You may have heard the old joke: There are two kinds of people in this world. Those who believe there are two kinds of people in this world and those that don’t. Under federal employment law, however, there are two kinds of people in the world: those who are exempt and those who are not. This classification into exempt and non-exempt status is likely one of the most important classifications that an employer can make. To put it simply, getting this classification wrong can be expensive. The Fair Labor Standards Act (FLSA) creates an exemption from overtime pay requirements for “any employee employed in a bona fide executive, administrative or professional capacity or in the capacity of outside salesmen.” When the Act was passed, Congress did not define these terms, but instead granted authority to the Secretary of Labor to do so. Each of these exemptions have particular requirements that must be satisfied in order for courts and administrative agencies to consider an employee exempt from the requirements of overtime.
Misclassification can result in snowballing legal problems. The FLSA (and many statement laws) requires employers to keep accurate time records of non-exempt employees. Of course, when an employer misclassifies an employee as exempt, it starts paying that employee on a “salary basis” and frequently stops recording the employee’s hours worked. When the misclassification error is discovered, the employer must attempt to reconstruct the hours actually worked by the misclassified employee in order to determine the amount of unpaid wages and in some cases, penalties. There can be other significant legal and financial consequences from misclassification under state laws.
Until quite recently, many employers considered the classification of employees to be a casual or unimportant matter. A significant mistake is to confuse the words “exempt” and “non-exempt” with the words “hourly” and “salaried.” An employer cannot render a non-exempt employee exempt simply by changing their form of compensation from an hourly wage into a monthly salary. How employees are paid is not completely determinative of whether or not they are exempt or non-exempt.
What follows is a brief review of the basics of classification of employees under the FLSA. Warning: Check state laws to determine that you do not have obligations in excess of those imposed by the FLSA.
In order to be correctly classified as exempt under the FLSA, an employee must be paid under certain minimum compensation requirements and must also meet the specific requirements to be classified as either an executive employee, an administrative employee, a professional employee, a computer related occupations employee, or an outside sales employee.
The United States Department of Labor (the administrative agency charged with regulating and enforcing the FLSA) offers a useful FLSA overtime security advisor. That advisor can be found at: http://webapps.dol.gov/elaws/whd/flsa/overtime/menu.htm. There, the DOL provides useful fact sheets and occupational guides to assist you in correctly determining the exempt or non-exempt classification of your workers.