3 Things Employers Need to Know About Employee Classification: A Refresher Course
By: Joshua D. Kohler
Congratulations! You and your business survived a global pandemic and one of the most challenging economic downturns in recent memory. The last year took a devastating toll on employees and business alike, and you may be looking to reconsider employee compensation and avoid litigation. As you look forward to bouncing back in 2021, here are three reminders for properly classifying employees.
1. Minimum Salary for Overtime Exempt Employees
As of January 1, 2020, the new minimum pay threshold under the Fair Labor Standards Act for exempt employees (i.e., those not entitled to overtime) increased to $35,568 per year or $684 per week. The rule also allows you to use nondiscretionary bonuses, incentive payments, and commissions (all paid annually) to satisfy up to 10% of the standard salary level. Importantly, some states may depart from what is required under federal law, so it is important to understand the minimum salary requirements for any states in which you have employees.
Similarly, if you claim the “highly compensated employee” exemption, the new minimum annual compensation increased to $107,432 per year from $100,000.
2. Do Your Exempt Employees Meet the “Salary Basis” Test?
If you classify your employee as exempt under the bona fide executive, administrative, or professional capacity exemptions (the three most common), you must also meet the Salary Basis Test.
To meet this test, the employee must be paid a predetermined and fixed salary that is NOT subject to reduction because of variations in the quality or quantity of work performed. In other words, if you are not paying your employee overtime, you generally cannot reduce his or her pay for missing a shift or require that he or she make up any missed time.
3. Do Your Exempt Employees Meet the “Duties” Test?
This final test is arguably the most subjective and typically the employee-plaintiffs’ focus in lawsuits. Your exempt employees’ “primary duty” must be the principal, main, or most important duty that the employee performs. The following are basic guidelines for meeting the Duties Test under three common exemptions:
- Manage the enterprise, department, or subdivision;
- Direct the work of at least two full-time employees or the equivalent (one full-time and two part-time employees); and
- Authorize hiring, termination, or other changes to an employee’s employment status or whose recommendations and suggestions on the same are given weight.
- Examples: C-Suite Officers, Presidents, and Vice Presidents.
- Performs office or non-manual work related to management or general business operations; and
- Exercises discretion and independent judgement with respect to matters of significance.
- Examples: Managers, and some office staff.
- Learned Professional:
- Work requiring advanced knowledge of intellectual character in a field of science, learning, law, medicine, theology, accounting, etc.; and
- Advance knowledge must be acquired by a prolonged course of specialized instruction and/or training as a prerequisite into entry into the profession
- Examples: Lawyers, Doctors, and Professors.
Although these three tests are useful for a preliminary determination of whether your exempt employees are properly classified, it is important to note that many states have variations on what is and is not an exempt employee. To ensure that your employees qualify for exempt status under state and federal law, you should consult with a qualified employment law attorney. Visit our Labor & Employment Practice page to find an attorney in your area