Navigating employee classification is a critical responsibility for employers. Incorrectly categorizing workers as exempt vs. non-exempt can lead to significant financial and legal repercussions. Despite these risks, many companies fall into this trap. Understanding the nuances of proper classification is vital to safeguarding your business.
Exempt vs. Non-Exempt Employees
The Fair Labor Standards Act (FLSA) establishes criteria for classifying employees as exempt or non-exempt from overtime requirements. This classification determines how company’s need to pay their employees.
Exempt Employees: Exempt employees are typically salaried and must meet specific criteria falling under different Exemption categories. Employees in these categories are exempt from overtime, meaning they get paid the same amount regardless of how many hours they work.
- The first, the Executive Exemption includes being compensated no less than $684 per week, managing the company or a subdivision of the company, directing the work of at least two other full-time employees and having the authority to hire or fire other employees.
- The second exemption category is the Administrative Exemption. This category has the same salary requirements, the employee must perform non manual work directly related to the management or general business operations and the employee’s primary duty includes the exercise of discretion and independent judgement with respect to matters of significance.
- The Professional Exemption is a category also referred to as the learned professional employee exemption. To qualify under this category employees must meet the compensation requirement, perform work requiring advanced knowledge, be in a field of science or learning and have acquired such knowledge from a prolonged course of specialized study.
- The Computer Employe Exemption is one of the newer exemptions and requires employees be hired as computer system analysts, computer programmers, software engineers or in similar computer field roles.
- There is an Exemption for Outside sales as well which the employee’s primary duty must be making sales and must be regularly engaged away from the employer’s place of business.
Highly Compensated employees making over $107,432 or more/year are only exempt if they meet the criteria of one of the categories above. Just being highly compensated does not automatically qualify a role to be exempt.
Non-Exempt Employees: Typically, hourly and must receive overtime pay. In California the overtime laws include:
- Overtime pay (1.5x the regular rate of pay) for hours worked over 8 in a single day
- Double pay (2x the regular rate of pay) for hours worked over 12 in a single day
- Overtime pay (1.5x the regular rate of pay) for the first 8 hours worked on the 7th consecutive day of working in a single workweek and 2x the regular rate of pay for all hours beyond 8 on the 7th consecutive day of working in a single workweek.
- Overtime pay (1.5x the regular rate of pay) for all hours worked over 40 in a workweek.
Failing to classify employees correctly can result in wage and hour lawsuits, back pay for unpaid overtime, fines, and penalties.
Misclassification Example
For example, let’s say an Administrative Assistant making $25/hour was classified incorrectly as Exempt and has worked for your organization for two years.
This employee is laid off and applies for unemployment with the State. The State then recognizes that this employee was misclassified and is owed back pay for overtime worked.
Back Pay for Overtime
The employee estimates they worked 10 hours/week overtime (assuming 50 hours/week total)
- Overtime rate: $25/hour *1.5=$37.50/hour
- Weekly overtime pay: 10 hours *$37.50=$375/week
Total Back pay for Overtime (2 years)
- $375/week 52 weeks/year2 years= $39,000
Interest on Unpaid Wages
California law allows interest of 10% per year on unpaid wages
- Interest for 2 years: $39,000*10%*2=$7,800
Penalties
Waiting Time Penalties
If the employee leaves the company and isn’t paid correctly upon termination, they are entitled to 30 days of wages as a penalty.
- Daily rate: $25/hour *8 hours=$200/day
- 30 days: $200/day *30 days= $6,000
Labor Code/Wage Statement Violations
California imposes a penalty of $50 for the first pay period and $100 for subsequent pay periods, capped at $4,000.
- Total Penalty: $4,000
PAGA Penalties (Private Attorneys General Act)
- Example estimate: $5,000 (varies by case and violations identified)
Legal Fees (Employer)
Employers are typically responsible for covering their own legal costs, which can range between $20,000 and $100,000 for misclassification disputes.
- Example: $40,000
Grand Total in this Example
Back Pay (Overtime): $39,000
Interest on Back Pay: $7,800
Waiting Time Penalties: $6,000
Wage Statement Violations: $4,000
PAGA Penalties: $5,000
Employer Legal Fees: $40,000
Total: $101,800
Misclassifying a single employee could easily result in over $100,000 in liabilities and costs to an employer. Actual amounts may vary depending on the specifics of the case, and the length of the misclassification as well as legal proceedings. However, this underscores the importance of properly classifying employees to avoid costly repercussions.
Don’t wait for a costly mistake to catch up with you. Let’s work together to protect your business, your team, and your bottom line. Reach out today to get started!