The Fair Labor Standards Act (FLSA), originally passed in 1938, has complex rules for classifying employees and paying overtime. Under the FLSA, employers are not required to pay overtime to exempt employees, but are required to pay overtime to non-exempt employees.
As this part of the law is often the focus of IRS and Department of Labor (DOL) audits, it’s important for employers to understand how to classify employees and when they are obligated by federal law to pay overtime.
3 Tests for Exempt Employees
There are 3 things to remember when considering whether an employee is exempt or non-exempt. Under the FLSA, to properly qualify as exempt from overtime pay, an employee must pass all three of the following tests:
- Salary Level Test
- Salary Basis Test
- Duties Test
1) Salary Level Test
Since 2004, the salary threshold for overtime pay has been $455, meaning workers earning $455 a week or more, who can also be classified as exempt, do not get paid overtime when working over 40 hours in that week. Employers must keep this threshold in mind when determining classification and overtime pay.
2) Salary Basis Test
Under the FLSA, an exempt employee must be paid a fixed amount per pay period without reductions or changes to the amount. For example, an exempt employee that leaves 2 hours early to handle a personal matter cannot have a pay reduction for leaving early.
3) Duties Test
The employee’s work must meet duties requirements under the Administrative, Executive or Professional exemption. Each of these categories have requirements that must be met to qualify for the exemption.
- Primary duty is office or non-manual work that is directly related to management or general business operations of the employer or employer’s customers and
- The primary duty includes the exercise of discretion and independent judgment with respect to matters of significance and free from immediate direction or supervision.
- Primary duty is to manage the company, department, or subdivision in which he or she works, and
- Regularly directs the work of two or more other employees, at least two full-time employee or four part-time employees, and
- The employee has the authority to hire or fire other employees or suggest that other employees be hired or fired, advanced, or promoted.
- Primary duty is work that requires advanced knowledge in an area of science or learning, and
- The advanced knowledge is usually gained by studying and earning at least a four-year degree, or
- The primary duty requires originality, invention, imagination or talent in a recognized artistic or creative field (the creative professional exemption).
President Obama plans to use executive authority to change DOL overtime regulations and increase the number of people who qualify for overtime as part of his plan to fix what he refers to as a “crisis of economic equality.” He will raise the salary threshold from $455 to around $600-$640 per week and require that employees perform a minimum percentage of executive work before being exempted from overtime pay. These changes would make many more occupations such as fast-food managers, loan officers, and other jobs that are now exempt from overtime eligible for overtime pay, except in areas where the salary threshold is already higher, like California ($640) and New York ($600).
An automated time tracking system can identify how employees spend their time at work and better manage the need for overtime. An effective time labor management system should even reduce costs by cutting unnecessary overtime and eliminating buddy punching. It can also serve as a good record of time to use in case of audit.