Employee Classification: Complying with the Fair Labor Standards Act
Business owners must adhere to a variety of laws and regulations; however, few are as confounding as those relating to employees. The Fair Labor Standards Act (FLSA), a complex federal law enforced by the United States Department of Labor (USDOL), requires businesses to comply with key areas of federal wage and hour regulations. Although the FLSA covers several aspects of federal wage and hour requirements, this article reviews one major area of concern for many employers: classification of employees.
Employee classification under the FLSA refers to the exempt or non-exempt status of employees. An exempt classification generally means the employer is not obligated to pay overtime when the employee works more than 40 hours in a workweek. Conversely, a non-exempt classification means the employee is not exempt from overtime and must be paid overtime when hours worked exceeds 40 in a workweek. While some states differ in overtime laws and regulations, federal regulations use a 40-hour workweek as the measurement.
Why wouldn't employers make all employees exempt from overtime, pay employees a flat salary, and not bother with timekeeping and paying applicable overtime? Unfortunately, some employers do make that misstep and land in hot water by doing so. To qualify for an exemption under the FLSA, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles alone do not determine exempt status.
Here is a link to a DOL Fact Sheet reviewing some of the commonly used FLSA exemptions: http://www.dol.gov/whd/overtime/fs17a_overview.htm
Consequences of Misclassification
The danger in misclassifying employees does not lie in classifying employees as non-exempt; instead, it rests with classifying as exempt. Because an exempt classification generally removes the employee's right to receive overtime pay for hours worked over 40 in a workweek, employers must take care to ensure proper classification. If misclassification is discovered by the employee, the employer, or a state or federal agency, the employer may be responsible for paying the employee back wages plus any applicable penalties and fees. If an employer is faced with a wage and hour claim for overtime owed, it also could result in a full-scale audit encompassing all employees, both active and inactive, over a period of up to three years (or more depending on state law).
One challenge, when faced with an audit or claim for owed overtime, is a lack of timekeeping records. Most employers do not require exempt employees to clock in and out so proof may be nonexistent to show the employee did not work claimed overtime. Without the employer's proof of hours worked, an agency or court may have little choice but to side with the employee and award back overtime payments.
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Employers may want to complete a self-audit of current classifications using the DOL's exemption fact sheet 17A as a guide, as it addresses the most common exemptions. The information in this fact sheet can be used in a comparative fashion against positions within an organization to determine whether a position is exempt. Employers may want to err on the side of caution in the classification of positions and keep in mind that a non-exempt classification may be a less risky choice if the employer is unsure.
Although the DOL provides an array of helpful resources, interpreting the information can be challenging; therefore, employers are encouraged to involve human resource professionals and legal counsel in the classification process. Obtaining legal assistance in classifying employees may help you mitigate exposure to expensive mistakes.