The Fair Labor Standards Act (FLSA) was first enacted in 1938 and provided employees with a minimum wage for hours worked and also put into place the 40 hour work week. In many circumstances, employees working over 40 hours a week are entitled to overtime compensation. It is crucial that you know how to classify employees to determine who is entitled to receive overtime pay.
When looking at overtime rules, it is important to know the difference between exempt and nonexempt employees. Exempt employees are those who have jobs that do not fall under the overtime rules of the FLSA. There are some particular jobs that are specifically excluded from overtime rules, for example, agricultural workers are exempt as are employees who perform certain high level job functions. Typically, these types of employees are paid a salary, rather than an hourly wage. Employees who fall into the nonexempt category are generally paid an hourly wage for each hour worked. If they work over 40 hours in a week, they must be paid an overtime rate of no less than one and a half times their hourly wage for those additional hours.
However, you can’t just look at whether an employee is paid a salary or hourly wage to determine if they are exempt or nonexempt. There are tests that look at not only the amount an employee earns, but also the duties of that employee.
Salary Level Test: Currently, employees who are paid less than $23,600 per year ($455 per week) are nonexempt.
Salary Basis Test: Under this test, the employee is paid a salary if there is a guaranteed amount of money they will receive in any work week that they perform any work. So, whether they work 35 hours or 55 hours, if the job responsibilities are performed, they are entitled to their salary.
Duties Test: If an employee meets both the salary level and salary basis test, they are exempt only if they perform exempt job duties. Generally, this is considered high level or professional work. The three categories of exempt job duties are executive, professional, and administrative functions.
Executive Duties: The primary duty must be managing the company, department, or a subdivision. They also regularly manage at least two employees or the equivalent, and they have the ability to hire or fire employees or their suggestions and recommendations on the hiring, firing, advancement, or promotion of employees is given significant weight.
Professional Duties: The employee’s work must require advanced knowledge in a field of science or learning and is usually acquired by a prolonged course of specialized intellectual instruction. Some examples of professional fields that would fall under this category are engineering, education, law, and medicine.
Administrative Duties: The employee’s primary duty is the performance of office or non-manual work directly related to the management of the general business operation of the employer or their clients/customers. They must exercise discretion and independent judgment with respect to matters of significance.
In May 2016, there were proposed changes to the FLSA that would have raised the salary level threshold to $47,476, greatly expanding the group of employees that could be considered nonexempt and therefore have a chance at earning overtime. This change was set to take effect December 1, 2016. However, the new rule was challenged in court and was struck down before the effective date. The Department of Labor has stated that they will issue a new proposed rule by the end of October 2018. There will be a 60-90 day comment period, so it is unlikely that this issue will be settled by the end of 2018, but it is an area that employers should be watching closely.
As an employer, knowing the rules surrounding overtime pay can save you from having to pay back wages to an employee who has been misclassified. With changes to the overtime rules looking likely in the future, call on us at De Novo to help you navigate these changes and ensure that you are in compliance.