How to Classify Employee Status | Exempt vs Non-Exempt

not properly classified, it can cost you thousands, if not tens of thousands, if not hundreds of thousands of dollars in back penalties because you failed to file proper payroll taxes. It could cost you back wages. It could cost you all sorts of penalties and interest from the IRS. This is definitely not a game you want to play. So if you have any uncertainty about whether or not your employees should be classified as exempt or non-exempt, I'm going to break it all down for you in this detailed presentation today on what classifies an employee for exempt, where exempt came from, some examples on how you can make sure that your team is properly classified, and what the different classifications are. So thank you for joining me so much today. My name is Matt Vadie, and this is HR Simplified. All right, so let's talk further about some of the high-profile cases. And there have been not just high-profile cases, but smaller cases in every market I've come across where people have been busted for improperly classifying their employees. Sometimes it's really nefarious in that they're actually trying not to pay people overtime. Sometimes it's just the way things have always been done and maybe they had no idea. But these two high-profile cases are a great example of big ticket penalties and interest and back wages that were owed. Now, the thing I like to think about when I point at these is the titles of the individuals, because people get hung up on a title determining whether or not an employee classifies as exempt or non-exempt. When I see assistant branch manager, I might think that employee classifies as exempt based on their title. But what we'll talk about later is that titles have nothing to do with it. It's based on a two-part test, your salary and your duties. And we'll talk about what those different salaries and duties are later in this episode. These two organizations had folks in titles that you'd think qualify as exempt salaried positions, but they did not and they were busted and owed big time fines and penalties and back wages as a result. So today we're going to talk about what the different classifications are, why they matter, what the FLSA is, some common errors, and what you can do to move forward. My name is Matt Vadie. I'm the CEO of Guru Payroll and HR. I am a pizza enthusiast, and I am your HR guru on today's episode. So let's dive right in. Now, one of the biggest reasons I think employers should be aware of this beyond the obvious, right? You want to pay people what they're worth. You want to pay them for the job they did. You want to make sure that you don't owe back penalties and interest. But also, man, it can be a little whack to see your name in the newspaper when your employees file a class action suit against you because you've got a batch of them misclassified, whether intentionally or unintentionally. And I've seen it multiple times in my market alone. A lot of local restaurants have been busted for not paying cooks overtime, for trying to make sure others don't get paid overtime inside the organization and it always makes the paper. So stay out of the paper in addition to all the other reasons why this makes sense. So let's talk about where the Fair Labor Standards Act came from, the FLSA. This brings us back to a simpler, simpler time. I don't know. In 1938, this was launched as during a fireside chat, which I like to think about how interesting that would have been to be alive at that time and get your news and your information from the Oval Office via fireside chat. But fun facts about this, it was really meant to stop the overwork and child labor of individuals in the factories during the Great Depression. It was meant to put a minimum wage in place and overtime past a certain number of hours per week, make sure that people are getting equal pay for equal work. It's one of the first initiatives towards that. Make sure there's proper recordkeeping on how much time people are working and how they're paid for their work. And then of course to stop the child labor in there. And so the first minimum wage, fun fact, was 25 cents an hour. And this all kicked off in 1938. And shockingly, there have not been a ton of updates to the minimum wage over the last 25 years. There've been a few, but we're gonna talk about that more in another video as far as what that minimum wage and minimum salary requirement is. Because I'm filming this in June of 2024, and we're actually about to have some seismic shifts in that salary threshold here come July of this year. So let's talk right now about what exempt is. What does this even mean? So what are the employees exempt from? Well, first of all, they're exempt from overtime pay. So that means you do not have to pay them 1.5 times their rate at the federal level past 40 hours. And some different states have different overtime regulations. And then it also means that they're exempt from minimum wage. And so some of these you might say, well, doesn't the salary basis put them over minimum wage? Yes, except for one of these. And so definitely worth looking deeper at that. So who is exempt from overtime and minimum wage? Well, there's 5 different classifications of exemption plus highly compensated employees. So executive, administrative, commuter, commuter computer personnel, professional, and outside sales. And we're going to talk about each of those here in more detail right now. Um, and again, we'll talk about the salary requirements and what those are, but they are changing right now as we speak, but also could be not changing. Uh, so that's the fun about this. Is, I think, the third attempt to bump the salary requirements up. And when we look at whether or not someone classifies as exempt or non-exempt, the first thing we have to look at are the two