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Everything You Need to Know About Classifying Employees Exempt Vs. Non-Exempt

Aug 25, 2023 11:49:31 AM

As an employer, understanding the distinction between exempt and non-exempt employees is essential. Under the Fair Labor Standards Act (FLSA), employers are legally obligated to follow specific guidelines when classifying their workforce. Failing to do so accurately could lead to severe fines, penalties, and potential lawsuits. 

This article delves into the critical aspects of employee classification, wage and hour laws, and potential consequences of misclassification.

Exempt Employees

Exempt employees enjoy the benefit of a fixed salary, regardless of the number of hours worked, and are not entitled to overtime pay under the FLSA. Workers must meet specific criteria related to their job duties and salary levels to be considered exempt. The FLSA outlines two tests for exemption:

1.) Salary Basis Test: Exempt employees must receive a salary above a specific cap. As of 2020, the minimum salary requirement is $684 per week or $35,568 annually.

2.) Duties Test: Exempt employees must perform specific job duties in executive, administrative, professional, computer, or outside sales roles. 

Non-Exempt Employees

Non-exempt employees are entitled to overtime pay when they work more than 40 hours per week. The FLSA sets guidelines for calculating overtime pay, typically one and a half times their regular pay rate. Some states may have their own wage and hour laws, requiring additional overtime pay for work exceeding eight hours per day.

Proper Classification and Compliance

 Employers must be diligent in correctly categorizing their employees. Misclassification can lead to: 

  • Regulatory Enforcement Action: Violations can result in penalties from the Department of Labor's Wage and Hour Division.
  • Fines and Penalties: Employers may face fines and back pay claims from misclassified employees seeking unpaid wages and overtime.
  • Employee Lawsuits: Misclassified workers can file lawsuits to recover compensation and damages.
  • Costs to Remedy Misclassification: Correcting classification errors can be complex and potentially affect employee morale.

Ensuring Accurate Classification

To accurately classify employees, employers must perform the Salary Basis and Duties Test. Job titles alone are not sufficient to determine exemption status. Correctly classifying employees as exempt or non-exempt is crucial for employers to comply with labor laws and avoid costly violations. Accurate employee classification prevents potential legal disputes, safeguards the company's reputation, and maintains a positive work environment. Understanding the FLSA guidelines, conducting thorough assessments, and seeking professional guidance when needed are essential steps in ensuring compliance and fair treatment for all employees. 

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Wage and Hour Laws

The Fair Labor Standards Act (FLSA) comprehensively oversees various aspects of wage and hour laws at the federal level, encompassing critical elements such as minimum wage, overtime, recordkeeping, and youth employment. To maintain adherence to labor standards and ensure compliance, employers must follow these federal regulations diligently.

However, keep in mind that particular state and local jurisdictions may have distinct wage and hour laws that could potentially offer supplementary benefits or enhanced employee protections. Consequently, employers must implement the minimum wage or overtime rate most favorable to the employee, as mandated by the applicable state or local law.

FLSA Overtime Rule

Under the Fair Labor Standards Act (FLSA) overtime rule, employers must provide non-exempt employees with overtime pay, which must be at least one and a half times their regular pay rate for each hour worked beyond 40 in a workweek. Precise and accurate calculation of overtime pay is imperative, and this is achieved by dividing the total compensation earned by the total hours worked within the specified workweek. When performing these calculations, excluding any vacation, holidays, or sick days is essential unless the employee has worked on those days. Adhering to these guidelines ensures equitable compensation for non-exempt employees and compliance with the FLSA's provisions.

Employee Classification and Misclassification Risks

Correctly classifying employees as exempt or non-exempt is critical to avoid misclassification risks, which can lead to regulatory enforcement actions, fines, penalties, and employee lawsuits for unpaid overtime. Because penalties for non-compliance can be substantial, employers should carefully review job descriptions and salary levels. Seeking guidance from the Wage and Hour Division or consulting legal experts can provide additional clarity and ensure compliance with the FLSA and relevant state and local laws.

About Proliant

Proliant puts the human in human resources. We provide a fully integrated, cloud-based HCM solution that simplifies payroll and HR processes. The company serves small to large clients in multiple industries in all 50 states and is committed to providing the highest quality customer service in the industry.

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