When you run a small business, it’s important to be aware of the state and federal laws related to employees’ wages and benefits. One particularly important issue is understanding which of your employees are entitled to overtime pay.
The U.S. Department of Labor sets rules and regulations detailing the employees who are exempt or nonexempt from overtime pay under the Fair Labor Standards Act. Violating these rules can lead to serious penalties and require you to provide back-pay to the affected employees.
Exempt versus nonexempt employees
The FLSA mandates that all nonexempt employees be paid at least minimum wage and receive overtime pay equaling one-and-a-half times their regular rate of pay for all hours worked in excess of 40 per week. Although the federal minimum wage is $7.25 per hour, state minimum wages differ, and you must pay whichever rate is higher.
Most employees earning an hourly wage are nonexempt. “Blue collar” workers—or those who provide manual labor such as construction workers—and first responders such as police officers and firefighters are also nonexempt.
The FLSA excludes certain types of workers, such as outside sales employees, teachers and airline employees, along with those employees earning above a certain salary. These employees are labeled as exempt.
Determining exemption status
To determine if your employees are exempt from overtime, you can conduct a few simple tests based on their earnings and job duties. Most exempt employees meet the following requirements:
- They get paid on a salary basis
- They earn a minimum salary of $23,660 annually (or $455 per week)
- They perform specific, exempt, “white collar” job duties
The FLSA excludes employees who perform particularly high-level job duties within three main categories: executive, administrative and professional. There are also specific regulations in regard to computer and outside sales employees.
Executive employees are considered exempt if they perform the following duties:
- Have the primary responsibility of management
- Supervise two or more employees
- Have the ability to hire, terminate or promote other employees
Administrative employees typically perform duties that assist the management or operations of the business, such as human resources or accounting staff. To be considered exempt, they must:
- Perform non-manual work directly related to business operations
- Exercise independent judgement in regard to matters of significance
Professional employees perform work that requires advanced training or education, including creative professions like writers and musicians. To be considered exempt, they must:
- Perform work that requires advanced knowledge and specialized education OR
- Perform work that requires invention, imagination, originality or talent
Properly classifying your employees
It’s absolutely critical that you properly classify each of your employees as exempt or nonexempt according to the regulations outlined in the FLSA. Additionally, you should always keep records of hours worked and how much you pay all workers to ensure they are making more than the required minimum wage. Employees who are nonexempt, but are not offered overtime wages, may file FLSA overtime claims with the Labor Department.
By keeping careful records and taking the time to properly classify your employees, your business will be safe from the penalties and complications that arise when a violation has taken place.