Understand How to Classify Exempt and Non-exempt Employees

As seen in Business First of Louisville.

You should be aware that the U.S. Department of Labor is on the hunt for violations of the federal Fair Labor Standards Act's (FLSA) overtime provisions. Also, plaintiffs’ attorneys continue to file class action lawsuits claiming certain categories of employees have been misclassified as exempt and are owed back wages.

The Labor Department recently announced that Wal-Mart Stores, Inc. has agreed to pay more than $5 million in back wages, damages and penalties. Labor officials say Wal-Mart failed to compensate vision center managers and asset protection coordinators with overtime pay, by misclassifying them as exempt from the FLSA's overtime requirements.

"Let this be a signal to other companies that when violations are found, the Labor Department will take appropriate action," said Secretary of Labor Hilda L. Solis. A company found guilty of misclassifying employees will owe back wages for unpaid overtime for either two years (for an inadvertent violation) or three years (for a knowing violation). If time records are lacking, the overtime owed will be determined based on employee testimony.

Non-exempt employees must be paid at least the current minimum wage for all hours worked, plus time and one-half their regular rates, including commissions, bonuses and incentive pay, for hours worked beyond 40 per week (for Kentucky and Indiana employees).

Which Employees Are Exempt?

Don’t assume an employee that’s paid a salary and given certain supervisory authority is exempt. Job titles do not determine exempt status. Misclassifying an employee as exempt will cost you big.

To qualify for an exemption from the minimum wage and overtime requirements under the FLSA, an employee must meet three tests:

1. The Salary Level Test: Employees must receive a guaranteed minimum weekly salary of at least $455 per week. (There are exemptions for outside salespersons and certain computer employees that do not require payment of a salary.) 
2. The Salary Basis Test: Employees must regularly receive a predetermined amount of compensation each pay period on a weekly or less frequent basis, without reductions for variations in the quality or quantity of the employee's work. Generally, exempt employees must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. 
3. The Job Duties Test: Employees must also satisfy the job duties requirements for a bona-fide executive, administrative, or professional and outside sales exemption. If an employee performs work in more than one capacity for the same employer, i.e. clerical and managerial, the employee’s primary duty must be determined.

What about Independent Contractors?

Don’t assume an individual classified as an “independent contractor” is exempt. Simply labeling someone an independent contractor and executing a contract to confirm this label does not mean you are not the employer and that the individual is not an employee entitled to overtime pay.

To the contrary, you must consider several factors, which comprise an "economic reality" test, to determine whether an employment relationship exists under the FLSA:

1. Whether the worker's services are an integral part of the company's business; 
2. Permanency of the relationship; 
3. Amount and extent of the worker's investment in facilities and equipment; 
4. Nature and degree of a company's control over the worker; 
5. Whether the worker has an opportunity for profit and loss; and 
6. Degree of skill involved.

The totality of the circumstances will determine how the relationship is defined. None of these factors alone is determinative.

What’s the Prevention Prescription?

The FLSA is fraught with traps for the unwary. Employers, big and small, can easily run afoul of the Act’s requirements. If you are serious about reducing your exposure to expensive legal consequences, consider taking the following steps now to ensure compliance with the FLSA’s overtime provisions.

• Inform new employees of their employment status (i.e., salaried exempt, salaried non-exempt, or non-salaried non-exempt); provide a written description of the terms of payment for straight time and overtime; and review job requirements, including the job description for the position. 
• Periodically review duties actually performed by exempt employees and independent contractors to ensure they remain properly classified. 
• Review your compensation policies for exempt employees and implement a safe harbor policy to reimburse employees as soon as possible for any inadvertent wage deductions.
• If you identify a possible classification mistake, i.e., an employee who is treated as exempt should arguably be non-exempt, contact a labor and employment attorney to determine the appropriate corrective action, such as a change in status from exempt to non-exempt and making payments to such employee.