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Working Classes

To exempt or not to exempt? That's a tricky question. Misclassifying your employees could land you in hot water, so do it right.

This story appears in the November 2006 issue of Entrepreneur. Subscribe »

From time to time, Seth Hishmeh considers changing the status of one or more of his 70 employees from non-exempt to exempt. Classifying an employee as exempt allows USAS Technologies LLC, the New York City IT consulting company he founded in 1998, to legally avoid paying employees overtime for working more than a standard workday or workweek. Reclassifying can also be a management tool. Hourly employees often consider it a promotion to join the ranks of salaried exempt workers, says the 34-year-old entrepreneur, but sometimes he prefers people whose work is billed to clients by the hour to remain nonexempt. "If they're salaried employees, sometimes they don't pay as much attention to how many hours a day they're working, or make as good use of their time," Hishmeh explains.

The decision of how to classify an employee carries significance for labor costs, employee morale and, last but not least, the chance of a visit by investigators from the Department of Labor, the federal agency charged with enforcing the Fair Labor Standards Act.

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