In the dynamic landscape of labor regulations, maintaining compliance with the Fair Labor Standards Act (FLSA) is paramount for employers. One area where I consistently see clients stumble is in the classification of employees as salaried exempt when it comes to overtime exemptions. While classifying employees under one of the several exemptions can offer flexibility and autonomy for both employers and employees, failure to understand the guidelines needed for these exemptions can lead to costly consequences if not managed properly.
One of the most prevalent errors employers make when misclassifying employees as exempt is failing to pay them at the minimum salary threshold required by the FLSA. Previously set at $684 per week (or $35,568 annually), this threshold is set to increase to $844 per week ($43,888 annually) as of July 1st, 2024. Failure to meet this "Salary Basis Test" alone can result in misclassification, leaving employers open to the risk of lawsuits or fines in fees should they be subject to a payroll audit.
The second most common mistake is assuming that paying an employee a salary automatically exempts them from overtime eligibility. Put simply, all exempt employees are salaried, but not all salaried employees are exempt. It is crucial to understand that salary alone does not determine exempt status. Instead, employers must evaluate job duties and ensure they align with the FLSA's requirements for exemption.
The consequences of misclassifying employees as salaried exempt can be severe, ranging from financial penalties to reputational damage. Employers found to be in violation of FLSA regulations may face back pay obligations for unpaid overtime, liquidated damages, and legal fees. Additionally, non-compliance can lead to costly payroll audits by the Department of Labor (DOL) or state entities, such as the LWC in Louisiana, placing a significant strain on resources and time.
Another common misclassification issue lies in the classification of independent contractors. It is important for employers to understand the differences between a 1099 worker and a W2 employee. Key considerations include factors such as whether the employee sets their own hours and rates, whether they work at a specific location/office, and whether they utilize their own equipment and tools. Employers must carefully evaluate the nature of the working relationship and apply the appropriate classification criteria outlined by the Internal Revenue Service (IRS) and Department of Labor (DOL). By conducting thorough assessments and seeking legal guidance when necessary, employers can ensure compliance with FLSA regulations and mitigate the risks of potential lawsuits.
Additionally, seeking guidance from HR professionals either in-house or via consulting, as well as legal experts, can offer valuable insights and support in navigating complex compliance issues. By investing in compliance efforts upfront, employers can avoid costly penalties, protect their reputation, and foster a culture of fairness and transparency in the workplace.
In conclusion, maintaining FLSA compliance when classifying salaried employees and 1099 workers is essential for employers to avoid costly legal repercussions and uphold ethical business practices. By avoiding common misclassification errors, understanding the potential consequences of non-compliance, and implementing proactive compliance measures, employers can navigate the complexities of FLSA regulations with confidence and integrity.
Alex Vial
HR Advisor, HR Services
Alex obtained his Bachelor of Science in Business Administration, with a focus in Human Resource Management from The University of New Orleans. He has worked in a variety of industries, including not-for-profit organizations, Telecommunications/IT, and Solar/Renewables. In his career, he has focused on human resource and legal compliance for companies operating in multiple states, Professional Development and employee trainings, employee engagement, onboarding, offboarding, and conflict resolution. Alex believes the best part of HR is helping companies create pro-employee cultures, increasing retention and reducing recruiting costs. Alex loves tackling new challenges on behalf of his customers at empact and Crescent.
His personal philosophy is “The obstacle in the path becomes the path. Within every obstacle is an opportunity to improve our condition.” – Ryan Holiday