Employment Tip of the Month – March 2025

Q: What does an employer need to prove to establish that it correctly classified employees as exempt from minimum wage and overtime pay?

A: If an employer is sued for misclassifying an employee under the Fair Labor Standards Act (FLSA), it must prove that an exemption applies and is supported by a preponderance of the evidence.

On January 15, 2025, the U.S. Supreme Court clarified that the preponderance of the evidence standard applies when an employer tries to prove that an employee is correctly classified as exempt from the FLSA’s minimum wage and overtime pay provisions. E.M.D. Sales, Inc. v. Carrera, No. 23-217, 2025 U.S. LEXIS 364 (2025). Although Carrera involved only the outside sales exemption to the FLSA, the Supreme Court held that “the longstanding default rule regarding the standard of proof” should apply in all FLSA actions. 

Prior to the Supreme Court’s decision in Carrera, there was a circuit split, with the U.S. Court of Appeals for the Fourth Circuit applying the much stricter “clear and convincing evidence” standard to FLSA actions. While the lower standard requiring a “preponderance of the evidence” roughly translates to a 49% chance of employer success, the “clear and convincing evidence” standard previously used by the Fourth Circuit translates to only a 10-20% chance of employer success.

The Carrera decision was not a surprise for those following the circuit split, as it was anticipated that the Supreme Court would correct the Fourth Circuit’s outlier decision.

Effect on Employers – Why Should Businesses Care?
Given the Supreme Court’s decision in Carrera, an employer need only show that its position on an employee’s exempt status is, more likely than not, correct. This decision set a national standard under the FLSA and will effectively reduce a business’ litigation risks by making it easier to demonstrate that an employee is properly classified.

Misclassifying employees based on their exemption status is a substantial source of litigation for businesses, especially as the frequency and cost of class and collective actions soar. The default under the FLSA is that an employee is nonexempt, meaning the employee is owed a minimum hourly wage and overtime pay. When an employee’s exempt status is challenged, the employer has the burden of proving that it correctly classified the employee.

FLSA Basics
In 1938, Congress enacted the FLSA, guaranteeing a federal minimum wage for covered workers and requiring overtime pay. 29 U.S.C. §§ 206(a)(1), 207(a)(1). Under the FLSA, employees must be paid an overtime rate of 1.5 times their regular pay rate for all hours worked beyond 40 hours per workweek, unless they fall under an exemption. The FLSA exempts the following classes of workers:

• Independent contractors
• Trainees and interns
• Volunteers
• Certain recreational employees
• Persons working for federal, state, and local governments who are not subject to civil service laws and who hold public office or belong to the personal or policy-making staff of a public officeholder, or are employed directly by legislative bodies
• Labor organizations (unions), except when acting in the capacity of an employer, and their elected officials 
• An individual employed by an employer engaged in agriculture who is a parent, spouse, child, or another member of the employer’s immediate family
• White collar workers (provided they meet certain salary minimums), including:
  • Executives and supervisors
  • Administrative employees
  • Learned professionals 
  • Outside salespeople.

How Can Employers Ensure Compliance with the FLSA?
Compliance with federal and state wage and hour laws should be a priority for employers because misclassification claims constitute the largest percentage of class actions filed in federal court and can result in substantial penalties and litigation costs. To ensure compliance with the FLSA, employers should consider the following:

• Regularly review your employee handbooks and ensure job descriptions are accurate to avoid misclassification.
• When an employee’s job description falls within a gray area, consult with an employment attorney and consider classifying the position as nonexempt while your attorney evaluates the position.
• Recognize that state and local mini-FLSA laws can have different, and occasionally more strict, wage and hour requirements.

One common misclassification claim that employers face is the claim that employees have been misclassified as independent contractors. Workers are presumed to be employees, and the burden is on the employer to prove that the worker is an independent contractor, i.e., the worker is free from the employer’s control; the work performed is outside the usual course of the employer’s business; and the worker is engaged in an independently established trade or business. For more information on the independent contractor standard, see our January 2025 Employment Tip of the Month. While the new administration’s Department of Labor may drop the more stringent independent contractor standard presently in place, it is essential to remain aware of all independent contractor standards, including state and municipal statutes and standards.

Another change in the law employers should remain aware of is the new 2025 salary standard for the white-collar exemption. Effective January 1, 2025, administrative, executive, and professional employees are exempt from overtime pay only if their weekly compensation is $1,128 or greater (equivalent to $58,656 annually). This is a significant increase from the 2023 salary standard of $684 per week ($35,569 per year) and the 2024 salary standard of $844 per week ($43,888 per year).

Conclusion
The Supreme Court’s decision in Carrera has created a nationwide standard of proof applicable to all FLSA actions, no matter the exemption claimed. Even so, employers must be cognizant of state and local laws, which may contain heightened requirements in addition to the requirements established by the FLSA.