parts of classification. So there's two different parts. There's the duties, there's what I do for my job, and then there's the salary requirement. So the salary requirement is, is currently proposed to be pushed and has been approved to be pushed up to $844 per week effective July 1st, 2024. And on January 1st, 2025, it will move up to $1,128 per week, uh, which is a pretty substantial bump. From the current, which is $684 per week or $35,568 annually. So that's about a $7,000 bump annually in July. And then an almost 20, or excuse me, a $23,000 bump in January. So some massive changes happening there. And we've got another great video we just put together walking through those changes and what they're gonna look like. So please check that out. Make sure you subscribe to our channel for all the latest updates related to this topic and more. All right, so first and foremost, again, the titles don't matter. You can call somebody the chief executive officer, but if they don't do the things that a chief executive officer does, it just doesn't matter. And this actually will come up and you'll see why here when we look at the executive exemption in just a moment, in that sometimes people are classified what they think as an executive exemption, but they don't qualify for this reason alone. They don't have the direct work of 2 or more FTEs. They don't direct the work of 2 or more FTEs. They don't have the authority to fire or hire or make recommendations. So sometimes you'll see this either with somebody who's maybe managing a branch that they're trying to put under the executive exemption, or maybe somebody who's the new leader in a startup or a company that's well-funded but doesn't necessarily have the a whole lot of employees yet. And so they may classify under another exemption. But it's important to know which exemption somebody classifies under because they need to not only pass the salary but the duties component, the executive duties. As you can see here, those are the two big ones that we see. If there's ever any issues with this is that they're directing the work of two or more FTEs and they have the authority to fire or hire or make recommendations in the firing and hiring. And they must be spending at least 20% of their time focused on executive-level tasks. Now, this one right here, I'm going to double-click. I'm going to stop. I'm going to put up the red caution tape around this one. This is the number one misused exemption in all of the exemptions. When people see the word administrative, they think any administrative employee could classify as exempt from overtime and from minimum wage. And so what's happened over the years, like I said, it's $43,000— excuse me, $35,568 today, getting ready to go up to $43,000 $88,888 on July 1st, 2024. Well, a lot of people might classify for that salary basis that work at your front desk or work in reception or work as an administrative assistant. So you might think, oh, they're administrative in nature, they make over that salary amount, I'll just make them salary exempt and work them 50 hours a week and pray for the best. Well, you know what those people are starting to do? They're starting to do the math and realize if I work 50, 60 hours a week for $40,000 a year, that's a pretty low hourly rate, probably dangerously close to minimum wage. Let me see if I actually qualify as exempt. And this is what I tell all of my clients is you're much less likely to get a DOL audit checking out your exemption status on all your employees. You're much more likely to have a disgruntled person who's been misclassified reach out and try to dispute whether or not their classification is accurate.. And that happens a lot with this administrative exemption. And when you see some of those large-scale company cases like we highlighted earlier, oftentimes that's a group of employees getting together and saying, hey, we should be getting paid overtime. We're working a lot of hours and we are misclassified. Now here is the key sentence in the administrative exemption that you have got to make sure is satisfied for your administrative teammates that you are trying to make exempt. Or classify as exempt is the work includes the exercise of discretion and independent judgment with respect to matters of significance. With respect to matters of significance. Now, that is important because it is going to be your word versus that employee's word on whether or not this occurs. If you don't have documented proof that they are free to exercise discretion and independent judgment, with respect to matters of significance. So make sure that this is a no-brainer. They do this. This is, again, this is typically more of a manager, supervisor, company administrator that's going to have this, not somebody that sits in an administrative type of role. Very important to note. All right, next up, the third exemption is the professional exemption. You have both two sides of this. Again, it's got to make sure it's got to satisfy the salary test. And on the duty side, we've got both learn and creative. And some of the people that might qualify for this are accountants, nurses, engineers on the learn side. On the creative side, you might have singers, graphic designers, folks like that. But when I think about the learn professional, people that come in with certifications, people that come in with knowledge that they had to gain through an institution of learning, you know, that accountant, that nurse, that engineer, they're gonna qualify under that learn professional. They should come in, they should be an expert in that thing. They should not be learning that thing at your organization. And on the creative professional, you know, consists of performance of work requiring invention, imagination, originality, or talent in a recognized field or artistic or creative capacity. So, you know, the creative ones tend to be a little bit more obvious, right? If I'm hiring, you know, where it might get a little bit less obvious is if, again, I'm bringing in a graphic designer, but I'm not training them.