Is Your Employee Really Exempt?

As employment lawyers, we encounter one stubborn misconception over and over – the idea that all salaried employees are exempt from overtime.  If you take away nothing else from this article, let this be it: an employee is not automatically exempt from federal minimum wage and overtime requirements because s/he is paid on a salaried basis or has a job title that “sounds exempt” – further analysis is required.

The basics: the Fair Labor Standards Act (“FLSA”) is a federal law that requires that most employees be paid at least the federal minimum wage for all hours worked and receive overtime pay for all hours worked over 40 in a workweek.  While certain employees are “exempt” from these requirements, the exemptions are technical and often difficult to apply.  When determining whether your employees are exempt or non-exempt, we recommend starting with the assumption that everyone is non-exempt, then carving out the employees who are exempt. 

Employees are exempt if they fall into one of the following categories:

• executive, administrative, professional, and computer employees typically must satisfy both a salary test and duties test;
• highly compensated employees must satisfy both a salary test and a modified duties test; and
• outside sales employees must satisfy only a duties test.

Salary Test:

The salary test is the same for executive, administrative, and professional employees.  These employees must be paid on a salaried basis with a guaranteed salary of at least $455/week.  It is worth noting that: (1) performance-based compensation does not count towards the minimum weekly salary, (2) the employee must be paid no more frequently than weekly, and (3) the employee’s salary generally must not be reduced for hours not worked.

Computer employees are the only exempt employees who may be paid on an hourly basis.  If paid hourly, a computer employee must be paid at least $27.63/hour.  If paid on a salaried basis, the same salary test outlined above must be met.

Administrative, professional, computer and highly compensated employees may be paid on a “fee basis” rather than a salary basis; however, the fee payment must meet the minimum salary level requirement. 

Highly compensated employees must earn at least $100,000 annually.  These employees must also satisfy the same salary test outlined above, which means you can’t use quarterly or annual performance-based bonuses to get an employee into this category.

Duties Test:

The duties test for executive employees requires that: (1) the employee’s primary duty is managing the business (or, department, subdivision, or branch, if applicable), (2) the employee regularly supervises at least two other full-time equivalent employees, and (3) if s/he doesn’t have the authority to hire and fire other employees, his or her opinion must be given particular weight when the company considers employment-status decisions.

The duties test for administrative employees requires that: (1) the employee’s primary duty is performing office work, or other non-manual work, that is directly related to the management or general business operations of the employer or its clients and (2) s/he exercises discretion and independent judgment related to significant matters.

Under the FLSA, there are two types of professional employees — learned professionals and creative professionals. 

• As you might guess, to be a learned professional the employee’s primary duty must be performing work that is predominantly intellectual, requiring advanced knowledge in a field of science or learning generally gained through a prolonged course of specialized study.  In addition, s/he must exercise discretion and independent judgment.
• Creative professionals’ primary duty must be performing work that requires invention, imagination, originality, or talent in a field that is recognized as artistic or creative.

Highly compensated employees must satisfy at least one of the prongs outlined above for executive, administrative, or professional employees (i.e. his/her primary duty may be managing the business, but s/he may not regularly supervise two or more full-time equivalent employees).

Computer employees must have specific primary duties and be employed in specific roles (a computer systems analyst, for example).

Outside sales employees’ primary duty must be making sales or obtaining orders or contracts for services or the use of facilities; and, these employees should regularly be engaged in work away from the employer’s office. 

Workers who primarily perform manual labor, along with most police, firefighters, paramedics, and other first responders, may not be considered exempt even if they would otherwise satisfy the requirements of an exempt category.

The Fine Print:

There are many twists, turns, and exceptions within the FLSA that are beyond the scope of this introductory article.  This article is intended only to help you think about whether the employee you’ve always treated as exempt really is.  Ask your attorney for assistance with specific facts and circumstances that impact your employee classifications.

Meredith Silliman’s practice focuses on corporate and real estate matters, with an emphasis in the area of employee benefits, and, specifically, ERISA, assisting clients with the design, drafting, implementation, and ongoing administration of qualified and nonqualified retirement plans, health and welfare plans, bonus and equity compensation plans, and other executive-level compensation arrangements.

Camden Massingill’s practice includes counseling and assisting clients on day-to-day labor and employment-related matters, and further includes all facets of workplace-related litigation defense in federal and state courts including cases involving wage and hour laws, Title VII, ADA, FMLA, and other anti-discrimination laws and employment-related torts.  In addition to workplace-related litigation, Camden’s broader practice regularly involves assisting clients with their other general litigation needs.