As an employer, you are always on the lookout for ways to be efficient and cut unnecessary costs to your business. As you are hiring new administrative employees you come across an employment classification: exempt status. Under this status, you realize you are not required to pay overtime; you even see that there is an administrative exemption, so you think “this is great, I’m not required to pay overtime as long as I classify my employees as exempt!” Sound too good to be true? Probably because it is.
The Fair Labor Standards Act (FLSA) requires that employees be paid at least minimum wage and be paid time and a half for any time worked past 40 hours in a workweek. Some states, such as Nevada, have additional overtime laws, such as daily overtime for hours worked past eight in a 24-hour period. The FLSA provides an exemption to these overtime laws for certain types of positions, where an employer would not be required to pay overtime if an employee works more than 40 hours in a workweek. However, there are very specific requirements to qualify for this exemption. A misclassified employee can result in employers being held liable for up to three years of unpaid overtime and liquidated damages in the amount of the unpaid wages. If you aren’t tracking an employee’s hours since you have classified them as exempt, this can leave your company at the mercy of how many hours an employee claims they worked, and it would be the employer’s burden to disprove those hours. Willful violation can also result in up to $1,000 in civil penalties for each violation and criminal prosecution, exposing you to a fine of up to $10,000 and/or incarceration.
Keep in mind “exempt” and “salaried” are not interchangeable. While an exempt employee is typically paid a weekly salary (instead of hourly), an employee can be salaried nonexempt. This means the nonexempt employee has a set weekly salary, but they are still required to track their hours worked and are paid overtime for any hours past 40 in a workweek. In comparison, exempt employees are not required to track their hours.
The FLSA specifies five categories of exempt employees: executive, administrative, computer, professional, and outside sales. All of these categories, with the exception of outside sales, require that an employee be paid at least $684 per week* to qualify as exempt; don’t forget to check your state and local laws as some areas will require a higher minimum salary. Additionally, there are other tests involved for each of the five categories that a position must pass to be considered exempt. Please see the Department of Labor’s Fact Sheet #17A to review these tests.
One common pitfall to using exempt status includes changing a job title to reflect one of the categories listed as eligible for exempt status. For example, instead of using the job title of custodian, an employer might use the job title Manager of Custodial Duties. While the title may sound impressive and like it could fall under the executive exemption, naming a position to mirror one of these categories while the job duties do not reflect the exemption requirements would not be sufficient since the classification is based on the actual work performed.
Another pitfall is classifying an employee who performs manual labor as exempt. Maybe the employee doesn’t want to bother with having to track their time or maybe the position is so highly paid, you feel it’s justified to not pay overtime. However, “blue-collar” work, or work that involves manual labor cannot be qualified as exempt, regardless of how highly paid they may be. Employees also cannot waive their right to overtime pay and must track their hours. Police, firefighters, paramedics, and other first responders also cannot be classified as exempt.
Are They Exempt?
Scenario #1: You hire an administrative assistant for $684 per week. He is responsible for answering calls at the front desk and directing them to the correct department, booking rooms for meetings as requested by managers, and ordering office supplies. Is he exempt?
Answer: Most likely not. While he earns enough to meet the wage requirement, the job duties described do not show that his primary duty includes the exercise of discretion or independent judgement in matters of significance as the DOL test requires. Being able to pick the color of pens he orders, for example, is not considered sufficient.
Scenario #2: You hire a salesperson to go out and sell widgets for your company. You pay her a commission of 10% of each sale. The first few weeks she is working, she only earns $300 per week in commission. Is she exempt?
Answer: Yes. Even though she has not earned much each week, the outside sales exemption does not have a minimum salary requirement. Also, the salesperson meets both requirements of her primary duty of making sales and engaging in this activity away from the employer’s place of business.
Scenario #3: You have a manager at your construction company that earns $800 per week that manages five full-time employees. While he cannot unilaterally hire or terminate employees, his opinion carries a lot of weight in these decisions. He typically works about 50 hours per week and spends approximately 30 hours a week working alongside the team with the construction projects. Is he exempt?
Answer: No. This employee meets the requirement of earning at least $684 per week, managing at least two full-time employees (or equivalent), and his recommendations for hiring and firing are given particular weight. However, he does not pass the test of his primary duty being the management of the department. While he is responsible for the management of his team, the fact that 60% of his week is spent performing manual labor means it is not his primary duty and the majority of his job is actually spent performing blue collar work.
Properly classifying an employee as exempt can sometimes be complicated, especially if an employee’s job duties fluctuate. When in doubt, you can always classify any employee as nonexempt as this will never result in fines or penalties from the DOL. Clients of FrankCrum can also reach out to their HR Consultant to assist with determining exempt status.
*The DOL has proposed future changes to the minimum salary threshold. You can learn more here.