Exempt and Nonexempt Employees: Compliance Communication Is Key

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Understanding the difference between exempt and non-exempt employees has always been important for your costs, compliance and employee engagement. But with the new FLSA overtime rules set to take effect on December 1, carefully and systematically classifying your employees has never been more critical.

Misclassification of an employee can bring with it the possibility of lawsuits, regulatory enforcement actions, penalties, direct costs related to remedying the misclassification and indirect costs related to falling employee morale. Knowing the legal requirements for employee classification under the Fair Labor Standards Act (FLSA) is essential for FLSA compliance efforts, but so is communication with employees so they're confident you're following the rules.

If your employees think that you're not complying with FLSA classification standards for exempt and non-exempt employees, for whatever reason, then you have a big problem that could escalate into possible litigation and the kind of employee disengagement that diminishes productivity. Therefore, classifying correctly at the hiring stage, updating your classifications when appropriate and communicating about compliance clearly and concisely is essential.

Employee Classification Under the FLSA

The U.S. Department of Labor and the FLSA mandate that companies must track the hours of non-exempt employees, paying them at least the minimum wage and overtime pay for time worked over 40 hours per week. Exempt employees are not entitled to overtime pay, so their hours aren't typically tracked; however, they must meet the requirements set out by the Department of Labor (DOL) to be classified as exempt.

Exempt Employee Due Diligence

At the moment, you must prove an exempt employee passes the following three-pronged test to be considered exempt:

  1. The salary level test. The employee must be paid at least $47,476 per year.
  2. The salary basis test. The employee must be paid regularly and at a fixed rate commensurate with their annual salary. So an employee with a salary of $48,000 could be paid $4,000 per month or $2,000 every two weeks, no matter the hours that employee actually worked.
  3. The duties test. An exempt employee is required to have certain responsibilities as set out by the DOL, such as participation in hiring or managing other employees. For more information, see the Department of Labor's Fair Labor Standards Act Advisor.

What to Do When You Need to Reclassify

Confusion and resentment may occur among employees when they're classified as exempt and no longer paid overtime, but still don't perform the kind of duties exempt employees are required to perform. According to the Washington Post, retail companies, for example, have run into highly publicized legal challenges (employee lawsuits and DOL enforcement actions) for misclassifying assistant managers as exempt when those employees don't actually perform sufficient managerial tasks to pass the duties test. "Job titles do not determine exempt status," notes the DOL, "for an exemption to apply, an employee's specific job duties and salary must meet all the applicable requirements provided in the Department's regulations."

Resentment can also bubble to the surface when exempt workers get reclassified as non-exempt under the new OT rules. There is often a stigma associated with being a non-exempt, hourly worker who has to punch a clock, versus the "status" of being exempt. "Forty-five percent of the managers we surveyed said they were worried [the new overtime rule] would make them feel like they were performing a job instead of pursuing a career," said Lizzy Simmons, senior director of government relations for the National Retail Federation, in Newsweek. She also concluded that "converting those workers back to hourly status could eliminate the middle-management rung from the retail career ladder."

Communicate Proactively

When you reclassify, you may also risk legal liability and employee disengagement. Communication to employees about this transition should stress that it's not anything the employee did wrong and it's not due to any changes in company policy, but simply that the law has changed and the organization is thus compelled to comply. In some cases, employees could see the reclassification as a positive: non-exempt status could now mean more money when extra hours are worked.

Proactive compliance communication with employees about this delicate, difficult issue can help protect you from potential litigation, regulatory enforcement actions and potential drops in employee morale.