United States

Classifications under the Fair Labor Standards Act

It’s more than just salaried or hourly

INSIGHT ARTICLE  | 

Most employers do their best to pay their employees fairly and in compliance with the provisions of the Fair Labor Standards Act (FLSA). The FLSA sets the law for payment of minimum wage, overtime, record-keeping and youth employment standards. Compliance with the law is enforced by the U.S. Department of Labor (DOL). Yet, as evidenced by the DOL’s Wage and Hour Division (WHD) press releases, employers are still struggling to get it right. In fiscal year 2016, the DOL reported 10,884 cases of wage and hour violations resulting in back wages totaling $171,917,225. Frequently, these back wages result from the misclassification of employees as exempt, paying them a fixed salary and not compensating for overtime hours worked at one and a half times the regular rate of pay.

The DOL, under the leadership of Secretary Alexander Acosta, has indicated the DOL will continue to “enforce all laws within its jurisdiction.” 

The most prevalent of violations continues to be misclassification of nonexempt employees as exempt and not paying these employees overtime.

Exempt or nonexempt classification is more significant than being “salaried or hourly.”  A nonexempt employee can be paid a fixed salary, as long as they are properly compensated for overtime hours worked.

To meet the exemption (that is to be exempt from the provisions of the FLSA), an employer must prove the following:

  • The employee is paid on a salary basis—fixed salary that is not reduced for quantity or quality of work (though there are provisions permitting reductions of an exempt employee’s pay for very specific reasons).
  • The employee is paid at least $455 per week (again, exceptions apply for outside sales, teachers, lawyers and doctors).
  • The duties of the job being performed by the employee must pass at least one of the duties test named in the FLSA:
    • Executive
    • Administrative
    • Professional-learned or creative
    • Computer employee
    • Outside sales

Not all the duties tests are clear, concise checklists of which jobs are exempt. Neither title nor education is a factor that exclusively determines if a position is exempt. 

Let’s explore the administrative exemption. First, as stated earlier, the position must pay a minimum salary of $455 per week. The primary duties “must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers” and include “the exercise of discretion and independent judgment with respect to matters of significance.”  The DOL does provide additional guidance on primary duty, discretion and independent judgment, and matters of significance,  but it is all a matter of how the employer’s interpretation of these definitions aligns with the DOL when a position’s status is being challenged. 

Misclassification issues are usually made worse by the lack of payroll records. Employers must ensure that their payroll records clearly indicate the actual hours worked by their nonexempt employees, and be able to show the employees regular rate of pay and overtime rate. Costly penalties have occurred for employers when the payroll records do not clearly show hours worked. In these cases, the DOL will rely on the employee’s estimation or records or establish average hours worked based on other similar workers—both approaches potentially resulting in overstated hours.

There is only one fix for these problems—being in compliance. The DOL will not “forgive” errors due to lack of knowledge—the DOL will require violators to pay current and former employees. The only potential forgiveness is that the period the DOL will look back is two years versus three in determining violations and subsequent back wages.

Employers must ensure that all wage payments to employees are classified as such and treated appropriately for calculating overtime. Employers have been penalized when they’ve coded wages as per diems, allowances or other types of payments to avoid payment of taxes and overtime.

DOL audits most commonly occur as a result of an employee complaint. Employees have the right (without risk of retaliation) to make a complaint to the DOL (and there are apps that make it easy). The burden is on the employer to prove a position is exempt, and presenting a job description alone won’t suffice. Employees performing the same work may be interviewed to establish the type of work, level of discretion and independent judgment, etc., the employee actually performs or has responsibility for. 

Employers should also be aware that the DOL has enforcement authority over workers who are misclassified as independent contractors. While the IRS is seeking unpaid taxes in these situations, the DOL is seeking to determine if these misclassified workers were denied minimum wage and overtime pay, and benefits. 

What is the best approach to achieving compliance? First, comprehensive analysis of the jobs which includes review of duties performed by incumbents in relation to the requirements of the FLSA, accurately reflecting these duties on job descriptions and training managers on the basics of FLSA. Finally, take your employee concerns and complaints seriously—if you don’t resolve it, the DOL will!

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