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.
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:
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:
If any of these red flags hold true at an organization, the company may be violating the FLSA.
The consequences of misclassifying workers range from monetary penalties to jail time and can add up quickly. The following are penalties related to misclassification:
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.
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.
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