Is your business struggling to determine if the Fair Labor Standards Act (FLSA) applies to you, and if it does, whether it applies to your employees? You’re not alone—FLSA compliance is notoriously one of the trickiest HR topics.
What Is the FLSA and What Does It Mean for Employers?
The FLSA is a federal act passed by Congress that requires employers to abide by several rules, the most notable being that covered employers must pay their employees overtime pay of at least 1.5 times the regular rate of pay for all hours worked over 40 in a workweek.
For purposes of the FLSA, employees can be grouped into two categories: exempt and nonexempt workers. You can have a mix of both exempt and nonexempt workers employed at your organization. The difference comes down to their job duties and their pay—more on this below.
What Is an FLSA Exempt Employee?
An FLSA exempt employee is one that is expressly considered “exempt” from the overtime pay provisions of the act. These employees do not need to be paid at a higher rate for hours worked in excess of the typical 40-hour work week. In other words, the salary you pay them accounts for all hours worked, whether that number turns out to be 39 or 60.
RELATED: Should You Switch Salaried Exempt Employees to Hourly Pay? >>
What Is an FLSA Nonexempt Employee?
An FLSA exempt employee is one that is not considered “exempt” from the provisions of the act (i.e., they are nonexempt). These employees must be paid at a higher rate for hours worked in excess of the typical 40-hour work week; specifically, each hour worked over 40 hours should be paid at a rate of at least 1.5 times the employee’s regular rate of pay.
RELATED: Three Common FLSA Issues For White Collar Workers >>
Do Small Businesses Have to Comply with the FLSA?
In short, yes, unless your business is very small and specialized. According to the Department of Labor, the FLSA “does not provide an exemption . . . specifically for small businesses.” The DOL states, “generally, the FLSA applies to employees of enterprises that have an annual gross volume of sales made or business done totaling $500,000 or more, and to employees individually covered by the law because they are engaged in interstate commerce or in the production of goods for commerce.”
That’s a very small subset of businesses, and even if you fall into this bucket, a state or local law may still require you to pay your otherwise exempt employees overtime. If you have any questions about whether your organization should comply with the FLSA, reach out to an experienced professional employer organization (PEO) or a labor law attorney.
How Can I Tell if an Employee Is FLSA Exempt?
The Three FLSA Exemption Tests
The Department of Labor outlines three tests that a business should use to determine whether a certain employee carries an FLSA exempt or FLSA nonexempt status. For an employee to be exempt from the FLSA such that their employer does not need to pay them for overtime hours, the employee must meet each of the three tests. Here are the three exemption tests:
1. The Salary Basis Test
Under this test, the employee must receive a fixed, predetermined salary to pass. Their salary cannot be subject to change based on the quality of their work or how much work they get done.
2. The Salary Level Test
Under this test, the employee must receive a salary that reaches a certain threshold. The exact number can vary, but in most states, and for most employees, it will be a floor of $684 per week (that’s $35,568 annually).
3. The Duties Test
Under this test, the employee must have a set of job duties that primarily involve the duties associated with executive, administrative, professional, outside sales, or computer-related roles. It’s crucial to remember that the exempt nature of an employee’s title, or even their job description, is not enough to give them an FLSA exempt status (it’s all about what the employee actually does day-to-day.)
RELATED: Asleep on the Job - When You Have to Pay Employees for "Unproductive" Time >>
The FLSA Duties Test Explained
One of the three tests that the FLSA requires an employee to pass in order to carry an FLSA exempt status is The Duties Test. This test requires an employee’s role to fall into one of the following categories:
To meet this exemption, an employee’s primary duty must be management; they must regularly direct the work of two or more employees; and they must have the authority to hire or fire other employees.
To meet this exemption, an employee must perform office or non-manual work and they must exercise discretion and independent judgment with respect to “matters of significance” within the business.
To meet this exemption, an employee’s primary duties must require either advanced knowledge gained from a “prolonged course of specialized intellectual instruction” or specialized creative talent. Doctors, engineers, artists, and lawyers typically fall into this category.
