Are You Following Compliance Guidelines for Exempt Employees?

See the 5 most common mistakes employers make with salaried staff and how to create a compliant policy for exempt employees.

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compliance guidelines for exempt employees

The Fair Labor Standards Act (FLSA) requires businesses to classify employees as either exempt or nonexempt. How you classify your workers determines whether they are eligible for overtime pay.

Nonexempt employees must receive overtime pay for any hours worked beyond 40 in a workweek. If a nonexempt worker puts in more than 40 hours during any 7 consecutive 24-hour periods, they must receive pay at a rate of 1.5 times their regular rate. In some states, such as California, employers must also pay overtime for hours employees work beyond eight hours in any day.

An exempt employee, however, is overtime exempt. In other words, you are not required to pay overtime for your salaried workers if they meet the federal government’s exempt employee rules.

Who qualifies as an exempt employee?

To meet the exempt employee definition under the FLSA, employees must pass two tests:

  • The salary test: They receive a minimum of $684 per week (fixed salary) or $35,568 per year.
  • The duties test: They perform specific executive, administrative, or professional tasks. There are very specific rules that you must meet to classify the employee in one of these roles.

The labor laws for salaried employees also include a provision to exempt highly compensated workers earning more than $107,432 with fewer restrictions. very specific rules that you must meet

5 common mistakes employers make with exempt employees

Here are the 5 most common mistakes employers make with exempt employees.

1. Misclassifying employees

The most common mistake employers make is misclassifying employees as exempt. Just because some employees are on a salary rather than hourly pay, this does not make them exempt. They must meet the minimum pay thresholds and pass the duties test.

2. Relying on titles

Job titles aren’t enough, either. You can call someone a supervisor, manager, or assistant manager, but they are only exempt if they meet the specific requirements for income and duties.

3. Paying based on days worked

Exempt employees receive a salary regardless of how many days or hours they work in a given week. Whether they work one hour or 60 hours, they must be paid the same fixed base salary each week to count as exempt.

4. Reducing pay for sick days, poor performance, or emergency closings

Employers that deduct pay for sick days or poor performance may violate FLSA laws when it comes to exempt status. Salaried employees must also be paid in case of emergency or holiday closings.

5. Not meeting state regulations

Besides federal regulations, some states have their own tests and rules. For example, some require higher salary minimums or prohibit employers from using bonuses to meet minimum salary requirements.

8 steps to create a compliant policy for exempt employees

To create a compliant policy, employers should follow a few straightforward steps.

1. Classify employees properly

Employers should carefully determine employee classifications and make sure all exempt employees pass the salary and duties tests. Misclassifying employees is the most common FLSA violation and can carry significant penalties. Liability can extend to 3 years of back pay plus liquidated damages and attorney fees. In cases where multiple employees have been misclassified, it may also trigger class-action suits on behalf of current and former employees

The duties test has become complex and is often misinterpreted by employers. Organizations should consult with their labor attorney to make sure they understand the nuance of the duties test.

Misclassifying employees is the most common FLSA violation and can carry significant penalties.

2. Review and correct any misclassifications

Employers should regularly review employee classifications and correct any deficiencies, including providing back pay for overtime that should have been paid if an employee was classified improperly.

3. Provide clear documentation

Employers should clearly document their policies and pay procedures in their Employee Handbook, including language that satisfies what’s known as “safe harbor.” Employers should:

  • Have a policy prohibiting improper deductions.
  • Provide a way for employees to complain if they believe they are being paid improperly.
  • Reimburse for any improper deductions.
  • Make a “good faith” commitment to comply in the future.

If a company willfully violates these policies after receiving a complaint, the safe harbor will not apply.

4. Stay on top of rules changes

FLSA laws from the U.S. Department of Labor (DOL) can change. In 2020, for example, the minimum salary threshold and highly compensated employee salaries went up, impacting more than 1.3 million workers. There have been several attempts to raise the federal salary threshold in recent years. HR leaders need to stay on top of labor laws for salaried employees.

5. Watch state regulations

HR leaders also need to pay attention to changes in state regulations. For example, California recently raised its salary threshold for exempt employees to $58,240 for businesses with 25 or fewer employees and $62,400 for larger companies. New York has different salary thresholds depending on location and has phased-in increases.

6. Post FLSA rules

Employers must display a poster that details the FLSA provisions where employees can see it. You can download the most recent version of the poster from the DOL website.

7. Maintain records

Under the FLSA, companies also need to keep records for each employee that include identifying information to support classification. Payroll records must be kept for three years.

8. Legal review

As always, you should consult your HR attorney for clarification and review to assure you comply with all federal and state labor laws.

Make sure you stay compliant

Under certain circumstances, failing to follow FLSA regulations can result in the loss of an employee’s exempt status and force companies to pay overtime. The DOL notes that employers can correct an inadvertent or isolated mistake. However, a willful oversight or a pattern of misclassification or improper deductions can also lead to fines and judgments.

If one employee in a job class received improper deductions, and the company fails to rectify it immediately upon discovery, it may impact everyone in the job class. For example, if one employee out of a group of workers with similar job duties for several years received improper pay, the status of the entire group might move from exempt to nonexempt.

Concerned to ensure you stay compliant? Zenefits can automate many of your compliance tasks, including payroll and HR compliance. We also provide advisory services for complicated issues. For more information, explore an interactive demo of Zenefits now.

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