The number of misclassification suits filed within a variety of industries has increased over the years. Despite there being numerous legislations and laws that aim to make compliance less difficult, employee classification continues to be a serious matter that many businesses encounter due to its complex nature. To help you better understand the employee classification landscape, we have put together everything you should know about exempt and nonexempt employees.

How Are Employees Classified Under California Law?

To properly classify each worker, businesses must discern whether a worker must be an employee or could potentially be classified as an independent contractor. If a worker must be or the employer makes the decision to hire the worker as an employee, they must then be further classified as exempt or nonexempt. Under federal law, the classification of exempt and nonexempt employees is determined by state law, as well as the Department of Labor (DOL) and the Fair Labor Standards Act (FLSA). The default classification is non-exempt unless the employee fits into an exemption.  To find out whether an employee can be exempt, employers must carry out an evaluation based on (1) how much money an employee earns; (2) the type of work an employee does; and (3) the employee’s specific responsibilities and job duties. The classification of employees as exempt or nonexempt will affect their eligibility for overtime pay and meal and rest breaks.

Who is an Exempt Employee Under California Law?

Generally, under California law, for an employee to be classified as exempt, they must:

  1. Be paid at least double the state’s minimum wage as a full-time employee who works 40 hours a week;
  2. Perform specific job duties (professional, clerical, administrative, or executive duties); and
  3. Customarily and regularly exercise discretion and independent judgment in their work.

When determining if an employee’s duties meet the requirements for an exemption, remember that an employee who does not perform exempt duties on a regular basis cannot be classified as exempt for a temporary assignment unless they meet the following criteria:

  1. Works the exempt job for at least one month; and
  2. Meets the duties and salary tests.

Exempt employees are salaried and not eligible for overtime pay even if they work more than 40 hours a week. Additionally, these employees are exempt from minimum wage and rest break requirements. Employers will find that nearly all exempt employees have management-level positions, such as executive positions. However, there are other positions that can also classify as exempt, like outside sales, physicians, commissioned employees, private school teachers, truck drivers, and union employees. Despite this, it is important to keep in mind that job titles do not determine an employee’s classifications status. Even if an employee’s job title is similar to those listed above, it is crucial to check whether his/her duties meet the requirements to become exempt.

Who is a Nonexempt Employee Under California Law?

Nonexempt employees are protected by federal and state labor laws and are paid minimum wage. As such, nonexempt employees are entitled to receive overtime pay if they work more than 8 hours in a day or more than 40 hours per week. When nonexempt employees work over 40 hours, they should be paid at 1.5x the regular pay rate. Nonexempt employees are also subject to meal and rest break laws and entitled to their respective state’s meal and rest break premiums. Employers who fail to pay overtime or allot a meal or rest break for their nonexempt employees may be hit with a myriad of penalties and fines.

What is the Potential Liability in a Misclassification Claim?

As mentioned earlier, employee classification is determined by state law, the DOL, and FLSA. Employers who do not accurately classify their employees become subject to multiple liabilities, misclassification lawsuits, wage claims, and IRS penalties that can result in severe fines.

When employers misclassify their workers as exempt, they often fail to pay overtime wages and provide the required breaks that nonexempt employees are entitled to. If hit with lawsuits or wage claims, employers may be subject to back-pay for the unpaid overtime wages that the employee earned.  In addition, employees who successfully prosecute these claims are entitled to payment of their attorney fees.  These fees can add up quickly, which can lead to the employer paying bigger amounts than necessary. There are also penalties calculated per pay period when California’s laws are violated. Additionally, if an employer wrongly classifies their employee to be exempt and does not give them a rest break, the employee is entitled to one extra hour of pay at their regular hourly rate. If more than one rest break is missed, the employer has to pay one extra hour of pay per workday for every missed requirement.

How Can Employers Avoid Misclassifying Employees?

To avoid the fines and penalties that arise from misclassification suits, employers – no matter what business or industry they are in – must take the appropriate measures to ensure that all their employees are properly classified as exempt or nonexempt. If, by chance, your business is not located in the State of California, it is important for you to remember that wage and hour regulations can vary depending on which state you reside in. If not properly checked, it can make employee classification even more complex for nonprofits and businesses, especially those that have locations in multiple states. Employers must make sure to check their local state laws regarding wage and hour regulations to stay compliant.

Key Takeaways

The topic of employee classification may not be new but it can be quite complicated and overwhelming for many employers and businesses, especially those who are just starting out. Now is the best time for employers to reevaluate and reexamine how they classify their employees to make sure they are staying up to date with all the regulations and policy changes. It is a good idea for businesses to put forth detailed policies and guidelines for employee classification to properly abide by the law and stay compliant. If you need assistance navigating the exempt and nonexempt employee classification landscape, please do not hesitate to contact Hackler Flynn & Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.

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