Are your employees classified correctly?

Employee classification is a tricky subject, and mistakes can be very costly to your business. Read on to find out more about how to correctly classify your employees.

Many business owners misclassify employees, which often leads to significant problems. As a business owner, it is your responsibility to make sure you classify your employees correctly.

Did you know that business must manage their employees differently, based on their classification? The Fair Labor Standards Act (FLSA) sets out a number of entitlements for employees, such as:

  • Federal minimum wage
  • 1.5x overtime for each our worked over 40 per week.

But not all employees are entitled to overtime, right? That's correct! The FLSA sets out two classifications for employees. Each employee is either non-exempt or exempt. Exempt employees are not covered by the provisions of the FLSA - they only apply to non-exempt employees.

It is the responsibility of the employer to classify their employees correctly, and apply the FLSA accordingly. Mistakes can be very costly and represent a real risk, especially to a small business, as misclassification can lead to large fines and back-pay demands.

Exempt vs Non-Exempt

So what is the difference? Non-exempt employees are typically blue-collar workers who are directly supervised by a higher layer of management directing the workflow. Exempt employees are typically 'Professional' white-collar workers who are somewhat self-managing in their day-to-day activities.

Examples of non-exempt employees include:

  • Construction site laborer
  • Janitor
  • Factory workers

Examples of exempt employees include:

  • Managers
  • Engineers
  • Computer programmers
  • Attorneys

Employee Classification under the FLSA

The FLSA outlines a number of definitions to help employers classify their employees. However, it is not an exact science. Most of the time, the classification of an employee is obvious, but not in all cases. There are three main criteria employees must meet to be considered exempt. They are:

1 - Salaried

An exempt employee must be salaried - that is to say, the employee is guaranteed a minimum level of pay regardless of the number of hours worked. To

2 - Total Earnings

Employees must earn the salary threshold set by the FLSA to be exempt. The minimum salary threshold of the FLSA changes every year, so it’s important to stay current on the regulations for proper employee compensation. For 2020, employees must earn a minimum or $684 per week or $35,568 per year to have exempt status. Employees who earn below this amount are designated as non-exempt.

3 - Job Duties

The third criteria relates to the nature of the role. It is important to note that in assessing job duties, an employer must carefully consider the actual job duties performed, not simply those described in a job description or company handbook (if there is a discrepancy, this should of course be addressed anyway). Exempt employees typically perform professional job duties that require a high level of expertise or knowledge. The next section provides an overview of the types of job that the FLSA considers to be generally exempt.

Types of Exemption

Professional Exemption

Applies to those whose job duties need specialized education, who hold an appropriate college degree or higher qualifications in their particular field. A creative professional exemption applies to those who work in a creative or artistic field, and use their originality, talent, imagination and inventiveness to perform their job duties.

Executive Exemption

Employees who hold executive exemption status must regularly supervise two or more full-time employees or four part-time employees, must be responsible for managing at least part of the business, and must play an important role in the job status of other employees, such as hiring and delegating tasks.

Administrative Exemption

To qualify for the administrative exemption status, an employee must perform office or non-manual work directly related to the business operations or management of the organization and its customers. In addition, the employee must have the ability to exercise independent judgment and discretion over important business decisions without reporting to another person.

Computer Exemption

This one has not aged well, as almost everyone's job includes a computer in the current age. To qualify for the computer exemption status, the employee must have a computer-related role (which in the modern context would include software engineers and IT professionals, but NOT data entry clerks).

Outside Sales Exemption

Employees exempted based on outside sales must perform a primary duty of making sales or securing contracts or orders. They must also conduct their work outside of the employer's business premises.

Highly Compensated Exemption

Employees who have an office or professional job duties and earn the FLSA’s minimum salary for highly compensated employees qualify as exempt. These employees must have at least one duty of an exempt administrative, professional or executive employee.

How to get help

If you are not sure you are classifying your employees correctly, don't worry - corrective action is relatively straightforward and inexpensive. Ignoring the problem will surely cause you substantial problems down the road. Click the button to reach out to us today, we can cost-effectively help re-classify your employees and protect you from costly legal action.