Exempt vs. Non-Exempt: Employee Misclassifications can be Costly

There have been a number of headlines lately about the DOL Wage and Hour Division (WHD) hiring auditors in droves to enforce the Fair Labor Standards Act (FLSA) exempt status classification. In a post last month the DOL WHD announced that they recovered over $270M in 2014 owed to more than 270,000 workers. That is a lot of cheddar.

Why wouldn’t they hire a lot of auditors? Recovering those back wages means that they also were able to recover the taxes on those wages. The WHD has recouped more than $1.5B in back wages since 2009.

While it is absolutely awesome that they were able to recover the money for people that were owed, what if you, as an employer, didn’t know you owed back wages? What if you thought that you had your employees classified properly based on common misconceptions or heresay? That doesn’t matter when the audit happens.

Audits can be disruptive and costly for employers if you have not properly classified your employees. Let’s take a look at what the FLSA is and what qualifies someone for an exemption from certain provisions to determine the difference in exempt vs. non-exempt.

What is the FLSA?

The 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.

The FLSA also provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees, as well as certain computer employees.

To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status.

In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor (DOL)’s regulations.

Here are the “Big Five” exemptions:

Executive Exemption

This is a commonly misunderstood exemption. There have been many high profile suits involving improper use of this exemption. To qualify for the executive employee exemption, all of the following criteria must be met:

  • The employee must be compensated on a salary basis 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

This is another exemption that is often misapplied and provokes many lawsuits. 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 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.

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.

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.

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 (as defined in the regulations) 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

Many times companies will try to apply this to an inside salesperson or “sales manager”. 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.

Highly Compensated Employees

Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

While this is a great breakdown of what the exemptions are and how to determine if someone qualifies for one of them, you must be sure that employees meet ALL of the criteria in a category, not just some.

If you have questions, please feel free to reach out and I will be glad to help. You can also download our free FLSA Classification Checklist from our website.

Thanks for reading!
Matt

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