In my years of being an independent HR consultant, I have noticed a similar situation appear. I perform an HR audit, where I look at the gaps in terms of compliance, along with HR best practices. What I have found is that one of the most common issues is the misclassification of employees. This entails who is eligible for overtime and how that overtime is determined.
To my surprise, when I would bring it up to a company, they made it sound like it was not an issue for them. They will state how all of their employees are earning wages above the salary threshold and that since everyone is in an office job, it isn’t an issue. What I noticed is that many companies fail to realize that the salary test is just one of the factors in determining whether an employee is exempt or not, as far as the Department is Labor is concerned.
Let’s take a look at what the federal Fair Labor Standards Act requirements are.
To be exempt from overtime, both salary and duties have to be considered. Since 1/1/20, employees earning less than $35,568 are now eligible for overtime. They are now subject to the same requirements as nonexempt employees.
While the salary test got tweaked, the duties test did not. This is a test that has been around for years. In this test, HR needs to look at what an employee’s responsibilities are, including their primary duties.
There are officially seven classes of workers who have the potential for being exempt. Out of these, I have seen two come up the most in my practice: Executive Employees and Administrative Employees.
Employees classified as executives are people who are responsible for two or more workers. These individuals, such as a manager, have the authority to both fire and fire. This seems simple enough to understand, yet we can’t stop there, which is what sometimes companies seem to do.
You also have to look what the duties of an executive are. This means what they are doing day-to-day within a company. For example, let’s say there is a manager who is responsible for three full-time employees, earning a $50K/year salary, and is mostly doing what their nonexempt employees are doing. This is a situation where the duties test indicates they are probably nonexempt and eligible for overtime.
Besides executives, the other class of workers we should take a look at more closely encompasses administrative employees. These are workers who are involved in the general operations of a business. These individuals have to exercise strict discretion and independent judgment. If an employee spends over half of their time coming up with and implementing policies, without needing approval, they may be exempt. This starkly differs from someone who follows and applies well-established policies and procedures, as in the case of nonexempt duties.
As you can see, there is some nuance to correctly classifying employees. Misclassifying employees happens fairly often, so consider whether your company is following the duties test and applying the correct classifications. I encourage you to use the exemption tests that exists, so that you can ensure your company is in compliance with this critical factor regarding employee wages.