One of the many responsibilities of management is ensuring employees are paid correctly under wage and hour law. A common area of confusion is determining whether an employee can be classified as exempt from overtime pay under the Fair Labor Standards Act (FLSA). Properly classifying employees is critical as mistakes can lead to costly back pay, penalties, and legal issues.

There are two primary classifications for employees: nonexempt and exempt. In simple terms, an employee whose position is classified as exempt is not entitled to overtime pay under federal law. In contrast, an employee whose position is classified as nonexempt must be paid time and a half (overtime) for all hours worked over 40 in a workweek. Under FLSA, nonexempt classification is considered the default. Most employees are considered nonexempt unless they specifically qualify for an exemption.

In order to classify an employee as exempt, there is a three-part test that must be met.

1. Salary Threshold Test – currently the employee must earn at least $684 per week ($35,568 annually).
2. Salary Basis Test – the employee must be paid a set salary that does not change based on hours worked or the quantity/quality of work.
3. Duties Test – the employee must perform certain job duties that fall under a specific exemption available under the law. The most common exemptions are Executive, Professional, and Administrative.

For example, the duties test for the Executive exemption requires the employee to perform the following job responsibilities:

• Primary duty is managing a business or department
• Customarily and regularly directs the work of two or more full-time employees or their equivalent
• Has authority to hire or fire employees (or their recommendation carries weight).

All three requirements must be met in order to classify the employee as exempt.

Properly classifying an employee as nonexempt or exempt can be tricky. Below are some of the most common mistakes employers make:

• Assuming a salary alone makes someone exempt – It does not. The employee must meet all three tests.
• Relying on job titles rather than duties – Job duties are what count, not titles like “manager” or “supervisor.”
• Not paying attention to state laws – States may not recognize certain federal exemptions or have additional exemptions.

When determining employee classification employers should focus on the following:

• Carefully review the job description and actual duties performed.
• Ensure the employee meets all three tests: salary level, salary basis, and job duties.
• If in doubt, classify conservatively. It is safer to treat a position as nonexempt and pay overtime than to misclassify and underpay.
• Seek professional guidance for borderline cases.

Proper classification of employees under wage and hour law is both a legal requirement and a crucial aspect of maintaining a fair and responsible business operation. When you pay employees correctly for the work they do, you build trust, avoid legal headaches, and create a better workplace.

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