Worker Classification Part 2: Exempt versus Non-Exempt

In our last blog post about worker classification, we explained the differences between employees and independent contractors and why this distinction is important (i.e. misclassification has serious consequences).

In this blog, we’ll cover exempt versus non-exempt worker classification which we believe is one of the most important functions of HR because it determines wages and overtime rules - serious stuff! Like employee versus independent contractor classification, misclassifying employees as exempt can lead to lawsuits and DOL investigations, and become extremely costly if several employees are involved.

The Fair Labor Standards Act (FLSA)

The Fair Labor Standards Act (FLSA) sets rules around minimum wage, overtime, recordkeeping and youth employment standards. It requires that most employees are paid at least the federal minimum wage, and they receive overtime pay at no less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. 

However, exempt employees are not subject to minimum wage or overtime pay. The most commonly applied exemptions are for executives, administrators, professionals, computer employees and outside salespersons. There are several other more narrow exemptions.

Determining Employee Classification

The single most important rule to remember when classifying an employee is that it's an employee's job duties, not their title, that matter. 

The first step in determining an employee's primary duty under the FLSA is to audit the employee’s job duties. The goal is to obtain the most accurate account of the duties the employee actually performs, not the duties in the employee’s job description or even the duties the employee is supposed to perform. Here are some techniques to help with your audit:

• Observe the employee in action;
• Review the employee’s job description with the employee, have them correct any errors, and ask them to acknowledge in writing that the job description is accurate and up to date; and
• Interview the employee’s manager, subordinates and/or colleagues about the employee’s job duties.

Once you have a firm handle on the employee’s many job duties, it’s time to determine which is their primary duty (as defined in the FLSA). The proportion of time an employee spends on a particular duty is generally a good indicator; a duty that occupies 50 percent or more of the employee’s time will generally constitute a primary duty. However, exempt work that occupies less than half of an employee’s time can still qualify as their primary duty if:

• It is more important than the employee’s other duties;
• The employee is relatively free from supervision; and
• The employee is paid more than other employees who do not perform exempt work.
  

What Qualifies as Exempt 

Exempt Executive

To qualify as an exempt executive, an employee must:

• Have a primary duty of management of the business or a recognized department or subdivision of the business;
• Customarily and regularly direct the work of two or more employees; and
• Possess hiring and firing authority or have the power to affect the employment status of other employees through suggestion or recommendation of an employee regarding hiring, firing, advancement, promotion or change of status because his or her position is given “particular weight.”

Exempt Administrator

To qualify as an exempt administrator, an employee must:

• Have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• Exercise discretion and independent judgment with respect to matters of significance.

Exempt Professional

To qualify as an exempt professional, an employee must perform work requiring either:

• Advanced knowledge in a field of science or learning, which is customarily acquired by a prolonged course of specialized intellectual instruction; or
• Invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Exempt Computer Employee

To qualify as an exempt computer employee, an employee must work as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field and have one of the following as his or her primary duty:

• 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 above duties, the performance of which requires the same level of skills.

Exempt Commissioned Salesperson

To qualify as an exempt commissioned salesperson, an employee must:

• Be employed by a retail or service establishment;
• Have a regular rate of pay exceeding one and one-half times the minimum wage for every hour worked in a workweek in which overtime hours are worked; and
• Derive more than 50 percent of his or her total earnings during a representative period (that can be between one month and one year long) from commissions.

Exempt Outside Salesperson

To qualify as an exempt outside salesperson, an employee must:

• Have a primary duty of making “sales” (as defined in the FLSA), obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the customer; and
• Customarily and regularly work away from the employer’s place or places of business.

Qualifying Salary

To qualify for most of the exemptions from the FLSA's minimum wage and overtime requirements, employees generally must be paid at least $455 per week on a salary basis. Two requirements must be met to satisfy the salary basis test:

• The employee must be regularly paid a set amount of compensation; and
• The amount of compensation cannot be reduced because of the quality or quantity of the employee’s work.

There are certain exceptions to the salary basis requirement. Also, certain deductions from an employee's pay can violate the salary basis requirement and nullify an employee's exemption.

Other Exemptions

Overtime exemptions also are available for:

• Employees involved in transportation, such as truck drivers, pilots and railroad employees;
• Farmers and other agricultural employees;
• Employees of “seasonal and recreational establishments” such as amusement parks, carnivals, summer camps and circuses;
• Domestic companions;
• Live-in domestic help;
• Casual babysitters; and
• Other miscellaneous employees; and
• Partial overtime exemptions are available for:
• Police officers and firefighters; and
• Certain unionized employees.

Next Steps

You’ve performed an audit and feel confident that you’ve determined the correct classification of your employees. Here are the next steps:

If Your Employee is Exempt...

Be sure to document the factors supporting the classification of the employee as exempt. In the event of a lawsuit or a DOL investigation, the burden of proof is on the employer, not the employee, so it’s important to store this information.

If Your Employee is Not Exempt...

You must pay the employee at least the minimum wage (the federal minimum wage is $7.25 per hour) for each hour worked and overtime for any hours beyond the statutory maximum in each workweek.

Spur is here to help you determine if you’re classifying your workers correctly. We can also handle your entire hiring and onboarding process as well as employment recordkeeping so you can focus on growing your business. For more information, reach out to us.

Source: U.S. Department of Labor Wage and Hour Division