Exempt Versus Non-Exempt: Employers Could Face Fines for Misclassifications
March 1, 2023
For employers to comply with the Department of Labor (DOL) and the Fair Labor Standards Act (FLSA) regulations, they must be careful to classify their workers as exempt or non-exempt correctly. The correct classification of workers is essential because non-exempt employees generally have more protections than exempt employees. To ensure the accurate status is assigned to each employee, employers should familiarize themselves with all relevant state and federal regulations because non-compliance could result in costly fines and regulatory penalties. Suppose you are an employer with questions about your exempt and non-exempt employee classifications. In that case, you can consult with one of the experienced labor and employment lawyers at the Lynch Law Firm to confirm you are following all state and federal requirements.
What is a Non-Exempt Employee?
According to the overtime provisions of the FLSA, a non-exempt employee is generally eligible for overtime pay if they work more than forty hours per week. In some states, however, overtime pay is due when workers work more than 8 hours daily. In these instances, even if the worker has not met the federal threshold of forty hours per week, they must be paid at a rate of time-and-a-half for any hour they work that exceeds eight hours.
What is an Exempt Employee
An employee is exempt from the overtime provisions of the FLSA if they have been classified as an executive, a professional, an administrative, or an outside sales employee and they meet all the specific criteria required for the exemption. Most exempt employees work professionally within their organizations and are often management staff or executive team members. When classified as exempt, employees are generally paid a salary and receive the same compensation for each pay period, even if they have worked overtime hours. Exempt employees are not covered by the Fair Labor Standards Act and are not entitled by law to receive overtime pay. Employers must also abide by the labor laws and additional requirements of the state where the worker is employed.
Exempt vs. Non-exempt Employees: Overtime Eligibility is the Difference
Under federal law, an exempt or non-exempt status is determined by the Fair Labor Standards Act (FLSA). Exempt employees are not entitled to overtime pay, while non-exempt employees are eligible for overtime pay. For an employee to qualify for exempt status, they must meet specific criteria. To determine if employees should be classified as exempt or non-exempt, Employers can perform an assessment based on several factors
· How much money the employee earns.
· The type of work performed by the employee.
· The employee's specific duties and responsibilities.
It is also essential for employers to follow state laws that may have different criteria for classification. Still, the primary difference in status between exempt and non-exempt employees is their overtime eligibility.
Does the Exempt Status Represent an Advantage to the Employer?
Classifying an employee with an exempt status may be advantageous to employers because this status does not limit the number of hours an employee can work during any given pay period. Exempt employees earn a salary and often work far more than the standard 40-hour workweek. Employers must note, however, that the job description must meet all the exemption requirements before classifying an employee as exempt. Employers cannot override the exemption requirements because they do not want to be responsible for paying overtime compensation.
Do Employers Have to Pay Overtime to Part-Time Workers?
According to the Department of Labor, employers must pay non-exempt employees overtime at least one-half times the employee's regular pay rate after working 40 hours in a work week. Special exceptions may apply to police officers, firefighters, and workers who are employed by hospitals and nursing homes.
When an employee is subject to state and federal overtime laws, the worker is entitled to overtime compensation according to the standard that will provide the employee with the highest amount of overtime pay.
Fair Labor Standards Act (FLSA) Exempt and Non-exempt Tests.
To ensure Fair Labor Standards Act compliance, employers must correctly classify their workers as exempt or non-exempt. To determine if an employee is eligible for overtime wages, the employer must consider two important points:
1. The Salary Test: Sets a cap on wages.
2. The Duties Test: Outlines the type of work being performed.
Workers who meet the criteria outlined by the Salary and Duties tests are generally paid a salary and are exempt from overtime pay. With a few exceptions, all other employees are considered non-exempt and eligible for overtime wages.
The Salary Test
The salary test determines if an employee is exempt from overtime pay. To qualify, employees must meet minimum requirements. Executive, professional, and administrative employees must be paid:
· A salary of at least $684 per week or $35,568 annually.
(Note: This requirement does not apply to outside salespeople, teachers, lawyers, or physicians.)
· Computer professionals must be paid at least $684 per week or $27.63 per hour.
Some states have passed laws that require higher salary thresholds or more specific duties tests. Employers are typically advised to meet the most beneficial level for the employee if there is a conflict.
The Duties Test
The duties test lists seven primary classifications of workers exempt from overtime pay. These include:
1. Executive Employees
2. Administrative Employees
3. Learned Professionals
4. Creative Professionals
5. Computer Professionals
6. Outside Sales Employees
7. Highly Compensated Employees
The Duties Test lists three primary categories for exempt employees:
1. Executive Exemption
To qualify for the executive employee exemption, these employees must:
· Have a primary duty that requires them to manage a business or a department within the organization.
· Direct the duties and performance of two or more full-time employees,
· Have decision-making authority to hire or terminate other employees within the organization.
2. Administrative Exemption
To qualify for the administrative employee exemption, these employees must:
· Perform office or non-manual work that is related to the management or general operations of the employer or the employer's clients and customers, and
· Have decision-making authority.
