You have assembled a great team and together you are busy building a great company. However, one area that can often be overlooked is whether or not you’ve properly classified your employees under the federal Fair Labor Standards Act (FLSA). Not everyone on your team may qualify as “salaried” or “exempt” and it’s important to know how to properly classify your workers as the consequences of not doing so can be quite costly. Misclassifying an employee can result in costly regulatory penalties, including several years of back wages, plus additional fines and taxes.
Most employees are covered by the FLSA, so they are considered “non-exempt”. As such, they must be paid at least minimum wage for all hours worked and a higher rate (time and a half) for overtime hours. Even employees who are paid on a commission basis are entitled to time and a half for overtime hours. Employees classified as “salaried” or “exempt” are exempt from the minimum wage and overtime laws of the FLSA and can work more than 40 hours a week without being paid overtime.
The determination of exempt versus non-exempt is not as simple as asking whether the employee is paid a salary or an hourly rate. While this is one aspect of the classification, the employee’s job duties and salary level much also be taken in consideration. As for salary, employees generally must be paid at least $455 per week, with some exceptions. As for the employee’s job duties, titles do not determine exempt status. The Department of Labor’s (DOL) regulations have specific requirements for job duties that qualify an employee for exemption. Here are the basics:
The FLSA allows exemptions for seven categories of employees, known as the white collar exemptions:
It’s critical that when you access whether a particular employee fits within the above category that the decision is defensible. Remember, the DOL or state agency may disagree with you.
Employee misclassification can have significant repercussions. The U.S. Department of Labor Wage and Hour Division enforces the FLSA and may impose penalties through administrative proceedings, litigation, and/or criminal prosecution. Potential consequences range from a warning, to audits, back wages, additional fines, attorneys fees and owed taxes. Where minimum wage and overtime violations exist, the employer may be directed to pay the employee - or the DOL - back wages going back two years, or three years if the violation is found to be willful. The DOL or the courts may also levy penalties against an employer in the form of liquidated damages in an amount equal to the sum of unpaid wages owed, effectively doubling the amount of unpaid wages the employee may recover.
Employers who willfully and/or repeatedly misclassify employees as exempt are subject to up to $1,000 in civil penalties for each violation and may be criminally prosecuted as well, which would expose them to a fine of up to $10,000 and/or time in jail.
Keep in mind that individual states may have overtime rules that are different from the federal regulations, and employers are bound by whichever is more generous to employees. For example, Texas has its own salary test for exempt employees.
If you have questions about whether you have properly classified your employees, I welcome you to contact me.