Federal employment regulations can seem intimidating to employers, especially those without extensive HR or legal departments. In this post, Jeanette Coleman, Director of Human Resources here at Axcet HR Solutions, breaks down the FLSA’s overtime regulations which will leave you with an understanding of which of your employees need to be paid overtime (and how much they need to receive).
The Fair Labor Standards Act (commonly referred to as just “the FLSA”) provides that some employees must be paid overtime pay for hours worked beyond the typical 40-hour workweek. Figuring out which employees must be paid overtime can be tricky. Whether or not your employees receive overtime pay comes down to whether they are classified as “exempt” or “nonexempt” under the FLSA.
In general, the FLSA requires employers to pay overtime to their employees unless an employee falls into an exemption. (More on that later!) Exempt employees are given this classification title because they are exempt from being paid overtime under the FLSA. In other words, these are the employees that receive only their salary and any bonus compensation allotted to them in their original employment contract.
Nonexempt employees, however, must be paid overtime. They’re not exempt from the FLSA overtime pay requirement.
How Can I Tell if an Employee is Exempt or Nonexempt Under the FLSA?
Start by assuming that all employees are “nonexempt until proven exempt.” There are a few different categories of exemptions prescribed by federal law. If you go looking for these exemption descriptions in the text of the actual FLSA, you won’t find them. Interestingly, the FLSA itself does not define exemptions. However, exemptions are found in another federal law passed by Congress (29 C.F.R. § 541). Here is a breakdown of the exemptions:
1. Executive Employee Exemption
Federal law provides an exemption for executive workers. To meet this exemption, an employee must meet the following qualifications: (1) they must make at least $684 per week; (2) their primary duty must be management; (3) they must regularly direct the work of two or more employees; and (4) they must have the authority to hire or fire other employees.
2. Administrative Employee Exemption
An exemption is also made for "administrative workers," but watch out for the exacting language in the text of the exemption. To meet this exemption, employees must: (1) make at least $684 per week; (2) perform office or non-manual work; and (3) they must exercise discretion and independent judgment with respect to matters of significance. Keep in mind that this exemption, like all other exemptions, is strictly and narrowly construed. Not all "admin" or customer service roles will fall into the exemption - in fact, these types of roles will almost never qualify for this exemption. The key is to focus on the third element: the exercise of discretion and independent judgment with respect to matters of significance. When it comes to a decision that could truly affect or bind the company later, does your employee have to get an "okay" from a manager to proceed? If so, they will likely not fall into the narrow administrative employee carveout, since they're not using their discretion when it comes to matters of significance.
3. Professional Employee Exemption
Your professional employees are exempt from overtime, but this exemption is a lot narrower than its title suggests. Employees are exempt if and only if they (1) make at least $684 per week; and (2) their primary duties require either advanced knowledge gained from a “prolonged course of specialized intellectual instruction” or specialized creative talent. Think, for example, artists, doctors, engineers, and lawyers. Just because an individual has a college degree does not mean they will meet the professional employee exemption.
There is another (relatively narrow) exemption, but don’t be fooled: it doesn’t apply to just any employee that uses a computer. The exemption applies only if the employee both (1) makes at least $684 per week, and (2) works with the design and implementation of computer systems or helps the company’s users interact with technology. This exemption is designed more so for IT professionals, rather than data input employees.
5. Outside Sales Employee Exemption
This is an exemption only for outside sales workers, so be careful not to erroneously exempt retail workers or sales associates. The exemption applies if an employee meets both of these qualifications: (1) their primary duty is making sales; and (2) they work away from the employer's place of business when they’re making these sales. Federal law cautions that this exemption does not apply to salespeople who make sales by “mail, telephone, or the internet unless such contact is used merely as an adjust to personal calls.”
6. Highly Compensated Employees
This designation applies to employees who meet two qualifications: (1) they must make over $107,432 annually, and (2) they must regularly perform any of the responsibilities of an executive, administrative or professional employee (described above).
Classification Compliance Considerations
Err On the Side of Caution
Keep in mind that courts tend to narrowly construe the above definitions of FLSA exemptions. In other words, err on the side of caution when deciding to classify an employee as exempt. Withholding overtime pay from an employee who is legally entitled to it can lead to a messy legal situation in the future, including a costly and public class or collective action.
While it's impossible to say what a lawsuit in this arena would cost a company that is found to be out of compliance with FLSA overtime regulations, the overall damages calculation will likely include a range of factors, such as the number of employees who were misclassified, the length of the violation, and in some states, the willfulness of the organization's noncompliance.
Review Your Job Descriptions Carefully Before Making an Exemption
Just because an employee’s title includes an exemption buzzword, i.e., “Computer Assistant” or a “Sales Executive,” it doesn’t necessarily mean the employee is exempt from the FLSA overtime requirements. Rather, whether an employee is exempt comes down to what they spend the bulk of their time at work doing. If the activities and duties they perform at work don’t meet exemption requirements, neither do they – regardless of their official title. For this reason, the safest course of action is always to have a professional team of compliance experts review your overtime policies and exemption classifications. This should be done both as soon as a new role is added to your organization, and periodically for good measure.
The FLSA mandates that employers pay overtime of at least one and half times the employee’s regular pay. Overtime pay should be paid for all hours worked beyond the company’s typical 40-hour workweek. Some states have stricter prescribing higher pay for overtime hours, a maximum number of hours that may be worked in a single day, mandatory lunch breaks, and more.
Don’t Forget Your State-Specific Overtime Laws
The FLSA is a federal law that applies in all 50 states. Individual states, however, are free to pass and enforce their own overtime regulations, so long as they are not less strict than the FLSA. In other words, depending on the state where your employees are located, you may be subject to additional overtime requirements above and beyond what is required by the FLSA. In order to avoid a costly misclassification issue, it’s always best to consult with experienced HR Compliance professionals.
Overtime regulations are always changing, and they can be hard to stay on top of for even the most knowledgeable managers and business owners. Wondering if your employees are properly classified, but don’t know where to start? Meet Axcet HR Solutions: risk management and compliance specialists with over 30 years of experience. We’d love to see how we can help you. Schedule a conversation with us today.