Exempt vs. Non-Exempt — Is Your Business Properly Paying Its Employees?

One of the most frequent mistakes employers make is the misclassification of employees as exempt.  This article provides a roadmap for employers to understand when an employee is exempt from the FLSA overtime requirements.  It also briefly outlines the potential damages for non-compliance.

The Fair Labor Standards Act (“FLSA”) requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.  However, it also allows for certain employees to be exempt from the overtime requirement if certain tests are satisfied.  To qualify for exemption, employees must generally satisfy three tests:  (1) salary level; (2) salary basis; and (3) job duties.

1. Salary Level:  Employees generally must be paid at not less than $455 per week (minimum salary level) on a salary basis. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine. Exempt computer employees may be paid at least $455 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour.
2. Salary Basis:  Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.
3. Job Duties:  To satisfy the job duties test, an employee must qualify as a bona fide Executive, Administrative, Learned Professional, Computer, or Outside Sales Employee as outlined below.  It is important to note that job titles do not determine exempt status.

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; and
• 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; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Learned Professional Exemption:  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; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Computer Employee Exemption:  To qualify for the computer employee exemption, the following tests must be met:

• The employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
• The employee’s primary duty must consist of:
  1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
  2) 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;
  3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or,
  4) A combination of the aforementioned duties, the performance of which requires the same level of skills.

Outside Sales Exemption:  To qualify for the outside sales employee exemption, all of the following tests must be met:

• The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and,
• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Damages for Failure to Comply:  In addition to requiring the employer to stop its violations of the law (called injunctive relief), the FLSA permits the employee who was wrongfully denied minimum or overtime wages the difference between what the employee should have been paid under the law and what the employee was actually paid for two years prior to the date the employee filed the lawsuit or opted into the case. If the violation of the FLSA was “willful”, damages may be awarded for three years prior to that particular employee becoming a plaintiff in the case. 29 U.S.C. § 255(a). Further, in most cases the prevailing employee is also entitled to an have their actual damages doubled. 29 U.S.C.A. § 216(b). This is called liquidated damages. The award of liquidated damages is mandatory unless employer shows that (1) act or omission giving rise to violation was in good faith and (2) he had reasonable grounds for believing that his act or omission was not a violation of § 216.  In addition, plaintiff attorneys have incentive to file FLSA claims by providing for the recovery of reasonable attorneys’ fees and costs of litigation by prevailing employees.

PRACTICAL COUNSEL:  All employers should examine each employee (or employee category) to determine whether the employee is properly classified as an exempt or non-exempt employee.  Remember, just because an employee does some administrative work, it does not make him/her an exempt administrative employee pursuant to the FLSA.  The damages available to employees can be extensive so it is important to ensure that employees are properly classified and paid.  If in doubt, all employees should consider conducting an FLSA Audit.

If you have any questions about the Fair Labor Standards Act, need help with employment decisions, or any other legal matter, please contact Merritt Green, Managing Partner and Chair of General Counsel, P.C.’s Labor and Employment Practice Group at mgreen@gcpc.com
or 703-556-0411.