Fair Labor Standards Act: Everything You Need to Know
The Fair Labor Standards Act (FLSA) was enacted to create two employee classifications to deal with minimum wage and overtime compensations8 min read
2. Current Minimum Wage
3. Minimum Employees Required
4. Exempt Employees
5. Non-Exempt Employees
7. Exclusions from FLSA Coverage
8. Salary Basis Test
9. The Duties Test
10. Exempt Executive Job Duties
What Is the Fair Labor Standards Act?
The Fair Labor Standards Act (FLSA) was enacted to create two employee classifications to deal with minimum wage and overtime compensations; those employee classifications are exempt and non-exempt employees. The FLSA treats minimum wage and overtime provisions differently based on the classification of the employees. FLSA standards are not necessarily the only legal standards that will apply to employees and employers regarding the topics of child labor, overtime, and minimum wage standards.
Several state legislatures have chosen not to rely solely on the FLSA, but have passed their own labor standards within the individual states. Some of these state laws have enacted higher minimum wage standards, tougher overtime provisions, and differing child labor protocols with which employers are required to comply, in addition to all federal provisions. In today’s job market, most of the covered employees under the FLSA can be classified as non-exempt. Some, however, are exempt. The reason for this fact is that the FLSA is largely focused on federal wages and hour laws that apply to most non-exempt employees who are doing work for most employers.
The FLSA is an important and overly broad law that provides employees with certain rights including the right to be compensated fairly. The FLSA also lays the foundation for the standard 40-hour work week, has established the federal minimum wage standards, and has laid out the provisions for offering overtime to employees as well as placing restrictions on the ages in which children may begin working.
In 1938, the FLSA was passed in response to the Great Depression of the 1930’s in which many employers were able to take advantage of a tighter than usual job market by providing workers with awful work conditions and imposing extremely harsh hourly requirements on employees.
Current Minimum Wage
In the present day’s job market, the federal government currently maintains the minimum wage level at $7.25 for employees that are not able to earn tips. Those employees who are paid in tips in addition to an hourly wage have a minimum set by the federal government of $2.13. The minimum wage is defined by statute as the lowest hourly wage an employee may be paid by an employer and is mandated by federal legal provisions. By passing the minimum wage laws, the federal government has, in effect, set a federally mandated floor under which employees may not be paid hourly wages. Employers cannot offer and employees cannot accept a role with the employer if the hourly compensation offered is below these federal guidelines.
Minimum Employees Required
If employers believe that they can employ only a minimum number of employees to avoid compliance with federal mandates, there is no such provision that would allow an employer to remain exempt from compliance with the FLSA.
There are certain statutory exemptions that may not require the employer to comply with mandatory minimum wage and overtime laws. The FLSA provides two exemption categories.
- The employees are exempt from both minimum wage and overtime standards.
- The employee is exempt from only the overtime standards.
The Department of Labor strictly enforces the classification of employees as exempt or non-exempt. Thus, if you are an employer, you must take great care in ensuring that those employees that you have classified as being exempt employees do in fact meet the definition of exempt.
The Department of Labor will generally require employers who have misclassified employees as being exempt to reimburse those employees for any wages that have been forfeited as a result of the incorrect classification. As a strong deterrent to employers to not misclassify employees, employers can be subjected to criminal prosecution and made to pay a fine of up to $10,000 or on a per violation basis a fine of $1000 based on the employer’s intent.
Most employees are classified as exempt or non-exempt employees depending on:
- The amount of compensation paid
- The manner in which that compensation is paid
- The type of work the employee currently performs
While there are some exceptions, an exempt employee typically must earn at least $23,600 on an annual basis and also perform those duties laid out in the FLSA that are expected of an exempt employees. Employees are generally required to meet three tests as detailed in the FLSA. Lastly, employees earning in excess of $100,000 in annual compensation are almost certainly classified as exempt.
Those employees that do not meet the three-part test under the FLSA to be classified as exempt employees will be classified as non-exempt employees. Under the FLSA, minimum wage standards and overtime requirements have been laid out for non-exempt employees. For example, the FLSA details that for employees currently under 20 years of age, the minimum wage cannot be less than $4.25 on an hourly basis over the span of the first three months of employment. If an employer fails to comply with minimum wage and overtime standards, the employer may be subject to imprisonment in the most severe circumstances and monetary punishment in less severe cases. As we learned above, generally employees making less than $23,600 per year would most likely be classified as a non-exempt employee. Being a non-exempt employee allows the employee to avail themselves of overtime compensation.
