Employee Misclassification Red Flags Under the FLSA

The Fair Labor Standards Act (FLSA) provides minimum wage and overtime pay protections to nearly all workers in the United States. Under the FLSA, all employees must be classified as either “exempt” or “nonexempt” from minimum wage and overtime provisions. Misclassification of employees occurs when employers classify nonexempt workers as exempt and fail to provide workers FLSA protections such as overtime. This is a common problem that many employers face. In fact, employee misclassification is one of the most common violations of the FLSA.

Enforcement of the FLSA has been on the rise. In the fiscal year 2022, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) collected more than $213 million in back wages owed to over 152,000 workers. WHD investigations found an average of $1,393 in back wages for each employee.

This article highlights common red flags employers should know that could signal an employee is misclassified. Additionally, it addresses the difference between exempt and nonexempt employees and the legal risks for employers who misclassify employees.

Overview of the FLSA’s White Collar Minimum Wage and Overtime Pay Exemptions

Under the FLSA, covered employers must pay employees at least the federal minimum wage for all hours worked and overtime pay—at a rate of 1.5 times their regular pay rate—for all hours worked over 40 in a workweek. However, the FLSA provides several exemptions from minimum wage and overtime pay requirements. The most common are “white collar” exemptions. These exemptions mainly apply to executive, administrative and professional employees (EAPs), but they also include outside sales personnel and certain computer and highly compensated employees (HCEs).

To qualify for a white collar exemption, an employee must satisfy the following tests:

• Salary basis test—This test ensures the employee is paid a predetermined and fixed salary that is not subject to reduction due to variations in the quality or quantity of work.
• Salary level test—This test confirms that the employee meets a minimum specified amount to qualify for the exemption. The current salary threshold is $684 per week ($35,568 per year) for EAPs and $107,432 per year for HCEs. The current salary threshold took effect on Jan. 1. 2020.
• Duties test—This test requires that the employee’s job duties conform to EAP duties. To satisfy the duties test, an employee’s actual work responsibilities must match the description the FLSA assigns to the exemption.

Common Red Flags

Improperly misclassifying employees as exempt under the FLSA is one of the most serious problems in today’s workplaces. Misclassification denies employees access to critical benefits and protections they are entitled to under the FLSA, such as overtime and minimum wage. Impacts are felt beyond individual employers and monetary issues, as misclassification creates an economic ripple effect and a competitive disadvantage for employers legally compliant with the FLSA.

As the federal government continues to crack down on misclassification and overtime violations, consider the following red flags indicating that an employee may be misclassified according to FLSA rules:

• A salaried employee is automatically classified as exempt. While most exempt employees must be paid a predetermined amount of compensation (e.g., annual salary), FLSA exemptions also require that the employee meet specific job duties tests with a nuanced set of criteria.
• An employee is paid hourly. Exempt employees generally must be paid a minimum wage of $684 per week, except for computer and outside sales employees. States may also have their own requirements.
• A part-time employee is paid less than $684 per week. FLSA laws enforce that all exempt employees—regardless of part-time and full-time—should be paid at least $684 per week.
  An employee primarily performs manual labor. Manual labor is also not a factor, as these types of workers (e.g., engineers, plumbers, electricians and carpenters) may not be classified as exempt under the FLSA.
• A duties test is not performed. Employers should verify an exempt employee’s duties conform to EAP duties to ensure FLSA compliance.
  The job title is used to determine exemption status. To satisfy the duties test, an employee’s actual work responsibilities, not job title, must match the description the FLSA assigns to the exemption.
• All administrative positions qualify for the administrative exemption. Administrative staff typically don’t qualify for the exemption because the duties test requires that the employee’s primary duty involve the exercise of discretion and independent judgment with respect to matters of significance.
• All managers and supervisors qualify for the executive exemption. An employee may qualify for the executive exemption if their primary duty involves managing the business or a customarily recognized department of the business. The duties test will confirm the other exemption criteria, but to qualify, the employee must also regularly direct the work of at least two or more full-time employees and have the authority to make hiring and firing decisions.
• A college degree is used to determine exemption status. Employees are classified as exempt if they meet the FLSA’s duties test. Determination is not based on the employee having a college degree.
• The same deductions are made for exempt and nonexempt employees. Deductions from an exempt employee’s salary are permitted only in a few limited circumstances. For example, an employer shouldn’t make deductions from an exempt employee’s salary because they leave work early for personal reasons, for performance issues or when the organization closes on a holiday. These types of deductions could jeopardize the employee’s exempt status.
• State exemption criteria are not considered. Although it’s critical to comply with FLSA rules, some employers may forget to follow state laws for additional exemptions.

If any of these red flags hold true at an organization, the company may be violating the FLSA.

Misclassification Legal Risks

The consequences of misclassifying workers range from monetary penalties to jail time and can add up quickly. The following are penalties related to misclassification:

• Back pay
• Unpaid overtime
• Liquidated damages
• Attorneys’ fees
• Civil penalties
• Lost benefits
• Interest
• Reputational damage

Penalties can become even more severe if the DOL determines the misclassification was intentional. Misclassification penalties are also determined by several factors, including the number of times a company avoided FLSA requirements.

Conclusion

Misclassification denies employees access to critical benefits and protections. It also creates a competitive disadvantage for employers who comply with the law, resulting in unfair competition. As the misclassification of workers remains a top workplace issue today, employers need to be aware of common red flags that they may be misclassifying employees and violating the FLSA.

Seek legal counsel if you’re unsure about federal or state compliance, or visit the DOL’s website for more information. Contact us for additional FLSA-related resources.