Employers make some common—and potentially costly—misclassification mistakes. There are dangers in misclassifying an employee as exempt from overtime when they should actually be nonexempt. And there are similarly costly dangers in misclassifying an independent contractor as an exempt employee.
Here, we review the 10 most common mistakes employers make in these areas, as presented by an expert.
- Deducting from an exempt employee’s pay. Exempt employees must be paid a guaranteed base salary, which cannot fluctuate week to week and cannot be reduced because of late arrival of early departure. It also cannot be deducted because of the quality of the work. Deducting for these types of things could jeopardize the exempt employee status. You can, however, reduce their future salary (i.e. give them a pay cut) as long as it stays above the minimum to meet the exemption.
- Feeling helpless to reward exempt employees with additional compensation. Employers need not fear. As long as exempt employees are paid a guaranteed base salary, they can also receive additional compensation. Examples include weekly bonuses based on productivity, sales, and work quality. Weekly bonuses can even be based on long hours – almost like an overtime payment.
- Paying an exempt employee for the entire week if she performs any work in the workweek. It is a common misconception to assume that an employer must pay an exempt employee a full week for any work performed that week. In reality, there are differing situations an employer may face. In some situations, the statement is true and in others it is false. For example:
- Scenario one is when there is a lack of work to be done. If the exempt employee is ready, willing and able to work for a week, an employer cannot make deductions from the exempt employee’s weekly pay when no work is available. This situation aligns with the rule: the exempt employee must be paid.
- Scenario two involves employee absences for personal reasons. If an exempt employee does not come to work for a full day for personal reasons, his pay can be deducted for that day. This is only valid for full days taken off, not partial days. Some employers choose to use paid time off or paid sick leave policies to cover these absences instead of deducting from pay, but a pay deduction would be allowed.
- Always treating salaried employees as exempt. "Salaried employees may be non-exempt; salary is only half of the equation. Even a salaried employee must meet the duties test." Daniel B. Chammas warned in a recent BLR webinar. "Salaried employees who are not exempt must get paid overtime." Be very careful of assuming an employee is exempt based solely on being salaried.
- Always treating supervisors as exempt. Supervisors may also be non-exempt, depending on their primary duties. For example, shift supervisors who work the cash register all day may not be exempt. The key to evaluating the exempt status of a supervisor is determining how much "hourly work" they do. If the supervisor is more like a lead foreman who works side-by-side his employees they are likely not exempt. A manager who actually runs the department would be more likely to be an exempt employee.
- Evaluating possible exemptions by job descriptions and job titles. A job title and job description are two of the many factors that go into whether or not an employee is exempt. However, assessing their actual duties is far more important. Regardless of the title and regardless of the job description, an employee will not be exempt if the employer asks him to engage primarily in non-exempt work.
- Believing that exempt employees must be allowed to keep their own schedules and ignoring their day-to-day activities. To the contrary, employers are able to regulate and track what hours an exempt employee must keep. An employer is only prohibited from docking pay because of a discrepancy in hours. Instead, employers may discipline exempt employees for arriving late or leaving early. Employers should also keep a close eye on an exempt employee’s actual duties and make sure that exempt employees are doing what they are supposed to.
- Equating highly-educated jobs with exempt jobs. An employee who is highly educated may not be exempt, depending on their job duties. Even a job that requires the use and application of highly complex and specialized skills may not be exempt. If the employee merely follows prescribed or formulaic procedures, then the job is not exempt. Independent judgment and discretion is key.
- Confusing exempt employees with independent contractors. Just because a worker performs services for a business "independently," does not mean he is an independent contractor. Many exempt employees also work very independently. Lack of control is consistent with exempt employees. In other words, lack of control by the employer does not necessarily mean the position can be classified as an independent contractor. There are many other factors that must be taken into account before making this call, and the fact that the employee has a lot of independence is not the sole determinant.
- Classifying individuals as independent contractors when they perform the same work as regular employees. There is an easy test to see if employer has misclassified independent contractors: determine if the business also has employees who perform the same services. If yes, this is a red flag for the IRS because this indicates that the individual is an integral part of a company’s business. Independent contractors usually bring something to the table that the company does not do.
For more information on the proper classification of exempt employees, order the webinar recording of "Exempt vs. Nonexempt: How to Find and Fix Misclassification Mistakes." To register for a future webinar, visit http://catalog.blr.com/audio.
Daniel B. Chammas, Esq., is a partner in the labor and employment practice group in Venable’s Los Angeles office. He has extensive experience defending employers in wage and hour class actions and other employment disputes, from actions for unpaid wages and sexual harassment claims to wrongful termination litigation and racial discrimination complaints.