According to the Fair Labor Standards Act (FLSA), there are three different categories workers; non-exempt employees, exempt employees, and independent contractors. Employers need to know which category each person working for them is. A misclassification of a worker may lead to monetary consequences in the form of fines or penalties.
The FLSA is enforced by the Wage and Hour Division of the Department of Labor (DOL), whose duty is to recover back wages and assess penalties. These penalties can be up to $1,000 per violation.
In fact, in the 2021 fiscal year, the DOL recovered over $230 million in total back wages due to the misclassification of workers. Even still, it continues to be one of the most common payroll mistakes employers tend to make.
The following sections will help employers determine the exemption status of employees, meaning which employees are exempt from minimum wage and overtime pay under the FLSA rules, and regulations.
Any employee who is classified as exempt is not subject to FLSA overtime and minimum wage requirements.
While there are several categories of exempt workers, one thing the majority of them have in common is they must pass the Salary Level Test as part of their exemption requirements.
In order to pass the Salary Level Test, an employee must be paid on a salary basis of no less than the standard salary level:
Date | Standard Salary Level | Compensation Threshold for Highly Compensated Employees |
Before July 1st, 2024 | $684 per week | $107,432 / year (including at least $684 / week on salary or fee basis) |
July 1st, 2024 | $844 per week | $132,964 / year (including at least $844 / week on salary or fee basis) |
January 1st, 2025 | $1,128 per week | $151,164 / year (including at least $1,128 / week on salary or fee basis) |
July 1st, 2027 | TBD (Based on up-to-date wage data to determine new salary levels). | TBD (Based on up-to-date wage data to determine new salary levels). |
Employers may use nondiscretionary bonuses and incentive payments (such as commissions) paid on an annual or frequent basis, to satisfy up to 10% of the salary requirement.
Any employee who passes this test is one step closer to being classified as exempt. After passing the Salary Level Test, an employee must also meet the requirements of one of the next six categories.
In order to qualify for an executive exemption, an employee must pass the Salary Level Test as well as:
If an employee meets the previous three requirements as well as the Salary Level Test, then they are considered an Executive Exempt Employee and are not subject to FLSA minimum wage and overtime law.
In order to qualify for an administrative exemption, an employee must pass the Salary Level Test as well as:
If an employee meets the previous two requirements as well as the Salary Level Test, then they are considered an Administrative Exempt Employee and are not subject to FLSA minimum wage and overtime law.
There are two categories of professional exempt employees according to the FLSA, each with its own requirements.
In order to qualify for a learned professional exemption, an employee must pass the Salary Level Test as well as:
If an employee meets the previous requirement as well as the Salary Level Test, then they are considered a Learned Professional Exempt Employee and are not subject to FLSA minimum wage and overtime law.
In order to qualify for a creative professional exemption, an employee must pass the Salary Level Test as well as:
If an employee meets the previous requirement as well as the Salary Level Test, then they are considered a Creative Professional Exempt Employee and are not subject to FLSA minimum wage and overtime law.
In order to qualify for a computer employee exemption an employee must first either pass the Salary Level Test or be compensated at $27.63 per hour on an hourly basis, as well as:
If an employee meets the previous requirement as well as the Salary Level Test or specific wage requirement, then they are considered a Computer Exempt Employee and are not subject to FLSA minimum wage and overtime law.
In order to qualify for an outside sales exemption an employee must:
If an employee meets the previous two requirements then they are considered an Outside Sales Exempt Employee and are not subject to FLSA minimum wage and overtime law.
In order to qualify for a highly compensated employee exemption an employee must:
Date | Compensation Threshold for Highly Compensated Employees |
Before July 1st, 2024 | $107,432 / year (including at least $684 / week on salary or fee basis) |
July 1st, 2024 | $132,964 / year (including at least $844 / week on salary or fee basis) |
January 1st, 2025 | $151,164 / year (including at least $1,128 / week on salary or fee basis) |
July 1st, 2027 | TBD (Based on up-to-date wage data to determine new salary levels). |
If an employee meets the previous four requirements, then they are considered a Highly Compensated Exempt Employee and are not subject to FLSA minimum wage and overtime law.
If an employee fails to qualify for any of the above exemptions, then they are considered to be a non-exempt employee. Non-exempt employees are workers that are paid an hourly rate and are subject to the minimum wage and overtime requirements set by the FLSA.
There are also some specific professions that exemptions may not apply for, these include:
In addition to having to determine whether an employee is exempt or non-exempt, employers also need to understand the distinction between an employee and an independent contractor.
Generally, employers must withhold and pay income taxes, social security taxes, medicare taxes, and unemployment tax on wages paid to an employee. Typically, none of the previously mentioned taxes are withheld or paid on payments to independent contractors.
In short, understanding this type of classification can make a big financial difference for employers and employees alike.
Determining whether or not a worker is an independent contractor or not mainly revolves around the relationship between the employer and the worker. The IRS has a list of rules that pertain to determining that relationship.
Rescinding the Independent Contractor Status Under the Fair Labor Standards Act rule (2021 IC Rule), the U.S. Department of Labor has published a final rule. To determine whether workers are employees or independent contractors under the FLSA, the final rule takes into account six factors equally to determine if a worker is in business for themselves as a matter of economic reality.
The following six factors to be considered are:
If necessary, additional factors may also be considered if they are deemed relevant to the status of economic dependence of a worker to their employer.
Employers must weigh all factors and rules when making this determination, as there is no set number of factors that makes an employee an independent contractor.
It is important that employers look at the entire relationship and consider the extent to which they can control and direct the worker. Note, employers should document all factors and common laws used to determine the relationship.
Alternatively, any employer who can’t determine the relationship using these factors and laws can submit form SS-8 to the IRS, who will then review the factors and circumstances and make an official determination on the behalf of the employer or worker.
It is crucial that employers understand the distinction between different types of employees so that they can avoid any unnecessary payroll mistakes, fines, lawsuits, or damages.
For any employers struggling with employee classification, an HR and payroll company may be of some assistance. For more information or to find a provider, contact us today.