Exempt or Nonexempt

Exempt or Nonexempt

Most employees are "nonexempt" (entitled to overtime) under the FLSA. Some are not. While there are several overtime exemptions which are specific to particular industries or jobs, there are also some general exemptions for so-called "white collar" employees. Generally to be "exempt" (not entitled to FLSA overtime) requires that "white collar" employees meet both of two conditions:

They must be paid "on a salary basis" (the "salary basis test").

-and-

Their job duties must be genuinely high-level "executive," "administrative," or "professional" (the "duties test");

Each of these requirements is quite technical under the FLSA. Employees (with one exception) must "pass" both the salary basis test and the duties test to be exempt.

The "Salary Basis Test"

"White collar exempt" employees must (with one exception) be paid "on a salary basis" rather than "hourly" (in addition to performing exempt duties). "Hourly" employees are nonexempt no matter what their duties are.

Under the FLSA, being paid "on a salary basis" has a technical definition which may be different from the way "salary" is sometimes used in other contexts.

Do not assume that just because an employee is paid a "salary" (rather than a wage classified by the employer as an hourly wage) that this means the employee "passes" the salary basis test.

Under the "salary basis test," FLSA overtime exemptions are generally reserved for employees who are (a) paid the same amount each work period no matter how many actual hours they spend on the job, and (b) whose compensation is not "subject to reduction based on the quantity or quality of work."

"Salary basis" for FLSA purposes means that an employee has a "guaranteed minimum" amount of pay s/he can count on receiving for any work period in which s/he does "any" work. If an employee works one hour during a work period, s/he should still receive the full amount of the "guaranteed minimum" pay.

Employees are not paid "on a salary basis" if their guaranteed minimum pay may be reduced based on either the "quality or quantity" of work performed. This is sometimes called the "no docking" rule. Employees who are paid "on a salary basis" are therefore not generally subject to reductions in pay because of layoffs, suspensions without pay for (most) disciplinary violations, or (net) reductions in their guaranteed minimum pay for when they are on jury duty, or when they are on temporary military leave. Their pay is not based on the amount of time they spend at work, but rather for "getting the job done."

Actual pay reductions are not necessary before an employee will "fail" the salary basis test. Employees are not paid on a salary basis if their guaranteed minimum pay is "subject to" reduction for impermissible reasons. This means that there is a genuine likelihood of a reduction in the employee's guaranteed minimum "salary" and the employee knows it.

The "salary basis test" is subject to a variety of "exceptions" and interpretations which may not be readily apparent nor easily grasped. For example, reducing "leave accruals" for absences is probably not the same as reducing "pay." Getting paid "more" for extra hours worked is not necessarily inconsistent with being paid "on a salary basis," since this would not reduce an employee's "guaranteed minimum" salary. Reducing pay for absences caused by illness which is offset by a bona fide sick leave plan is not inconsistent with being paid "on a salary basis." An exempt employee need not be paid for work periods in which s/he does "no work," so docking pay in weekly increments may not "defeat salaried status."

The one exception to the requirement that exempt employees be paid on a salary basis is for some "computer professionals" such as software engineers, systems analysts and high level programmers. (Computer operators, troubleshooters, manufacturers, etc., are not considered computer professionals for purposes of this exemption.) Individuals who meet the "duties test" for computer professionals may be exempt even if they are paid hourly, provided their hourly wage is at least 6.5 times the minimum wage.

The "Duties Test"

Under the "duties test," FLSA overtime exemptions are reserved for truly high-level, white collar employees, in positions which routinely involve discretionary decision-making at a "policy" level.

Do not assume that an employee "passes" the duties test merely because the employer has classified them as exempt, or because they have been given a high-sounding title. Some employees are incorrectly treated as exempt under the duties test who are really nonexempt.

Under the FLSA duties test, employees are "exempt" only if they perform relatively high-level "executive," "administrative," or "professional" duties (and are also paid "on a salary basis").

For any of these exemptions, "job titles" are relatively unimportant. If a secretary is called an "administrative assistant" s/he is still a secretary. And if the president of a company chooses to call herself the janitor, s/he is still an executive. What counts is what the employee actually does at the job on a day in, day out basis -- the job tasks.

The tests for these exemptions are complicated and there are few "bright lines." Generalizations are dangerous.

The "executive" exemption applies to "managers." A manager, under the FLSA, must regularly supervise two or more employees. However, supervisory responsibilities are not enough. To be exempt, an employee must also have "management" activities as his or her primary duty. S/he must be "in charge" (at least sometimes) of a recognized unit or subunit within the company or organization, and must "make decisions" on behalf of the company or organization which are of genuine importance to its business. Exempt executives may still perform a variety of "nonexempt" tasks, if "management" is nonetheless their primary duty. However, a "working foreman" is not considered an executive, and if an employee performs "production" work (non-management, "line" work) or "clerical" work more than 50% of the time this is some indication that s/he is not an exempt executive.

