Be honest, do you know the difference between exempt and non-exempt employees?
While many people have heard these terms and may even be able to loosely define them, most don’t understand the nuances associated with each classification.
If you aren’t diligent in classifying employees under their rightful categories, you’re opening your business up to hefty liabilities.
Read on to discover the difference between exempt and non-exempt employees, common misclassification mistakes, and the potential penalties for doing so!
By doing a little research upfront, you can avoid a big headache later on.
Exempt Versus Non-exempt Employees
At their core, the terms “exempt” and “non-exempt” are used to describe whether employees are entitled to overtime pay.
Many people assume that only hourly workers qualify for overtime, while salaried employees do not. But, this is not the case.
In reality, an employee may be considered “exempt” if they are salaried, make a certain amount each year, and perform job duties that are listed under “exempt status”.
These job duties can be anything from computer-related duties, to administrative tasks, or business management.
For a full list of job descriptions that would qualify an employee as exempt, be sure to read the Fair Standards and Labor Act.
Non-exempt employees would be employees who are paid hourly and do not perform exempt duties as defined by FLSA. Those working in interstate commerce are also non-exempt.
The Importance of Classification
Misclassifying non-exempt employees is very common among employers. This can be accidental or purposeful.
They might name an employee as a contractor instead of as an employee, or they may assume an employee is exempt because they are salaried.
Sometimes misclassifications are mistakes, but they can also be purposeful. Some employers do so to avoid paying workers overtime.
Not only is this unethical, but it also opens up the employer to lawsuits and IRS audits.
It’s crucial that employees are correctly classified during the employee onboarding process.
Using a payroll service can help small businesses avoid costly mistakes.
Potential Penalties
If you misclassify an employee and they sue, you may owe them more than their backdated overtime pay.
Not only may you owe them their overtime pay, but you may also have to pay extra damages as well.
This means that you could end up paying double the amount of overtime pay.
Also, you may have to pay fees to the court if they suspect that the misclassification was purposeful. Incarceration or other criminal proceedings are possible as well.
Don’t Risk It
Employment law is a complicated area that many new business owners are unfamiliar with.
Instead of making guesses on who is a non-exempt employee, it’s best to do your due diligence or outsource your payroll requirements to professionals. Although it may seem cheaper to do your payroll yourself, you may end up paying for any mistakes made.
If you’re a small business looking for payroll services, contact us today! We’ll work with you to ensure payroll is one less thing you have to worry about.
