Fair Labor Standards Act
Exempt v. Non-Exempt
Despite employers exerting great efforts to properly compensate their employees, businesses of all sizes and in varying industries find themselves running afoul of the wage and hour laws. Unfortunately, providing fair and adequate compensation to employees does not automatically translate to complying with the technical and often convoluted requirements of the Fair Labor Standards Act (FLSA)1. The FLSA turned 75 this year, yet many misconceptions regarding its regulations continue to puzzle employers.
To understand the exempt versus nonexempt classification of employees, you must first understand the basic requirements of the FLSA. At its core, the FLSA requires employers to pay employees at no less than the minimum wage for all hours worked, and one and one half times their regular hourly rate for all hours worked in excess of 40 in a workweek.
While most employers are generally familiar with the minimum wage and overtime requirements, confusion quickly ensues when determining whether an employee is entitled to overtime. An exempt employee is not entitled to receive overtime compensation. A nonexempt employee is entitled to overtime compensation.
While the exempt versus nonexempt classification is a fairly simple concept, determining whether an employee should be classified as exempt or nonexempt is anything but simple. First, titles mean nothing. Designating an employee as a director or manager has little to no value for purposes of classification under the FLSA. Second, compensating an employee on a salary basis also means nothing. Employees compensated on a salary basis may still be entitled to overtime compensation.
The FLSA’s most common overtime exemptions are known as the white collar exemptions: executive, administrative, professional, computer employee and outside salesman.
The determination of whether an employee falls within one of these exemptions is highly fact-specific (see sidebar for details). Moreover, all exemptions under the FLSA are narrowly construed against the employer. Hence, employers must be meticulous in classification of employees and should avoid applying blanket classifications. For example, a manager at one retail location may qualify as exempt, while a manager at a smaller retail location may not, depending on his/her daily duties and responsibilities.
For all the white-collar exemptions, the key issue is whether an employee’s primary duties are of an exempt nature. The FLSA’s regulations recognize that most, if not all, exempt employees perform some nonexempt work. To that end, the regulations provide four factors for employers to consider in determining whether an employee’s primary duties are exempt: 1) The relative importance of the exempt duties as compared with other kinds of duties; 2) The amount of time spent on exempt duties; 3) The employee’s freedom from direct supervision; and 4) The relationship between the employee’s salary and the wages paid to nonexempt employees performing the kind of nonexempt work performed by the salaried employee. Again, this analysis is highly fact-specific and blanket classifications must be avoided.
Not only must employers proceed with caution in the initial classification of employees, but employers must also avoid taking actions that could destroy an employee’s exempt status. Employers may be unaware that certain practices threaten the exempt status of employees. Employers should regularly evaluate the daily duties performed by exempt employees and update job descriptions accordingly. Indeed, an employer may inadvertently expose itself to risk if it fails to utilize up-to-date job descriptions for exempt employees. Similarly, improper salary reductions based on absences from work, poor work quality or misconduct that causes a financial loss to the employer will also jeopardize an employee’s exempt status.
With the number of claims filed under the FLSA up 10 percent in 2013, employers must be proactive in ensuring compliance with the intricate and rarely commonsensical wage and hour regulations. Be proactive and invest in a wage and hour audit. Learn how to comply with the FLSA’s extensive record keeping requirements and implement best practices that provide protections against unpaid wage claims.
The following is an overview of the FLSA’s most common overtime exemptions. These exemptions are commonly referred to as the five white collar exemptions: executive, administrative, professional, computer employee and outside salesman. However, to qualify for each of these exemptions from overtime, specific factors must be met.
Executive employee exemption: Must be compensated on a salary basis at a rate not less than $455 per week; primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
Administrative employee exemption: Must be compensated on a salary basis at a rate not less than $455 per week; primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Learned professional exemptions: Must be compensated on a salary basis at a rate not less than $455 per week; primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; advanced knowledge must be in a field of science or learning; and advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Computer employee exemption: Must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour; must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; and primary duty must consist of the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or a combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside sales employee exemption: Primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and must be customarily and regularly engaged away from the employer’s place or places of business.
Common Misconceptions/Myths under the Fair Labor Standards Act
» Paying an employee on a salary basis automatically results in no overtime compensation owed.
» Merely labeling a person as an independent contractor circumvents the FLSA’s minimum wage and overtime requirements.
» Employers are not required to keep records regarding salaried employees.
» Providing paid time off is a viable substitute for paying overtime compensation.
» Hours worked over a two week period may be averaged to avoid overtime compensation.
» Employees must be paid double-time for hours worked on holidays. The FLSA trumps state wage and hour laws.
Heather N. Tyndall-Best and Jeffrey D. Slanker are attorneys who specialize in employment and labor law in the Tallahassee office of Sniffen & Spellman, P.A.
Nothing in this article should be construed as legal advice. You should seek advice and counseling from a licensed attorney experienced in wage and hour law regarding whether your business’ particular compensation practices are lawful.
