Exempt or Non-Exempt? Employee Classifications: Are You Ready for an Audit?

Written by Kay Troupe, Director of HR Support Services, Payroll & Benefit Solutions

What happens if you receive a letter from the Department of Labor (DOL) stating that you are being audited or if an investigator simply knocks on your door one day with no warning?  Will you be prepared and in compliance with the Fair Labor Standards Act (FLSA)?

The FLSA is the federal law that governs the payment of minimum wages and overtime hours.  As the Department of Labor continues its “Strategic Enforcement to Maximize Impact,” employers can expect to see an increase in Wage and Hour Division (WHD) audits that could cause havoc to their businesses. Whether the audit was agency-initiated or initiated because an employee or former employee filed a complaint against the company, the employer can expect that the agency will review all records and interview employees. Therefore, it is essential for employers to ensure that their employees are classified and paid correctly.  Failure of compliance with the FLSA can result in damaging claims and significant liability.

The WHD of the DOL appears to be placing a considerable amount of focus on the exempt status. To ensure that your business is not in violation, you must properly classify your employees as exempt or non-exempt.  To qualify as exempt status, an employee’s position must meet not only the salary requirements, but must also meet certain criteria regarding their job duties.  Many employers seem to think that if they pay an employee on a salary basis, then they are exempt from overtime.  This is not the case.  While employers may pay employees on a salary basis, they must determine if the employee is a non-exempt salaried employee or an exempt salaried employee.  To establish if the employee’s position is a salaried non-exempt position, the duties of the employee’s position must meet the exempt duties test.  If the duties do not qualify for an exemption, the employee may be paid a salary but must also be paid overtime for all hours worked over 40 in a workweek.

A local company, that pays their employees on a salary basis, learned this lesson the hard way when it was recently audited by the DOL.  Because the employer had classified its employees as salaried, it had not recorded time for the employees and had not paid overtime to those employees. During the audit, rather than reviewing job duties outlined in the job descriptions, the investigator interviewed employees and questioned them about their responsibilities, authority, decision-making, judgment, and discretion duties used in their positions. As a result of this audit, the DOL classified all employees with the exception of five (5) as non-exempt employees and the employer had to pay thousands of dollars in back wages to those employees. As no time records had been kept, the employer had to negotiate with the DOL regarding the amount of payment.

If you do not think the WHD is serious about its strategic enforcement, review the following statistics regarding investigations and back wages published on the Wage and Hour Divisions statistic webpage:

• Nearly $1.6 billion in back wages recovered by WHD since 2009.
• In the fiscal year 2015, more than 42% of the investigations were agency-initiated, up from 35% just 6 years ago.
• In fiscal year 2015, WHD found over $246 million in back wages for more than 240,000 workers.
• WHD found violations in 79% of agency-initiated investigations, which is a 21% increase in fiscal year 2015 over fiscal year 2009.
• WHD found an average of more than $8,900 in back wages in agency-initiated investigations which is a 21% increase in fiscal year 2015 over fiscal year 2009.
• In fiscal year 2015, WHD found $74.3 million in low wage industries for 102,000 workers which is more than a 29% increase in back wages and more than a 32% increase in the number of workers from 2008 statistics.
• In fiscal year 2015, WHD collected an average of more than $676,000 in back wages for workers every day and found, on average, more than $1,000 due for each employee in back wages

As you review your employees’ classifications, keep in mind that the DOL has proposed regulations to drastically raise the minimum salary requirement for employees to qualify as exempt status.  It is possible that the threshold could be raised from the current $455 a week ($23,660 annually) to as high as $50,440 annually.

In addition to the DOL auditing the classification of exempt status, the Department is also auditing companies for employees incorrectly classified as independent contractors.  It is also projected that employers will see an increase in the number of DOL audits related to employee benefit plans because of the new requirements of the Affordable Care Act.

For more information regarding the requirement for the exempt status, please refer to the DOL Fact Sheet #17A or contact Payroll & Benefit Solutions to discuss your your own unique situation at (205) 271-5400.