The "administrative" exemption applies to relatively high level "support" or "staff" personnel within an organization, who perform (either) "office" or "nonmanual" work. Exempt administrative employees' work is directly and primarily related to management policies or general business operations, and requires the exercise of judgment and discretion. Examples might be (true) administrative assistants, buyers, and planners -- although again it is important not to confuse job titles with actual job duties. With the same proviso, bookkeepers, "gal Fridays," many "executive secretaries" and most employees who operate machines or devices are not administratively exempt employees. It is also important to distinguish the exercise of judgment and discretion (exempt work) from the use of even high level skills (nonexempt work) in performing job tasks. If an employee is engaged in "production" s/he is not an exempt administrator. ("Production" work means making the "product" the company or organization "produces," and is not limited to traditional manufacturing. A police detective, for example, is participating in "production work" for a police department, which is "in the business" of making criminal investigations.)

The "professional" exemption is usually reserved for practitioners of the traditional "learned professions" such as physicians, lawyers, teachers, accountants, and so forth. A "special rule" permits some computer experts to be considered professionals, as well (even if they are not paid "on a salary basis"). To be exempt an employee must actually be doing the work of the profession. A physician who is employed as a clerk is not professionally exempt.

In many cases, whether an employee's tasks fall under the duties required for one of the "white collar" exemptions will be obvious. In others, a highly detailed and fact-specific analysis may be required. Generalizations are dangerous. There are many instances of misclassification of employees as exempt who are really nonexempt based on their job duties.

Other Exemptions

Some occupations are exempt from the FLSA. These generally fall into two types. Occupations are exempt from the FLSA if they are governed by some other federal labor law. For example, the federal "motor carrier act" governs some employees of "motor carriers." These employees work in jobs which are subject to regulation by the federal Department of Transportation, and are not regulated by the FLSA. Some other occupations are specifically exempted from the FLSA by the statute itself. For example, the FLSA does not govern wages and hours of employees at motion picture theaters or "seasonal recreational establishments," personal staff of elected public officials, etc. There are peculiar interpretations and definitions which may apply to any of these additional FLSA exemptions, so employees (and employers) should be wary of simply "assuming" that their jobs do or do not fall under an FLSA exemption.

"Salaried Nonexempt" Employees

An employee may be paid "on salary" and still be nonexempt and entitled to overtime. Just because an employee is paid "on a salary basis" does not necessarily mean that s/he is exempt. The terms are not synonymous.

However, the arithmetic used to compute overtime for "salaried nonexempt" employees is peculiar.

Nonexempt employees are entitled to overtime at time and one-half their "regular rate" of pay for FLSA overtime hours worked. When an employee is paid hourly, the computation of time and one-half is relatively straightforward -- multiply the hourly rate by 1.5. However, when a nonexempt employee is paid "on a salary basis," the "salary" must be converted to an hourly equivalent for purposes of computing FLSA overtime due.

For purposes of computing overtime, a "salary" as defined in the FLSA is considered to be compensation at "straight time" for "all" the hours worked in a work week. To obtain a "regular rate" on which time and one-half can be computed, generally the salary received for a work week is divided by the total hours worked in the week. So, for example, if a "salaried nonexempt" employee worked 50 hours in a work week and received a gross paycheck of $500 for that work week, the hourly rate in that week would be $10 per hour -- $500 divided by 50 hours. Since 10 of the hours worked in that work week were overtime hours, the employee is entitled to be paid time and one-half the regular rate for these extra hours. However, the salary has "already" compensated the employee at "straight time" for "all" hours worked in that week, at the regular rate of $10 per hour. Since the employee is entitled to "time and one-half the regular rate" for overtime hours, s/he is due "the difference" between what s/he has already been paid for these hours ($10 per hour) and the time and one-half rate ($15 per hour). Thus, on this example the employee is owed an additional $50 in overtime. This is sometimes called a "half time" system. However, technically the employee is really receiving "full time and one-half."

Note that on this kind of pay system an employee's regular rate (and therefore the overtime rate) can vary from work week to work week depending on how many total hours the employee worked. If an employee received a salary of $500 for working 60 hours in a work week, the regular rate for that week is $500 divided by 60 hours, or $8.33 per hour. In this week, the employee's overtime rate is $12.50 per hour rather than the $15 per hour s/he would have been entitled to in a week when s/he worked 50 hours. The "overtime premium" due the employee in a 60 hour week is $4.17 per hour additional for each of 20 overtime hours, or $83.40.