Are Your Salaried Employees Truly Exempt?

There are individuals in every workplace in the United States who are paid a salary and considered exempt from pay for overtime after forty hours in a work week. The current threshold for exempt status is $23,660.  This number will likely increase to $31,000 to $33,000 in the near future.  It has been reported that such a proposed rule could be issued in early 2019.

It is imperative that those employees that you classify as exempt from overtime pay are truly properly classified. If overtime is common in your business, the back pay liability could be significant. The liability period can go back three (3) years. In addition, penalties also include liquidated (double) damages and attorney’s fees.

How Does an Employee Qualify as Exempt from Overtime?

To be properly classified as exempt, the person must satisfy the two part, “salary” and “duties”, tests. The person must be paid at or above the required salary level (currently $455 per week) and the duties of the employee must fall within one of the so-called “white collar exemptions”. They are generally referred to as the “executive”, “administrative” and “professional” exemptions.

Executive Exemption

For the “executive” exemption to apply, the person’s primary duties must be management of the enterprise or a customarily recognized department or subdivision thereof. The person must also direct the work of two or more other employees, and have authority to hire or fire employees or have particular weight given to his or her recommendations on employee issues. The most common positions falling under the executive exemption are business owners or managers, department managers, and supervisors.

Administrative Exemption

The “administrative” exemption is the one most commonly used by businesses to classify employees as exempt and also the one most frequently litigated. To qualify, it requires the requisite salary and that the person perform office or non-manual work directly related to the management of the business. In addition, the employee must exercise discretion and independent judgment on significant matters.

The exemption would not apply to an employee responsible for performing duties that involve clerical or secretarial work. Some of the well-recognized exempt administrative positions include human resources personnel, purchasing agents, insurance claim adjusters, office managers, payroll managers and executive assistants to business owners.

Professional Exemption

In considering who qualifies as an exempt professional employee, the DOL recognizes four separate categories: “learned professionals”, “artistic or creative professionals”, “teachers” and employees engaged in the practice of law or medicine. Most businesses will have few, if any employees who qualify as a professional. If they do, such as engineers, the basis for exempt status is usually clear. They will have a college degree or comparable training qualifying them as a professional in their area of expertise.  

Computer Professionals

The DOL also recognizes certain computer professionals as exempt. The FLSA actually has two separate exemptions for these types of employees. In addition to an exemption with the same salary level as that of other categories, $455 per week, there is also an exemption for computer employees who are paid at least $27.63 per hour. The types of employees that qualify for these exemptions are computer system analysists, computer programmers, software engineers and other similarly skilled professional employees.

Outside Sales

The FLSA also provides an exemption for employees engaged in “outside sales” as opposed to inside sales. This exemption must satisfy both a duties and a location test. No specific salary amount is required.

Outside sales employees generally work alone, away from the place of business, have minimal supervision, and normally receive commissions based on their successful sales rather than hours worked. Inside sales personnel are generally not exempt unless they qualify for the “executive” or “administrative” exemptions. These are among the most frequently misclassified employees.

Final Thoughts on the Overtime Exemption

Employers should be cognizant of workplace morale. Simply re-designating previously exempt employees as non-exempt to avoid a salary increase can have serious negative workplace effects. First, it is likely that some employees will view this as a demotion. Second, previously exempt employees could lose work schedule flexibility, benefits that are provided only to exempt employees, and perhaps equally important to many, their perceived status in the workplace. By carefully considering all these factors, you may be able to avoid the misclassification challenges that some employers face when an exempt status is questioned, or a new salary threshold is implemented.