Mitigate Risk with an FLSA Audit

December 1^st has come and gone, and like many others, you may be relieved that businesses did not have to comply with the Department of Labor’s Final Rule on FLSA White Collar Exemptions because of the Injunction issued on November 22^nd by a Federal Judge in Texas. However, with this recent injunction, it does not mean your business is in the clear from having to comply with the Final Rule. An appeal has been filed by the Department of Labor (DOL) with the U.S. Circuit Court of Appeals for the Fifth District, and the court has already decided in favor of an expedited review of the appeal.

Many of my clients started the process of auditing the Fair Labor Standards Act (FLSA) status of their employees to see if they met the new white collar exemption salary thresholds, and what steps they needed to take to become compliant by December 1^st. If you have already audited your employee base, you are now ahead of the curve, but you may still have to implement changes to comply with the proposed minimum salary thresholds.

Employee misclassification is one of the most common and most costly mistakes employers make. It takes just one complaint to the DOL from a single employee who thinks they are entitled to overtime pay and have been misclassified as exempt, and your company runs the risk of having to pay up to three years of back wages and overtime.

It is extremely important to remember that while salary is a large part of FLSA overtime exemption status, it is not the only way to deem if an employee should be exempt or non-exempt. Simply giving an employee a raise to meet the new salary limit does not eliminate your risk of a Wage and Hour Audit and hefty financial consequences. Even though the proposed minimum salary thresholds are currently on hold, I advise my clients to move forward with an FLSA audit of their employee classifications.

How to Best Determine if An Employee is Exempt or Non-Exempt

The three important things to consider (or the three tests to perform) when deciding if an employee should be exempt or non-exempt are:

1. Salary Basis Test: Is the employee paid on a salaried basis rather than an hourly basis?
2. Salary Level Test: Are they paid more than the minimum salary threshold? The minimum salary threshold currently is $23,600 annually, or $455 a week. If the Final Rule Injunction is overturned, that minimum will increase to $47,476 annually or $913 weekly.
3. Standard Duties Test: Do the employee’s primary job duties fall into an exempt category for professional, administrative, executive, outside sales, or computer employees?

If you can answer “no” to any of the above tests, then that employee should be non-exempt.

Many companies like the idea of having all employees classified as exempt.  Employees generally view exempt status as being better than non-exempt, and it is easier to administer for payroll purposes. There is high risk associated with that school of thought for employee classification, as it is highly likely that you are non-compliant on at least one employee. FLSA non-compliance is costly to all employers, and more so to government contractors who have to disclose any DOL complaints/audits when bidding on work.

While the injunction is in place, now is the perfect time to review your employee classifications to ensure current compliance with DOL standards, as well as auditing employee salaries to see if they meet the proposed new thresholds. If you find that you are not aligned with the proposed new FLSA regulations, make a plan to ensure you have the ability to become compliant if the injunction is overturned. As I recommend to my clients, have a plan of action to make any necessary changes to be compliant with the Final Rule, BEFORE IT HAPPENS!