employers should look at exempt classifications.  If the employee’s duties don’t fall into one of the exempt categories (listed below), then the employee is likely non-exempt.

Exempt:

Exempt employees are not entitled to overtime pay. They generally tend to perform higher-level jobs within an organization that are either executive, professional, or administrative.  To qualify as exempt, certain FLSA tests must be met.

Here’s a look at those tests:

  • Executive Exemption. To qualify for the executive employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise.
  • 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. To qualify for the administrative employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
  • Professional Exemption. There are two types of professional employee exemptions, the creative exemption and the learned exemption.
  • To qualify for the creative professional employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • 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.
  • To qualify for the learned professional employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
  • The advanced knowledge must be in a field of science or learning; and

The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Note:  There are also exemptions for outside sales positions, computer-related occupations, and others which have their own FLSA requirements.

Misclassifications Cost Employers Cash

Employers who misclassify employees may be liable for back pay, retroactive benefits (such as healthcare, 401(k), memberships) and more.  The issue can become exacerbated when more than one employee or department is involved, which is generally the case. In fact, it can affect thousands of employees if a national company has wrongly classified employees.

Case in point: Walmart.  The retail giant misclassified 4,500 managers and coordinators as exempt at stores nationwide.  In fact, they were actually non-exempt and were entitled to $5.3 million in penalties, damages, and back wages for overtime violations at stores nationwide.

What to Do Next

As part of our legal services for business owners, we’re happy to guide you in ascertaining whether your employees are exempt or non-exempt as well as provide guidance with other day-to-day business operations matters. Please call the office to schedule a meeting.

 

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