With recent changes to the Fair Labor Standards Act (FLSA), many business owners – and their employees – are trying to figure out exactly who qualifies as exempt from overtime pay under the new rules. Unless you’re ready to dig into Department of Labor (DOL) fact sheets and other documents, it’s not always clear just what counts as white collar exemption these days. To help, we’ve put together a breakdown of these exemptions to help you properly classify your employees.
What Qualifies White Collar Employees to be Exempt?
There are three tests that employees must pass in order to classify them as exempt.
- The salary basis test – Exempt employees must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed
- The salary level test – Exempt employees must meet the threshold for minimum weekly salary
- The duties test – Exempt employees must primarily perform a list of set duties
The thresholds for the salary level changed as of Jan. 1, 2020. In the past, the minimum salary threshold was $455 per week. The recent rule changes officially raised the threshold to $684 per week. That equates to a $35,568 annual salary, 10 percent of which can come via nondiscretionary bonuses, incentives, and commissions that are paid out each year or more frequently.
There are also separate stipulations for “highly compensated employees” (HCE). The salary threshold for this group raised from $100,000 to $107,432 per year. Unlike other employees classified as exempt, HCEs face a “relaxed” duties test according to the Society for Human Resources Management (SHRM).
The Different Exempt Employee Classifications
While the salary thresholds have changed, the employee classifications listed as exempt have not. These classifications are not based on job titles. Instead, certain types of duties are used to mark an employee for exemption. The DOL lists the following groups as exempt, each with their own duties tests.
- Outside sales
To be considered an executive employee, a person must manage an enterprise, or a recognized department or subdivision of that enterprise, as his or her primary duty. This definition also states that an executive employee must regularly oversee and direct at least two or more full-time employees (or the equivalent in part-time employees). In addition, this employee must have some influence on hiring or firing other employees, whether he or she can outright terminate employees or can influence decisions related to any other type of status change for other employees. There is also a stipulation that any employees who are actively engaged in management and own at least 20 percent equity interest in the enterprise in their place of employment are considered exempt.
Administrative employees are judged by a pair of tests. First, the employee must primarily perform office or non-manual work that is directly related to management or general business operations. Second, administrative employees must “exercise of discretion and independent judgment with respect to matters of significance” which refers to the level of importance or consequence of their primary duties. This discretion and judgment implies that an administrative employee evaluates various courses of action and has authority to decide which is best for the business.
The DOL has guidelines for two different types of exempt professional employees: learned professionals and creative professionals. Learned professionals must primarily perform work that requires “advanced knowledge.” This knowledge involves work that requires consistent discretion and judgment and must be “predominantly intellectual in character.” The DOL also stipulates that this knowledge be in a field of science or learning. As for creative professionals, their primary work should require a form of invention, imagination, originality, or talent in a recognized artistic or creative field.
Employees classified under the computer exemption are those employed as a systems analyst, programmer, software engineer, or some other type of skilled individual who operates in the computer field (not including manufacturing or repair). The DOL also stipulates that these employees’ primary duties involve one or more of the following tasks.
- The application of systems analysis techniques and procedures to determine hardware, software, or system functional specifications
- The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes based on and related to user or system design specifications
- The design, documentation, testing, creation, or modification of computer programs related to machine operating systems
Outside Sales Exemption
Unlike the other classifications, the FLSA’s salary requirements do not apply to outside sales employees. To be considered part of this exemption, an employee’s primary duty must involve either making sales or obtaining orders/contracts for either services or for the use of facilities. In addition, an outside sales exempt employee must regularly work outside of his or her employers place(s) of business.
Why is it So Important to Correctly Classify Exempt Employees?
Employee misclassification can lead to a series of issues. Not only can misclassification impact the compensation for certain employees, it can also affect benefit plan eligibility, payroll taxes, and other crucial details. Not only can these mistakes be a huge issue for your employees – Joe Schmo from the warehouse won’t be thrilled if he’s classified as exempt – you’re putting your business at risk with the law as well.
There are serious financial consequences if the Bureau of Workers’ Compensation (BWC) finds out that you’ve misclassified employees. There are a variety of potential penalties you can face depending on the severity of the situation:
- The collection of unpaid wages
- Back taxes
- Additional penalties for failing to deduct and withhold taxes for misclassified employees
- Punitive damages from lawsuits for unpaid wages and taxes
In addition to the initial penalties, you can bet that you’ll end up on the BWC’s radar. Businesses that misclassify employees are known as potential repeat offenders, which means that these penalties will make it more likely for the Department of Labor and OSHA to audit your business in the future, even if the initial misclassification was the result of a simple mistake.
Protect Your Business from Misclassification Mistakes
Proper employee classification is very important, but it’s not necessarily easy to make the right call for every employee if you haven’t spent the time necessary to learn all the appropriate classifications. Meanwhile, you still have a business to run even after you’re done trying to figure out tedious HR management tasks.
While you may not have extensive HR expertise, the experts at GMS do. In addition to helping you avoid costly misclassification issues, we can help you simplify and strengthen your business through payroll management, employee benefits administration, and other crucial tasks. Contact GMS today to talk to us about how we can help you save precious time and protect your business through professional HR management.