Many of my HR colleagues may already be familiar with the Fair Labor Standards Act (FLSA) exemption classification requirement, which provides guidance on which positions are exempt from overtime under the FLSA. However, I have come across several organizations that are unaware of these requirements and classify everyone as exempt or have misinterpreted the classification requirements by focusing solely on the salary threshold. Let's review the facts about exemption classifications.
First, all employers who employ a minimum of one (1) employee must classify each of their positions as either exempt or non-exempt. When you create job descriptions for each position, focus on the functions a person performs for the employer, not about the person.
Second, the exemption status identifies those positions that are not included in the payment of overtime. Those that do not meet the DOL requirements for exemption are to be considered non-exempt or hourly workers.
Third, conduct a three-pronged assessment for all positions in the organization that determine if a position is truly exempt. Each DOL Fact sheet provides what is called the "job duties test," which includes more detail on what makes someone exempt.
In January 2020, the Department of Labor (DOL) released a final rule increasing the minimum salary requirement to be considered exempt under the Fair Labor Standards Act in addition to some other provisions. Employers often get into trouble as they only look at the salary threshold when there are other factors to consider. Salary threshold alone does not indicate someone exempt or non-exempt.
The Wage and Hour Division of the DOL has Fact Sheets that provide further detail into what qualifies a position as exempt from overtime. Exemption from the FLSA requirements includes if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee. There are Fact Sheets that provide the exemption qualifications and primary duty guidance.
Job Duties Test
To properly assist the evaluation of exemption status, three tests must occur together to satisfy exemption requirements. They include:
- Salary Test: Employees must earn a weekly salary that meets the minimum requirements. This minimum requirement is $684 per week ($35,568 per year) for administrative professionals, including salaried computer professionals and executive exemptions.
- Salary-Basis Test: The employer must pay employees their full salary in any week they perform work, regardless of the quality of the work.
- Duties Test: The employee's primary job duties must meet certain criteria in the Fact Sheet.
Highly Compensated Employees
The final rule also increased the total annual compensation requirement for highly compensated employees to $107,432 annually paid on a salary or fee basis. The annual compensation is allowed to include non-discretionary bonuses, commissions, bonuses, or other non-discretionary compensation earned during the 52 weeks (see bonus, incentive commissions payments below). These positions must meet the requirements under the Executive, Administrative or Professional employee section of the Fact Sheet.
Non-discretionary Bonuses, Incentive Payments & Commissions
This rule is new and now includes the use of non-discretionary bonuses, incentive payments, and commissions to satisfy up to 10% of the minimum salary requirement, as long as these forms of compensation are paid at least annually.
Position by Position Evaluation
To conduct a proper evaluation, review all your organization's positions by creating a spreadsheet including:
- All position titles within your organization
- Current exemption classification
- Annual base compensation as of determining date
- Manager title
- A column for does the position duties meet the required tests for exemption
- New exemption classification
- Reason for the change
This will be used as documentation to support your decisions in case challenges arise. You will also need the current job descriptions and the appropriate Fact Sheet to review and complete the review properly.
In addition, once this is completed either internally or by a third-party consultant, it is strongly recommended to have your employment attorney conduct a final review.
Communications to Employees
While the employment attorney reviews your exemption worksheet, you should prepare a communication plan for all impacted employees. This is probably one of the most difficult, sensitive messages you can give to an employee. Great thought and care must be considered throughout this entire process. Look to focus on the positives and be ready to address any questions or concerns during the conversation. Not everyone will be happy about the change as many will view it as either a demotion or feeling less valued. Be ready to address those concerns.
For further information, go to https://www.dol.gov/agencies/whd/overtime/fact-sheets.
We know completing this work right can seem a daunting task. But, it has to be done in order to remain in compliance. If you find you don’t have the time or resources to properly conduct this review, let us know. For the last five years, our consultants have helped clients navigate through ensuring FLSA compliance.
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