How To Avoid Misclassification Of Exempt vs Nonexempt Employees

There are two types of employees – “exempt” and “nonexempt.” An exempt employee is not entitled to overtime pay and other protections according to the Fair Labor Standards Act (FLSA). Nonexempt employees must be paid minimum wage, overtime, and provided breaks and are protected by the rules of the FLSA.

Most jobs are governed by the FLSA (Fair Labor Standards Act). Some are not. Some jobs are excluded from FLSA coverage by statute. Other jobs, while governed by the FLSA, are considered “exempt” from the FLSA overtime rules.

FLSA Coverage Exclusions

There are certain jobs that may be completely excluded from coverage under the FLSA overtime rules. These jobs typically fall into one of two different categories:

  1. Jobs that are mentioned specifically in the FLSA including movie theater employees and certain agriculture jobs.
  2. Jobs that are governed by a different government act including most railroad workers who are governed by the Railway Labor Act, and many truck drivers who are governed by the Motor Carriers Act, and not the FLSA. 

Exempt or Nonexempt

Employees whose jobs are governed by the FLSA are either “exempt” or “nonexempt.” Nonexempt employees are entitled to overtime pay and other benefits protected by the FLSA. Exempt employees are not.

Some jobs are classified as exempt by definition. For example, “outside sales” employees are exempt (“inside sales” employees are nonexempt). There are states like California who have their own lists for exempt and nonexempt employees. For most employees, however, whether they are exempt or nonexempt depends on (a) how much they are paid, (b) how they are paid, and (c) what kind of work they do. Most employees must meet all three “tests” to be exempt.

Salary Requirements For Exempt Employees

To qualify for the exemption, employees must meet certain tests regarding their job duties and be paid on a salary basis of not less than $684 per week ($35,568 annually).

Salary Basis Test

Generally, an employee is paid on a salary basis if they have a “guaranteed minimum” amount of money they can count on receiving for any work week in which they perform “any” work. This amount need not be the entire compensation received, but there must be some amount of pay the employee can count on receiving in any work week in which they perform any work. Whether an employee is paid on a salary basis is not affected by whether pay is expressed in hourly terms (as this is a fairly common requirement of many payroll computer programs), but whether employees in fact have a “guaranteed minimum” amount of pay they can count on.

The salary basis pay requirement for exempt status does not apply to some jobs including doctors, lawyers and school teachers are exempt even if the employees are paid hourly.

The Duties Tests

An employee who meets the salary level tests must also perform exempt job duties in order to be classified exempt. These FLSA exemptions are limited to employees who perform relatively high-level work. Whether the duties of a particular job qualify as exempt depends on what they are. Job titles or position descriptions are of limited usefulness. It is the actual job tasks that must be evaluated, along with how the particular job tasks “fit” into the employer’s overall operations.

There are three typical categories of exempt job duties, called “Executive,” “Professional,” and “Administrative.”

Exempt Executive Job Duties

Job duties are exempt Executive Job Duties if the employee:

  1. Regularly supervises two or more other employees, and also
  2. Has management as the primary duty of the position, and also,
  3. Has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments).

Supervision means what it implies. The supervision must be a regular part of the employee’s job, and meet the “two employees” requirement. This requires the supervision of two full-time employees or the equivalent number of part-time employees. (Two half-time employees equal one full-time employee.)

In addition, the supervisory employee must have “management” as their “primary duty” of their job. The FLSA Regulations contain a list of typical management duties. These include (in addition to supervision):

  • Interviewing, selecting, and training employees
  • Setting rates of pay and hours of work
  • Maintaining production or sales records (beyond the merely clerical)
  • Appraising productivity; handling employee grievances or complaints, or disciplining employees
  • Determining work techniques
  • Planning the work
  • Apportioning work among employees
  • Determining the types of equipment to be used in performing work, or materials needed
  • Planning budgets for work
  • Monitoring work for legal or regulatory compliance
  • Providing for safety and security of the workplace

Determining whether an employee has management as the primary duty of the position requires case-by-case evaluation. One handy clue might be to ask who a telephone inquiry would be directed to if the caller asked for “the boss.” 

An employee may qualify as performing executive job duties even if they perform a variety of “regular” job duties as well. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers.

The final requirement for the executive exemption is that the employee have genuine input into personnel matters. This does not require that the employee be the final decision maker on such matters, but rather that the employee’s input is given “particular weight.” 

Exempt Professional Job Duties

The job duties of the traditional “Learned Professions” are exempt. These include lawyers, doctors, dentists, teachers, architects, clergy. Also included are registered nurses (but not LPNs), accountants (but not bookkeepers), engineers (who have engineering degrees or the equivalent and perform work of the sort usually performed by licensed professional engineers), actuaries, scientists (but not technicians), pharmacists, and other employees who perform work requiring “advanced knowledge” similar to that historically associated with the traditional learned professions.

Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. Professionally exempt workers must have education beyond high school, and usually beyond college. Advanced degrees are the most common measure of this. 

Some employees may also perform “creative professional” job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. 

Exempt Administrative Job Duties

The most elusive and imprecise of the definitions of exempt job duties is for exempt “Administrative” job duties.

The Regulatory definition provides that exempt administrative job duties are:

  • Office or non-manual work, which is directly related to management or general business operations of the employer or the employer’s customers
  • It is a primary component of which involves the exercise of independent judgment and discretion
  • And pertain to matters of significance

Administrative employees provide “support” to the operational or production employees. They are “staff” rather than “line” employees. Examples of administrative functions include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising (as differentiated from direct sales), quality control, public relations (including shareholder or investment relations, and government relations), legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration).

Rights Of Exempt Employees

An exempt employee has virtually “no rights at all” under the FLSA overtime rules. About all an exempt employee is entitled to under the FLSA is to receive the full amount of the base salary in any work period during which s/he performs any work (less any permissible deductions). 

Keep in mind that this discussion is limited to rights under the FLSA. Exempt employees may have rights under other laws or by way of employment policies or contracts.

Rights Of Nonexempt Employees

Nonexempt employees are entitled under the FLSA to time and one-half their “regular rate” of pay for each hour they actually work over the applicable FLSA overtime threshold in the applicable FLSA work period as well as other protections provided by the FLSA.

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