Why You Should Review Your Employee Classifications

Date: March 8, 2016

Originally published in Associations Now Plus, an ASAE publication.

With new Department of Labor regulations on the horizon, proper classification of employees as exempt or nonexempt is more important than ever. Here are some steps you can take to ensure that you're prepared for a possible rule change in 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 attorneys' fees. Classification is particularly important now, in light of the proposed changes to the Fair Labor Standards Act.

Under the FLSA, employees are classified in one of two categories: exempt and nonexempt. Exempt employees are not entitled to overtime pay, and their hours worked are not tracked. On the other hand, nonexempt employees are required to earn overtime for each hour worked over 40 hours in a week, and organizations are required to track nonexempt employees' time. 

How to Classify Employees

Two tests are used when classifying an employee:

The salary test. This test requires that an exempt employee make a minimum of $455 per week or $23,660 annually, with a few limited exceptions. 

The duties test. The factors used in the duties test depend on the exemption category in question. Exemption categories include executives, administrative staff, education employees, professionals, creative professionals, computer professionals, outsides sales employees, and highly compensated employees, among others. The test for each exemption category is different, but most require that an exempt employee's primary duties include the exercise of discretion and judgment in matters of significance. 

As a general rule, the presumption is that most employees should be classified as nonexempt (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 to perform nonmanual work directly related to the management or general business operations of the organization, and in performing that work the employee must exercise discretion and independent judgment in significant matters. If an employee is classified as exempt under the administrative exemption but is primarily in a support position, which is often the case with administrative roles, that position should be nonexempt. 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 helpdesk staff or the typical IT employee. 

Currently, more than 85 percent of the workforce satisfies the salary test for exempt employees. 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. If enacted, the new rules will dramatically increase the minimum salary for exempt employees to $921 per week, or $47,892 annually. In addition, the minimum salary for exempt employees will continue to increase yearly. These changes are expected to take effect in 2016.

What this means is that employees who are currently classified as exempt but make less than $47,892 a year may need to be reclassified as nonexempt employees, entitling them to overtime pay. Associations will need to determine whether the affected employees will end up working overtime and, if so, what the cost to the association will be. In some instances, associations may need to consider whether to increase some employees' salaries to the new minimum to allow their exemption status to remain. Either way, organizations need to be aware that payroll will likely increase when the new rules take effect.

Steps to Take Now

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

Review job descriptions. Review all of your organization's job descriptions to ensure they accurately reflect the essential functions of the job, particularly for exempt positions. Determine which specific exemption category applies to each position and ensure that the job description supports that exemption status. 

For example, because the rules require that a person in an exempt position exercise discretion and judgment with respect to matters of significance, the job description should reflect those factors and should not include language such as "supports" and "assists." If the accurate job description does not satisfy the requirements of the exemption category, or if the employee actually is more of a support person and does not have independent discretion, strongly consider reclassifying the employee as nonexempt. 

Identify "at-risk" positions. At-risk positions are those that either will not meet the minimum-salary test when the changes are implemented or where compliance with the duties test is questionable. Carefully scrutinize all exempt positions, especially ones that are classified under the administrative exemption. 

Plan how you will implement the changes. Consider how your organization 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 reclassified from exempt status to nonexempt, even though nothing substantively changes in their position other than their ability to earn overtime. Requiring previously exempt employees to clock in and out may hurt morale. 

Consider the messaging you will use 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 to minimize risk and liability.

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 to best deal with the proposed changes.

The proposed changes to the FLSA regulations may be costly to employers. Taking action now will help your organization minimize risk and prepare for the new rules.