How to avoid the exempt vs. non-exempt employee classification trap

Are your employees correctly classified? The basis of the Fair Labor Standards Act (FLSA), and all subsequent pay decisions, revolves around classifying your employees as exempt or non-exempt from minimum wage and overtime pay. However, many employers get caught in the classification trap: The misconception that job titles alone dictate whether or not an employee is exempt. The truth is, other factors such as job duties, functions, and salary dictate an employee’s classification status.

What’s the big deal with classification, you ask? Misclassifying employees can result in serious financial penalties such as back pay due to unpaid overtime, fines, and legal fees. The Department of Labor estimates that 70% of businesses are in some way out of compliance with the FLSA, and in 2008 alone there were over 23,000 registered complaints, with U.S. businesses paying over $185 million in back wages to over a quarter million employees.

Don’t become another statistic. Before you classify your next employee as “exempt” just because they have a fancy title, review the following exemption criteria which will help you to determine appropriate classifications based on job responsibilities:

• Exempt Employees. First and foremost, let’s start with what it means to be classified as “exempt”. Exempt employees must be paid a set salary for any week in which work is performed, regardless of the quality or quantity of their work. This means that whether an exempt employee performs 10 hours of work within a week or 60, he or she still receives the same amount of pay. To be classified as exempt, an employee must earn at least $455 per week and perform job duties that fall under one of the six FLSA exemptions, which are outlined below.
• Executive Exemption. To qualify for this type of exemption, employees must manage the operations of a business, department, or subdivision within the company. They must direct and supervise the work of at least two employees and have the authority to hire, fire, and promote. Typically, employees meeting these conditions include your VPs, Directors, and Chief level staff members.
• Administrative Exemption. To qualify for this exemption, employees must exercise independent judgment and discretion performing non-manual work that is directly related to business operations. Typically, employees falling under the administrative exemption category include office managers, insurance agents, human resource processionals, and marketing personnel.
• Learned Professional Exemption. Employees in this exemption must have advanced knowledge in a field of science or learning through prolonged course of instruction (i.e. university, college, law or medical school). Occupations that require prolonged study include doctors, lawyers, dentists, professors, accountants, and the like.
• Creative Professional Exemption. Employees in this exemption category must perform work that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Occupa Actors, musicians, writers, and painters qualify for this exemption.
• Computer Exemption. Employees in this category include those employed as computer programmers, computer systems analysts, and other skilled workers in the computer or technology fields. Their primary job duties involve designing, developing, testing, and analyzing computer systems and programs. Note: the computer exemption does not include employees engaged in the manufacturing or repairing of computer hardware and systems.
• Outside Sales Exemption. There is no salary requirement for this exemption, mainly because these employees typically work solely on a commission basis. Employees qualify for this exemption if their primary duties involve making sales away from their employer’s physical place of business.
• Non-exempt Employees. Non-exempt work is routine, following set standards, procedures, or rules, and does not require regular exercise of discretion and independent judgment. Non-exempt workers are entitled to a minimum wage per hour and must be paid overtime (time and a half) for all hours worked over 40 in a given workweek. Typical non-exempt employees include receptionists, data entry clerks, cashiers, and physical laborers, such as construction workers, carpenters, and machine operators.

While FLSA laws are complex, taking the time to shed common misconceptions and understand your obligations under the Act will help you avoid the “trap” - saving you the expense and headaches that result from non-compliance. Each situation is unique, and to ensure your business is protected, you should take time to review your state’s specific pay requirements and email us if you have questions specific to your business.