Do You Know if You Have Exempt or Non-Exempt Employees…Many Don’t

While it might seem pretty straight forward, most organizations still have difficulty determining who is an “Exempt” employee and who is a “Non-exempt” employee. If you have often wondered about this you are not alone. Let me see if I can help clear this up once and for all for you.

This all started with the Fair Labor Standards Act (FLSA) which has governed the rules of employee classification. Although many people generally view “non-exempts” as non-managers and “exempts” as managers, the truth is that there is a fine line between the two.  That fine line often gets employers into hot water and can cost them significantly in terms of fines, back overtime pay, and even future Department of Labor (DOL) monitoring.

Let’s Start with a Definition of Non-Exempt & Exempt Employee Status…

Non-Exempt…Non-exempt employees are generally entitled to minimum wage and overtime and have jobs that DO NOT meet the requirements of the FLSA’s exemption tests:

• Minimum Wage…Non-exempt employees must be paid the minimum wage or more. The current federal minimum wage is $7.25 per hour. Some states have rates that are higher or lower than the federal rate and employees are entitled to whichever is greater.  If an area has a living wage (a wage that is high enough to maintain a normal standard of living and which is generally much higher than either the federal or state rate), the living wage prevails.
• Overtime Pay…Non-exempt employees are entitled to overtime pay (time and a half) for any time worked beyond 40 hours in a given week. Some states, such as California, Nevada and Alaska, require overtime after working eight hours in one day.  Others, such as Colorado, require overtime pay if an employee works more than 12 hours in one day.
• Type of Work…Contrary to popular belief, the type of work an employee performs is not generally a defining factor of a non-exempt Instead, employers should look at exempt classifications.  If the employee’s duties don’t fall into one of the exempt categories (listed below), then the employee is likely non-exempt.

Exempt…Exempt employees are NOT entitled to overtime pay. They generally tend to perform higher-level jobs within an organization that are executive, professional, or administrative.  To qualify as exempt, certain FLSA tests must be met.

• Executive Exemption. To qualify for the executive employee exemption, ALL of the following tests must be met…
  • The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week.
  • The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise.
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent.
  • The employee must have the authority to hire or fire other employees or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
• Administrative Exemption. To qualify for the administrative employee exemption, ALL of the following tests must be met…
  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week.
  • The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
• Professional Exemption.  There are two types of professional employee exemptions, the creative exemption and the learned exemption.
  • To qualify for the creative professional employee exemption, ALL of the following tests must be met…
    • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week.
    • The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
  • To qualify for the learned professional employee exemption, ALL of the following tests must be met…
    • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week.
    • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.
    • The advanced knowledge must be in a field of science or learning.
    • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Note:  There are also exemptions for outside sales positions, computer-related occupations, and others which have their own FLSA requirements.

Misclassifications Cost Employers Cash

Employers who misclassify employees may be liable for back pay, retroactive benefits (such as healthcare, 401(k), memberships) and more.  The issue can become exacerbated when more than one employee or department is involved, which is generally the case. In fact, it can affect thousands of employees if a national company has wrongly classified employees.

One such case was the one involving Walmart. The retail giant misclassified 4,500 managers and coordinators as exempt at stores nationwide.  In fact, they were actually non-exempt and were entitled to $5.3 million in penalties, damages, and back wages for overtime violations at stores nationwide.

If you are a business owner and not sure which employees are exempt or non-exempt, we would be happy to walk you through these criteria with your specific employees in mind so you can be within the law and save thousands in penalties through misclassification. Once you understand how it works you should be able to be much better at assessing your own employees to make sure you meet the requirements. You can CALL US and schedule a time to meet or simply ASK A QUESTION about it and we’ll get right back to you. There is never a fee for asking a question to get some insights and guidance.