Employees can be classified as exempt or nonexempt. This classification affects their paychecks, and a misclassification could cost your business thousands of dollars, so understand how to classify employees properly.
Who Determines Classification
The Fair Labor Standards Act (FLSA) oversees equal pay, overtime pay, child labor and record keeping standards for employees. This federal law establishes minimum wage and standard work week hours. It also determines an employee’s classification as exempt or nonexempt.
Exempt employees are exempt from minimum wage and overtime provisions of the FLSA law. They are not required to receive overtime pay when they work more than eight hours a day or on weekends or holidays.
The FLSA requires that employers pay nonexempt employees 1-1/2 times their normal pay rate for any overtime hour they work. This rate is based on a 40-hour workweek.
The Difference Between Exempt and Nonexempt Employees
According to the FLSA, there are several key differences between an exempt and nonexempt employee.
Exempt employees often work in white-collar jobs often as professionals, executives and administrators. Certain employees in sales, computer and retail industries also exempt. These employees meet certain FLSA tests regarding job responsibilities and duties. They’re also paid a certain minimum salary.
Nonexempt employees typically work in blue-collar careers. Examples include clerical, construction, maintenance and semiskilled workers such as laborers and technicians. Nonexempt employees are paid by the hour.
How to Determine Exempt Versus Nonexempt Status
The Department of Labor’s Wage and Hour Division has placed regulations on employee classification. They are based on an employee’s salary and duties, so use these guidelines as you properly classify your employees.
Salary
Exempt employees are typically paid a salary of at least $455 per week. Its total is not based on the employee’s performance or the number of days worked.
Duties
An employee’s duties rather than job title affect classification. Administrators, executives and professional employees are generally classified as exempt.
Consequences of an Employee Misclassification
Deciding if an employee is exempt or nonexempt can be tricky. You’ll want to classify your employees correctly, however, to comply with FLSA and avoid consequences.
As many as 280,000 employees were misclassified in 2016, resulting in the U.S. Department of Labor collecting back wages of over $266 million or an average of $950 per misclassified employee. The common violators worked in construction, food services and retail.
You, too, could face financial implications if you misclassify employees. You would have to pay back wages, fines, penalties and legal fees.
Classifying employees as exempt or nonexempt is important. It’s your legal obligation, and you owe it to your employees. For assistance, talk to your financial advisor.
