One of the most important decisions an employer makes regarding its workforce is worker classification. Misclassification of workers is one of the costliest mistakes an employer can make. Penalties for misclassification can quickly multiply and produce significant losses. Federal and state enforcement efforts have produced an increase in agency led audits, employee class action and collective Private Attorneys General Act (PAGA) lawsuits.

For an individual to be protected by wage and hour laws, they must be classified as an “employee.” Independent contractors or “gig workers” are not considered employees and are therefore not subject to minimum wage, overtime pay, or other legal requirements with respect to employees.

Classifying an employee as exempt or non-exempt determines whether the individual is eligible to receive overtime and is subject to other legal requirements such as minimum wage pay and meal/rest breaks. Traditionally, exempt employees are paid a salary while non-exempt employees can be paid either on a salaried or hourly basis so long as all wage and hour legal requirements are satisfied.

Keep in mind that pay status (e.g., paying an employee a salary) is not enough to qualify an employee for an exemption. Exempt classification status requires a review and analysis of the employee’s actual job duties and responsibilities. 

California’s test for administrative, executive, and professional exemptions varies from federal standards under the Fair Labor Standards Act (FLSA) by requiring the exempt employee to be: 

• Primarily engaged in the duties that meet the requirements of the exemption at issue (i.e., quantitatively measured as meaning 50% of the employee’s time must be spent performing exempt work); 

• Customarily and regularly exercise discretion and independent judgment in carrying out their primary duties; and  

• Earn a monthly salary equivalent to no less than twice the California minimum wage for full-time employment. 

California’s narrowly construed exemption terms place the burden on employers to show the individual fits within the exemption. Below are a few best practices for employers to keep in mind when classifying employees under California law:  

• Regularly Review and Update Classifications: Periodically review the classification of workers to ensure compliance with current laws and regulations. This includes staying updated on any changes in legislation or case law that may affect worker classification. Conduct internal audits and seek legal advice if necessary to ensure that classifications remain accurate and compliant. 

• Maintain Clear Documentation: Keep detailed records of the factors considered and the rationale behind each worker’s classification. This includes contracts, job descriptions, and any communications that demonstrate the nature of the working relationship. Clear documentation can help minimize risk in the event of a dispute or audit. 

• Provide Training and Resources: Offer training and resources to managers and HR personnel on the proper classification of workers. Regular training sessions can help ensure that everyone involved in the classification process is knowledgeable and up to date with the latest legal requirements. 

Continue reading here, for important information on the new federal overtime rule raising the threshold for overtime exemptions (i.e., executive, administrative, professional) under the FLSA.