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The In-House Advisor Published by Shepard Davidson & Renee Inomata

Three Myths About Who is “Exempt” and Who is “Non-Exempt”

Posted in Compliance, Policies & Notices, Miscellaneous Employment, Wage & Hour, Worker Classifications

Even the most sophisticated employer in the most intellectually demanding industry may misclassify its workers as “exempt” when they are, in fact “non-exempt.”  The increasing number of misclassification litigation is a sure sign that no one is completely immune from inadvertently misclassifying workers. 

What exactly are the workers “exempt” from anyway?  The federal Fair Labor Standards Act (FLSA) requires that workers be paid a minimum wage for every hour they work and an overtime premium for any hours in excess of 40 hours worked in a week, but it permits employers from excluding certain types of employees from each of these requirements; hence, they are “exempt” employees.  The most common areas of exemption are known as the “white collar” exemptions.  These exempt employees are:

Of course, these “white collar” classifications may appear straightforward, but like the roads in the Tuscan hillside, they can become quite foggy and have twists and turns from time to time.  Don’t fall for the typical myths about exempt classifications.

Myth No. 1:  If the employee is paid a “salary” rather than “hourly,” the employee must be “exempt.”

Although any employee who is paid on an “hourly” basis is unlikely to be exempt, the converse, i.e. any employee who is paid a “salary” must be exempt, is not true.  Each of the exemptions above do require that the employee must be paid on a “salary basis.”  That is, the employee is paid at least $455 per week regardless of the number of days or hours actually worked, and cannot be reduced based on quality or quantity of work.  The $455 amount does not apply to outside salespeople, teachers, and employees practicing law or medicine, and, for otherwise properly classified exempt computer-related employees, the “salary basis” may be met if the employee is paid an hourly rate of not less than $27.63 per hour.

Myth No. 2:  If the employee works on computers, the employee must be “exempt.”

In order for an employee working in computer-related fields to be properly classified as “exempt,” the employee must engage in some skilled work in the computer field, such as computer programming, computer system analysis, or designing or developing computer systems or programs.  Being an IT support person, such as in a “helpdesk” position, is not likely to be sufficiently “skilled” to be properly classified as “exempt.”

Myth No. 3:  If the employee performs administrative tasks, the employee must be “exempt.”

In addition to being paid on a “salary basis,” a properly classified exempt administrative 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 “include the exercise of discretion and independent judgment with respect to matters of significance.”   This classification has sparked quite a bit of attention recently in the mortgage industry, since the Department of Labor’s 2010 Administrative Interpretation where mortgage loan officers were deemed to be engaged in the production operations of a mortgage company rather than the administration of the mortgage company’s business.  The “administrative/production” dichotomy is very fact-intensive, and simply stating that an employee’s primary duty is to engage in conduct directed to the administration of the business, rather than the production of the business, does not make it so.  

In addition, employees engaging in office or non-manual work who receive non-discretionary compensation of $100,000 or more (including at least $455 per week) and who engage in duties of at least one of the other “white-collar” exemptions, are also exempt from the minimum wage and overtime requirements of the FLSA.

Most states also have minimum wage and overtime requirements, and in some cases, different exemptions.  Employers are required to comply with both federal and state requirements.  Proper classification of employees as “exempt” can be complicated, so keep an eye out for future posts on this topic.