Sid Lewis is a partner at Jones Walker and leader of the firm’s labor and employment practice group.
As a labor and employment law attorney, misclassification is by far the most common mistake I see day in and day out.
And classifying a nonexempt employee as exempt — whether deliberately or not — can be costly.
Exempt vs. nonexempt
An employer is free to make every employee in the organization a nonexempt employee. That just means you must record all their hours and pay overtime for every hour worked over 40 hours in your seven-day workweek (required under the Fair Labor Standards Act for determining overtime).
What an employer cannot do, however, is treat everybody as an exempt salaried employee, because many employees will not meet any of the FLSA’s narrow exemption categories. If you are paying any nonsupervisory employee a salary, without regard to overtime, then you are best served confirming that it is a correct classification in order to avoid accruing overtime liability and liquidated damages.
The primary exemptions when it comes to overtime are executive, administrative and professional employees, employees in certain computer-related occupations and outside sales employees.
The executive exemption
Executive employees must be compensated on a salary basis of no less than $684 per week, and their primary duties must involve: (1) managing the enterprise or a recognized department or subdivision of the enterprise; (2) directing the work of at least two or more full-time employees; and (3) having authority to hire, fire or promote other employees, or at least have their suggestions and recommendations be given particular weight.
The administrative exemption
An exempt administrative employee must receive a guaranteed weekly salary of at least $684 per week, and their primary duties must involve: (1) the performance of office nonmanual work directly related to management or the general business operations of the employer or the employer’s customers; and (2) the consistent exercise of discretion and independent judgment regarding matters of significance. Secretaries and clerical staff usually never should be salaried.
The professional exemption
Professional employees must receive a guaranteed weekly salary of $684 per week, and their primary duty must be the performance of work requiring advanced knowledge in a field of science or learning that was acquired by a prolonged course of specialized intellectual instruction. Certain professionals may be paid on a fee basis.
The computer employee exemption
For the computer employee exemption, the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field dealing with the application of systems analysis techniques and procedures. They must be paid $684 per week but can be paid $27.63 or more per hour and keep their exempt status.
The outside sales exemption
Sales employees are usually improperly treated as exempt, so it is important to make sure that any sales employee qualifies as a true outside sales employee or otherwise meets the commissioned employee exemption, also known as the Section 7(i) exemption. The latter is a complicated test that requires that an employee’s hours be tracked and monitored on a weekly basis to ensure that the employee receives (with commission) at least 150% of the applicable federal or state minimum wage each week and that the commission constitutes a majority of the employee’s earnings over an extended period.
Timekeeping and pay responsibilities
If an employer properly classifies an employee as exempt, it does not have to track the employee’s time and can simply pay the guaranteed weekly salary. Except for Family and Medical Leave Act-related and other limited circumstances, employers cannot make deductions from an exempt employee’s salary.
Remember, an employee has to meet both the duties test and the guaranteed salary test to be considered exempt from overtime. The employee can meet the exempt duties test, but if they are paid an hourly rate (except for the computer-based exemption) or have their salaries unlawfully deducted, then they are entitled to overtime going back up to three years. All employers should carefully audit their exemption categories to make sure they are not exposed to liability for misclassifications.
As for nonexempt employees, employers need to be aware of any additional compensation employees receive above their stated hourly rate. There is a very good chance the same inflates their hourly rate for purposes of a correct overtime payment.
The calculation is simple: An employee makes $10 an hour and receives a $100 bonus for perfect attendance at the end of the calendar month. The employee worked 200 hours that month, with 40 of those hours being overtime hours. For the purpose of calculating overtime, the bonus changes their regular rate to $10.50 per hour, making their overtime rate $15.25 per hour. The employee is now owed an additional $10 in overtime for that month.
Only incentive bonuses have to be included in the regular rate calculation. Discretionary bonuses do not. However, just calling a bonus discretionary may not cut it. If employees understand that if they and/or the company reach certain goals, they will receive additional compensation, then that is usually an incentive bonus, and it must be considered as inflating their regular rate over the period of time the bonus covered, with the result being that they are due additional overtime.
For nonexempt employees working different rates in the same seven-day workweek, you must calculate overtime owed by using a weighted average formula. Employers can pay overtime on the hourly rate worked during the overtime hours, but there must be a prior written agreement with the employee.
Additional overtime due to nonexempt employees can add up quickly. Factor in liquidated damages, attorney’s fees and a three-year statute of limitations, and employers could be looking at paying two to three times what they owe in overtime.
Avoiding expensive FLSA liability is actually very easy and avoidable. It is just that employers fall asleep at the wheel when it comes to proper employee compensation and overtime calculations.
Employers should always question themselves when it comes to paying any employee a set salary. And red flags should always be raised if nonexempt employees receive any compensation above their basic hourly rate.
