Exempt vs. Non-Exempt…It Pays to Know the Difference! by Brenda Gilchrist

If you employ people, you need to know the difference between exempt and non-exempt jobs, or face the risk of potential hefty penalties, legal fees, and payment of unpaid overtime and missed meal periods. Most employers think of jobs as “salary” vs. “hourly”. Most non-exempt positions are paid hourly and exempt positions are paid salary. It is unwise to improperly classify an employee as exempt, just to avoid paying overtime.  Employers must decide whether their jobs (and therefore the employees) are exempt, or not, from wage & hour requirements (overtime and meal/rest periods) based on complex FLSA classifications set by State and Federal law.

Here’s a real life example of what can happen when the employer misclassifies a job: A former employee filed a complaint with their local Department of Labor stating his employer misclassified him as an exempt employee. He claimed that the company had removed so many of the exempt level job functions that he was left with non-exempt duties. Thus, he claimed that he should have been treated as a non-exempt and should have been paid overtime and meal/rest periods. The employer, did in fact, start to remove duties since they felt he was unable to perform the higher level functions (engineering) at an acceptable level. As a result, they eroded the exempt status and the company had to pay back wages (going back 3 years), which included what the employee reported to DOL as missed overtime and missed meal/rest periods. The employer also paid penalties on top of the overtime, missed meal periods, the 1 hour meal period penalty for every day he stated he missed a meal/rest break.

What makes the job become Exempt? It’s actually the job duties that classify someone as exempt or non-exempt. Job titles are irrelevant to whether a job qualifies for exemption. So, just because you create the job title, for example, VP of Administration, it doesn’t mean the person meets the FLSA exemption. State and federal governments assume a position is non-exempt unless it clearly meets both tests for exempt status: the salary test and the duties test.

Salary test

For most “exempt” categories, the employee must be salaried and earn twice the current minimum wage per month.

Labor Code Section 515.5 provides that certain computer software employees shall be exempt overtime if certain criteria are met. Effective January 2011, exempt computer software employees must earn $37.94 or annual salary of not less than $79,050 for full-time employment, and paid not less than $6,587.50 per month

Duties tests

There are five job categories for which the DOL allows exempt status:

Executive: the primary duty must be management of the enterprise or a department and include decisions such as hiring/firing, promotions or assignments. The position must regularly supervise at least two or more full-time employees.

Administrative: the primary duties must be office (non-manual) work directly related to management or general business operations, and the employee must exercise independent judgment about matters of significance. This exemption is often misapplied to clerks, secretaries and customer service employees who do not meet the duties test. The administrative exemption is meant to apply to high-level employees whose primary job is to “keep the business running.”

Professional: generally requires a 4-year college degree or a State license in a specific science or discipline. The most common jobs under the professional exemption are in the areas of law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting. Professionally exempt work is primarily intellectual, requires the specialized education mentioned above, and involves the exercise of discretion and judgment. Certain creative jobs may qualify for a ‘creative professional’ exemption, such as actors, composers and musicians.

Computer Professional: reserved for high level computer professionals such as systems analysts, programmers and software engineers, who exercise independent judgment. Specifically, the exemption applies to employees who apply systems analysis techniques and procedures to determine hardware, software, or system functional specifications, or who design, develop, test or modify computer systems or programs based on user or design specifications.

Outside Sales: this exemption does not have to meet the salary test. The primary duty is to make sales or obtain orders for the company, while regularly working away from the place of business (not at home and not in the office – inside sales typically don’t qualify as an exempt position).

Preserving the exemption

Once a position is considered exempt, you will want to avoid eroding that status. Says the DOL, “The employer will lose the exemption if it has an actual practice of making improper deductions from salary.” You should not dock pay for quality/quantity of work, discipline or availability of work. Requiring or requesting an “exempt” employee to clock in and out and/or to complete a timesheet, reflecting hours worked, may also erode your argument that their position is exempt.

Exempt employees must be paid the week’s salary for any week in which they perform work. There are exceptions to this rule, the most common of which are docking for absences from work for one or more full days for either personal reasons or sickness or disability (as long as deductions are made under a bona fide plan). Partial day absences should not be docked unless you have a partial day docking policy in place.

There have been a few landmark cases involving misclassification and substantial penalties:

Wachovia Securities Wage & Hour Litigation, $39 million. Employees claimed they were denied overtime pay and other wages.

Veliz v. Cintas Corp., $22.75 million. Delivery drivers claimed that Cintas misclassified route drivers as exempt employees in order to avoid paying overtime.

Conley v. Pacific Gas & Electric, $17.25 million. Employees alleged they were improperly classified as exempt employees and were denied overtime compensation and paid a salary rather than on an hourly basis.

If you would like help with properly classifying your jobs and employees or with administration of policies for exempt employees, please contact Brenda Gilchrist at Brenda@thehrmatrix.com or 707-526-0877 x11.

For additional reading, see the following government sites:

http://www.dol.gov/elaws/esa/flsa/overtime/menu.htm

http://www.dir.ca.gov/dlse/FAQ_OvertimeExemptions.htm

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