Are you aware that a change to the Fair Labor Standards Act (FLSA) went into effect on January 1 of this year? If not, now would be an excellent time to review the latest laws governing exempt and nonexempt employees. The distinction between the two classifications is not as clear cut as you might think. In some instances, the definition can be situational specific. As a business owner, you need to ensure you are in compliance and have supporting documentation. If your company is found to be out of compliance, it could be catastrophic, requiring you to pay back wages and a fine.
If you are like many business owners, exempt means salaried, and nonexempt means hourly. Hourly employees are paid overtime if they work more than 40 hours a week. Exempt employees are paid a salary and do not work overtime. If it were only that simple.
2020 Compliance
In 2019, the Department of Labor increased the minimum salary requirement for exempt employees. As of January 1, employees are deemed to be exempt if they make $646 per week or $35,568 per year. Anyone making less than that is considered nonexempt and must receive overtime pay for any time worked beyond the base 40 hours. That means, as an employer, you need to review all employee pay to see if the new requirement applies.
If a salaried employee makes less than $35,568 per year, he must be reclassified as nonexempt and paid overtime. If you have not looked at job responsibilities in a while, you may want to ensure all exempt positions can pass the “duties test.” If they cannot, the employee becomes nonexempt and must be paid overtime at 1.5 times the hourly rate.
Duties Test for Exempt Employees
Salary is not the only requirement for exempt status. The employee must also meet specific duty requirements. These requirements are divided into four groups.
Managerial
According to the FLSA, a managerial or executive position includes the following:
- The employee regularly supervises two or more employees.
- Managerial duties are the primary job function.
- An individual has impactful input into the job status of other employees, such as hiring, firing, or job assignments.
If an employee spends most of the day performing the same functions as the staff she supervises, she is probably not eligible for exempt status.
Professional
Doctors, attorneys, and certified public accountants fall under this category. Any position that requires an advanced degree or advanced knowledge usually falls under the professional group. Creative professionals such as actors, painters, or musicians are also considered exempt and fall under this group.
Administrative Professional
This group has the most imprecise definition of all the groups. According to the regulations, administrative professionals perform nonmanual labor that relates to the management of business operations. The individuals in this role must operate with discretion and apply reasoned judgment on matters of importance. The people are employees who work at a high-level and are responsible for keeping the business running.
Outside Sales
Outside is the operative word in this group. Outside salespeople spend the majority of their time outside the office, contacting customers and potential customers. Individuals who perform inside sales have a different status, even if the inside salesperson sells the same product.
Independent contractors
With the growth of the gig economy, companies should become more familiar with the requirements for an independent contractor classification. Although the FLSA has no jurisdiction over independent contractors, it does control the classification of someone as an employee or an independent contractor. If your company uses independent contractors, make sure they are correctly classified.
Company Policies
If any employee’s status changes after applying the latest FLSA change, a company should look at its policies and procedures, especially if they vary between exempt and nonexempt staff. For example, can exempt employees work from home, but nonexempt personnel must work onsite? Do nonexempt employees use a time clock, but exempt staff can set their own hours?
Organizations need to look at the ramifications to employees who were exempt, but with the rule change are now nonexempt. It may be advisable to discuss these changes with the individual employees to explain why the change must be made. Not all employees will be happy with the reclassification.
If your company does not have an employee handbook, you should consider creating one. Handbooks and job descriptions can help reduce the odds of being audited. Providing documentation on policies, employee classification, and job duties demonstrates a willingness to comply with FLSA requirements.
Local Jurisdiction
The Fair Labor Standards Act sets the minimum standard for exempt and nonexempt employee status. Individual states may have different standards in place, so a company should check with the state’s department of labor. For example, California has a minimum salary exemption of “$49,920 effective January 1, 2020, for employes with 25 employees or less; $54,080 for employers with more than 25 employees.” If your state does not have standards, the FLSA applies.
If you have not made adjustments in accordance with the January 1 deadline, you should make those corrections immediately. Be sure to apply those changes to all wages since the beginning of the year. If you don’t, you will violate the FSLA, which could result in fines or imprisonment.
Being Compliant
The best way to avoid an audit is to keep accurate records, track time, and classify employees correctly. You may want to discuss FLSA with professionals to ensure you are complying with all regulations. They can help clarify compliance requirements so you can avoid an audit. At Luxa Enterprises, we have a team of professionals to help you stay in compliance with FLSA letting you focus on your business. Contact us for more information on how we can help.