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How to Classify Exempt Employees and Nonexempt Employees

By August 27, 2013February 19th, 2015No Comments

The terms “exempt” and “non-exempt” are defined under the Fair Labor Standards Act (FLSA), which is the federal law that establishes a minimum wage and limits the number of hours that may be worked in a standard work week. The FLSA provides standards for equal pay, overtime pay, record keeping, and child labor.

What is an exempt employee?

An exempt employee must always be paid on a salary basis which exceeds minimum wage and won’t be covered by the FLSA.  A major advantage of classifying employees as exempt is that an employer does not have to track hours worked or pay overtime, no matter how many hours an employee works. Examples of exempt employees under federal law are:

  • white collar employees (executives, administrators, professionals, and outside salespersons)
  • certain retail and service industry salespersons who work on commission
  • certain government employees (elected officials and their appointees, state and local legislative employees)

What is a nonexempt employee?

A nonexempt employee is protected by federal and/or state wage and hour laws and must be paid at least the minimum wage for all the hours worked, and extra overtime pay if the employee works more than 40 hours in a single workweek. Employees generally classified as nonexempt include, but are not limited to, clerical, blue-collar, maintenance, construction, and semiskilled workers, as well as technicians and laborers.

Although there are some exceptions, generally, the FLSA requires that overtime must be paid at a rate of 1 ½ times a nonexempt employee’s regular rate of pay for each hour worked in excess of 40 hours in a single work week. The FLSA does not require that overtime be paid to employees who are exempt or for hours worked in excess of 8 hours per day or on weekends or holidays.

What about independent contractors?

Classifying someone as an independent contractor doesn’t automatically mean that worker is not an employee entitled to overtime pay. An employer should consider several factors to determine whether an employment relationship exists under the FLSA:

  • Whether the worker’s services are an integral part of the company’s business
  • Permanency of the relationship
  • Amount and extent of the worker’s investment in facilities and equipment
  • Nature and degree of a company’s control over the worker
  • Whether the worker has an opportunity for profit and loss
  • Degree of skill involved

Other issues to consider

  • It is usually illegal to give non-exempt employees comp time /time off instead of paying them overtime.
  • Federal and state laws include special provisions that protect workers younger than 18 years old. These laws can affect the type of work, wages, and hours that an employee can work.
  • Employers need to comply with federal and state law requirements regarding worker breaks/meal breaks.

The importance of classifying employees properly

Classifying employees as either exempt or non-exempt is neither exact nor easy. However, it is important for an employer to classify all employees correctly and to comply with the FLSA rules. Some of the most significant class action lawsuits have been the result of an employer’s misclassification of nonexempt employees as though they were exempt from overtime pay. Misclassifying employees can have serious financial implications such as unpaid overtime, fines and penalties that can be assessed by federal, state, and in some cases, local agencies.

This year there has been heightened enforcement of overtime laws. In fact, the Department of Labor recently slammed one California company with a $580 million verdict. In part, the stakes are so high because an employer can be liable for back wages, taxes, penalties, interest, and attorney’s fees. Employers are advised to be extremely cautious when classifying employees.

For more information, please contact HR Knowledge..