One of the many potentially confusing things about hiring and managing employees can be determining their exemption status per the Fair Labor Standards Act (FLSA). In this article, we’ll discuss the importance of FLSA classification and give a brief overview of classification types; we’ll also share some news on the FLSA exempt test.
The Importance of FLSA Classification
The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Overtime pay at a rate not less than one and one-half times the regular rate of pay is required after 40 hours of work in a workweek.
Because of its tedious nature, classification is an area that many businesses get wrong. Making sure your employees are properly classified protects you from the potentially damaging repercussions of an audit; it will also save you time and money.
We recommend the best practice of documenting each of the factors used to determine how you came to each classification decision. The supporting documentation will be useful if a classification is ever called into question.
Companies that have been audited and found in violation of FLSA guidelines face enormous penalties. Consider how large a penalty could be if you had a number of employees classified as exempt, who should have been paid overtime, over the course of a few years. You would owe back wages (at time and a half) to the employees, and the penalties and interest on the taxes you should have paid could be enough to sink your company.
FLSA Classification Types
Here are basic definitions you need to know to understand salaried, hourly, exempt, nonexempt, and salaried nonexempt employees. Except where noted, these employee classification definitions come from the U.S. Department of Labor.
FLSA Exempt: Under the Regulations Part 541, exempt employees are those who are not entitled to the minimum wage or overtime pay protections of the FLSA. This classification of employee is often referred to as “salaried.”
FLSA Nonexempt: A nonexempt employee is one who is entitled to the minimum wage and/or overtime pay protections of the FLSA. This classification is often referred to as “hourly.”
Salaried Nonexempt: According to the Houston Chronicle, “salaried nonexempt employees receive a salary rate for a fixed number of hours.” Once (or if) they exceed that number of hours and work more than 40 hours in a week, they receive overtime compensation. The calculation of their overtime compensation is based on the equivalent hourly rate the employee earns.
Salary: A predetermined, fixed amount of pay that constitutes all or part of the employee’s compensation for the pay period. It may not be reduced based on the quality or quantity of the work performed. A salary is generally expressed as an amount paid per week, per month, or per year. Per the Regulations Part 541 the employee must earn the minimum required salary of $455 per week “free and clear” or exclusive of “board, lodging, or other facilities.”
FLSA Exempt Tests
To qualify for exemptions under FLSA, employees must meet the criteria outlined in three tests: a salary basis test, a salary level test, and a duties test. We discuss these three tests in detail in our article, Three tests for determining employee exemption status. But big changes are on the horizon…
In 2016, the DOL released the Final Rule updating the regulations defining and limiting “white collar” overtime exemptions under the Fair Labor Standards Act (FLSA). These rules apply to workers who fall under the executive, administrative, or professional exemptions from the FLSA’s minimum wage and overtime protections. The rule was set to go into effect Dec. 1, 2016, until a Texas federal judge issued an order on Nov. 22, 2016, to block the regulation.
Since then, we have been waiting to see what would happen to the Final Rule. According to HR Dive, “Employers may see a new overtime rule proposal in October 2018, which the U.S. Department of Labor announced in its fall regulatory agenda.
“DOL has not made its intentions for the new rule public, but did offer some hints in the RFI, asking stakeholders how it should set a new threshold, or whether it should do away with the threshold altogether. If DOL does continue the practice of using a threshold, many expect it to be between $32,000 and $35,000.” (HRDive)
Of course, we’ll keep you updated on the blog if and when this Final Rule is issued. For now, here’s what potential changes mean for your business:
- The existing FLSA ruling will still be in effect, so employees who were correctly classified before are still correctly classified now.
- If you’ve already made changes in advance of the effective date, it’s probably best to keep them in place, particularly if you’ve made salary changes. (It would be difficult to decrease an employee’s salary now in response to the changes.)
- If you’re about to implement changes, a wait and see approach is prudent. This is a temporary hold, and changes of some form could happen once a final ruling is issued.
What should you do next?
The duties test of the FLSA ruling is not changing. If you haven’t done it already, now would be a good time to verify that your employees are correctly classified based on their work duties. You can also do the following to prepare:
- Review the salaries of your exempt-level staff against the proposed salary changes.
- Review the job descriptions of your exempt-level staff to ensure they meet the criteria outlined in the duties test.
- Determine whether any changes to salary or duties will be required to maintain the exemption.
- Make a plan for changing the classification at the appropriate time.
Want to know more about employee classification?
There’s a lot you need to know about employee classification beyond the basics listed here. That’s why we created a free guide to help you understand the intricacies of properly classifying your employees. Just click below to download it!