Exemption under the Fair Labor Standards Act: The cost of misclassifying employees

The Fair Labor Standards Act of 1938 created two classes of employees—those who are paid for each hour of their labor and those who are given a salary due to the administrative, professional, or executive nature of their responsibilities. The FLSA created exemptions from the hourly wage laws for executive and administrative employees who are paid a salary. Therefore, employers must classify each employee correctly or risk substantial damage payments for lost overtime hours. The law contains a two-fold test for exempting positions from the law's overtime provisions. The first prong of the test is that the position pays a regular salary that essentially does not vary according to either the quality or quantity of work performed. The second prong involves the position's primary duties as being executive or administrative. (The article does not discuss the professional exemption.) The executive-duties test is that the position directs the equivalent of two or more full-time employees in managing a recognized department or subdivision of an enterprise. To meet the administrative test, the position's primary duty must involve the exercise of discretion or independent judgment relating to management policies or conduct of the business.