Innovation@work: From Entrepreneur to Boss – Classification of Employees as Exempt or Non-Exempt
The Fair Labor Standards Act (“FLSA”) contains the federal minimum wage and overtime requirements. Under the FLSA, a business is required to pay employees at least minimum wage and overtime pay. However, an exception to the minimum wage and overtime requirements applies to employees who are properly classified as “exempt.”
There is significant litigation surrounding whether certain employees should be classified as “exempt” or “non-exempt” under the FLSA. As a result, it is important to take the classification of employees seriously, since a misclassification could have dire consequences for a business.
Generally, an employee should be considered “non-exempt,” unless the employee qualifies for certain statutory exemptions under the FLSA. The common statutory exemptions include:
- Administrative employees
- Executive employees
- Professional employees
- Computer professionals
- Outside sales employees
- Highly compensated employees
At first glance, it may appear that an employee could easily satisfy one of the common statutory exemptions. For example, it would seem that an employee with the job title of “Administrative Assistant” should qualify for the “Administrative Employee” exemption. However, the determination of whether an employee qualifies as “exempt” is not so simple.
To qualify for “exempt” status under one of the common statutory exemptions, an employee must satisfy the following criteria:
- The “Salary Basis Requirement”: We often refer to the first factor as the “Salary Basis Requirement.” To satisfy the Salary Basis Requirement, an employer must:
- Pay the employee a predetermined salary (rather than an hourly rate) each pay period, which is not reduced based upon the quality or quantity of work performed
- The predetermined salary must satisfy the “predetermined salary threshold” set by the Department of Labor (“DOL”). As of the time of writing, the predetermined salary threshold is $455/week ($23,660 annually), however, the DOL has announced a proposed rule to increase the predetermined salary threshold
- The “Duties Test”: We often refer to the second factor as the “Duties Test.” To satisfy the Duties Test, the employee must perform certain duties and responsibilities in his/her position. The duties and responsibilities that must be performed are specific to each exemption.
An employee who satisfies the criteria listed above may be classified as “exempt” and not subject to the FLSA minimum wage and overtime requirements. However, the analysis to determine whether an employee is “exempt” from such requirements is often in fact intensive. It is recommended to seek advice of counsel to confirm the “exempt” and “non-exempt” status for each employee, which will help reduce the risk of liability for your business.