To understand the complex task of reclassifying positions as Exempt or Nonexempt, let’s start with a review of a few definitions:

Fair Labor Standards Act (FLSA): The FLSA of 1938 was a piece of legislation created during FDR’s presidency. The FLSA created a set of standards governing minimum wage, child labor laws, work week hours, and pay equity. The FLSA applies to employees of organizations engaged in interstate commerce, operations of a certain size, and public agencies.

Nonexempt employee: Employees who are entitled to overtime pay.

Exempt Employee: Employees who are not entitled to overtime pay.

Classifying employees as exempt or nonexempt is complicated, due not only to the criteria each classification must be tested against, but due to the fact that the FLSA established rules on a federal level while states reserve the right to pass their own labor laws that employers must also abide by.

On a federal level, the FLSA dictates that some jobs are classified as exempt by their definition. For most jobs though, they are classified based on how much the job pays, the manner in which it is paid, and the type of work required. Federally, the Salary Test means that employees must be making at least $47,476 annually to be considered exempt. However this test is on hold pending litigation. The Salary Basis Test means that to be exempt, an employee must be paid the same amount for the same work weekly, and that amount cannot be reduced (there are exceptions to this rule). The Duties Test determines whether or not an employee is exempt based on the duties they perform; not their job title. The Duties Test is an evaluation of the tasks performed and how they fit into the goals of a particular organization. There are many categories of exempt job duties, the most common being: executive, professional, and administrative. For example, to qualify for the executive exemption, one of the criteria is that the employee must “regularly direct the work of at least two or more other full-time employees…” To be considered an exempt employee the classification must pass all three tests.

On a state level, there may be more or less additional criteria to evaluate an employee’s exemption status against. For example, in California, the Salary Test is defined by the employee earning a minimum monthly salary no less than two times the state minimum wage. The Duties Test also contains additional criteria for which an employee’s duties are graded. There are three federal guidelines for an administrative exemption, whereas, in California, there are six.

The combination of the three tests and complexity of the Duties Test makes classifying positions as risky. Any misclassification can have detrimental results. Misclassification can mean costly lawsuits, fines, attorney’s fees, and double any back wages. For companies to prevent costly mistakes it is imperative that they review job descriptions and compensation plans to ensure they are complete, up-to-date, and able to withstand a potential federal or state audit.

Questions on what this means for you? Let us help! Since 1896, Employers Group has been working side-by-side with employers to help them tackle big issues facing the work environment. Use the experts at EG to help you develop your compensation system—saving you time, money, and aligning your compensation system with your business goals. Please contact us at (213) 765-3920 or email surveys@employersgroup.com.

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* The contents of this article are intended to convey general information only and not to provide legal advice or opinions. The contents of this article, and the posting and viewing of the information on this website, should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. An attorney should be contacted for advice on specific legal issues.

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