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Your Employees: To Exempt or Not to Exempt?

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by Charlotte Jensen, Vice President – HR compliance, Affinity HR Group

Charlotte Jensen

Charlotte Jensen

You’ve just hired an entry-level employee and, to avoid the hassle of tracking hours and paying overtime, you’ve decided to put your new hire on salary. Well, guess what? You may have violated the law.

While we often use the terms “hourly” and “salaried” to designate an employee’s payroll status, there is a much more important consideration: the employee’s legal status. Referred to as “exempt” or “nonexempt,” this designation dictates how the employee can be paid and whether he or she is eligible for overtime.

Established in 1938, the Fair Labor Standards Act (FLSA) governs many foundations of employment law, including minimum wage, overtime, minimum age for workers, calculation of time worked, deductions from pay, and record-keeping requirements. The terms “exempt” and “nonexempt” mean that an employee is either exempt or not exempt from the minimum wage and overtime provisions of the law.

Assessing whether an employee qualifies as exempt can be tricky and, according to the Department of Labor (DOL), most employees do not meet the criteria.

How is the determination made? Let’s first look at nonexempt, or what most of us think of as hourly employees. From a legal perspective, even if their pay is high enough to qualify as exempt, you can’t go wrong treating them as nonexempt because, by doing so, you are ensuring they are paid at least minimum wage and receive time-and-a-half for working more than 40 hours in a week, thus meeting the key concerns of the law.

In addition, while most nonexempt employees are paid hourly, there is no legal requirement to do so, and you can still pay them a salary as long as you track the employee’s hours (although the calculation for determining overtime can get tricky). In other words, you can pay your nonexempt employees a salary so long as you track their actual time and ensure the employee is receiving proper minimum wage and overtime pay.

On the flip side of the law is classifying an employee as exempt, and, for this, there are extensive (although not always straightforward) guidelines to ensure a proper designation and treatment. It is not a matter of the employer’s preference or convenience. Instead, an employee must pass both a salary test and a duties test to qualify as exempt. The salary test sets minimum requirements for what an exempt employee is paid; the duties test establishes criteria for what an exempt employee does.

Salary Test

Whereas a nonexempt employee does not have to be paid on an hourly basis, in most cases an exempt employee must be paid on a salary basis and must receive a guaranteed salary each week. And that salary cannot be reduced based on quality or quantity of work. In fact, there are very few scenarios wherein an exempt employee’s salary can be docked.

The key element, and one that is in the spotlight at present, is the minimum level of pay that federal regulations require before an employer can make an employee exempt. Right now, an exempt employee must be paid at least $455 per week ($23,660 per year)—anything below that requires that the employee be designated nonexempt and thereby paid overtime for work exceeding 40 hours per week. The DOL has established a new salary minimum: Effective Dec. 1, 2016, the new salary minimum became $913 per week ($47,476 per year). At that level, even if you have an employee who passes the duties test to be exempt, you may not want to treat them as exempt because you may not want (or be able) to pay the minimum required in order to pass the salary test.

Duties Test

In addition to the salary test, a potentially exempt employee must also pass the duties test. To make this determination, the DOL developed the “White Collar Exemptions.” To qualify as exempt, an employee’s primary duties only have to meet the standards in one of the following categories:

  • Executive: Management of the organization, or a customarily recognized department or division. This is true management, not usually a working supervisor, based on actual duties and level of bona fide, independent management authority, and not on job title alone.
  • Administrative: High-level office or non-manual work directly related to management or general operations (e.g., accounting, IT, HR, marketing), and including the exercise of independent judgment and decision-making discretion on matters of significance.
  • Professional: Work requiring advanced knowledge in science or other fields of learning customarily obtained by a prolonged course of specialized intellectual instruction (i.e., higher education (not vocational education)). In other words, much of the knowledge required is typically learned by going to college, not on-the-job.
  • Computer: Design, development, creation, testing, and modification of computer systems and programs; this does not apply to help desk employees and roles involved in the manufacture, operation, repair, or maintenance of computers. Exempt computer professionals may, in lieu of passing the salary test, be paid by the hour if they make at least $27.63 per hour.
  • Outside Sales: Making sales or obtaining orders or contracts, and work is largely performed away from the employer’s premises (e.g., cold-calling, identifying, and visiting prospects). Inside sales and customer service positions typically do not qualify. Bona fide outside sales professionals do not have to meet the salary test.

The vast majority of employees do not meet the criteria to be exempt and should be treated as nonexempt. A favorite focus of the DOL: Penalties for misclassification are steep, including back pay with interest for up to three years, liquidated damages, and criminal penalties and imprisonment.

One word of caution: Many of our small business clients with misclassified employees feel they are unlikely to be audited, and, therefore, don’t worry about this lapse in compliance. Don’t make this mistake; you are only as safe as your last bad hire. And if a disgruntled employee feels he or she should have been eligible for overtime, you face an elevated risk that the DOL will come a-knockin’.

Charlotte Jensen is vice president of HR compliance for Affinity HR Group. Affinity HR Group specializes in providing human resources assistance to associations and their member companies. To learn more, visit affinityhrgroup.com.

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