Remember: Just because an individual has a college degree does not mean they will meet the professional employee exemption.
To meet this exemption, an employee must work with the design and implementation of computer systems or help the company’s users interact with technology.
Remember: This exemption doesn’t apply to just any employee that uses a computer; it’s designed for IT professionals, not data-input employees.
To meet this exemption, an employee’s primary duty must be making sales, and they must work away from the employer's place of business when they’re making those sales. Remember: this is an exemption only for outside sales workers, so be careful not to erroneously exempt retail workers or sales associates.
Highly Compensated Employee
To meet this exemption, an employee must both regularly perform any of the responsibilities of an executive, administrative or professional employee and be paid over $107,432 a year.
RELATED: How to Accurately Measure Time & Attendance >>
What Happens if an Employer Does Not Comply with the FLSA?
Businesses that are found to be in violation of the Fair Labor Standards Act can face both civil and criminal penalties in federal and state courts. Penalties most often involve repayment of back overtime combined with fines and punitive damages, court costs, and attorneys’ fees.
In extreme cases, employers may be subject to jail time for egregious and willful violations of the FLSA. In most instances, employees can bring an action to recover unpaid overtime wages for a period of 2 years following the last alleged violation of the Act, but for violations that are alleged to be “willful” on the part of the employer, the lookback period extends to 3 years.
Keep in mind that if the Department of Labor opens an investigation into your organization’s practice of paying overtime, the courts will be able to analyze the pay of all of your employees, not just the pay practice related to the individual who filed a claim. Employers with many employees (and especially those that employ many workers in comparable roles) should be particularly careful to avoid class action litigation where similarly wronged employees band together in order to pursue a cause of action.
Class action litigation can be particularly expensive for employers, even those who are able to reach a settlement. You can proactively defend against these and other types of FLSA suits by ensuring that employees are properly classified under the FLSA and that overtime payments are made in accordance with the Act.
The FLSA works nationwide to set a minimum standard of payment for excess work. At the state and local level, however, there may be even stronger overtime regulations in place than those imposed by the FLSA. Where a state or local regulation would provide a higher rate of pay than the FLSA would, those laws must be followed. It’s important to make sure you’re aware of all applicable laws in the region(s) in which your business operates.
Kansas and the FLSA
Kansas is one of the U.S. states with more nuanced overtime regulations in place than those imposed by the FLSA. While the FLSA generally does not apply to businesses with less than $500,000 in annual revenue, Kansas overtime regulations do—regardless of what your organization brings in each year.
Kansas law requires businesses to pay overtime at a rate of 1.5 times the employee’s regular pay for all hours worked in excess of 46 (as compared to the FLSA’s 40). Keep in mind that when both laws apply to your business (i.e., your business brings in more than $500,000 annually), the law that is more favorable to the employee—in this case, the FLSA—will apply.
Missouri and the FLSA
In general, Missouri does not have distinctly different requirements than those imposed by the FLSA. However, Missouri employers should be aware that in 2018, the state passed what is known as “Proposition B.” Proposition B effectively imposes harsher civil punishments on employers who shirk their responsibilities regarding minimum wage and overtime payments to their employees.
In Missouri, wage and hour violations can carry an award of “treble damages” to the wronged employee. In other words, employers will have to pay up to three times what the employee was originally owed if they’re found to have misclassified an employee as exempt or committed another wage and hour law violation.
RELATED: Understanding Business Travel Time for Nonexempt Employees >>
Why Axcet HR Solutions
Even if you don’t have a robust in-house HR team, you don’t have to determine your employees’ exemption status alone. Be sure you’re in compliance with the FLSA with the help of a trusted Professional Employer Organization (PEO). Meet Axcet HR: your PEO, specializing in human resources and compliance. We have over 30 years of experience, and we’d love to see how we can help you. Schedule a conversation with us today.