Exempt vs Nonexempt Are You Paying Attention?
Estimated reading time: 6 minutes
I took a labor law class when I was in college. And I’ll never forget my first day in class. The instructor said, “If management would be fair to employees, unions would never be needed.”
He then explained the history of the labor movement, which stems back to the early 1900s when companies prioritized profits over the care of their workers.
This resulted in the birth of labor unions as workers fought for fair pay and treatment by employers.
The Department of Labor was established on March 4, 1913. The Department’s purpose is “to foster, promote, and develop the welfare of working people, to improve their working conditions, and to enhance their opportunities for profitable employment.”
Employment Status Matters
I remember early in my career, I was an hourly employee. I didn’t really mind punching a time clock.
The pros were that you got paid overtime if you worked half an hour over your regular schedule.
The cons were that you were docked for that time if you left a half-hour early.
We got paid for the time we worked.
I then remember yearning to be a salaried employee because I discovered that they didn’t have to account for the time clock.
Salaried employees were free to come and go. That freedom appealed to me, even if it meant not being compensated for extra hours worked.
It seemed to be a club of a higher level, and if you joined that club, you were considered a success.
Back then, it was the bosses (exempt), the professionals (accountants, etc. – exempt), and the worker bees.
The worker bees were nonexempt, and the others (white collar) were exempt from overtime.
How Do You Define Exempt Verse Nonexempt Status?
The Fair Labor Standards Act (FLSA) has changed that mindset (to some extent); however, there is much confusion about who qualifies for exempt status under the Act.
The act intended to ensure that all employees are compensated fairly and to discourage organizations from slotting employees as exempt when they qualify as hourly and should be eligible for overtime pay.
You need to consider some criteria as you assign a classification to employees. You can see those criteria here.
What Happens If You Misclassify an Employee?
All you have to do is search the DOL website to see the cases settled on behalf of workers.
A whistle-blower often notifies the DOL of employers’ misclassifications of exempt status.
And for a whistle-blower to go through that step, there is typically a history of, at least perceived, injustice.
Here are a few recent DOL news headlines.
US Department Of Labor Recovers $185k In Overtime Back Wages
Owed To 181 Workers Of North Carolina Rack System Installation Company.
These stories pop up occasionally when a company fails to pay its workers properly.
In this particular case, a North Carolina commercial and industrial rack installation company misclassified its employees working as installers as independent contractors. By doing so, IPD failed to pay employees the time-and-a-half overtime rate for hours over 40 in a workweek, a Fair Labor Standards Act violation.
This case involved the misclassification of employees. I like to think that businesses more often make these kinds of mistakes by accident.
Meaning they don’t understand labor laws, rather than intentional misclassification. Regardless, the Department of Labor can come after you when you fail to comply.
US Department Of Labor Recovers $40k For 56 Employees
At Two Catskill Mountains’ Resorts In New York.
Villa Roma Resort Lodges Inc. failed to pay correct overtime wages to tipped employees when it paid them time-and-a-half on their tipped wages and not on the higher New York state rate for hours over 40 hours in a workweek.
New York City Hotel Management Company Denied Employees
Overtime Pay and Benefits By Misclassifying Them As Independent Contractors
A federal investigation has recovered $113,613 in back wages and liquidated damages for 71 New York City hotel management company employees who denied them their full-earned wages, including overtime, by misclassifying many of the affected workers as independent contractors.
US Labor Department Secures $10k In Overtime Back Wages,
Damages For 9 Employees of Wytheville Window Installation Company.
The employer paid window installers overtime wages at straight-time rates and denied workers the required rate of time-and-one-half for hours over 40 in a workweek. The employer also kept inaccurate records of total daily and weekly hours worked.
Us Department Of Labor Recovers $3.1m In Wages, Benefits For 3,100 Workers Employed By A Federal Subcontractor Servicing Benefits Program.
The U.S. Department of Labor has recovered over $3.1 million in back wages and fringe benefits for more than 3,100 workers at a California subcontractor that provided enrollment and dental and vision benefits support to federal employees, retirees, and their dependents.
As you can see from these headlines, once the DOL gets involved, they pursue litigation until they feel a fair settlement is made.
Now, think about being the defendant. You are now distracted from your business and scrambling to pull requested documents and defend yourself.
Your business suffers because you can’t devote focused time to what it is you do.
It’s not a position any business owner wants to be in.
What You Should Do
You should consider an audit of your employees to make sure you have them classified correctly. Or consider your options with hiring an independent contractor.
In a recent role with a client, we underwent some reclassification after an audit of employees revealed that some employees did not meet the exempt status criteria.
We moved several (otherwise professional) employees from exempt to nonexempt status because they didn’t meet the criteria for exempt status.
The response was fierce, and most employees were angry when we made these changes. After all, they would lose that perceived freedom that comes with exempt status. I completely understood.
We quickly learned that employees identified with being “exempt” and considered it a demotion to have their status changed.
Even though their salary would inevitably go up with the pay for the extra hours they worked.
I had only one employee come and thank me for helping him get the overtime pay that he had missed out on.
Overtime regulations dictate the criteria for employees to qualify for exempt status.
Now might be a good time for your organization to audit your employee files and do a salary test on every employee to ensure they are categorized appropriately.
Changing employment status can entail sensitive conversations with employees who no longer qualify as exempt. Ensure you provide the change’s pros and cons as you communicate what these changes mean to each employee.
For more information on overtime rules, you can go to dol.gov.
