Exempt vs. Non-Exempt: Do I Have to Classify Some Employees as Hourly?
Besides part-time and full-time, perhaps one of the most important classifications of employees is distinguishing between exempt and non-exempt. What are the differences between the two, the overtime regulations for both types of employees, and what do employers need to know?
What is the Difference between Exempt and Non-Exempt Employees?
A non-exempt employee qualifies for the federal minimum wage and overtime pay, which is calculated as one-and-a-half times their hourly rate beyond a standard 40-hour work week.
The Fair Labor Standards Act (FLSA) protects non-exempt employees and requires employers by law to pay non-exempt employees overtime for every hour worked over 40 hours. These laws assure fair workplace standards and require employers to post overtime and minimum wage standards in high-traffic, visible areas in the workplace.
Currently the overtime income threshold stands at $35,568/year or $684/week. Therefore, this means that those earning less than $35,568/year or $684/week automatically qualify for overtime. On a federal level, there is no maximum limit to overtime unless an individual is younger than 16 years old.
Meanwhile, exempt employees are left out of the FLSA, and are not eligible for overtime pay. To qualify, an employee must receive a salary (not hourly) of at least $684 a week (or $35,568 annually). Also, the employee must not fall under any of the other exemptions set forth by the United States Department of Labor.
How Do I Classify Employees as Exempt and Non-Exempt?
The FLSA requires employers to classify employees as overtime exempt or non-exempt. Therefore, when trying to figures out employee classification, it’s important to ask the following questions:
- How much do my employees make? As stated above, as of January 1st, 2020, employees earning less than $35,568 per year on a salary or less than $684 per week should be classified as hourly pay, overtime non-exempt.
- Which tasks are my employees responsible for? An employee’s day-to-day duties-- not job title--should determine whether an employee is classified as exempt or non-exempt. There is a common misconception that only working-class employees performing manual tasks should be classified as hourly. This is not the case. Some “white collar” positions should actually be classified as hourly. For instance, many employers wrongly assume that commissioned inside sales people should be paid on a salary basis when in fact, these employees should be classified as hourly and overtime non-exempt.
You can check to see if your employees should be classified as hourly or salary using the FLSA duties test. Each of the following six categories outlines duties performed by salaried employees. Six categories help outline duties that exempt employees perform:
- What legal ramifications exist? The risk of a lawsuit is highest when employers classify non-exempt employees as exempt. The risk is highest in this scenario because the employer is opening itself up to an argument that the misclassified employees were not paid overtime wages that they should have been paid under the FLSA. Employers who misclassify employee exemption status on more than one occasion may be subject to civil penalties as well.
What Else Should Employers Consider?
In order to stay compliant when classifying employees, an employer will be responsible for monitoring and recording employee payroll and hours, among other things. The following steps can help guide employers when restructuring from exempt to non-exempt:
- Look at the Numbers. Take an honest look at the salaries of your employees and evaluate the actual amount of hours each employee is working week-to-week. By getting a read on the current state of work and overtime hours, proper decisions can be made on how to adopt the new rules. A good first step is to make sure you have a reliable tool to track time and attendance that removes ambiguity around when employees are working and when they aren’t.
- Make Adjustments to Compensation. Once you’ve analyzed workers’ pay and time statistics, make a call as soon as possible on which compliance method to take for each employee. Business owners can choose to increase salaries to meet the minimum threshold, pay overtime to those now eligible to receive the pay rate, eliminate overtime altogether in the company, or make a reduction in base salary to afford the overtime changes.
- Communicate Changes with Your Team. Once you’ve analyzed your numbers and figured out how you’re going to comply as a company, hold a meeting with your employees to communicate a) what the new regulations mean for your business, b) how you’re going to comply with the regulations as an organization, and c) how the new policies will affect employees on an individual basis. Provide clarity wherever you can, encourage questions, and reassure your employees that you’re committed to them as individuals and to upholding the company culture you’ve worked to foster prior to the new regulations.
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