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Employee Misclassification - Exempt v. Non-Exempt

Posted by Grace H. Gil, Esq. | Sep 14, 2023

Employee classification is a crucial aspect of compliance for California employers. Whether it is as a full-time employee, part-time employee, or hourly verses salaried, there are certain federal and state rights and responsibilities that flow from these respective designations. In California, non-exempt employees are entitled to the full protection of labor law such as minimum wage, overtime pay and meal and rest breaks while exempt employees are not. Employers' wrongly classifying their employees as exempt often leads them to significant legal consequences because it opens the door for the employees to request all these labor law protections otherwise not available if exempt.  

As employment attorneys defending employers in California, we understand the challenges that employers face when it comes to classifying workers as exempt or nonexempt. Contact us by our ONLINE FORM or calling us at (310) 769-6836 to schedule a free consultation and learn more about how we can make sure you properly classify your employees according to law. 

Understanding Exempt and Nonexempt Employees

Before diving into the requirements, let's clarify what exempt and nonexempt employees mean:

Exempt Employees: Exempt employees are not entitled to overtime pay and are exempt from certain labor law protections because they are typically salaried and hold specific job positions that meet certain criteria.

Nonexempt Employees: Nonexempt employees are entitled to overtime pay and enjoy full labor law protections, as they are generally paid hourly or on a fixed salary that falls below the threshold for exempt status.

Determining Exempt Employees

When employers classify their employees, they must make sure they comply California law providing specific requirements whether a certain employee can be exempt. 

1. Salary Basis Test

To qualify as an exempt employee in California, an individual must receive a minimum salary that meets or exceeds twice the state minimum wage for full-time employment. As of September 2023, this threshold is $64,480 annually for employers. This amount is set to increase every year on January 1st. Visit the California Department of Industrial Relations (DIR) website for the most up-to-date state and local minimum wage rates.

The salary to exempt employees must be in a fixed amount, predetermined or guaranteed to cover twice of minimum wage and not subject to reduction based on employee's performance or lesser work. If an employer pays any exempt employee  non-salary form of payment, such as bonuses or incentives, to satisfy this required salary, that amount should not exceed 10% of the standard salary amount.

2. Duties Test

The duties test evaluates whether an employee's job responsibilities meet the criteria for an exempt category, such as executive, administrative, or professional. Each category has specific requirements:

Executive Exemption: Employees must primarily manage the company or a recognized department or division, supervise at least two employees, exercise discretion and independent judgment, and have the authority to make employment decisions.

Example: Alex works as a manager at a retail store in California. He is responsible for overseeing the daily operations of the store. His job involves managing the store's 5 employees, making staffing decisions, setting work schedules, and handling customer complaints when necessary. He also has the authority to hire and fire employees and make important decisions about store policies. He meets the criteria for the executive exemption.

Administrative Exemption: Employees must perform office or non-manual work related to the management or general business operations, exercise discretion and independent judgment, and hold a position of responsibility.

Example: Maria works for a marketing company in California. Maria holds the position of "Marketing Coordinator." Her job involves various tasks related to managing the company's marketing projects and campaigns. She meets the criteria for the administrative exemption.

Professional Exemption: Employees must work in a recognized profession, such as law or medicine, and exercise discretion and independent judgment in their work.

Example: Sarah is a licensed attorney who provides legal counsel for a law firm. Her job involves legal research, case analysis, and advising clients. She meets the criteria for the professional exemption.

An employee must engage in the above job duties as his or her primary duty more than half of his or her working hours. To figure out if he or she is spending more than half of time on the exempt tasks, we need to look at how they actually spend their time. But, the employer's realistic expectations on the employee's handling such duties can also be a factor. 

To meet the "exercising discretion and independent judgment" requirement, employers must show (1) their exempt employee can make choices and decisions rather than following strict rules in performing her duties, (2) she works independently with minimum supervision, and (3) her decisions have a significant impact on employers' business rather than trivial.

Consequences of Misclassifying Employees as Exempt

Misclassifying employees in California can have serious consequences for employers. When employers wrongly classified their employees as exempt, they face potential legal liabilities because they are considered denied their employees' certain labor law protections, including overtime pay and meal and rest breaks. Here are some of the potential consequences employers may face when they misclassify their employees:

  1. Overtime Pay Violations: Misclassified nonexempt employees may not receive proper overtime compensation when they work beyond regular hours. Employers may be required to pay the unpaid overtime regardless of what they have already paid to them as salary, along with penalties for failing to comply with labor laws.

  2. Meals and Rest Breaks Violations: Misclassified nonexempt employees can request premium (one extra hour of pay per day) for their missed meals and rest breaks for the whole period they worked for their employer as misclassified.  

  3. Wage Statement Penalties: If misclassification is found, employers are considered provided inaccurate pay stubs to those misclassified employees. These workers can recover $50 for the initial pay period, $100 for subsequent pay periods, up to $4,000.  

  4. Waiting Time Penalties: Because employers are considered not paid these overtime payment and meals and rest break premiums to those misclassified employees, they are also obligated to pay penalties for the payments not paid on time. The unpaid overtime payment and meals and rest break premiums are treated as unpaid wages and employers must have paid these within 72 hours from the employee's last day of work if they properly classify the workers as nonexempt. The workers can recover their daily average wage for each day the wages are not paid, up to a maximum of 30 days.

  5. Class Action Lawsuits: Misclassification can lead to class action lawsuits, where multiple affected employees join forces to seek compensation for unpaid wages and damages.

  6. Legal Costs: Defending against misclassification claims can result in substantial legal costs and attorney fees.

  7. Government Audits: Misclassifying employees may trigger government audits by agencies like the California Labor Commissioner's Office, resulting in additional fines and penalties.

It's essential for California employers to understand the criteria for determining exempt and nonexempt employees to avoid these potential consequences. Let our experienced employment attorneys guide you through the complexities of employee classification under California labor law and help you maintain compliance.

Contact Our Office Today

With an employment attorney defending employers in California, I can guide you on your employee classification and labor law compliance needs. If you are an employer seeking guidance on classifying your workforce, I am here to provide expert legal advice and representation. Reach out to me today by filling out the ONLINE FORM or calling us at (310) 769-6836 to schedule a free consultation to ensure that your workforce is correctly classified.

About the Author

Grace H. Gil, Esq.

Grace H. Gil is a California attorney specialized in business, employment and real estate law. She has handled a wide range of civil and business disputes and transactions. Ms. Gil has worked at law offices handling various business litigations. She also worked as an in-house counsel and handled various business affairs most business owners face.

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