To be or not to be exempt – that is the question!
July 25, 2016
By Nancy Johnson, Director of Operations, HR Collaborative, LLC
To be or not to be (exempt)? That is the question! Some of us may struggle to grasp the full meaning of Shakespeare’s prose and poetry. Same is true for employers grasping the full scope of the Fair Labor Standards Act. The Department of Labor, through the FLSA, outlines the requirements of paying employees as either non-exempt (eligible for overtime pay over 40 hours in a work week, aka hourly) or exempt (exempt from earning overtime pay, aka salary). In this article we will be taking a deeper dive into the requirements to classify employees as exempt versus non-exempt.
How employees should be classified is regulated by Department of Labor within the Fair Labor Standards Act (FLSA). By now, you’ve likely heard that the Department of Labor announced changes affecting the overtime provisions of the act going into effect on December 1, 2016. This change most notably includes raising the exempt salary threshold from $23,660 to $47,476 for certain exemptions.
With changes, comes uncertainty. As we work to provide guidance to employers, we are reminded of how difficult this regulation can be to comprehend and to follow. And understandably so; it’s complicated, extremely detailed with a variety of variables that come into play. The goal of this series of articles is to help explain how employees can or cannot be classified as exempt outside of the salary threshold. This is the first step in establishing compliance with wage and hour law. Now is going to be a great opportunity to correct any employees that were previously misclassified.
It is important to know all the requirements for classification as simply meeting the minimum salary threshold may not be enough for an employee to qualify as exempt. One of the most important factors to remain compliant, and one of the most overlooked by employers, is the duties test.
The duties test is one of three requirements outlined by the DOL to determine exempt status. In this article we will be focusing on the duties test, but all tests must be passed in order for a position to be exempt from overtime. The tests are:
1. Salary Level Test
The employee must be paid at or above the designated salary amount each payroll. As of December 1, 2016, the salary threshold is rising to $47,476 for certain exemption rules (administrative, executive, and learned professionals) with up to 10% permissible to come from non discretionary bonuses.
2. Salary Basis Test
The employee must receive the full salary for any week in which the employee performs any work, regardless of the quality or quantity of work performed.
3. Job Duties Test
This test is our focus today and the most widely misunderstood of the tests. An employee must meet all of the criteria specified in one or more of the five categories in order to pass. The categories include: Executive, Administrative, Professional, Outside sales, Computer employees, and Highly compensated.
Each of the categories of the duties tests have different conditions that must be met to be considered exempt. Confused, yet? We’ll break it down for you.
The duties test is just that. You must determine if the primary duties an employee performs qualifies as exempt work. Primary duty means the principal, main, major or most important duty that the employee performs. For example, the Administrative Exemption states that primary duty of the job includes the exercise of discretion and independent judgment with respect to matters of significance. The executive, professional and computer professional exemptions have different requirements relevant to primary duties.
No matter the type of exemption (administrative or executive, etc.) classifications are made based on the duties and character of the position as a whole to determine if exempt work constitutes a “primary duty” of the job. The relative importance of the exempt duties as compared with other types of duties, the amount of time spent performing exempt work, the employee’s relative freedom from direct supervision, and the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee all must be taken into account. For example, if an assistant manager of a retail store is only making .50 cents more per hour than the workers they supervise, their supervisory duties are probably not “primary” enough to qualify them for an exemption.
If you haven’t performed a job duties test for every exempt position and job description at your company, you really should. This is especially important to analyze prior to making changes to pay in response to the new salary threshold requirement. Just because a position has always been paid as exempt in your organization, does not mean that it is correctly classified. Remember, employers don’t have the luxury of paying someone a salary with no overtime because it’s administratively easier. Employees that conduct certain types of work have the legal right to overtime compensation.
Over the next several weeks, we will take an in-depth look at each of the exemptions and their respective duties tests. We’ll break down each category and review the very specific considerations and conditions, which must be met in order to “pass the test”.
To be or not to be (exempt)? This is the question we will help you answer for your organization. Stay tuned as we dig in and explore this question further.
*Keep in mind that the FLSA is a federal regulation. States and local governments could have stricter compliance standards.