Everything employers need to know about employee job classifications

Chief among the issues that keep employers up at night is staying compliant with federal and state employment laws.

Arguably, wage and hour rules are the most complex and cause the most issues for companies. Job classifications under the FLSA can confuse even the most experienced HR managers.

In fact, some of the costliest wage and hour lawsuits and penalties on record could have been avoided if only the employer properly classified an employee as either exempt or nonexempt. It’s critically important to understand the law — and the devil is in the details.

Exempt or nonexempt?

Most employers understand that an exempt employee is not entitled to receive overtime pay for hours worked in excess of forty hours per week, according to the provisions of the FLSA. Conversely, nonexempt employees are required to receive overtime pay and should be classified as nonexempt from these same overtime provisions.

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While it may sound straightforward, figuring out an employee’s exempt status is not that simple. Different types of exemptions exist and each has its own unique set of requirements that are outlined in the FLSA. Most of these exemptions are specific to certain jobs or industries, for example, some exemptions only apply to specific types of agricultural workers, or to truck drivers who transport goods in interstate commerce. But for most businesses, exempt employees will usually fall into one of the following three exemption categories: executive, administrative and professional. Collectively, these are referred to as the white collar exemptions.

A common error that employers make is to classify all their salaried employees, or all employees with the word manager in their title, as exempt. Neither of these factors alone is enough to make the exempt designation. Each of the white-collar exemptions has two components: a salary requirement and a duties requirement. The salary requirement is the same for each of the three exemptions, but the duties requirements are different.

The salary basis test

For any employee to be considered exempt under any of the white-collar exemptions, they must be paid on a salary basis. This means that any employee who is paid by the hour, per day, or is commission-only, regardless of their title or position, will not meet the criteria for any of the white-collar exemptions. How the salary is paid as well as the amount are also subject to certain restrictions. The salary basis test determines the minimum amount, which is subject to change from time to time. The minimum salary is currently $455.00 per week (or $23,660 per year). This test also provides restrictions on when and how an employer can make deductions from an exempt employee’s salary.

An increase to the minimum salary per week from $455 to $913 (or $47,476 per year) was originally scheduled to go into effect back in December 2016, but industry groups against the measure successfully lobbied to block it. The U.S. Department of Labor is exploring alternatives that could appease these industry groups while keeping the regulations in line with the times. The DOL is scheduled to re-start the rulemaking process in March 2019, and prior statements of the current DOL Secretary, Alexander Acosta, suggest that the new rule may propose a more modest salary increase to around $634 per week (or around $33,000 per year).

Job duties

In addition to the salary, each white-collar exemption has its own unique set of duties requirements. Employers must look at the actual duties that each employee performs to determine whether they meet the criteria and their title or position does little to influence the outcome. So, simply naming an employee a manager does not automatically qualify the worker as an exempt employee. To be considered exempt under the executive exemption, which is the most common exemption for managers, this employee would need to supervise two or more full-time employees (or the equivalent) and have the authority to hire and fire employees. Otherwise, they would need to meet the requirements for one of the other exemptions to be paid in this manner.

Knowing that these regulations exist and being well-informed of the framework is the first step in understanding overtime obligations – and reducing wage and hour worries. Employers should seek a qualified employment law attorney for additional guidance on the specifics of each requirement to ensure compliance with applicable overtime laws.

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