Know the Rules on Classifying Employees

The Fair Labor Standards Act (FLSA) sets guidelines for whether an employee is exempt or nonexempt under federal law. Exempt means that the employee is excluded from the Act’s overtime pay provisions and therefore does not have to be paid overtime for work hours exceeding 40 hours in a week. Nonexempt means that the employee is covered by the Act’s overtime pay provisions and must receive overtime pay for any hours worked over 40 in a week.

Federal Basis for Exemption

To qualify for exemption from overtime, the employee must perform specific duties equivalent to his or her position, as defined by the FLSA. In other words, exemption is based on job duties, not on job titles. For many jobs, exemption also depends on how much the employee is paid and how that payment is made.

  • Executive, administrative, and professional employees are exempt not only from overtime pay but also from receiving minimum wage, provided they meet the FLSA’s duties and earnings tests. In addition to passing the duties test, these so-called white-collar employees must receive at least $455 per week to qualify for the exemption.
  • Executive employees must be paid on a salary basis.
  • Administrative and professional employees may be paid on a salary or fee basis.
  • Certain computer professionals are exempt from minimum wage and overtime if they pass the duties test plus and also receive a salary or fee of at least $455 per week or a minimum hourly rate of $27.63.
  • Outside sales employees are exempt from minimum wage and overtime pay if they satisfy the duties test, which includes making sales and frequently working away from the employer’s place of business. Outside salespeople do not have to undergo an earnings test.
  • Some positions are exempt from only overtime, rather than both minimum wage and overtime. These jobs include those performed by airline employees, motion picture theater workers, and railroad employees.

A Simple Rule for Nonexemption

If an employee does not meet the qualifications for exempt status, then he or she is nonexempt. In addition to qualifying for overtime, nonexempt employees must receive no less than the federal or state minimum wage, whichever is higher. Blue-collar, clerical, construction, and semiskilled employees are typical examples of nonexempt workers.

A Trap to Avoid

Most salaried employees are exempt and most hourly employees are nonexempt. This general standard, however, should not be used as the definitive guidepost for determining exempt or nonexempt status. Employees can be salaried yet nonexempt, such as those who do not perform the duties required for exempt status despite meeting the minimum salary requirement—in which case, they are eligible for overtime. Similarly, employees can be hourly yet exempt, such as those who perform the FLSA-required duties for their role but are compensated on an hourly basis, as allowed by the FLSA.

An Eye on State Law

The state may have laws on overtime pay and exemption that differ from the FLSA. For instance, California has established job duties tests for executive, administrative, professional, and computer employees as well as tests for inside and outside salespeople. California also has its own minimum salary and overtime pay requirements. Be sure to check both federal law and your state’s rules on wages and overtime.

Contact us today for more assistance with correctly classifying your employees.

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