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Special Report: Exempt Versus Nonexempt Employees



Exempt Versus Nonexempt Employees



"Tinker, tailor, soldier, sailor" goes an old nursery rhyme children use for counting cherry stones. Whatever your company's line of business, your workers probably represent a diversity of jobs and functions. Your own critical task is to analyze whether these fall into the exempt or nonexempt category for receiving overtime payments.

The determining federal statute is the Fair Labor Standards Act. The U.S. Department of Labor interprets and enforces the FLSA's provisions, addressing violations and complaints. In addition, most states have their own specific wage and hour requirements, which you must also follow. And yet one more wrinkle, the FLSA excludes certain jobs altogether, such as agricultural workers or movie theater employees, while groups like truck drivers and railroad employees are separately governed by their own statutes.

You must decide whether all or any of your employees are regulated by the FLSA rules. As an employer, you must pay the minimum basic wage, currently $7.25 per week for up to 40 hours a week, and 1.5 times the regular pay rate for extra hours performed. The devil, however, is in the details. Since many workers are exempt from the FLSA rules, it is your responsibility to identify who those individuals are, which means understanding the classifications. Keep in mind, however, that the exemptions are narrowly construed, and you must be ready to demonstrate that you have classified an employee accurately.

Who is entitled to overtime pay?

Start by considering job categories and distinctions. Generally, nonexempt employees earn less than $455 per week, or $23,660 annually. At the higher end, anyone earning over $100,000 is certainly exempt. Moreover, exempt employees earn a salary, rather than an hourly wage, which means they are entitled to receive a guaranteed minimum amount of money in any given work week, a sum they can count on, no matter how hard or how little they perform.

Next, you must sort out your workforce according to what your employees actually do. Executives, administrators, professionals, some computer technicians and salespeople all fall outside the scope of the FLSA rules, so you need to subject each employee's job description to a battery of descriptive tests. Here are some examples of exempt positions:

Executive: Is his primary duty to manage the business or a department of it? Does she regularly direct the work of at least two other full-time employees? Is he authorized to hire, fire or promote other employees?

Administrative: Is her work primarily a nonmanual desk job? Does it relate directly to the general operation of your business or to your customers? Does the work call for genuine judgment?

Professional: Does the employee bring advanced and sophisticated knowledge? Did she complete a course of graduate or specialized instruction, such as obtaining a law or medical degree? That person's education usually extends beyond high school or college, or might encompass equivalent on-the-job training. It may cover a spectrum of subjects, from dentistry, teaching, architecture or engineering to accountancy or registered nursing, and also includes actuaries and pharmacists. Creative professionals, such as actors, musicians, journalists and cartoonists, also qualify.

Computer employees: Is she a systems analyst, programmer or software engineer? Does he apply systems analysis techniques and procedures? Does she design programs or machine operating systems?

Outside sales: Is his main job to make sales or get orders? Is she regularly engaged on the road, traveling somewhere away from the office?

There is a host of exceptions, but you should be able to flag most of these easily. For example, blue-collar or manual workers are almost always nonexempt, no matter how skilled or highly paid they may be. That group would include carpenters, electricians, mechanics, plumbers and construction workers, among others.

The nitty gritty of daily duties

As if all these criteria were not complex enough, you must drill down deeper to ascertain what a given employee is actually doing, day to day or hour to hour. Tasks and functions are what ultimately determine overtime status, rather than a title or generalized performance. Don't imagine you can avoid overtime requirements just by adjusting somebody's title. It will not help to call your CFO a "bean counter" or your secretary a "documentation guru."

Exempt employees are expected to get the job accomplished, period. Too bad if they have to work from dawn to dusk. That said, a normal workweek is still assumed to be 40 hours, but it is considered more important that they should discharge their responsibilities than whether they are working for any specified amount of time. Exempt employees have no right to overtime pay or even extra time off. That does not mean they can pick their own schedules or burn the midnight oil if they are night owls. They must still turn up at appropriate times to perform what the business requires. You can insist they make up time lost from absences too.

Whether an employee is deemed exempt often comes down to whether the position demands judgment and discretion more than 50 percent of the time. That is obviously impossible to measure exactly! But that rule of thumb is valid for the administrative, executive and professional exemption categories, all of which have their own sets of defining characteristics.

Executive roles typically include interviewing and training; deciding pay rates and setting hours; managing grievances and discipline; planning and apportioning work tasks, budgets and equipment needed; and taking responsibility for workplace safety. An executive can still be busy dealing with mundane activities on the side, from photocopying to making coffee, as long as management remains the primary focus. But they must supervise at least two other employees or several part-timers.

Administrative functions tend to be handled by staff rather than by line personnel, in departments such as HR, finance, accounting, promotions and public relations, legal compliance, and computer administration. At this stage, you must ask some common-sense questions. For instance, ordering routine office supplies like stationery is a fungible job, but buying expensive mechanical equipment may take special skill. Does the nature of your business depend on somebody's creating the optimal mix of inventory?

Recent legal developments

The DOL had been planning to increase the salary level for overtime pay, as of Dec. 2, 2016. The level for exemption would have risen from $455 per week to $913, which comes to $47,476 annually. The $100,000 ceiling for FLSA inclusion would climb to $134,000 per year.

However, the U.S. District Court for the Eastern District of Texas blocked the change and leaving the current rules in effect for now. The DOL appealed that injunction, and dozens of members of Congress from 21 states urged the federal court to reconsider. However, there is no sign those rules will be back into play anytime soon.

But the wise employer will keep an eye open. Threshold changes might affect small businesses like yours, if you are compensating managers at the minimum-required level to qualify for exemption status. Your solutions would be either to give exempt workers a raise or reclassify them as nonexempt, so you would have to compare the cost of increasing salaries or paying overtime. Be ready to communicate effectively, as some of your workforce may grumble. Some like their exempt standing, which they see as prestigious, and it may irk them to have to track their breaks, meal periods and times for their shifts. Adding to resentment, they may no longer be allowed to take home computers or phones, to control any afterhours work. On the other hand, some workers may be pleased to pocket extra overtime money.

You will need to be scrupulously careful to classify correctly. If you mistakenly classify an employee as exempt, that person may be able to claim back pay for overtime from you. To compound the problem, workers may go from exempt to nonexempt from one week to another. Getting employment status wrong can lead to all sorts of disputes. As an illustration, mandatory days off without pay, known as furloughs, are not permitted for exempt employees, who are normally paid by the week. So you would need to furlough them for an entire week, rather than a single day. You may also come up against other benefit issues, such as insurance, medical care and vacation time, which also depend on appropriate exemption classifications.

With the laws in transition, it is more important than ever to stay on top of exemption rules. Making an erroneous classification could lead to adverse legal and financial consequences. In any case, you undoubtedly want to be known as a principled boss who treats and pays workers fairly.


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Tim Sinclair
Tim Sinclair
(843) 577-5843
40 Calhoun Street, Suite 320
Charleston, SC 29401
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