Employee Misclassification / Exempt versus Nonexempt

Getting it wrong can be a costly mistake

The Classification of employees as either Exempt or Nonexempt has its basis in the Fair Labor Standards Act (FLSA) and is governed by the US Department of Labor (DOL). Depending on the type of work being performed some positions may be exempt from the FLSA. The vast majority of employees in the US are governed by FLSA though and it’s critical that you classify these employees correctly. Some jobs are governed by other laws and may be exempt, for example agricultural workers, truck-drivers and some other professions.

Exempt- What does it mean?

Exempt employees are not protected by the Fair Labor Standards Act and the rules do not require the employer to pay overtime wages for work beyond 40 hours per week. At a state level, some states have also passed additional rules that require employers to pay overtime for any work beyond 8 hours in a 24 hour period. To be consider Exempt the employee must also be paid at least $23,600 per year on a salary basis and perform job functions that can be categorized as:

  • Administrative Job Functions

The FLSA rules allow an exemption for administrative jobs that are “office or non-manual 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 judgement and discretion about matters of significance.”

  • Professional Job Functions

To be considered for the FLSA exemption the job must require special education such as doctors, lawyers, architects, teachers, etc. and must also involve a degree of discretion and judgement. Creative positions are also included here such as writers, actors and musicians. Software developers and computer engineers have special wage rate rules.

  • Executive Job Functions

An executive exemption is for an employee who supervises two or more employees, has management as the primary duty of the position and also has input into the job status of other employees.

Getting it Right

In order to escape the rules (and cost) for overtime payment, many businesses have been tempted to bend the classification rules and declare a job as Exempt when under closer scrutiny it is not. This can be a costly misjudgment if a complaint is filed with the Department of Labor, they perform an audit and then find that the employer has been misclassifying its workers. In that case, the DOL may require the employer to go back many years to calculate and back pay overtime amounts. This can crush a company. Savvy employers may engineer their workplace roles and responsibilities through job descriptions and performance reviews to ensure that positions treated as Exempt can be justified and defended in the event it is contested by an employee or by the DOL. Professional Employer Organizations (PEO) help guide small business owners when designing and documenting their work roles and job descriptions to ensure employee classification are accurate and defensible.

FLSA Changes on the Horizon

DOL Secretary Perez

If all this was not confusing enough, the DOL under Labor Secretary Tom Perez is seeking to update the FLSA in numerous ways. From Secretary Perez: “The rules governing who is eligible for overtime have eroded over the years. As a result, millions of salaried workers have been left without the guarantee of time and a half pay for the extra hours they spend on the job and away from their families.” More information about the FLSA changes on the horizon for employers can be found here.

What about declaring workers to be 1099 contractors?

Employers who think that they can avoid the employment rules altogether by declaring workers to be 1099 contractors face another set of guidelines that are even more detailed and challenging. Just ask the good people at FedEx who just got fined $227,000,000 for misclassifying workers in California and Oregon as 1099 contractors rather than employees. For employers, joining a PEO is an option that brings HR efficiencies and regulatory compliance while avoiding the 1099 contractor vs. employee dilemma. Let’s StaffMarket help you uncover the best solutions for your company.

See more details about Exempt versus Nonexempt rules here.