3. Learned Professional Exemption
The learned professional exemption applies only to employees who perform primarily intellectual (as opposed to manual or mechanical work or physical labor). To qualify for the learned professional employee exemption, the employee must:
· Perform work that requires advanced knowledge and includes the regular exercise of judgment and discretion.
· Work in a field of science or learning.
· Have an advanced degree.
What are Workers Eligible for Overtime Pay?
To qualify as an exempt employee who does not receive overtime pay, workers must meet all the criteria defined by the duties and salary basis tests. Workers not meeting all the responsibilities and standards requirements should be classified as non-exempt.
How to Categorize Workers Correctly
Many businesses incorrectly classify their workers based on job titles or wages. Most companies with employees who are paid a salary or have titles that include "manager" or "supervisor" believe they are in complying with the law. But the FLSA requires that the duties and salaries tests be met to exclude an employee from overtime pay.
When categorizing new hires or existing employees, employers must review their employee's job descriptions to ensure every requirement is being met. Even when a single point of the duties or salaries test does not meet the exemption requirements, the employer should classify the employee as non-exempt, and the worker should be eligible for overtime pay.
Penalties for Misclassification
Employers must review all job descriptions to ensure their employees are correctly classified. Misclassification can result in back pay recovery, and even fines and penalties are possible if the Wage and Hour Division determines that the employer was willful in violating the law.
The U.S. Department of Labor Last Updated Earnings Thresholds for Overtime Pay in September 2019
The U.S. Department of Labor last updated the earnings thresholds in September 2019. The DOL updated these thresholds to account for the growth in employee earnings since the thresholds were last updated in 2004. The revised rules were deemed necessary to exempt executive, professional, and administrative employees from the Fair Labor Standards Act's (FLSA) minimum wage and overtime pay requirements. The 2019 rules also allowed employers to count a portion of specific bonuses or commissions towards meeting the salary level. In 2019, the U.S. Department of Labor:
· Raised the "standard salary level" from $455 to $684 per week ($35,568 per year for a full-year worker).
· Raised the total annual compensation requirement for "highly compensated employees" from $100,000 to $107,432 annually.
· Allowed employers to use nondiscretionary bonuses, commissions, and incentive payments paid at least annually to satisfy up to 10% of the standard salary level, and
· Revising the special salary levels for workers in U.S. territories and the motion picture industry.
The DOL May Raise the FLSA Salary Test in 2023
In 2023, the U.S. Department of Labor (DOL) may seek to raise the salary threshold for a person to fit within a Part 541 white-collar exemption. The agency is expected to seek an increase of $900-1000 per week, somewhere in the range of $50,000 per year. At the end of 2022, the salary minimum was $684 per week or $35,568 per year.
How Employers Should Prepare
If the DOL increase salary thresholds in 2023, employers can prepare for new legislation by reviewing the job descriptions and salaries of all their employees currently classified as exempt. Employers must ensure their exempt employees' duties and responsibilities fall within the executive, administrative, or professional categories. If employers want their exempt employees to retain their exempt status, the employer may need to increase salaries to the required minimum.
Before employers classify the workers on their payroll as exempt or non-exempt, it is essential that they understand the differences between these two categories. To remain in compliance with state and federal regulations, employers must ensure that they are not misclassifying their workers.
Non-exempt workers are covered by the Fair Labor Standards Act (FLSA), and employers must track their hours, follow minimum wage guidelines, and offer overtime pay for time worked over forty hours per week.
Because exempt workers are paid a fixed salary, employers don't need to track their hours or pay overtime. However, the overtime pay requirements of the FLSA do not apply to exempt employees.
According to the U.S. Department of Labor, the FLSA allows exemptions for seven categories of employees:
3. Creative professional,
4. Learned professional,
5. Outside sales,
6. Computer sales,
7. Highly compensated.
The correct classification of exempt or non-exempt workers is essential because non-exempt employees generally have more protections under the FLSA than exempt employees. Employers not following state and federal requirements should note that non-compliance could result in costly regulatory penalties.
Consulting with a Labor and Employment Attorney
Before classifying employees as exempt or non-exempt, employers should review the U.S. Department of Labor's website. Employers can familiarize themselves with all relevant state regulations before hiring new employees. However, if you have questions about classifications, consider speaking with an experienced labor and employment lawyer.
Working with a Labor and Employment Attorney Can Mitigate Misclassification Risk
Attorney Natalie Lynch and her team at the Lynch Law Firm have considerable experience in assisting organizations in complying with state and federal regulations.
Working with a group of experienced labor and employment attorneys can help you navigate the complexities associated with employment classification processes and procedures. Contact the Lynch Law Firm to arrange for a complimentary consultation.
Contact the Lynch Law Firm to Schedule a Free Consultation Now
Labor and employment matters arise in all types of businesses and industries. The Lynch Law Firm's team of attorneys is equipped with the resources, experience, and knowledge to help you resolve your legal matter. In addition to representing individuals and businesses in various labor and employment issues, our attorneys can assist you in developing employment contracts, employee handbooks, and performance evaluation materials and drafting legal agreements to address the problems that include non-disclosure, non-competition, severance, and separation.
The Department of Labor (DOL) FLSA Overtime Security Advisor
Overtime Laws, US Department of Labor – DOL.gov