The FLSA while providing several protections to employees does not limit the amount of hours that an employer may require their employees to work in a given day or week. However, employers are required under the FLSA to compensate employees with an overtime wage of 1.5x their standard wage rate for any hours worked in excess of a 40-hour work week. If, however, the employee is exempt from the overtime standards or the employee is non-exempt but works less than 40 hours per week, the employer will not be obligated to pay overtime if the employee happens to exceed eight hours in a given day or works on a weekend or holiday. The threshold remains the 40 hours per week.
When undertaking a calculation of overtime owed to an employee, the employer must determine the employee’s regular hourly pay rate and the hours the employee has worked during the present work week. It should be noted that employers can sign a contract with an employee which would increase the employer’s obligations to the employee as it relates to overtime even if this is more favorable treatment than the FLSA requires. Along these lines, if a state or federal law applicable to the employers imposes a greater overtime payment obligation than those enacted by the FLSA, the employer must comply with the stricter provisions of the superseding federal and state laws.
In 2016, the Department of Labor moved to update overtime regulation in an attempt to increase the threshold upon which salaries would be exempt. Approximately one week before the regulations were to become effective, a federal district court granted a motion that delayed the salary threshold increase and kept the present salaries threshold in place until a further review could be undertaken.
Exclusions from FLSA Coverage
The FLSA does not apply to ALL employment in the United States. There are a particular industries and employment types that are excluded from coverage based on the FLSA overtime provisions. For example, movie theater employees and a lot of agricultural employers are generally not subjected to the FLSA overtime provisions. However, this is not to mean that those workers are not covered by federal labor laws. It just means that the FLSA does not apply as there is another federal labor law that has been enacted to protect those employees.
Salary Basis Test
An employee who is compensated on a salary basis is in essence guaranteed a specific amount of compensation for work performed during a specific compensation period. A general guideline is that a salary basis employee is paid by dividing their annual compensation by the number of paydays in a given year. A salary basis employee is not impacted if their pay is recorded on an hourly rate basis, so long as the employee earns the guaranteed amount of compensation for the work performed in a given compensation period.
The FLSA salary basis test will only apply to situations in which a salaried employee has experience a reduction in the guaranteed salary amount. Furthermore, if an employer requires an employee to be charged for absences from the workplace, this is not such a reduction in salary as the employee is not obligated to be compensated more than the guaranteed salary, so this will not result in a reduction in pay. While there are a few exceptions, the base compensation of a salaried employee can generally not be reduced based on work quantity or quality. Thus, a salaried employee may not have his/her salary reduced if less work than expected has been performed by the employee.
In addition, a salaried employee cannot have their pay reduced if the employer has not given the employee any work to be done. Employers may, however, reduce the salaried employee’s compensation for disciplinary actions, etc. There are generally a list of permissible and impermissible situations in which an employee’s salary may be reduced. Permissible reductions will not have an impact on the employee’s status as exempt under the FLSA. However, impermissible reductions may have an impact, as any employee who has been subjected to a reduction may no longer be considered compensated on a salaried basis and could therefore be classified as non-exempt. Rest assured, though; employers have several options to remedy impermissible reductions, so it is not likely that an exempt employee will have their classification changed to non-exempt.
The Duties Test
If an employee has met both the salary level and salary basis tests under the FLSA, he/she must still meet the duties test to be classified as an exempt employee. Such FLSA exemptions are limited to those employees performing high-level work with job duties that qualify them as exempt. When undertaking a review under the duties test, an employee’s job title or job description is of limited utility, as the duties test is focused more on the actual role and responsibilities and how the employee’s particular role fits within the organizational framework.
Exempt Executive Job Duties
An employee's duties will likely be classified as exempt is he/she:
- Is responsible for supervising at least two or more employees
- Is responsible for management of certain business aspects
- Has substantive input into the hiring, firing, or growth of employees
Generally, supervision will mean that the employee is required to supervise as an aspect of the employee’s daily responsibilities. The supervision, however, must be over at least two full-time employees or four part-time employees.
FLSA provisions detail a list of those management duties that are typical of an executive job, such as
- Setting compensation rates
- Maintaining production metrics
- Performance evaluation responsibility
- Handling complaints and disciplinary issues
That said, determining if an employee is acting in a management capacity requires a comprehensive case-by-case review of the employee’s role and responsibilities to determine if the threshold is met. An employee can also be classified as having performed executive job duties through the completion of non-management related tasks.
One final requirement for determining whether an employee can rely upon the executive job duties exemption is to assess the level of input the employee has over personnel-related issues. The employee does not need to be the final decision-maker in hiring or firing, for example, but the employee should have significant input into the decision. Lastly, the employee must make a salary of greater than $455 per week to qualify to use the executive job duties exemption.
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