By Audra Hedberg, HR Compliance Consultant, Trüpp.
Misclassification of employees is costly
In light of the U.S. DOL releasing its final rule amending the overtime provisions of the FLSA, now is a good time to carefully review how your organization determines if employees are exempt or non-exempt. Many organizations are at risk of classifying employees incorrectly. Properly classifying employees is one of the most complex aspects of wage and hour law. An employer found to have improperly classified employees, in addition to being required to pay back overtime wages, will be subject to fines and penalties from the Department of Labor or state agencies. These costs can sometimes exceed the amount of unpaid back wages. Additionally, improper classifications can result in class action lawsuits by groups of employees which can cost organizations millions.
Imagine if you had just one employee working 50 hours a week for three years, who was improperly classified and should have received overtime pay? If this employee earned $20/hour, the backpay alone would be over $46,000. If you have one misclassification, there are likely others.
How do you know if you have your employees classified correctly?
Let’s start with the basics. Those jobs that are exempt, or salaried, allow an employer to avoid paying overtime when the employee works more than 40 hours in a work week. On the other hand, a non-exempt, or hourly employee, must be paid overtime for any hours worked over 40 in a week. On top of the federal law, more generous overtime laws apply in some states including Alaska, California, Colorado, Kansas, and Minnesota.
An employer doesn’t get to choose if a job is exempt or non-exempt; the job must go through a duties and salary threshold test that has been established by the Fair Labor Standards Act (FLSA). A frequent error employers make is to make decisions based on job titles. When looking to classify an employee, it is the employee’s job duties, not the job title, which must be considered. Even if a job title has the word “Manager” in it, it doesn’t necessarily meet the requirements of the exempt duties test. The most common misclassified jobs are supervisors, leads, sales, computer, and administrative staff.
Consider state regulations, pay compression, and internal equity
Starting January 1, 2020, the required salary of $455 a week moves to $684 per week, which is equivalent to $35,568 per year for a full-year worker. Keep in mind that California, New York and Alaska have higher state salary thresholds and many other states are moving in this direction. Nonetheless, federal organizations will need to review their current salaries to ensure all exempt employees are at or above the new threshold. In addition, companies should review job descriptions to ensure job duties meet the exempt duties test and if not, move those jobs to non-exempt. For those jobs that meet the exempt duties test, it’s not necessarily as simple as just increasing the salary to stay in compliance. Companies should be aware of compression effects and internal pay equity issues that may come with increased salaries and make adjustments to accomodate them.