New DOL Regulations: Proper Classification of Community Association Employees Matters

Date: February 5, 2016

Proper classification of employees is critical to avoid potential liability for unpaid overtime.  If that did not get your attention, then consider this:  In addition to unpaid overtime, misclassification of employees can result in liquidated damages, equitable relief and reimbursement of attorney’s fees.  Classification is particularly important now, in light of the proposed changes to the Fair Labor Standards Act (“FLSA”).

As a general review, there are two types of classification for employees:  exempt and non-exempt employees.  Exempt employees are not entitled to overtime and their hours worked are not tracked.  On the other hand, non-exempt employees are required to earn overtime for each hour worked over 40 hours and organizations are required to track non-exempt employees time.  

There are two tests to use when classifying an employee.  The first test is the “salary test” which requires that an exempt employee make a minimum of $455 per week or $23,660 annually, with a few limited exceptions.  The second test is the “duties test”.  The factors to use in the duties test are dependent upon the exemption category relied upon.  There are many exemption categories and those include, without limitation, executives, administrative staff, education employees, professionals, creative professionals, computer professionals, outsides sales employees, and highly compensated employees.  The test for each exemption category is different but most of the tests require that an exempt employee’s primary duty include the exercise of discretion and judgment with respect to matters of significance.  

As a general rule, status as an exempt employee should be the exception not the norm.  This is because the presumption is that most employees should be classified as non-exempt (and subject to overtime) rather than exempt (salaried).  The most commonly confused and misclassified exemption category is the administrative exemption in which the primary duty must be the performance of non-manual work that is directly related to the management or general business operations of the organization in which the person exercised discretion and independent judgment with respect to matters of significance.  If an employee is classified as exempt under the administrative exemption but is primarily in a support position (i.e. receptionist), which is often the case with administrative positions, that position should be non-exempt.  Similarly, the computer employee exemption is often misunderstood.  This exemption applies to computer programmers and engineers – the employees who design computer systems – and not to help desk employees or the typical IT employee.  

Currently, more than 85% of the workforce satisfies the salary test for exempt employees, meaning, the majority of the workforce earns more than $23,660 annually.  This is about to change.  In July 2015, the Department of Labor, at President Obama’s urging, issued its long awaited proposed changes to the FLSA Regulations which, if enacted, will dramatically increase the minimum salary for exempt employees to $921 per week, or $47,892 annually.  In addition, the proposed changes will provide an automatic adjustment of the minimum salary requirement going forward annually meaning that the minimum salary for exempt employees will continue to increase yearly.  These changes are expected to take effect in 2016.

What this means for community associations is that beginning possibly in 2016, employees who are currently classified as exempt may need to be reclassified to non-exempt employees and entitled to overtime if they make less than $47,892 annually.  This will affect budgeting since community associations will need to determine whether the affected employees will end up working overtime, and if so, what the cost to the community association will be.  In some instances, community associations may need to consider whether the estimated costs of overtime are higher than the cost of increasing the salary to the new minimum amount and make a decision as to whether to increase salaries to allow the exemption status to remain.  Either way, community associations need to be aware that payroll will likely increase in the upcoming years.

What can you do to prepare your community association for the upcoming changes and to ensure that your association has properly classified its employees?

  1. Review Job Descriptions.  Associations should review all of the job descriptions to ensure that they accurately reflect the essential functions of the job, particularly for exempt positions.  Determine which specific exemption category is relied upon for each position and ensure that the job descriptions support that exemption status.  For example, the primary duty for most exempt requires the exercise of discretion and judgment with respect to matters of significance.  Accordingly, job descriptions for exempt positions must include language that satisfies those factors and should include language such as “supports” and “assists”.  If the accurate job description does not satisfy the requirements of that category or the employee actually is more of a support person and does not have independent discretion, strongly consider changing the employee to non-exempt.  
  2. Identify “at-risk” positions.  At risk positions are those positions that either will not meet the minimum salary test when the changes are implemented or where compliance with the duties test is questionable.  The administrative exemption is the most commonly confused and misclassified exemption.  Carefully scrutinize all exempt positions, especially ones that are classified under the administrative exemption.  
  3. Plan.  Plan how your community association will adjust if the minimum salary increases and how those changes will be communicated to staff.  Sometimes employees feel marginalized or demoted when they are changed from exempt to non-exempt, despite the fact that nothing substantively changes in their position other than their ability to earn overtime.  That said, requiring a previously exempt employee to clock in and out may have a negative effect on employee morale.  Consider the messaging that will be used if changes to exemption status are made.  In the event that you determine you have misclassified employees, discuss options for correcting the misclassifications with counsel in order to minimize risk and liability.
  4. Consider an HR audit.  Hiring an outside attorney or consultant to review your job descriptions and policies (including overtime policies) can help ensure compliance with local and federal laws and can be useful in adopting policies and strategies moving forward to best deal with the proposed changes.

The proposed changes to the FLSA regulations may be costly to community associations.  Taking the above actions will help your community association minimize risk and prepare for these changes.  Please contact Jennifer S. Jackman and/or Tiffany M. Releford with any questions or for assistance in preparing for the proposed changes.