Scary HR Mistakes Part 4: Employee Misclassification

Employee Misclassification Is No Joke

Welcome to your Final Destination this month: week 4 of our series: Scary HR Mistakes. Last week, the importance of keeping good payroll records was explored. This week, we will discuss a connected issue: employment classification.

            Exempt versus Non-Exempt Employees

Who cares, right? Well, the Feds for one. The Fair Labor Standards Act requires companies to figure out which employee is which to figure out how they are paid. Basically, an employee who is exempt is not an hourly employee. They get paid the same amount no matter how long it takes. This includes doctors, lawyers, accountants – basically, all the people that you think make a lot of money, but not really when you break it down into their hourly work week! Non-exempt employees get cool things like overtime pay for any hours worked over 40 in a work week. They also get perks like a meal and rest break. (Can you tell what kind of employee is writing this blurb?) The FLSA provides help on this issue – but be careful. It’s not as easy as it looks.

            The Three Tests

There are three basic tests that you can use if you’re confused about how to classify your employees. First up is the Salary test which simply asks how much you pay the employee. If they get $23,000.00 or less, then they are non-exempt, period. The next test is the salary basis test, which asks whether the employee is paid a salary or hourly basis. If you require an employee to clock in and you pay them on the number of hours they work, then they’re paid on an hourly basis. That one is pretty straightforward. Finally, the duties test. The employee’s duties must meet the requirements for an executive, professional, administrative, computer or outside sales exemption.

Um.. what?

• The Executive exemption means an employee who regularly supervises two or more others with the authority to have a genuine effect on their job status – such as hiring, firing and promoting. Someone supervising another doesn’t mean they are an executive – they must have direct authority over another employee’s job status.
• The administrative exemption applies to people who basically make sure the business runs smoothly, like your faithful HR operators, accounting partners, and legal folks.
• The professional exemption usually relies on an employee with some sort of advanced degree, usually a lawyer, doctor, or dentist.
  • This exemption is we get to enjoy all those doctors shows where it seems like they never get to leave the hospital. They don’t. Imagine if they weren’t exempt? And you thought healthcare was expensive now. I digress.
• The computer exemption is pretty straightforward – it would be an IT professional like a software programmer, or the like. Think revenge of the nerds, here.
• The Outside Sales exemption applies to employees whose primary job is to make sales for the business, and they do so away from the regular place of business.

            So, do I care?

You should! If the company misclassifies an employee, they can face serious trouble: lawsuits, criminal investigations, fines, and even personal liability for the fat cats. By classifying some employees as an independent contractor, for example, companies can be tempted to save on benefits offered to employees, like health care, retirement benefits, or sick pay. But if they are actually employees, these ‘contractors’ could file a lawsuit to get these benefits back – and then some. At the same time, if an employee is misclassified as exempt when he or she should be nonexempt, then they are missing out on a bunch of overtime pay to which they would regularly be entitled, and could be awarded backpay). The employee may also be owed liquidated damages (basically, double back pay), statutory penalties, and even attorney’s fees if a legal complaint was made.

The FLSA is expected to file a record number of lawsuits against employers this year for misclassification. Misclassifying employees can be an incredibly expensive and ‘grave’ mistake. If you have questions about how an employee should be classified, get in touch with us!

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