— or excuse me, but I'm having to train them, then it might be working more into that gray area depending on what their level of expertise is coming in the door. But most likely these folks, you're not going to be able to hire them in your market for less than that salary threshold anyhow. So it should be potentially a moot point. But now it's just a matter of whether or not you're going to be on the hook to pay them overtime should they work more than 40 hours per week. All right. Let's look at computer-related. This is your folks, your network database analysts, developers, programmers, engineers. So anybody who's working consistently on the sort of IT development side of things is gonna fall into this bucket. And this $27.63 an hour was one that they put in place for folks that were more part-time and were doing hourly, but they needed to make sure that they hit a certain amount per hour to qualify as a computer-related employee.. And so now this is going to go out the window a little bit with the new salary updates coming through in January 2025. But most folks, again, you're going to struggle to find people for less than that amount anyhow. So this is not one that we get too worked up about, but important to know. Now, here's another one that we do have issues with at times, and that's outside sales. So example being salespeople, contract negotiators, salary basis and salary requirements do not apply for this exemption. But the key here is that they have to regularly be away from the employer's place of business. So this has to be outside sales. Your inside salespeople do not qualify. And even post-COVID, in a world where most of our sales have moved to inside sales, there have still been no updates to this. There have been a lot of talk about updates to it, but there have been no updates. So your inside salespeople are going to have to have a base that is past the salary. Well, I mean, to be fair, they don't qualify as exempt unless you can qualify them under the administrative category. So you either have to be paying them hourly with overtime or they have to qualify under another exemption under here. And so inside sales is one that's under a heavy amount of scrutiny as we look at these exemptions going forward. Then finally, we have highly compensated employees. This, I'm using the numbers here that are going into effect July 1st, 2024, $132,964 going to $151,164 in January. Now that number is currently $107,432. So if by chance this gets turned over by the time you watch this video, then revert back to the original $107,432. You can always Google at the time you're watching this and see what the current amount is or check with ChatGPT. But this is primary duty consists of performing office, non-manual work. So an interesting fun fact about this one is no matter how highly paid manual workers or other blue-collar workers are, they're just not eligible for this exemption. And in reality, only the salary amount has to be the floor of the exemption. So what I mean by that is if our current amount is $35,568 annually, they have to have a base of $35,500, and then the rest of this money can be made on top of that. And they could still qualify as a highly compensated employee, but they have to at least have a base salary commensurate with the salary duties test. All right. So what are some common errors we see? Like I said, the administrative one is number one. And, you know, a lot of managers get manager thrown in their title. And are misclassified. We see people trying to, their employees tell them, oh, I want to, don't worry, I'm opting out of overtime. I'll sign an agreement that says that I'm not, you don't have to pay me overtime. You cannot do that. That is not legal. And then again, another one we see is people just saying, hey, I've always had, you know, my salespeople as exempt even though they're inside salespeople. So I'm not going to make them start punching the clock now. It's just annoying. And, you know, they'll be fine. Well, everything's fine till it's not, right? So let's make sure that we're taking good care of ourselves. We're keeping good records with our employees. And God forbid if you write down anything by hand, I'll come right over there. Don't you, don't you tempt me. I'll come right over there if you're doing hand timekeeping. There's a million different ways to track it online. We've got some great ones. We're one of There's a thousand different ways you could track it online. But so from your perspective, what do you want to do, especially as we sit here in June of 2024? Well, I want to audit the classifications of my current team. I want to make sure it's documented and we have policies in place around what roles qualify as exempt and non-exempt. I want to do a job analysis where it makes sense to determine if what my employees are doing classifies them as exempt. And I want to make sure I've got accurate payroll records and tracking time for my employees. I want to be proactive. I want to get out in front of this thing, particularly as changes are on the horizon, but also just because I don't want to be the one who is waiting until things are already in place before I know what works and what doesn't work. So if you have any questions, you can email me. I'm going to put a link to our 42 free HR templates in the comments. We have our FLSA exempt versus non-exempt checklist you can use. We have recordkeeping guidelines you can use, tons of other free resources. Make sure you go to our website, Guru you'll find tons of free HR information and guidance there. And thank you so much for swinging by. This is HR Simplified.