4 Things You Need to Know About Employee Classifications

Employee Classifications.

Upcoming changes in the Fair Labor Standards Act (FLSA) have employers scrambling to review their current employee classifications. While employers may not be overly excited about the extra work, periodic audits of employee classifications are a good business habit as incorrect classification can prove costly and disruptive.

What is the difference between an exempt and non-exempt employee?
While exempt and non-exempt are not the only employee classifications to consider, they are the most common. Exempt employees are typically paid a salary and are not eligible for overtime pay regardless of how many hours they work. They fall into one of several categories created by the FLSA including management, professional, administrative or outside sales. Non-exempt employees must be compensated for overtime hours – this is generally at one and a half times their hourly rate for any hours worked over 40 per week, but some states have richer overtime compensation requirements. Employers should familiarize themselves with the applicable FLSA rules for the states where they conduct business.

Why is it important to get this classification right?
Misclassification of employees can be a very costly mistake for employers when treating an employee as exempt when they really should be non-exempt. Employers may be liable for back wages, taxes, penalties, interest, and attorney’s fees for up to two years in arrears.

Employers should always maintain up-to-date job descriptions for all employees and keep detailed and accurate time records for non-exempt employees.

How will the changing FLSA law impact my business?
Beginning December 1, 2016, the FLSA is changing the minimum salary threshold for exempt employees from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). This substantial increase could potentially prove costly to employers, who must now look through compensation records and identify employees that meet the minimum salary. Employers can chose to convert salaried employees to hourly so they are eligible for overtime pay or increase their salary above the new threshold.   

Employers should note that classifying employees is not as simple as deciding whether you will pay them hourly or with a fixed salary. The FLSA established set requirements based on job skills, supervision and other duties performed that must be evaluated in order for courts and administrative agencies to determine whether an employee is exempt or non-exempt from the requirements of overtime pay.

What can I do if I’m unsure my employee classifications are up-to-date?
The United States Department of Labor offers a useful FLSA overtime assessment tool found at http://webapps.dol.gov/elaws/whd/flsa/overtime/menu.htm. This tool outlines the requirements for each of the exemptions. Employers should also check applicable state laws to determine whether they have obligations in excess of those imposed by the FLSA.

Sound complicated and time consuming? Don’t fret; there’s good news! Professional Employer Organizations (PEOs) or HR outsourcing solutions, such as Tandem HR, provide employee classification and other government compliance guidance as part of their solution services. They also help clients save time and money while growing their business by taking on the administrative tasks associated with human resources, benefits, payroll, tax administration, regulatory compliance and risk management.

If you have questions on your employee classification or would like to discuss a relationship with a PEO, visit TandemHR.com or call 630.928.0510 today.