One law small businesses frequently underestimate is the misclassification of employees as being exempt from Fair Labor Standards Act (FLSA) overtime rules, an oversight that could cost millions in employee misclassification lawsuits.
Minimum wage rates also pose problems because there may be different standards at federal, state and local levels.
“Companies need to know the basics of the FLSA in order to determine if they’re in compliance,” says Tracy Baskin, payroll compliance analyst in Wage and Hour Compliance at TriNet, Inc.
Smart Business spoke with Baskin about FLSA issues and how to stay compliant.
What are typical FLSA compliance issues?
Many businesses have problems keeping in step with minimum wage rates. An employee, having worked a year or so at a given rate of pay, may be due retroactive payments because of an increase in state or local minimum wage rates. Employees paid at the lower rate of the previous calendar year could file a complaint with the Department of Labor (DOL), which could lead to an audit.
It can be even more of a problem with exempt employees — many companies aren’t even aware there is a minimum salary basis. Exempt employees paid at a rate less than minimum wage would need to be increased to at least $16 an hour to be in compliance with California’s requirement for executive, administrative and professional (exempt) employees. For example, computer professionals are employees who typically write or modify programming have their own minimum, which is $39.90 per hour.
The most impactful item is overtime compensation. Companies are not accurately calculating overtime pay because they aren’t including additional earnings such as bonuses or commissions, which need to be included to comply with the FLSA.
How do you determine if an employee should be classified as exempt and nonexempt?
The FLSA provides general guidelines. You’ll need to concentrate first on the employee’s primary duties. Are they managers who customarily and regularly direct the work of two or more employees? Do they set company policies, or authorize, suggest or recommend the hiring and firing of others?
Employees who have advanced knowledge in a field of science, whether college or beyond, may qualify for certain professional exemptions. However, college graduates are not necessarily exempt. In California, the professional exemption is reserved for those licensed or certified by the state, generally in the fields of law, medicine, dentistry, architecture, engineering, teaching and accounting. Typically, exempt employees must also be paid at least $455 per week on a salary or fee basis.
Nonexempt employees have to be paid a certain amount per hour. If they’re tipped, they must earn enough in tips to bring them up to minimum wage. They’re the average employee and are paid time and a half if they work in excess of 40 hours in a workweek.
While most exempt employees are required to receive salaries, not all salaried workers are necessarily exempt. As a rule of thumb, you can say that an employee whose duties include supervising two or more employees; authority to hire, fire and promote; and giving job assignments to others are usually exempt. But it’s not the job title that matters, it’s the actual job duties that determine whether an employee is exempt or not.
What are the penalties for noncompliance?
Penalties vary depending on what the employee has presented to the DOL, whether it’s an overtime violation, he or she wasn’t paid the minimum wage or a simple miscalculation. If the DOL considers the violation to be willful because a business has had this offense before and not corrected it, fines can be doubled or tripled.
Our recommendation is to pay employees what they are due. If you don’t, you should expect someone will eventually reach out to the DOL, which will open the company up to a much larger audit. The DOL will examine the status of all employees and ask for the documentation to see the criteria the business used to determine their status as exempt or nonexempt. So it’s best for everyone to make sure employees are classified properly and paid what they are owed.
Tracy Baskin is a payroll compliance analyst, Wage and Hour Compliance, at TriNet, Inc. Reach her at email@example.com
Insights Human Resources Outsourcing is brought to you by TriNet, Inc.