FLSA Classification is an important element of hiring and managing employees compliantly, and will dictate your requirements as an employer and whether you need to pay over time.
The Fair Labor Standards Act (FLSA) is a U.S. law that is intended to protect workers against certain unfair pay practices. The problem is that it’s not always simple to determine your employee’s FLSA status, so let’s break it down.
This article is part of our guide on Assembly Bill 5 (AB5).
What is FLSA classification, and where did it come from?
FLSA stands for Fair Labor Standards Act, and the requirements have actually been around since 1938. The FLSA has gone through some changes since then, but its main purpose is to ensure that employees get paid fairly for their work, whether that’s setting the minimum wage at a federal level, or establishing the 40-hour workweek.
If your employees are covered by FLSA, and they are non-exempt, and they will be entitled to overtime pay. This is time and a half of their regular pay for every hour they worked over the standard 40-hour working week in a seven-day period. (There is no requirement for overtime worked on holidays or weekends unless it increases the hours of work past the 40-hour/week limit.)
In order to determine if you employees are covered by the FLSA is the six-factor “economic realities” test, which, as its name suggests, looks at the economic realities of the arrangement to determine whether an individual is in reality subject to the direction and control of the employer or in business for herself.
The FLSA classification test resembles to the Borello employee classification test as they both classify workers based on the control of the employer over the worker.
Which kinds of employees are covered by the FLSA?
Your first question should be, “are my workers governed by the FLSA in the first place?”
If they are employees, (not freelancers or independent contractors) the answer will usually be a resounding yes. However, there are a few categories of workers who don’t need to be considered for FLSA classification at all.
Usually, these excluded workers are covered by another federal labor law, for example truck drivers are covered by the Motor Carriers Act, and railroad employees are covered by the Railway Labor Act.
The FLSA also does not apply if your business has just one employee, or if the business has an annual revenue of under $500,000 and only works in a single state. (Interesting fact! Working across multiple states can be as simple as sending emails or making phone calls outside of your home state, something it’s pretty tough to avoid nowadays.)
Other categories are specifically excluded, such as employees who work at a movie theatre or cinema, newspaper delivery workers, and ad-hoc babysitters.
My employees are covered! Does that mean I have to pay overtime?
Not so fast! Your next step is to determine whether your employees are exempt or nonexempt.
If they are exempt, then overtime rules do not apply to them. There are three steps to FLSA classification, and it’s important to consider them all when you take on a new hire. For example, your employee might be assumed nonexempt under the salary threshold, but in reality – the work they perform changes their classification.
1. How is my employee paid?
If your employee has a set salary which they receive regardless of the work that they perform or the hours that they work – they are usually exempt, while workers paid hourly are usually nonexempt.
2. How much is my employee paid?
Since 2020, the general salary threshold for employees to be considered as exempt from FLSA overtime has been raised to $35,568 annually, or $684 per week. If you’re paying employees less than that amount, they are likely to be nonexempt. On the other side of the scale, if your employee is paid in total (including non-salary) more than $107,432 each year – under the “highly-compensated employees” rule, they are certainly exempt from FLSA classification rules. Not sure how that could happen? Think about employees such as real-estate agents who might have a low base salary but be paid heavily on commission for sales.
3. What kind of work does my employee do?
So far, if you pay your workers hourly and they earn less than $35,568, they are classified as nonexempt, and you will need to pay overtime.
However, the last consideration is the kind of work that your employees perform. Certain job duties will mean they gain the exempt status.
This doesn’t mean their job title. This is specifically about the work that they do, and will usually fall into three categories, administrative, professional and executive. Let’s think about three hypothetical employees who would be exempt, with the relevant criteria called out for each.
- Administrative: Aisha is working hourly as an administrative assistant. Her salary falls under the threshold for FLSA classification as exempt. However, her primary duties involve office work that directly relates to business operations, such as handling front-desk operations, and she’s given a lot of freedom and discretion on how to perform her duties, such as what tasks should take priority. While Aisha doesn’t get involved in sales itself, she supports other employees in keeping business running as usual. Aisha cannot claim overtime, as she falls under administrative exemption.
- Professional: Alice is in an entry level position at a law firm, earning around $25,000/year. She’s newly graduated from a law degree, and has completed a course where she has been given specialized instruction, leaving education with advanced knowledge in law. In her role at the firm, she needs to display consistent judgement and discretion, and is given a job requirement of making her own deductions based on analysis and interpretation. Alice is what is called a “learned expert”, and would therefore be exempt from overtime pay. The same would be true in medicine, accountancy, or other skilled trades.
- Executive: John earns $30,000 as a consultant, and charges an hourly rate for his bespoke services. His role involves supervising two or more employees on a regular basis, and he would certainly consider people management to be one of the main parts of the role. As an expert in his field, he is involved in hiring and firing processes of other members of staff. As an executive role, John would be fully exempt, and would not qualify for overtime.
What happens if I don’t manage FLSA classification accurately?
The Department of Labor’s Wage and Hour Division enforces the FLSA, and is authorized to collect back-wages for two years for an unintentional misclassification, and 3 years for a wilful violation.
Your company could end up liable for a $1,000 civil money penalty for each employee that is misclassified, and if you’re found to be breaking the laws of the FLSA on purpose, this could lead to a $10,000 fine and even imprisonment for a repeat offence. The Wage and Hour division is great at their job, with more than $1.4 billion recovered in back wages over the past five years.