Employee Classification: What Employers Need to Know About the Fair Labor Standards Act

Understand the differences between an exempt employee and a non exempt employee.

As the end of the year approaches, it’s a good time for employers to review how they are classifying employees. Employee classification is an often-overlooked portion of HR, payroll, and employee management. Doing it wrong can land you in trouble based on the federal Fair Labor Standards Act, as well as under certain state regulations.

In a recent webinar presented by ACE Workforce Technologies, labor and employee law attorney Jeffrey Ettenger of Schwartz Ettenger, PLLC in Melville, New York, discussed the dangers of misclassifying employees under the Fair Labor Standards Act. He also talked about how to classify an exempt employee vs. a non exempt employee.

The “exemption” refers to which employees must receive overtime pay and which are “exempt” from overtime.

“A lot of employers believe if they pay somebody a yearly salary and give them a weekly or bi-weekly paycheck, that is sufficient,” Ettenger said. “But that is not the way the law works. The dangers of not qualifying an employee properly are very significant.”

Many employers will be surprised to discover which employees they can (or cannot) legally classify as an exempt employee.

Hourly Worker: Non Exempt Employee

What is a non exempt employee? Non exempt employees get paid a set hourly rate for every hour they work. If they exceed 40 hours of labor in a workweek, they are entitled to overtime pay, which is typically 1.5 times their regularly hourly wage.

To track their hours, non exempt employees typically use a time and attendance system, giving the HR and payroll departments a record of how many hours they worked. 

Who Can You Classify as an Exempt Employee?

While many employers think that anyone who collects an annual salary, rather than an hourly wage, qualifies as an exempt employee, that is not the case.

Exempt employees are classified based on their job duties as well as certain salary thresholds, which vary from state to state. Under the Fair Labor Standards Act, the following professionals are examples of employees who may qualify as exempt workers:

  • Managers
  • Operations Managers
  • Supervisors
  • Employees who work in a specialized capacity (IT, marketing, engineering, sales, etc.)
  • Administrative Professionals

“Regardless of your title or position, if you’re not paid a minimum salary threshold you cannot be classified as exempt,” Ettenger said. “If the person does not meet those two specific requirements, they cannot be exempt.”

Salary thresholds may vary based on state, region, and the size of the organization. For instance, in Suffolk, Nassau, and Westchester counties in New York, employees must receive $975 per week in 2020 to qualify as exempt, regardless of the size of the company.

“If you have an administrative assistant here in Suffolk, and you pay them $40,000 a year, and they work over 40 hours a week without overtime pay, you’re paying them improperly,” Ettenger points out.

Employee Classification: The Dangers of Getting it Wrong

Misclassifying employees can be an expensive mistake for an organization. “If you fail to pay a non exempt employee an hourly wage plus overtime, and you do not document their hours, that employee can claim unpaid wages, including overtime,” Ettenger said.

In addition, the employee can make other claims in a legal suit against the employer. If the employer loses the lawsuit, the employer may have to pay:

  • Unpaid wages claimed by the employee
  • Overtime (at 1.5X the hourly rate) for any hours worked over 40 per week
  • Liquidated damages (double damages of wages lost)
  • Interest on unpaid wages
  • Attorney’s fees

These penalties can add up to tens of thousands of dollars – not to mention tarnishing your company’s reputation if the lawsuit garners media attention or the employee posts negative reviews on sites like Glassdoor.

Avoiding Employee Classification Errors

To avoid employee classification errors in 2020, review the annual wages and job descriptions of all exempt employees. While you’re at it, review the hours of non exempt employees to ensure you’re paying the correct overtime.

A time and attendance system helps you track all employee hours to keep accurate figures and ensure non exempt employees are receiving the overtime pay they deserve.

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