While there are many advantages to being a small business owner, there are also many responsibilities that go along with it. One of which is determining whether or not your employees should be classified as exempt or nonexempt. Misclassifying even a few of your employees can have devastating consequences. Here are a few guidelines that should make it clear how you need to classify the different members of your staff.
Exempt versus nonexempt
The distinction between exempt and nonexempt employees is determined by the Fair Labor Standards Act of 1938. This statute introduced into law the 40 hour work week and the provision that employers must pay them 1.5 times their normal hourly rate for any time worked over that limit. Additionally, it designated certain kinds of workers as being exempt from its provisions. To be exempt, employees need to meet three criteria, which include earning $23,600 per year, being paid on a salary basis and performing duties that are classified as executive, professional or administrative. However, as the Wage & Hours Insights blog notes, a proposal by the Department of Labor’s Wage & Hour Division may raise the FLSA salary threshold up considerably in 2016.
Breaking down the exempt employee categories
This ERE Media post helpfully outlines the criteria that an executive, professional or administrative employee needs to meet in order to receive an exemption. The FLSA quantifies executive class employees as having duties that are administrative and executive in nature, meaning they supervise at least two employees, have input into their subordinates’ employment status and more than 50 percent of their work time must be spent on management-related tasks. Professional class exemptions are made for people working in professional areas that require special education and a higher than normal degree of discretion, such as the legal, medical and academic fields. Additionally, those working in creative industries, such as musicians, writers and actors are also exempt. Finally, employees who fulfill administrative roles within a company, for example, those who handle human resources or accounting tasks, are also considered exempt. The U.S. Department of Labor’s website contains a thorough listing of the different kinds of workers that should be classified as exempt and it’s recommended reading for anyone who is a small business owner.
The consequences of misclassification
Let’s say you are a small business owner who’s made the mistake of incorrectly classifying three of your employees as exempt when they should’ve been considered nonexempt. Once this mistake is realized, you would be liable for all back overtime incurred during the period those workers were incorrectly classified. Over the course of a few years, that liability could become so large that it could turn a black year red or even force your business into insolvency. As such, if you feel even slightly unsure of how to classify one of your employees, contact an experienced labor attorney for advice. Whatever their consultation fees are, it’s extremely unlikely that they would exceed the cost of misclassifying a long-term employee.
This article was written by Mario McKellop of Examiner.com for CBS Small Business Pulse.