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Exempt Employees and the Number 1 Employment Law Small Business Owners Break

Man eating noodles in a restaurant
Do you know the most common law small business owners break? According to an infographic from the California Chamber of Commerce, it's misclassifying exempt employees. This can be a problem since classifying all employees as exempt, whether they are or not, can get you into trouble for breaking the rules that govern overtime, meal breaks and more.

Here's what you need to know about who's exempt, how to comply and why it matters.

What's the Difference?

Employees are classified one of two ways: Exempt or nonexempt.

Classification is determined by the Department of Labor's (DOL) Fair Labor Standards Act (FLSA). The FLSA also sets rules such as minimum wage, overtime pay, meal breaks and employer recordkeeping requirements for those employees.

Here's how they differ:

1. Exempt Employees

An exempt employee is an individual not covered by the rules of the FLSA, meaning they are "exempt" from or not entitled to overtime pay or a minimum wage. That said, employers can still opt to pay an exempt employee overtime if they worked more than a standard 40-hour work week.

To be exempt, employees must also hold executive, administrative, or professional roles and meet minimum salary and pay levels, among other requirements. (This cheat sheet from the DOL can help you decide if your employees qualify as exempt.).

2. Nonexempt Employees

A nonexempt employee is covered by FLSA rules and entitled to a minimum wage and overtime pay. Nonexempt employees must be paid overtime for each extra hour they work above 40 hours in a given week. The overtime pay rate is time and a half. It's important to keep records of every hour nonexempt employees work so that you can pay the right overtime.

Federal law isn't the only consideration for wage and overtime. Each state has its own laws. Check with your state's labor department for more information.

What About Meal Breaks?

Although the DOL and FLSA don't require that you offer meal or coffee breaks, fair wage and hour laws still apply. Here's what you need to know:
  • Employers who offer short breaks (usually 20 minutes or less) must pay nonexempt employees for that time and count that time towards eligibility for overtime payment.
  • Employers who offer meal breaks (typically lasting more than 30 minutes) aren't required to compensate their workers (the DOL doesn't consider the time to be work time). Again, you can do so at your discretion.
  • If a nonexempt employee does any kind of work during the meal break, like checking email, you must pay them for the break.
Again, check the law in your state. Some states impose mandatory breaks for employees in certain industries after a number of hours has been worked. To avoid any non-compliance issues, be clear with employees about your break policy.

When Misclassification Leads to Trouble

The rules can be confusing and time-consuming, so many employers get caught out. The common mistakes employers make include:

  • Misclassifying employees as exempt when they are nonexempt and subject to overtime pay. Paying an employee a salary, instead of an hourly wage, will not exempt you from overtime laws. There are many factors that go into classifying a worker as an exempt employee, including the duties they undertake, and more.
  • Fancy titles won't exempt your employees. Simply adding the term "executive" or "administrator" to an employee's job title isn't going to exempt them from overtime laws. The FLSA criteria for exempt and nonexempt has much stricter qualification criteria.
  • Failing to pay nonexempt employees for all hours worked. This includes work time, rest breaks, travel time, on-call time or even checking email while away from the office or workplace.
  • Giving nonexempt employees time off in exchange for extra hours worked. Think you can offer your employees Friday afternoon off in exchange for working a few extra hours this week? Think again. You may have committed wage theft by not paying overtime (again the law varies by state on this one).
  • Classifying sales reps or commission-based employees as exempt. The FLSA will only allow you to classify a salesperson as exempt if they are regularly engaged in sales work away from the employer's place of business such as selling door-to-door or at the customer's location. Read more about the outside sales employee exemption.
  • Focusing on federal law and ignoring state laws. The FLSA isn't the only law that governs fair wage, overtime and breaks. State laws often legislate a higher minimum wage, require breaks after a certain amount of hours worked and daily overtime.
  • Not tracking hours worked. Time tracking can be a headache but is essential to FLSA compliance. Time sheets need to reflect actual hours worked, including unauthorized time worked (such as during meal breaks or after hours). Take advantage of time tracking apps to help you and your team.

The FLSA is awash with complexity and detail. If you're in any doubt about compliance, check in with an employment law attorney. These fact sheets from the DOL can help too.