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The AR Group

Exempt or Non-Exempt? That is the question.

Because we have witnessed a significant uptick in terms of client concern with Fair Labor Standards Act (?FLSA?) compliance, particularly involving employee classification issues, we thought we would blawg on some of the fundamentals. As a preliminary matter, let?s remind everyone that the FLSA creates some basic wage and hour protections for most employees who work in the United States. Although almost every employee in the U.S. is covered under the FLSA, there are some exceptions including some small construction companies and small independently owned retail or service businesses. Because exceptions to the FLSA are rare, all employers are strongly encouraged to secure the advice of counsel before concluding that either the FLSA or the state law equivalent does not apply to them.

The FLSA creates a floor in terms of setting wages, not a ceiling and requires overtime compensation for all non-exempt employees working more than standard work hours, and also mandates meal and rest breaks for employees. Since the FLSA creates only a floor, it leaves the States the opportunity to create higher wage and hour standards for workers, and many have. Indeed, some states (including Colorado) have set a higher minimum wage than the federal standard (currently $7.25 an hour). Accordingly, while the FLSA is administered by the U S Department of Labor, Wage and Hour Division, most states have a regulatory agency in place to administer their state law equivalent. Compliance, therefore, often must be evaluated with due consideration of both state and federal regulations.

To the extent that the FLSA (or the state law equivalent) applies to a business, it is critically important to ensure that each and every position within the organization has been evaluated for classification, generally as Exempt or Non-Exempt. We strongly encourage clients to assess classification at the time a new position is created and further encourage employers to classify an individual?s position as either Exempt or Non-Exempt in the offer letter.

Classifying Employees?

Many employers tend to assume that all employees are exempt when the FLSA actually begins with the assumption that all employees are non-exempt until proven exempt. Determining whether an employee is exempt involves a fairly detailed and fact specific inquiry of the position (e.g., the qualifications needed, the compensation range, the level of influence and/or autonomy accorded), the industry, and the employer?s actual practices. Given this reality, it is difficult to provide a simplified roadmap although the DOL does provide useful tools and guides that should be reviewed if an employer wishes to undertake this effort without the assistance of counsel. That said, employers may classify employees as exempt when they are able to invoke one of the dozens of exemptions under the FLSA. The most common exemptions are the white-collar exemptions for administrative, executive, and professional employees, computer professionals, and outside sales employees.

Once an employer has critically evaluated application of an ?exemption? to a particular job title/function and determined that the job/function qualifies, then (and only then) an employer need not track employee hours or pay overtime compensation. Remember, however, that the exemptions to the FLSA are very narrowly construed, and employers bear the burden of proving that a role has been correctly classified as exempt.

SMART Tip: Because exceptions to the FLSA are rare, all employers are strongly encouraged to secure the advice of counsel before concluding that either the FLSA or the state law equivalent does not apply to them.